Here is how naked shorts avoid Reg SHO: 50 Rule 2

Here is how naked shorts avoid Reg SHO:
50 Rule 203 of Regulation SHO imposes tighter borrowing and delivery requirements on short sellers, including new
buy-in requirements for stocks with long delivery failures. Rule 203, which became effective January 3, 2005,
should reduce strategic fails, but it may not eliminate them because it still provides for a market-maker exception
and does not control short positions that occur ‘ex-clearing’, i.e., outside the National Securities Clearing
Corporation.
51 The clearing firm retains the cash proceeds from the short sale to secure the selling broker’s delivery obligation.
The clearing firm releases cash equal to the reduction in value of the shorted shares as the price of the shares
declines (or demands additional cash margin if the share price rises).
52 The rest clear and settle through mutual agreement of the brokers (and their clearing firm(s))
https://www.sec.gov/comments/s7-08-08/s70808-318.pdf
Thanks to the party who emailed this link to me!