SEC Press press_release 6 KB 2,834 chars

Press Release: SEC Votes to Adopt Final Amendments to Rule 105 of Regulation M, Short Selling in Connection With a Public Offering

Release: 2007-120

summary

The SEC amended Rule 105 of Regulation M to prohibit traders who short sell during the restricted period before a public offering from purchasing shares in that offering, closing loopholes exploited to lock in guaranteed profits at the expense of issuers and shareholders.

paragraph

The SEC unanimously adopted amendments to Rule 105 of Regulation M on June 20, 2007, to combat abusive short-selling practices in public offerings where traders would short sell shares before pricing and profit by covering with lower-priced offering shares. The revised rule shifts the prohibition from covering short positions with offering shares to outright banning any purchase in the offering by those who sold short during the restricted period. Exceptions were included for investment companies and unrelated accounts making independent trading decisions, and a 'bona fide purchase' exception allows participation if a purchase is made before pricing; the rule became effective 60 days after publication in the Federal Register.

narrative

On June 20, 2007, the SEC unanimously adopted amendments to Rule 105 of Regulation M to address systemic market manipulation in public offerings, where traders exploited loopholes to short sell shares before pricing and then profit by covering their positions with shares purchased at the discounted offering price. The original rule prohibited covering short sales with offering shares, but traders circumvented it using complex strategies to conceal the prohibited activity, prompting the SEC to refocus the prohibition on the purchase itself rather than the cover. Under the amended rule, any person who sells short during the restricted period prior to pricing is barred from purchasing the offered security, eliminating the incentive for manipulative trading. To prevent undue restrictions on legitimate market activity, the rule includes exceptions for investment companies and unrelated accounts that make independent trading decisions without coordination or profit-sharing. Additionally, a 'bona fide purchase' exception permits participation in the offering if the trader made a legitimate purchase of the security before the offering was priced. The amendments were originally scheduled for June 13, 2007, but were postponed to clarify their application to entities with related accounts. The rule became effective 60 days after publication in the Federal Register, reinforcing market integrity by ensuring offering prices reflect true supply and demand.

Enriched metadata

Scheme: market-manipulation (100%)

Classified market-manipulation(confidence 100%). EDGAR detection: forms SC 13D/G/13F· recall 53% / precision 9%. detection rule →

Extracted insights

Entities 3

scheme_term abusive short selling and market manipulation
company purchasing in the offering after a short sale in the securities
agency Securities and Exchange Commission

Triples 11

Securities and Exchange Commission voted to adopt amendments to strengthen Rule 105 of Regulation M
Rule 105 helps prevent abusive short selling and market manipulation
Amendments replace the rule's current limitation on covering the short sales
Amendments prohibit purchasing in the offering after a short sale in the securities
Change triggered by persistent non-compliance with the rule
Person prohibited from purchasing the offered security
Amended rule includes a provision to allow a restricted period short seller to participate in an offering
Amended rule includes exceptions concerning investment companies and certain other entities
Rule does not prevent one account from purchasing in an offering
Matter postponed to clarify the amendment's application to entities with certain related accounts
Rule 105 amendments effective 60 days after publication in the Federal Register

View original SEC press releasesec.gov

Extracted body text (2,834c)

SEC Votes to Adopt Final Amendments to Rule 105 of Regulation M, Short Selling in Connection With a Public Offering FOR IMMEDIATE RELEASE 2007-120 Washington, D.C., June 21, 2007 - The Securities and Exchange Commission voted unanimously on Wednesday, June 20, 2007, to adopt amendments to strengthen Rule 105 of Regulation M. Rule 105 helps prevent abusive short selling and market manipulation to ensure that offering prices are set by natural forces of supply and demand for the securities being offered rather than by manipulative activity. When a trader expects to receive shares in an offering, there is an incentive to sell short prior to pricing an offering and then cover that short position with shares bought at the reduced offering price. By doing so, the trader can cover the short sale with minimal risk, and generally lock in a guaranteed profit — to the detriment of the issuer and the other shareholders. The amendments change the way the rule works to prevent this from happening. They replace the rule's current limitation on covering the short sales in the offering with a prohibition on purchasing in the offering after a short sale in the securities. This change was triggered by persistent non-compliance with the rule and a string of strategies to conceal the prohibited covering. Under the amended rule, if a person sells short during the restricted period prior to pricing, that person is prohibited from purchasing the offered security. Thus, the amended rule changes the prohibited activity from covering to purchasing the offered security. In order to ensure that the rule does not unduly limit the pool of possible purchasers in follow on and secondary offerings, it includes a provision to allow a restricted period short seller to participate in an offering if the seller makes a bona fide purchase prior to pricing an offering. Moreover, the amended rule also includes exceptions concerning investment companies and certain other entities that make separate trading and investment decisions. Thus, for example, the rule does not prevent one account from purchasing in an offering even though a related account sold short during the restricted period where the accounts were not coordinating their trading or sharing profits. This matter was originally scheduled for the June 13th open meeting, but was postponed in order to clarify the amendment's application to entities with certain related accounts. The Rule 105 amendments will be effective 60 days after publication in the Federal Register. The full text of the detailed releases concerning these items will be posted to the SEC Web site as soon as possible. Additional materials: Video of Chairman's Statement Windows Media Player (9 MB) QuickTime (10 MB) http://www.sec.gov/news/press/2007/2007-120.htm Home | Previous Page Modified: 06/21/2007

OCR text (2,834c · plain-text · 99% conf)