The following post comes to us from John M. Loder, partner and co-head of the Investment Management practice group at Ropes & Gray LLP, and is based on a Ropes & Gray publication by R. Daniel O’Connor, Maria Carboni, and Gina Riccio.
On September 16, 2013, the Securities and Exchange Commission (“SEC”) charged over 20 firms with violations of Rule 105 of Regulation M of the Securities Exchange Act of 1934 (“Rule 105” or “the Rule”), which prohibits the purchase of securities in a secondary offering when the buyer has a short position, as that term is defined in SEC rules, of the same securities established during a specified restricted period. [1] The same day, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued guidance to firms on issues they had observed regarding compliance with Rule 105 and made suggestions to firms as to how to address the relevant risk. These recent cases, and contemporaneous SEC statements on the subject, suggest that the SEC will continue to focus attention on Rule 105 violations in examinations and enforcement inquires. Companies should therefore take steps to ensure that their policies contain appropriate provisions related to Rule 105 and consider training of relevant staff to avoid such issues.
