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In the Matter of Back Bay Advisors, L.P.
Securities and Exchange Commission
Investment Advisers Act Release No. 2070 (2002)
Back Bay Advisors, L.P. (Back Bay) was the investment adviser to several mutual funds and managed multiple investment accounts for its indirect parent, Metropolitan Life Insurance Company (MetLife). From 1994 to 1999, Back Bay engaged in two categories of securities trades between client accounts (cross trades), in which each trading client was acting as principal: cross trades between the MetLife accounts and the mutual funds Back Bay advised and cross trades between the mutual funds. Both were generally prohibited as affiliated-person principal transactions under §§ 17(a)(1) and (2) of the Investment Company Act of 1940 (Company Act), but because the latter were transactions between registered investment companies with a common investment adviser—Back Bay—they were eligible for an exemption under Securities and Exchange Commission (SEC) Rule 17a-7 if (1) the trades were at the current market price, as determined under the rule; (2) no brokerage fee or other remuneration was charged; and (3) each investment company involved in the trades complied with recordkeeping requirements and board-approved procedures for Rule 17a-7 transactions. Back Bay’s employees were mostly unaware that the cross trades between MetLife and the mutual funds were prohibited by §§ 17(a)(1) and (2) and that the cross trades between the mutual funds were permitted only by complying with Rule 17a-7. The pricing methodology Back Bay used for the cross trades between mutual funds did not satisfy the current-market-price requirement of Rule 17a-7. After discovering this error, Back Bay’s chief investment officer attempted to conceal it by altering the firm’s trading records. Back Bay also paid a markup to the broker executing the trades, which was not permitted under Rule 17a-7. By not complying with Rule 17a-7’s price and brokerage-fee restrictions, Back Bay cost its mutual-fund clients over $200,000. Back Bay also caused these clients to violate Rule 17a-7’s recordkeeping requirements because it failed to inform them of the cross trades. The SEC brought an administrative proceeding against Back Bay for aiding and abetting its mutual funds’ violations of §§ 17(a)(1) and (2).
Rule of Law
Holding and Reasoning
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