SEC Proposes Modernization of Cross-Trading Rule for Registered Funds

Background on the Cross-Trading Rule

The Securities and Exchange Commission has long maintained a regulatory framework governing transactions between registered investment funds and their affiliates. Rule 17a-7 under the Investment Company Act of 1940 was originally adopted in 1966 to permit certain cross trades under controlled conditions. These transactions allow funds to exchange securities directly with affiliated entities rather than executing through the open market.

The primary rationale for permitting such trades has been the potential to reduce transaction costs that would otherwise be incurred in broker-mediated trades. When executed properly, these savings can be passed along to fund shareholders, improving net returns. For decades following its adoption, the rule supported cross trading in both equity securities and fixed-income instruments, providing flexibility to portfolio managers in rebalancing or adjusting positions.

Impact of the 2020 Fund Valuation Rule

The regulatory landscape shifted with the adoption of the Investment Company Act’s fund valuation rule in 2020. That measure effectively curtailed the ability of registered funds to engage in cross trades involving most fixed-income securities. The restriction arose from new requirements around valuation practices that proved difficult to reconcile with existing cross-trading conditions.

At the time the valuation rule was finalized, regulators acknowledged that the interaction with cross-trading provisions merited further review. The limitation on fixed-income cross trades has since constrained certain portfolio management techniques, particularly in bond markets where liquidity and pricing transparency have evolved considerably. The current proposal represents a direct response to those earlier observations.

Key Elements of the Proposed Amendments

The amendments would restore the ability to cross trade most fixed-income securities while updating the rule’s conditions to reflect contemporary market practices. Among the changes are modernized requirements related to pricing that take into account increased transparency and verifiability in current fixed-income markets. These updates are intended to maintain appropriate safeguards while expanding the scope of permissible transactions.

Additional provisions focus on oversight and reporting. The proposal introduces requirements for aggregated reporting of both overall trading activity and specific cross trades by funds that utilize the rule. This enhanced transparency is designed to provide regulators and investors with a clearer view of how cross trading is being employed across registered funds. The SEC has emphasized that any expansion must remain subject to strengthened investor protection measures.

Statements and Rationale from the Commission

SEC Chairman Paul S. Atkins described the proposal as a further step in modernizing regulatory frameworks to align with today’s market realities. In a prepared statement, he noted that properly executed cross trades enable funds to avoid costs associated with open-market transactions and to deliver those savings to investors. The chairman indicated that the amendments would help expand these benefits while incorporating updated conditions.

The proposal seeks to balance efficiency gains for funds and their shareholders against the need for robust controls. By recognizing developments in pricing mechanisms that offer greater transparency, the amendments aim to reduce reliance on potentially subjective valuations. Whether these changes will ultimately produce measurable cost reductions remains subject to the outcome of the public comment process and any subsequent adjustments to the rule.

Next Steps and Comment Period

The proposed rule will be published on the SEC’s website and in the Federal Register. Once published, the public will have 60 days to submit comments. This period will allow market participants, investor advocates, and other stakeholders to provide input on the specific provisions, including the expanded eligibility for fixed-income securities and the new reporting obligations.

The Commission has also made available a fact sheet outlining the proposal in greater detail. Final adoption of any amendments will depend on the feedback received and the SEC’s assessment of how best to update the cross-trading framework. Until that process concludes, registered funds must continue operating under the existing version of Rule 17a-7 as modified by the 2020 valuation rule.

Source

U.S. Securities and Exchange Commission published this record on 2026-10-09. Pennington Financial accessed it on 2026-10-10.