Key Takeaways
- • The Managed Funds Association is petitioning the SEC to relax Rule 105 of Regulation M, which currently prohibits hedge funds from purchasing shares in public offerings if they have recently sold short the same security.
- • Rule 105 applies to hedge funds holding short positions equivalent to 2.5% or more of a company's outstanding shares, creating operational constraints on participation in equity capital raises.
- • Hedge fund groups argue the regulation impedes their ability to participate in public offerings and claim the rules create conflicting disclosure requirements around securities lending and short-selling activity.
- • A coalition of hedge funds has pursued legal action, including lawsuits to invalidate short-selling rules, with executives planning to engage both the SEC and Congress to advocate for regulatory relief.
- • The dispute centers on balancing market transparency mandates (stemming from Dodd-Frank requirements) against hedge fund operational flexibility in capital markets participation.
Summary
The Managed Funds Association, a leading trade group representing hedge funds and alternative investment managers, is formally requesting that the Securities and Exchange Commission revise short-selling regulations that the group contends restrict legitimate participation in public equity offerings. The primary focus of this regulatory push is Rule 105 of Regulation M, which generally prohibits a person from purchasing equity securities in a public offering if that person has previously sold short the same security.
Under current SEC rules, the restriction applies broadly to hedge funds and other entities that hold short positions equivalent to 2.5% or more of a company's outstanding shares. The Managed Funds Association argues this threshold creates operational friction that prevents hedge funds from efficiently deploying capital and participating in underwritten offerings—a core component of equity capital market activity. The group contends that these restrictions are outdated and impede the natural market-making and hedging activities that hedge funds employ to generate returns.
Beyond the Managed Funds Association's regulatory petition, a broader coalition of hedge fund groups has pursued more aggressive legal strategies, including lawsuits challenging the validity of related short-selling rules. These groups claim that existing regulations contain conflicting requirements around disclosure of securities lending and short-selling activity. Hedge fund executives and investment managers have signaled plans to increase pressure on both the SEC and Congress, initiating meetings aimed at easing the disclosure and participation requirements embedded in current short-selling frameworks.
The underlying regulatory framework stems from Dodd-Frank mandates designed to increase transparency around securities lending and short selling activity. While these disclosure requirements have faced judicial scrutiny—with the Fifth Circuit remanding certain rules for reconsideration—the core tension remains: balancing the SEC's mandate for market transparency against hedge funds' operational needs in competitive capital markets. The outcome of the Managed Funds Association's petition and concurrent legal challenges could materially reshape the landscape for hedge fund participation in primary equity offerings and short-selling coordination strategies.
Under current SEC rules, the restriction applies broadly to hedge funds and other entities that hold short positions equivalent to 2.5% or more of a company's outstanding shares. The Managed Funds Association argues this threshold creates operational friction that prevents hedge funds from efficiently deploying capital and participating in underwritten offerings—a core component of equity capital market activity. The group contends that these restrictions are outdated and impede the natural market-making and hedging activities that hedge funds employ to generate returns.
Beyond the Managed Funds Association's regulatory petition, a broader coalition of hedge fund groups has pursued more aggressive legal strategies, including lawsuits challenging the validity of related short-selling rules. These groups claim that existing regulations contain conflicting requirements around disclosure of securities lending and short-selling activity. Hedge fund executives and investment managers have signaled plans to increase pressure on both the SEC and Congress, initiating meetings aimed at easing the disclosure and participation requirements embedded in current short-selling frameworks.
The underlying regulatory framework stems from Dodd-Frank mandates designed to increase transparency around securities lending and short selling activity. While these disclosure requirements have faced judicial scrutiny—with the Fifth Circuit remanding certain rules for reconsideration—the core tension remains: balancing the SEC's mandate for market transparency against hedge funds' operational needs in competitive capital markets. The outcome of the Managed Funds Association's petition and concurrent legal challenges could materially reshape the landscape for hedge fund participation in primary equity offerings and short-selling coordination strategies.
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