Investment Adviser Settles Charges for Short Selling Restricted Period Violations

An investment adviser settled SEC charges for violating an SEC trading rule by purchasing interests in a security via a public offering during the restricted period after short selling the same security.

Such transactions are prohibited under SEC Regulation M Rule 242.105 ("Short selling in connection with a public offering"), which is designed to prevent potentially manipulative short selling just before the pricing of follow-on and secondary offerings. The rule restricts firms from purchasing a security after a short sale of the same security for the shorter of the period (i) beginning five business days before the pricing of the offered securities and ending on the pricing date or (ii) beginning with the initial filing of a registration statement and ending on the pricing date.

In a Complaint filed in the District of Connecticut, the SEC said that the short sale and subsequent purchase of the security did not meet the criteria for an exception under Rule 105 of Regulation M. The SEC also said that after being informed by a participating underwriter of its possible Rule 105 violation, the adviser neither conducted a review of its prior trading history to identify other possible Rule 105 violations nor did it implement any new compliance policies related to Rule 105 transactions.

Without admitting or denying the allegations, the adviser agreed to (i) cease and desist and (ii) pay a civil monetary penalty of $103,591. The transactions involved three funds the adviser managed, each of which agreed to disgorge (i) $18,236 with interest of $806, (ii) $39,975 with interest of $1,768 and (iii) $53,417 with interest of $2,362, respectively.