SEC Proposes Expanding Cross-Trading Rule for Registered Funds

The Securities and Exchange Commission has proposed amendments to Rule 17a-7, the Investment Company Act rule that permits transactions between a registered fund and certain affiliates under specified conditions. The proposal would modernise the rule and expand the securities eligible for cross trading.

The SEC said the changes would restore the ability to cross trade most fixed-income securities. That activity became restricted after the 2020 fund valuation rule took effect, even though registered funds historically used the cross-trading rule for both equities and fixed income. The Commission said cross trades can avoid some open-market trading costs when they are executed appropriately.

The proposal would also update conditions around pricing and oversight, reflecting changes in the availability of verifiable market pricing. Funds that use cross trading would have to provide aggregated reporting of their trading activity and cross trades, adding a transparency requirement to the framework.

The SEC will publish the proposal on its website and in the Federal Register. The comment period will run for 60 days after Federal Register publication.

Why it matters

For fixed-income traders and market participants, the proposal concerns how affiliated registered funds can match eligible orders away from the open market. It is a proposed rule change, not a change in current trading permissions. The added reporting and oversight conditions are central to the SEC’s stated investor-protection approach.

What to watch next

Watch for the Federal Register publication, which will start the formal comment clock, and for feedback on pricing, reporting and oversight conditions. Any final rule could differ from this proposal.