I sold some in-the-money naked calls, and found out the next day that the broker bought the underlying shares to cover the calls. They claimed that the underlying is hard-to-borrow and since the option was in the money and could be assigned (even though the option still had significant time value and no sane person would exercise it), they needed to cover it in compliance with rule 204. I was shocked to hear this. Can a broker do this?
Some clarification: the calls were not assigned (I still have the position) and I had more than enough margin. The broker did not close my short calls, just bought the underlying.
Update: The broker has now walked back from their claim and attributed the buy-in order to some miscommunications.