Recent SEC enforcement actions demonstrate the SEC’s increased focus on violations of Rule 105 of Regulation M.
On September 17, 2013, the Securities and Exchange Commission (the SEC) announced enforcement actions against 23 firms for short selling violations under Rule 105 of Regulation M (Rule 105), which generally prohibits short selling of equity securities during a restricted period and then purchasing the same securities in follow-on and secondary public offerings.In the press release announcing these actions, the SEC stated that “[t]he benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent. Through this new program of streamlined investigations and resolutions of Rule 105 violations, we are sending the clear message that firms must pay the price for violations while also conserving agency resources.” As such, market participants who engage in short selling activities should “provide training to their employees regarding the application of [Rule 105], develop and implement policies and procedures reasonably designed to achieve compliance with [Rule 105], and enforce those policies and procedures.”
How Does the SEC’s “Zero Tolerance” Policy Affect My Firm?
The firms charged with violations of Rule 105 include various market participants, such as broker-dealers, investment advisers, asset management firms, hedge fund advisers and private equity firms. 22 of these 23 SEC enforcement actions have been settled, resulting in more than $14.4 million in monetary sanctions against the firms in total. The disgorgement that firms agreed to pay in these settled enforcement actions ranged from $4,091 to more than $2.5 million, indicating that the SEC is determined to bring claims irrespective of the magnitude of the violation measured in terms of illicit profits. In the one case that is still being litigated in an administrative proceeding, the SEC’s Enforcement Division is seeking “full disgorgement of the trading profits, prejudgment interest, penalties, and other relief as appropriate and in the public interest.”
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