In the past five years, the SEC has demonstrated its commitment to stamping out “manipulative” trading activity through numerous prosecutions of investment advisers for violating Rule 105 under Regulation M under the Securities Exchange Act of 1934 (Rule 105), which generally prohibits a person from selling an equity security short that is the subject of a firm commitment public offering and then purchasing such securities from an underwriter or broker participating in the offering if the short sale occurred in the five-day period ending with the pricing of such securities in the offering (restricted period). See “Touradji Capital Settlement Suggests That Having Employee Training on Rule 105 under Regulation M Without Policies to Prevent Violations Will Not Insulate a Firm From SEC Enforcement
,” Hedge Fund Law Report, Vol. 4, No. 46 (Dec. 21, 2011). The most recent of these enforcement actions, initiated against a large hedge fund manager, has resulted in a settlement order in which the SEC clearly communicated that it is very challenging for traders to qualify for the separate accounts exception from application of Rule 105. This article describes the factual and legal background of the action, the SEC’s legal analysis and the remedies. See also “Brookside Settlement Suggests That in Calculating Disgorgement Based on a Rule 105 Violation, the SEC Will Look to the Number of Shares Purchased in a Secondary Offering Rather Than the Number of Shares Sold Short Prior to the Offering
,” Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011).