SEC Proposes Broader Cross-Trading Rules for Registered Funds

The Securities and Exchange Commission proposed broader cross-trading rules for registered funds on Oct. 9, seeking to restore a cost-saving option for most fixed-income transactions between funds and certain affiliates.

The proposal would amend Rule 17a-7 under the Investment Company Act of 1940. Cross-trading allows registered funds and eligible affiliates to trade securities directly with one another instead of using the open market, potentially reducing transaction costs for investors.

The SEC said the practice became largely unavailable for most fixed-income securities after the agency adopted its fund valuation rule in 2020. The proposed amendments would restore the ability of registered funds and affiliates to conduct those trades under updated conditions.

The rule’s conditions have not undergone substantive changes since the 1980s. The SEC’s proposal would modernize those requirements while preserving limits intended to govern transactions between related parties.

The proposal also would require registered funds to provide aggregated reports covering cross-trades and related trading activity. The reporting requirement is intended to give investors additional transparency into the transactions.

SEC Chair Paul Atkins said the changes would provide “clear rules of the road” and reflect how markets function while focusing on investor savings.

SEC staff from the Investment Management division prepared the proposal with assistance from the agency’s Economic and Risk Analysis division.