The SEC Continues its “Broken Windows” Initiative with Charges of Late Filings of Ownership Reporting and Rule 105 Violations


In the last week, the Securities and Exchange Commission has announced charges in two separate investigations related to its “Broken Windows” initiative, signaling that the Commission’s focus on what some may characterize as “minor violations” will continue. In October 2013, Chair Mary Jo White announced at the Securities Enforcement Forum that the SEC would be increasing its focus on “control failures, negligence-based offenses, and even violations of prophylactic rules with no intent requirement” as part of its “Broken Windows” initiative. The broken windows theory – espoused by former New York City Mayor Rudy Giuliani – holds that allowing those who break a window to go unpunished signals that small crimes are tolerated and, as a result, leads to more and larger crimes. The SEC’s recent actions charged numerous individuals and companies for late filings of Forms 4 and Schedules 13-D and 13-G (reporting securities holdings and transactions) and charged dozens of hedge funds and private equity firms with participating in offerings following short sale activity prohibited by Rule 105 of Regulation M. We can expect to see coordinated investigations of and enforcement announcements by the SEC in coming months related to arguably minor rule violations.

Late Filings

The SEC announced charges on September 10, 2014, against 18 individuals, 10 investment firms, and 6 publicly traded companies for violating or contributing to violations of securities laws requiring prompt reporting of holdings and transactions in company stock by officers, directors, or major shareholders. Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires directors, officers, and certain beneficial owners of registered stock to report a change in ownership of that stock within two days of a transaction. These transactions must be reported on the familiar Form 4. In addition, Exchange Act Rule 13d-1 requires that certain new beneficial owners of registered company stock file a Schedule 13-D or 13-G within 10 days of acquiring that stock.

According to the SEC, the individuals, firms, and companies charged with violations were “repeatedly filing late,” in some cases delaying their filings by weeks, months, or even years (although some filings were late by as little as one or two days). Thirty-three of the 34 individuals and companies have settled the Commission’s charges and paid penalties ranging from $25,000 to $150,000. Following the announcement, SEC New York Regional Director Andrew M. Calamari stated, “The reporting requirements in the federal securities laws are not mere suggestions, they are legal obligations that must be obeyed. Those who fail to do so run the risk of facing an SEC enforcement action.”

Rule 105 Violations

The SEC has also brought charges against 42 firms in two separate announcements for violating Rule 105 of the Exchange Act, a rule designed to prevent firms from participating in public stock offerings after short selling the same stock during a restricted period. In September 2013, the SEC charged 23 firms and obtained $14 million in settlements. This week, the SEC announced additional actions against 19 firms for Rule 105 violations in a continuation of its efforts to “enhance enforcement of Rule 105.” In this group of actions, the disgorgement, interest, and penalties ranged from $70,000 to more than $3.6 million (one firm attested to the SEC that it was financially unable to pay a penalty). Total recovery by the Commission exceeded $9 million.

With Chair White’s announcement that the Commission is focused on pursuing “all types of wrongdoing,” we can expect to see more enforcement actions targeted at arguably minor violations. For example, the recently amended Regulation D of the Securities Act of 1933 may soon be a focus. In September 2013, a revised Rule 506 went into effect, pursuant to which issuers in private offerings may offer securities through means of general solicitation so long as, among other things, all investors are accredited investors, and the issuer takes reasonable steps to verify the investors’ accredited status. (You can read our coverage of these amendments here.) The SEC has been increasingly focused in some current investigations on the reasonableness of issuers’ efforts to verify potential investors’ accredited status under the new Rule 506(c), and many issuers are currently responding to Commission inquiries in this regard.

For additional information regarding any of these topics, please contact one of the lawyers listed below:

Kit Addleman


Ronald W. Breaux

Kathleen M. Beasley


David Siegal


Timothy Newman

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