Washington D.C. — In a significant regulatory move aimed at aligning antiquated rules with modern market realities, the Securities and Exchange Commission today proposed comprehensive amendments to the Investment Company Act “cross-trading rule.” The rule, which governs transactions in securities between a registered fund and its affiliates under carefully prescribed conditions, stands to be both modernized and expanded under the new proposal. By permitting cross trades that prove demonstrably beneficial to registered funds and their underlying shareholders—such as substantially reducing a fund’s overall trading costs—the proposed framework seeks to unlock new efficiencies while introducing enhanced investor protection measures to safeguard market integrity.
The initiative marks a concerted effort by federal regulators to refine the operational environment for registered investment companies, providing them with greater flexibility to execute internal portfolio adjustments without relying exclusively on open market intermediaries.
Addressing the regulatory changes, SEC Chairman Paul S. Atkins emphasized the practical benefits of the Commission’s action in an official statement released alongside the proposal. “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,” Atkins said.
Highlighting the direct advantages for everyday investors, he added that when executed appropriately, cross trades allow registered funds to avoid the substantial costs associated with open market trades, savings that can subsequently be passed directly 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,” Atkins noted.
To understand the current significance of the SEC’s proposal, financial markets observers must look back at the historical evolution of the regulation. Following the initial adoption of Rule 17a-7 in 1966, registered funds routinely relied on the cross-trading rule to facilitate the efficient transfer and trading of both equity and fixed-income securities. For decades, the rule served as a standard mechanism for fund complexes to cross-purchase or cross-sell securities among affiliated portfolios, minimizing brokerage commissions, market impact costs, and bid-ask spreads that would otherwise weigh on fund performance.
However, the regulatory landscape shifted dramatically with the adoption of the Investment Company Act’s “fund valuation rule” in 2020. That modernization package inadvertently or intentionally restricted cross trading for the vast majority of fixed-income securities. While the Commission recognized at the time that potential revisions to the cross-trading rule were warranted to address the friction created by the new valuation standards, comprehensive fixes remained on the horizon until now.
The newly proposed amendments directly address this regulatory gap by restoring the ability of registered funds to cross trade most fixed-income securities, thereby reinstating a vital tool for bond fund managers. Beyond simply bringing back fixed-income cross trading, the proposal comprehensively modernizes the broader rule’s conditions, updating requirements related to pricing mechanics and the internal oversight of cross trades.
These modernizations acknowledge profound structural developments in modern financial markets that have fostered pricing mechanisms which are significantly more verifiable and transparent than those available when the rule was first conceived or last amended. Furthermore, to ensure rigorous oversight and accountability, the proposal introduces a new regulatory reporting mandate. It would require aggregated reporting of trading activity and cross trades by registered funds that actively engage in cross trading, designed to provide regulators and the public with an additional layer of transparency.
As the regulatory process moves forward, the SEC’s proposal will be formally published on SEC.gov and entered into the Federal Register. Following its publication in the Federal Register, the Commission will open a 60-day public comment period, inviting feedback, data, and perspectives from asset managers, institutional investors, industry associations, and other interested market participants before deciding on any final rule adoption.
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