The Managed Funds Association (MFA) urged the US Securities and Exchange Commission (SEC) to reform Rule 105 of Regulation M, recommending targeted changes to reduce legal risk for investors and improve capital formation in US public markets.
“Rule 105 was designed to protect market integrity, not penalize legitimate investors who had no knowledge an offering was coming,” said Jennifer Han, MFA chief legal officer, in a statement. “Reforming the rule will strengthen US public markets by reducing unnecessary legal risk for investors, encouraging broader participation in offerings, and helping issuers raise capital at better prices.”
Rule 105 generally bars investors from buying shares in a public offering if they recently sold the same stock short. The rule is designed to prevent manipulative short selling that could push down the offering price. However, the SEC has taken a draconian approach to enforcing Rule 105, blocking fund managers from participating in offerings based on short sales made before the public has any knowledge an offering is planned.
This has harmed capital raising by discouraging investment managers from participating in stock offerings when there was clearly no intent to manipulate the market. MFA recommends revising the rule so it better targets harmful behavior without deterring legitimate investment.
The letter recommends the following revisions to Rule 105:
- Amend the definition of the “restricted period” so it begins only after an offering is publicly announced.
- Clarify that investment managers may rely on underwriter-provided information on when a security is priced, so they can avoid violating the restricted period.
- Confirm that investment managers can rely on the separate account exception even if they don’t meet all six criteria, as long as accounts trade independently.
- Reevaluate the SEC’s approach to disgorgement to ensure penalties are proportionate and aligned with the rule’s policy goals.