Fund Sponsor to Pay Over $5 Million for Incorrect Reading of Rule Exemption
The sponsor of Cayman-based hedge funds agreed to pay over $5 Million in disgorgement, interest and penalties for violations of Rule 105 arising from a misinterpretation of an exemption. Rule 105 prohibits the short selling of securities within 5 days before a public offering. The SEC charges that the respondent violated the rule 16 times over a two-year period when it allowed portfolio management teams to short securities when other portfolio management teams trading for the same fund bought shares in the public offering. According to the SEC, the respondent incorrectly relied on the Rule 105 “separate accounts exception” which allows trading by separate accounts without coordination of trading decisions. The SEC indicated that all portfolio management teams traded for one account (i.e. the fund) and not for separate accounts and frequently traded relevant information.
OUR TAKE: If a legal issue is less than clear, firms should consult counsel for a legal opinion or go directly to the SEC staff for interpretation, no-action letter, or exemptive order. As we have said before, sometimes it’s better to ask for permission than forgiveness.