By the Office of Compliance Inspections and Examinations1
From January 2010 to 2013, the SEC imposed over $42 million in penalties and disgorgement on more than 40 firms and individuals for violating Rule 105 of Regulation M by short-selling equity securities within five days before a follow-on offering and then purchasing shares in that offering, regardless of intent, with investment advisers and hedge funds like Harbinger Capital and D.E. Shaw among the most frequent violators.
Between January 2010 and 2013, the SEC resolved over 40 enforcement actions against investment advisers, broker-dealers, and hedge funds for violating Rule 105 of Regulation M, which prohibits short-selling a security during the five-day restricted period before a follow-on offering and then purchasing those same shares in the offering. These violations generated more than $42 million in combined disgorgement, penalties, and interest, with prominent firms including Harbinger Capital Partners, D.E. Shaw, and UBS O’Connor among those sanctioned. The SEC emphasized that Rule 105 violations are strict liability offenses—intent is irrelevant—and cited widespread failures in compliance programs, including inadequate monitoring, insufficient training, and poor account segregation despite three narrow exceptions.
From January 2010 through 2013, the SEC resolved over 40 enforcement actions targeting violations of Rule 105 of Regulation M, resulting in more than $42 million in disgorgement, penalties, and interest. Rule 105 prohibits purchasing securities in a follow-on or secondary offering if the purchaser had short-sold the same security during the five-business-day period preceding the offering’s pricing, regardless of intent, to prevent artificial price suppression. The majority of cases involved investment advisers and hedge funds, with notable violators including Harbinger Capital Partners, D.E. Shaw, Blackthorn, Touradji Capital, and UBS O’Connor. The SEC found systemic compliance failures, including lack of employee training, inadequate surveillance systems, and improper coordination between trading accounts that undermined the separate accounts exception. Although Rule 105 provides three exceptions—bona fide purchases, separate accounts, and investment companies—firms frequently misapplied them due to poor internal controls. The SEC issued a risk alert urging firms to strengthen compliance programs, implement real-time monitoring, and ensure clear segregation of trading activities. The agency stressed that after-the-fact remediation does not absolve liability and that Rule 105’s strict liability nature makes proactive compliance essential to avoid enforcement action.
Extracted insights
- agency Securities and Exchange Commission
- Office Of Compliance Inspections And Examinations issued Rule 105 Of Regulation M guidance
- SEC collected $42 million in disgorgement, penalties, and interest
- SEC settled over 40 Rule 105 enforcement actions
- Rule 105 Of Regulation M prohibits purchasing securities in follow-on and secondary offerings after short sales
- SEC amended Rule 105 in 2007
- Rule 105 makes unlawful purchasing securities in firm commitment equity offerings after short sales
- Rule 105 provides three exceptions: bona fide purchase, separate accounts, investment companies
NATIONAL EXAM PROGRAM RISK ALERT In this Alert Topic: Compliance issues related to Rule 105 of Regulation M, which governs short selling prior to pricing of certain offerings. Key Takeaways: Investment advisers, investment companies, and broker-dealers should review their compliance programs to promote compliance with Rule 105 of Regulation M. By the Office of Compliance Inspections and Examinations 1 Volume III, Issue 4 September 17, 2013 (“Rule 105” or “the Rule”) from examiners of the National Exam Program (“NEP”) firms’ 1 --- page 2 --- at a discount to a stock’s closing price the “bona fide purchase” E filed under the Securities Act of 1933 (“offered securities”), it shall be unlawful for any person to sell short (“Rule 105 restricted period”) --- page 3 --- • Rule’s • SEC order, investment personnel either misunderstood or were unaware of Rule 105’s requirements, the firm’s --- page 4 --- UBS O’Connor’s remedial efforts 4 --- page 5 --- comments and suggestions about how the Commission’s examination 5 --- page 6 --- 6 --- page 7 --- 7 --- page 8 --- Ontario Teachers’ Pension Plan Board 8 --- page 9 --- 9 --- page 10 --- This Risk Alert is intended to highlight for firms risks and issues that the staff has identified in the course of examinations regarding compliance with Rule 105 of Regulation M. In addition, this Risk Alert describes factors that firms may consider to (i) assess their supervisory, compliance and/or other risk management systems related to these risks, and (ii) make any changes, as may be appropriate, to address or strengthen such systems. These factors are not exhaustive, nor will they constitute a safe harbor. Other factors besides those described in this Risk Alert may be appropriate to consider, and some of the factors may not be applicable to a particular firm’s business. While some of the factors discussed in this Risk Alert reflect existing regulatory requirements, they are not intended to alter such requirements. Moreover, future changes in laws or regulations may supersede some of the factors or issues raised here. The adequacy of supervisory, compliance and other risk management systems can be determined only with reference to the profile of each specific firm and other facts and circumstances. 10
NATIONAL EXAM PROGRAM RISK ALERT In this Alert Topic: Compliance issues related to Rule 105 of Regulation M, which governs short selling prior to pricing of certain offerings. Key Takeaways: Investment advisers, investment companies, and broker-dealers should review their compliance programs to promote compliance with Rule 105 of Regulation M. By the Office of Compliance Inspections and Examinations 1 Volume III, Issue 4 September 17, 2013 (“Rule 105” or “the Rule”) from examiners of the National Exam Program (“NEP”) firms’ 1 --- page 2 --- at a discount to a stock’s closing price the “bona fide purchase” E filed under the Securities Act of 1933 (“offered securities”), it shall be unlawful for any person to sell short (“Rule 105 restricted period”) --- page 3 --- • Rule’s • SEC order, investment personnel either misunderstood or were unaware of Rule 105’s requirements, the firm’s --- page 4 --- UBS O’Connor’s remedial efforts 4 --- page 5 --- comments and suggestions about how the Commission’s examination 5 --- page 6 --- 6 --- page 7 --- 7 --- page 8 --- Ontario Teachers’ Pension Plan Board 8 --- page 9 --- 9 --- page 10 --- This Risk Alert is intended to highlight for firms risks and issues that the staff has identified in the course of examinations regarding compliance with Rule 105 of Regulation M. In addition, this Risk Alert describes factors that firms may consider to (i) assess their supervisory, compliance and/or other risk management systems related to these risks, and (ii) make any changes, as may be appropriate, to address or strengthen such systems. These factors are not exhaustive, nor will they constitute a safe harbor. Other factors besides those described in this Risk Alert may be appropriate to consider, and some of the factors may not be applicable to a particular firm’s business. While some of the factors discussed in this Risk Alert reflect existing regulatory requirements, they are not intended to alter such requirements. Moreover, future changes in laws or regulations may supersede some of the factors or issues raised here. The adequacy of supervisory, compliance and other risk management systems can be determined only with reference to the profile of each specific firm and other facts and circumstances. 10