The SEC’s Office of Compliance Inspections and Examinations issued a National Exam Program Risk Alert (the “Risk Alert”) highlighting compliance issues relating to Rule 105 of Regulation M of the Securities Exchange Act of 1934 (“Rule 105”). The Risk Alert was issued the same day that the SEC announced the settlement of enforcement actions related to violations of Rule 105 against over 20 firms.
Rule 105 prohibits purchasing securities from an underwriter, broker or dealer participating in follow-on and secondary firm commitment equity offerings when the purchaser has entered into short sales in those same securities within a specified amount of time prior to the pricing of an offering, which is often five business days prior to such pricing. A short sale is defined as a sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. Rule 105 only applies to firm commitment offerings and includes exceptions for certain “bona fide” purchases, purchases in separate accounts, and purchases by investment companies, in each case as long as certain conditions are met.
The Risk Alert reminds firms to provide training to their employees regarding the application of Rule 105, to develop and implement policies and procedures reasonably designed to achieve compliance with the Rule, and to enforce those policies and procedures. The Risk Alert also provides reference resources for Rule 105 and a list of settled Rule 105 enforcement actions.