Rule 105 Revisited: SEC Actions Remind Private Fund Managers About Participating in Offering After Selling Short
Highlights
SEC displays continued interest in enforcing Rule 105
Requirements must be mastered by fund managers whose strategies include shorting and purchasing in equity offerings
Rule 105 compliance is challenging but can be achieved with a focused effort
In late February 2023, the SEC announced two settled litigation proceedings against private fund managers for violating Rule 105 under the Securities Exchange Act. (1) These actions provide an opportunity for managers to revisit the scope and operation of Rule 105, which essentially bars an investor from purchasing shares in a public equity offering if the investor has sold the issuer’s shares short prior to the offering. This client alert reviews the basics of Rule 105; describes the facts in the two recent cases; and discusses how a fund manager can tailor its policies and procedures to avoid Rule 105 compliance problems.
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