SEC Proposes Expanding Securities Eligible for Cross Trading by Registered Funds

The Securities and Exchange Commission today proposed amendments to the Investment Company Act “cross-trading rule,” which permits transactions in securities between a registered fund and its affiliates under certain conditions. The proposed amendments would modernize and expand the cross-trading rule and would allow cross trades that are beneficial to registered funds and their shareholders (by, for example, reducing a fund’s trading costs), subject to enhanced investor protection measures.

“Today, the Commission took another step toward modernizing our regulatory frameworks to meet the realities of today’s markets by proposing amendments to Rule 17a-7 under the Investment Company Act of 1940, which permits trades in securities between registered funds and certain affiliates. 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 amendments we are proposing today would modernize and expand the cross-trading rule, helping to deliver additional cost savings to those investors,” said SEC Chairman Paul S. Atkins in a statement.

Following the initial adoption of Rule 17a-7 in 1966, registered funds relied on the cross-trading rule to trade both equity and fixed-income securities. However, adoption of the Investment Company Act’s “fund valuation rule” in 2020 effectively restricted cross trading most fixed-income securities, although at the time the Commission recognized that potential revisions to the cross-trading rule were under consideration.