SEC Settles with Numerous Firms for Covering Shorts out of a Public Offering in Violation of Regulation M

The SEC announced enforcement actions against 23 firms for short-selling violations by participating in public stock offerings after selling short those same stocks. The SEC also issued a risk alert, cautioning firms against noncompliance with Rule 105 of Regulation M ("Short Selling in Connection with a Public Offering"). The firms charged in the enforcement actions allegedly bought offered shares from an underwriter participating in a follow-on public offering after having sold short the security during the Regulation M restricted period. The risk alert released in response to these charges informs investment advisers, investment companies and broker-dealers about the importance of complying with Rule 105 and also describes some of the practices and controls that firms have employed for compliance.

See: SEC Enforcement Actions Press Release; SEC Rule 105 Risk Alert.For a general discussion of the application of Rule 105 of Regulation M to hedge funds and other investors, see the Trading Chapter of either the Guide to Hedge Fund Regulation or the Guide to Broker-Dealer Regulation.