General Securities Sales Supervisor (Series10) Practice Exam

Which type of security is NOT subject to the locate requirement under Regulation SHO?

1. A Class A Voting Stock

2. B Class B Non-Voting Stock

3. C Corporate Bonds

4. D OTC Stock

The correct answer is: C Corporate Bonds

The correct answer is that corporate bonds, which fall under the category of fixed income securities, are not subject to the locate requirement under Regulation SHO. Regulation SHO was enacted to combat certain trading practices such as "naked short selling," which occurs when a trader sells shares without having borrowed them first, creating the potential for market manipulation and delivery failures. The locate requirement specifically applies to equity securities to ensure that traders can borrow shares before engaging in short selling. This is crucial because short selling involves selling a security with the obligation to repurchase it later, and thus guarantees that the seller will be able to return the shares. However, this requirement does not extend to other types of securities, like corporate bonds, which are treated differently in trading practices. Understanding the types of securities subject to this regulation helps clarify the responsibilities and obligations for traders and ensures compliance with regulations designed to maintain market integrity.