## Facts

- Back Bay Advisors, L.P. served as investment adviser to several mutual funds and managed accounts for its indirect parent, Metropolitan Life Insurance Company (MetLife).
- From about 1994 to 1999, Back Bay arranged principal cross trades (client-to-client trades) in two forms: (1) between MetLife accounts and advised mutual funds, and (2) between mutual funds advised by Back Bay.
- The MetLife–fund trades involved transactions between a registered investment company and an affiliate, implicating the Investment Company Act’s prohibitions on affiliated principal transactions under § 17(a)(1)–(2).
- Some fund-to-fund cross trades could have qualified for Rule 17a-7, which permits certain cross trades between commonly advised funds only if conditions are met, including execution at “current market price,” no commissions or other remuneration, and required records and board procedures.
- Back Bay used pricing for fund-to-fund cross trades that did not satisfy Rule 17a-7’s “current market price” requirement.
- Back Bay paid an executing broker a markup on cross trades, contrary to Rule 17a-7’s prohibition on commissions, fees, or other remuneration (other than customary transfer fees).
- Back Bay did not adequately inform mutual fund clients about the cross trades and did not ensure required records were created and maintained to permit board oversight.
- The SEC found the mutual funds suffered aggregate losses exceeding $200,000 due to mispricing and improper brokerage costs.
- After the firm identified compliance problems, Back Bay’s chief investment officer altered trading records to conceal the violations.

## Issues

1. Whether Back Bay caused or aided and abetted violations of Investment Company Act § 17(a)(1)–(2) by effecting prohibited affiliated principal transactions between MetLife accounts and mutual funds.
2. Whether Back Bay’s mutual fund cross trades failed to satisfy Rule 17a-7 conditions, including “current market price,” no-remuneration, and recordkeeping/board-procedure requirements.
3. Whether Back Bay violated the Investment Advisers Act by engaging in deceptive or fraudulent conduct, maintaining inadequate compliance and supervision, and providing inaccurate or altered records to regulators.

## Decision

- The SEC entered an administrative order finding Back Bay caused and aided and abetted violations of Investment Company Act § 17(a)(1)–(2) through prohibited affiliated principal cross trades and through cross trades that did not qualify for Rule 17a-7.
- The SEC found Back Bay violated the Investment Advisers Act based on conflicted trading, improper pricing and charges, deficient compliance controls, and record alteration.
- The SEC imposed remedial relief typical of settled administrative proceedings, including a cease-and-desist order, censure, monetary remedies (such as disgorgement and penalties), and compliance-related undertakings.

## Legal Principles

- Investment Company Act § 17(a)(1)–(2) generally prohibits a registered investment company from engaging in principal purchases or sales with affiliates absent an available exemption or exemptive order.
- Rule 17a-7 provides a limited exemption for certain cross trades between commonly advised funds only if trades occur at the rule-defined “current market price,” involve no commissions/markups or other remuneration (except customary transfer fees), and meet specified recordkeeping and board-procedure requirements.
- An investment adviser’s fiduciary obligations and Advisers Act duties require fair dealing, appropriate conflict disclosure, and policies and procedures reasonably designed to prevent statutory and rule violations.
- Inaccurate, incomplete, or altered books and records can constitute independent misconduct and aggravate sanctions because such conduct impedes regulatory oversight and client governance.

## Conclusion

The SEC concluded that Back Bay’s affiliated cross-trading practices violated core restrictions on fund-affiliate principal transactions and failed to meet the strict conditions for Rule 17a-7 cross trades, and that its inadequate compliance and record alteration supported Advisers Act findings and remedial sanctions.


In re Back Bay Advisors, L.P., Investment Advisers Act Release No. 2070 (SEC 2002)