Byline: Peter Rawlings
Asset management firms need to condition traders to seek approval from compliance teams before participating in offerings of securities in which the firm may have a short position, Scott Black, general counsel and chief compliance officer at Hudson Bay Capital Management told attendees at a Practising Law Institute conference this week.
Asset management firms need to condition traders to seek approval from compliance teams before participating in offerings of securities in which the firm may have a short position, Scott Black, general counsel and chief compliance officer at Hudson Bay Capital Management told attendees at a Practising Law Institute conference this week.
Hudson Bay was one of more than 20 firms that settled Securities and Exchange Commission administrative proceedings in September over alleged violations under Rule 105 of Regulation M. The rule prohibits firms from selling short an equity security during a restricted period and then purchasing that same security through the offering (Complianceintel.com, 10/15). Hudson Bay settled without admitting or denying the SECas findings and agreed to pay a total of $949,454.27 in disgorgement, interest and a penalty. A spokeswoman for the firm declined to comment.
Twenty-one other firms accused by the Commission also settled without admitting or denying wrongdoing. One of the cases cited in the SECas announcement, involving G-2 Trading, is in a litigated administrative proceeding. A spokesman for the firm earlier did not respond to a request for comment.
Since there is no database capable of providing up-to-the-minute information on all SEC offerings, firms must lean on their traders to avoid violations, Black said. aTraders have to know to come to compliance.a He said Hudson Bay has taken the step of requiring traders to pre-clear transactions with the compliance department before participating in any secondary offerings.
Rule 105 can be a tricky, technical regulation for CCOs to grapple with, such as in the case of overnight offerings in a security in which a fund already has a short position, James Brigagliano, a partner at Sidley Austin and former deputy director of the SECas Division of Trading and Markets, told attendees during an earlier panel at the PLI event.
CCOs should also pay close attention to the two main exceptions from Rule 105, the so-called bona fide purchases and separate accounts exemptions, Brigagliano said. Creating robust compliance procedures around those exceptions can go a long way toward helping a firm guard against a possible enforcement action, he said. For instance, awe saw in the recent sweep that a number of funds had good separate account procedures and thus didnat get caught up,a Brigagliano noted.