The U.S. Securities and Exchange Commission has proposed amendments to the Investment Company Act’s cross-trading rule, specifically targeting Rule 17a-7. This regulation permits transactions in securities between registered funds and their affiliates under defined conditions. The proposal aims to modernize and expand the rule to allow cross trades that benefit registered funds and shareholders by reducing trading costs, while implementing enhanced investor protection measures.
Since the initial adoption of Rule 17a-7 in 1966, registered funds utilized it for both equity and fixed-income securities. However, the 2020 adoption of the fund valuation rule effectively restricted cross trading for most fixed-income securities. The new proposal seeks to restore this ability and update conditions related to pricing and oversight, acknowledging market developments toward more verifiable and transparent pricing. Additionally, the amendments would require aggregated reporting of trading activity for funds engaging in cross trades to increase transparency. The proposal will be published on SEC.gov and in the Federal Register, with a comment period open for 60 days after publication.
This regulatory move addresses a structural inefficiency created when the 2020 fund valuation rule inadvertently limited cross-trading capabilities for fixed-income assets. By restoring these mechanisms, the SEC acknowledges that modern pricing data allows for safer execution of internal transfers, potentially lowering transaction friction for institutional investors without compromising fiduciary standards. The emphasis on aggregated reporting suggests a shift from purely procedural compliance to outcome-based transparency, ensuring that cost savings are demonstrably passed to shareholders rather than absorbed by intermediaries.
Market participants should monitor how asset managers adapt their operational infrastructure to meet the new oversight and pricing verification requirements. The success of this expansion hinges on whether the enhanced safeguards prevent conflicts of interest while genuinely delivering the promised economic benefits. If implemented effectively, this could serve as a template for further modernization of legacy regulations that have become misaligned with current technological capabilities in trade execution and valuation.
