Investment managers, when forming their first private fund, can claim exemption for the fund from registration as an investment company (pursuant to Section 3(c)(1) of the Investment Company Act of 1940) if the fund (1) has no more than 100 investors; and (2) is not sold in a public offering. However, in many situations as investor demand increases – threatening to surpass the 100 investor limit - the investment manager decides to initiate a secondary private fund, believing it too will be exempt from registration. The result is that the manager is managing 2 identical funds with 160 investments.

With this year’s U.S. Supreme Court (the “Court”) term coming to a close, there has been a flurry of rulings that may substantially impact the securities industry. While most are aware of the Court’s decision to invalidate the Defense of Marriage Act (“DOMA”), and the possible windfall that adviser’s may now experience as a result, there was another Court decisions that may also greatly impact investment advisory firms and their Chief Compliance Officers (“CCOs”).

Recently, the Florida Supreme Court issued a decision ruling that the state’s statute of limitations (“SOLs”), or laws that limit the time within which a party can bring a lawsuit against another party, applies not only to court proceedings, but also to securities arbitration cases between investors and their brokers. As such, this ruling allows securities arbitrators in Florida to cut the time investors have to file a complaint with the Financial Industry Regulatory Authority’s (“FINRAs”) arbitration division. This ruling may have a significant impact on those seeking to file such a complaint due to the large disparity between Florida and FINRA SOLs. Whereas FINRA typically allows investors to bring a claim if they are filed within six (6) years from the event giving rise to the claim, Florida law imposes a four (4) year deadline to file a negligence case, and a two (2) year deadline to bring a claim under Florida’s securities fraud law.

Recently, the Securities and Exchange Commission (“SEC”) charged a penny stock promoter, David F. Bahr of Rancho Santa Fe, California, with fraudulently arranging the purchase of over $2.5million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase stock. In doing so, Mr. Bahr allegedly violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. According to the claim, Mr. Bahr conspired with a purported business man with access to a network of “corrupt brokers” to artificially increase the trading price and volume of the company. In a twist worthy of Hollywood however, this businessman was actually an undercover FBI agent, who was gathering evidence against Mr. Bahr, and prevented the execution of the fraudulent plan.

This week, the US Supreme Court (the “Court”) delivered their opinion in the matter of Association for Molecular Pathology v. Myriad Genetics, 12-398. Going against years of precedent set by lower courts and the United States Patent and Trademark Office, the Court unanimously held that naturally occurring DNA sequences are “products of nature” and therefore cannot be patented. This ruling marks a potentially major transition in patent law, and may greatly limit the scope of patentable subject matter in the biotech industry.

Recently, the Securities and Exchange Commission (SEC) brought charges against Institutional Shareholder Services Inc. (ISS), a company that advises large investors on corporate proxy issues, claiming that ISS failed to safeguard its clients’ confidential votes. Specifically, the SEC claimed that an employee at ISS provided a proxy solicitor with material, non-public information revealing how more than 100 ISS clients intended to vote their proxy ballots, and thus violated Section 204A of the Investment Advisers Act of 1940. In exchange for this information, the employee received more than $30,000 worth of benefits including meals, tickets to concerts and sporting events, and an airline ticket. The SEC said that this breach was made possible because ISS lacked sufficient controls over employees’ access to confidential client vote information. While ISS neither admitted nor denied the charges, it agreed to a settlement with the SEC whereby ISS is required to pay $300,000 and retain an independent compliance consultant.

The Financial Industry Regulatory Authority (FINRA) is considering new rules that would require additional reporting requirements for dark pool trades made by broker-dealers. This announcement was made recently by Richard G. Ketchum, chief executive officer of FINRA, largely in response to Credit Suise Group AG’s decision to stop sharing data on the volume of its trades. Credit Suisse currently operates the largest U.S. dark pool.

This week, LPL Financial LLC (“LPL”) was fined $7.5 million by The Financial Industry Regulatory Authority (“FINRA”) who cited LPL for thirty-five (35) separate email system failures. FINRA asserted that these actions were a violation of the record keeping provisions of the federal securities laws and FINRA rules, as well as supervisory requirements under FINRA rules. According to FINRA, these failures prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm's email failures (LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email).

It’s a phrase often heard in business, “know who speaks for your company.” On its face, it sounds like a simple question, whose answer is easily ascertained. However, all too often, a business finds itself committed to an unwanted agreement; or liable for upholding promises made by one of its agents whom the firm did not realize had the power to bind the company. The law of agency describes the relationship between two parties, where one is a principal and the other is an agent who represents the principal in transactions with a third party. Understanding when an agent acts within the scope of authority granted by the principal when dealing with third parties, and therefore can bind the company, requires further discussion. The following is a short summation of the different ways an agent may obtain authority: