SEC Brings First Rule 105 Case Of New Administration

Summary:

On August 4, 2025, The Securities and Exchange Commission (“Commission” or “SEC”) announced settled charges against a Colorado-based registered investment adviser (“RIA”)⁽¹⁾, for violating SEC Rule 105 (under Regulation M) when they purchased stock in a public offering after selling short the same stock during a period when the SEC rule prohibited that purchase
Rule 105 of Regulation M is designed to prevent market participants from depressing the price of a US registered secondary offering by short selling during a generally 5-day window prior to participating in the offering. The rule provides an exception for a “bona fide purchase” if certain requirements are met.
Without admitting or denying the findings in the SEC’s order, the RIA agreed to pay a civil money penalty of $250,000 without any disgorgement.

Conduct:

In November 2022, the RIA purchased an equity security for the accounts of six of its private fund clients in a covered offering after they had sold short the same security on behalf of those clients during Rule 105’s restricted period. There was no mention of the adviser availing themselves of the bona fide repurchase exception.
While the short sales and the subsequent purchases, violated Rule 105, the Commission noted the RIAs cooperation with the staff’s investigation, specifically by voluntarily gathering documents and communications, conducting a review for prior violations (of which none were found), and presenting these findings to the staff.

Key Takeaways:

The SEC and Rule 105: The Commission has a well-established history of enforcing Rule 105, having brought more than three dozen cases over the past decade. As a very prescriptive regulation, Rule 105 lends itself to detection through the SEC’s increasingly sophisticated analytics and surveillance capabilities – areas in which the Commission has made notable advancements. Coupled with its broader mandate to protect the integrity of the capital formation process, these developments suggest that Rule 105 enforcement activity under the Atkins administration will likely continue.
Rule 105 Controls and Considerations:
- While detective controls can identify Rule 105 violations after the fact, thoughtfully designed preventative controls are essential to minimizing risk.
  - For firms utilizing an Order Management System (OMS), front-end controls can be implemented within the OMS to flag or block potentially violative orders purchase securities in an offering during the restricted period.
  - Firms without an OMS should still establish front-end preventative controls, though these will need to be manual. In such cases, clear procedures, training, and compliance/supervisory pre-review are critical to ensure compliance.
- Although the 5-day restricted period may appear straightforward, it can be deceptively difficult to calculate accurately. This is often due to the timing of pricing announcements and communications from underwriters. If any short selling activity is identified during the restricted period, it is important to consult with Compliance before participating in the offering. This includes short sales that are subsequently covered in whole or in part during Rule 105 bona fide repurchase window.

^{(1) In the Matter of Sourcerock Group LLC}