Regulation
SEC moves to restore fixed-income cross trading for registered funds
By Benjamin Smith, . Insurance Wire.
The SEC has proposed changes to its cross-trading rule that would reopen a cost-saving mechanism largely closed off to registered funds for the past six years, according to an SEC press release.
Cross trading, governed by Rule 17a-7 under the Investment Company Act of 1940, allows a registered fund to buy or sell securities directly with an affiliated fund rather than going through the open market. The practical benefit is lower transaction costs, which can be passed to shareholders. When the Commission adopted its fund valuation rule in 2020, most fixed-income cross trades became effectively unavailable, even though the agency acknowledged at the time that rule changes were being considered.
The proposal would reverse that outcome. Fixed-income securities would largely be eligible again, and the rule's conditions around pricing and oversight would be updated to reflect how bond markets have changed since 1966, when Rule 17a-7 was first adopted. The Commission's position is that pricing in those markets is now more verifiable and transparent than it was when the original conditions were written.
SEC Chairman Paul S. Atkins framed the proposal in a statement as part of a broader effort to align the agency's rules with current market realities: "When executed appropriately, cross trades allow registered funds to avoid costs associated with open market trades and to then pass those savings on to investors."
The proposal would also add an aggregated reporting requirement. Funds that engage in cross trading would have to disclose their overall trading activity alongside their cross-trade volume, giving investors a clearer picture of how often the mechanism is being used.
For fund managers and their compliance teams, the practical question is whether the pricing and oversight conditions in the final rule will be workable for the fixed-income instruments they actually hold. The proposal sets a 60-day comment period after Federal Register publication, which is the window to flag any conditions that could limit the rule's usefulness in practice.
What the proposal does not yet settle is how the aggregated reporting requirement will be structured or what thresholds will apply. Those details will matter to operations teams estimating the compliance burden. Funds with significant fixed-income allocations and active affiliate relationships stand to benefit most if the rule is finalized broadly, but the comment period is where the scope gets shaped.
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