On the morning of September 17, anyone that receives emails from the SEC announcing enforcement news was flooded with emails about Rule 105 of Regulation M (“Rule 105″). The SEC announced enforcement actions against 23 firms for short selling violations of Rule 105. Rule 105 prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering. The rule applies regardless of the trader’s intent. The goal is to help prevent short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.
The SEC’s National Examination Program simultaneously issued a risk alert regarding non-compliance with Rule 105. The risk alert highlights observations by SEC examiners focusing on Rule 105 compliance issues as well as corrective actions that some firms proactively have taken to remedy concerns.
According to the SEC, the enforcement actions are being settled by 22 of the 23 firms charged, resulting in more than $14.4 million in monetary sanctions. Each settlement involved disgorgement, prejudgment interest and a penalty. The firms are primarily broker-dealers, investment advisers to private funds, or pension plans. It does not appear that any of the firms were managing client assets separately as investment advisers.
In the risk alert, the SEC said that it has collected in excess of $42 million for violations of Rule 105 since January 2010. Therefore, the September 17 settlements alone make up 34% of the penalties over a 3.75 year period, which would tend to show a focus by the agency.