SEC Proposes Expanding Securities Eligible for Cross Trading by Registered Funds

The SEC is proposing amendments to Rule 17a-7 under the Investment Company Act of 1940. The rule permits transactions between registered funds and certain affiliates under specific conditions. The proposal would expand the securities eligible for these trades and update the safeguards governing them.

The most important change is restoring the ability to cross trade most fixed-income securities. The SEC would also modernize requirements for pricing and oversight. These changes reflect markets where pricing can be more verifiable and transparent. A qualifying cross trade could help a fund avoid costs linked to an open-market transaction.

The proposal would additionally require aggregated reporting of trading activity and cross trades by participating registered funds. The SEC says these measures would provide more transparency and protect investors. The proposal will be published on SEC.gov and in the Federal Register. Comments will remain open for 60 days after Federal Register publication.

A cross trade is a transaction in which a registered fund trades securities directly with an affiliate, rather than with an unrelated market participant. Rule 17a-7 permits these transactions only under specified conditions. The arrangement connects two related parties while requiring safeguards intended to protect fund investors.

For example, one registered fund might need to sell a security while an affiliated fund wants to buy it. A direct transaction could let the funds exchange the security without separately placing orders in the open market. The key benefit identified by the SEC is avoiding costs associated with open-market trades. Those costs may otherwise reduce investment returns.

The SEC says cross trades can benefit funds and shareholders when executed appropriately. Its proposal would update pricing and oversight conditions and add aggregated reporting. These requirements are meant to support fair transactions and greater transparency while allowing funds to capture potential trading-cost savings.

The proposed expansion would cover most fixed-income securities as well as the equity securities that registered funds historically cross traded. The SEC says the change would restore a capability that funds used after Rule 17a-7 was adopted in 1966. That would broaden the rule’s practical reach across investment markets.

For example, a registered fund holding a bond could potentially sell it directly to an affiliated fund seeking that security, subject to the rule’s conditions. The direct exchange could reduce costs compared with trading through the open market. Updated pricing requirements would recognize market developments that have made pricing more verifiable and transparent.

The expansion is proposed, not yet final. The SEC would pair broader eligibility with modernized pricing and oversight requirements. Participating registered funds would also report their trading activity and cross trades on an aggregated basis. The comment period lasts 60 days after publication in the Federal Register.

The article links the restriction to the Investment Company Act’s fund valuation rule, adopted in 2020. After that rule was adopted, cross trading in most fixed-income securities was effectively restricted. The source does not describe the exact legal or operational mechanism producing that result. It does say the Commission recognized possible revisions to the cross-trading rule at the time.

Before 2020, registered funds relied on Rule 17a-7 to cross trade both equity and fixed-income securities. The later valuation rule changed the regulatory setting for those transactions. As a result, the earlier ability to cross trade most fixed-income securities was no longer available in practice under the existing framework.

The new proposal responds to that history. It would restore most fixed-income cross trading while updating conditions for pricing and oversight. The SEC says market developments have made pricing more verifiable and transparent. The proposal also adds aggregated reporting to increase transparency. It remains subject to public comment before any final action.

A qualifying cross trade can reduce the costs a fund would face when buying or selling through the open market. The SEC describes this as a potential benefit for registered funds and their shareholders. Lower transaction costs leave more of the fund’s money available for investment or reduce the expenses associated with carrying out a trade.

For example, if one affiliated fund wants to sell a security and another wants to buy it, they may trade directly under Rule 17a-7’s conditions. The funds can avoid some costs associated with finding an outside market participant and executing separate open-market orders. The SEC says those savings can then be passed on to investors.

The benefit depends on appropriate execution and compliance with investor protections. The proposal would modernize pricing and oversight conditions and require aggregated reporting. These measures are intended to help ensure that the cross trade serves fund investors rather than disadvantaging them. The proposal is not yet final.

The SEC proposal would pair broader trading eligibility with stronger investor protections. It would modernize conditions governing the pricing and oversight of cross trades. The SEC says these changes recognize market developments that have made pricing more verifiable and transparent. Reliable pricing helps support transactions that do not disadvantage a fund or its shareholders.

The proposal would also require registered funds that engage in cross trading to report their trading activity and cross trades on an aggregated basis. This reporting would give investors and others additional transparency about the scale of the activity. The article does not specify the exact reporting format or detailed oversight procedures.

Together, the measures would create a broader but more closely monitored framework. Funds could potentially cross trade most fixed-income securities while following updated pricing and oversight requirements. The SEC says the goal is to allow appropriate cost savings while protecting investors. The proposal will receive comments for 60 days after Federal Register publication.

A registered fund generally is an investment vehicle registered under the Investment Company Act. It pools money from shareholders and invests that combined capital in securities. This structure lets many investors participate in a portfolio managed within the fund’s regulatory framework. The article focuses on how such funds may transact with affiliates.

For example, shareholders contribute money to a fund, and the fund uses the pool to buy securities. If an affiliated fund has a matching need, the fund may potentially trade directly with it under Rule 17a-7. Avoiding some open-market trading costs could benefit the pooled portfolio and its shareholders.

The article does not describe the full legal definition or every type of registered fund. It does establish that registered funds and their shareholders are the beneficiaries the SEC seeks to protect. The proposal would expand eligible securities, update pricing and oversight, and require aggregated reporting for funds engaging in cross trading.