Rule 105 of Regulation M changes would reduce legal risk for investors, restore the rule’s original purpose, and support efficient capital raising
Washington, D.C. — MFA urged the Securities and Exchange Commission (SEC) to reform Rule 105 of Regulation M in a letter submitted today. The letter recommends targeted changes to reduce legal risk for investors and improve capital formation in U.S. public markets.
“Rule 105 was designed to protect market integrity, not penalize legitimate investors who had no knowledge an offering was coming,” said Jennifer Han, MFA Chief Legal Officer. “Reforming the rule will strengthen U.S. public markets by reducing unnecessary legal risk for investors, encouraging broader participation in offerings, and helping issuers raise capital at better prices.”
Rule 105 generally bars investors from buying shares in a public offering if they recently sold the same stock short. The rule is designed to prevent manipulative short selling that could push down the offering price. However, the SEC has taken a draconian approach to enforcing Rule 105, blocking fund managers from participating in offerings based on short sales made before the public has any knowledge an offering is planned. This has harmed capital raising by discouraging investment managers from participating in stock offerings when there was clearly no intent to manipulate the market. MFA recommends revising the rule so it better targets harmful behavior without deterring legitimate investment.
The letter recommends the following revisions to Rule 105:
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Amend the definition of the “restricted period” so it begins only after an offering is publicly announced.
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Clarify that investment managers may rely on underwriter-provided information on when a security is priced, so they can avoid violating the restricted period.
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Confirm that investment managers can rely on the separate account exception even if they don’t meet all six criteria, as long as accounts trade independently.
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Reevaluate the SEC’s approach to disgorgement to ensure penalties are proportionate and aligned with the rule’s policy goals.
Read the full letter here.
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About the global alternative asset management industry
The global alternative asset management industry — including hedge funds, private credit funds, and hybrid funds — serves thousands of public and private pension funds, charitable endowments, foundations, and other global institutional investors. The industry provides portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets throughout the economic cycle.
About MFA
Managed Funds Association (MFA), based in Washington, D.C., New York City, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest it, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 fund manager members, including traditional hedge funds, private credit funds, and hybrid funds, that employ a diverse set of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors diversify their investments, manage risk, and generate attractive returns throughout the economic cycle.
