Publications

SEC Finalizes New Rule on Short Selling in Connection with a Public Offering

Fall 2007
Marc E. Elovitz
Investment Management Developments - Fall 2007

The Securities and Exchange Commission (“SEC”), on Aug. 6, 2007, announced the final amendments to Rule 105 of Regulation M under the Securities Exchange Act of 1934, establishing a new bright line rule that prohibits selling short an equity security during a restricted period and then purchasing the same security in a public offering. The rule as amended (the “Final Rule”) includes exceptions for: (1) a “bona fide purchase” made prior to pricing of the offering; (2) trading by separate accounts in certain circumstances; and (3) trading by registered investment companies in certain circumstances. The Final Rule also clarifies some additional modifications to the rule. The Final Rule has been effective since Oct. 9, 2007. Special attention to the Final Rule should be paid by advisers to multiple funds, because a decision that one fund will put on a short position, or will seek an allocation in a public offering, may restrict affiliated or related funds from trading unless they fit into the separate-accounts exception.