Rule 105 of Regulation M may create more anxiety among compliance professionals in the hedge fund industry than any other SEC rule. It is a “strict liability” regime, meaning that you can be found in violation even if the infraction was an innocent error resulting in little profit. The SEC has historically brought actions based on such errors, and it has methodically brought a series of new actions every couple of years. This article explains the law of Rule 105, and includes some illustrative examples. It summarizes some of the past enforcement activity, and makes some predictions about the SEC’s current approach.

Although unrelated to Regulation M, this article ends with a side note on the federal tender offer rules. We do not mean the “large set” tender offer rules under Section 14(d) of the Exchange Act, which apply to a tender for the shares of publicly-listed securities. Rather, we address the “small set” of rules under Section 14(e), which apply to tenders for private company equity. It is these rules that (sometimes rather unpredictably) become relevant to hedge fund transactions.