SEC Sanctions Unregistered Fund Adviser for Regulation SHO Violations

One of the SEC’s core missions is to ensure fair, orderly and efficient markets. The SEC recently took aim at a fund adviser, along with one of its principals and one of its traders, for causing short sale and registration violations associated with a fund’s purchases and resales of securities from issuers. The SEC charged that a fund managed by the adviser told its executing brokers that certain sales of securities that the fund had contracted to acquire from issuers were “long” sales, even though the fund was not yet deemed to own those securities under Regulation SHO under the Securities Exchange Act of 1934. The brokers, in turn, violated Regulation SHO by improperly marking those sales as long. In addition, certain “equity line” agreements between the fund and issuers caused the fund to act as an unregistered dealer. This article analyzes the facts and circumstances that gave rise to the enforcement proceeding and the terms of the resolution, with added insights from H. Gregory Baker, partner at Patterson Belknap Webb & Tyler. See “SEC Settlement Suggests that Hedge Fund Managers Have Responsibility for Counterparties’ Reporting Obligations” (Jul. 23, 2015).

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