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U.S. Securities and Exchange Commission

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


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)



Modified: 06/21/2007