OCIE Issues Short Selling Risk Alert

September 17, 2013

The SEC’s  Office of Compliance Inspections and Examinations (OCIE) issued its latest Risk Alert, this time focusing on controls to ensure that financial firms engaging in short sales in securities comply with Rule 105 of Regulation M. That rule generally prohibits purchasing securities in follow-on and secondary offerings when the purchaser has effected short sales in the securities within a specified amount of time prior to the pricing of an offering. It was noted that the SEC has settled over 40 actions in which it found that firms and/or individuals have violated Rule 105.

The Risk Alert highlighted one practice that violates Rule 105. OCIE stated that the offering prices of follow-on and secondary offerings generally are set at a discount to a stock’s closing price just prior to pricing. A person who expects to receive offering shares may attempt to profit by aggressively short-selling the security just prior to the pricing of the offering, thereby depressing the offering price, and then purchasing lower-priced securities in the offering. Rule 105 makes it unlawful for a person to purchase securities in a firm commitment equity offering from an underwriter or broker-dealer participating in the offering if that person sold short the security that is the subject of the offering during the Rule 105 restricted period, absent an available exception.

The Risk Alert also reviewed each of the three exceptions to Rule 105.

Click here to access the risk alert.


Investment Advisers, Investment Companies