Washington D.C. — In a move aimed at aligning regulatory frameworks with the realities of modern financial markets, the Securities and Exchange Commission formally proposed amendments today to the Investment Company Act "cross-trading rule." The long-standing regulation permits transactions in securities between a registered investment fund and its affiliates under carefully prescribed conditions. The newly proposed updates are designed to modernize and expand the scope of the rule, unlocking opportunities for cross-trades that directly benefit registered funds and their underlying shareholders—such as substantially reducing a fund’s overall trading costs—while simultaneously reinforcing and enhancing investor protection measures.
The initiative marks a significant step forward for the federal regulatory agency as it seeks to eliminate unnecessary market frictions without compromising oversight. "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," said SEC Chairman Paul S. Atkins in an official statement released by the agency.
Chairman Atkins emphasized the direct economic advantages that well-executed affiliate trades can provide to everyday investors. "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," Atkins noted.
To fully understand the significance of the SEC’s proposal, financial market participants must look back at the historical evolution of the regulation. Rule 17a-7 was initially adopted by the Commission in 1966. For decades following its introduction, registered funds routinely relied on the cross-trading rule to execute transactions involving both equity and fixed-income securities seamlessly. Because these trades occur internally between affiliated entities or portfolios under common management rather than on public exchanges, funds can bypass brokerage commissions, exchange fees, and the market impact costs often associated with large open-market orders.
However, the regulatory landscape shifted dramatically with the adoption of the Investment Company Act’s "fund valuation rule" in 2020. That modernization effort 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 impact of the new valuation standards, the fixed-income restriction remained in place, forcing funds to bear higher open-market transaction costs when reallocating bonds and other debt instruments among affiliated portfolios.
The newly proposed amendments unveiled today would directly address this gap by restoring the ability of registered funds to cross-trade most fixed-income securities. In addition to bringing back fixed-income cross-trading, the proposal seeks to comprehensively modernize the rule’s governing conditions. This includes updating requirements related to how cross-trade securities are priced and how these internal transactions are overseen by fund management and compliance officers.
Crucially, these modernizations reflect sweeping structural developments that have taken place across modern financial markets over recent decades. Advances in market technology and data availability have led to pricing mechanisms that are significantly more verifiable and transparent than they were when the rule was last substantially overhauled. By leveraging these modern data sources, the SEC aims to ensure that cross trades occur at fair and verifiable market values, protecting fund shareholders from potential conflicts of interest or unfavorable execution prices.
To ensure robust oversight and accountability under the expanded framework, the Commission’s proposal would also introduce new reporting requirements. Specifically, registered funds that actively engage in cross-trading would be required to provide aggregated reporting of their trading activity and cross trades. This additional layer of disclosure is intended to give regulators, investors, and independent fund directors enhanced transparency into the frequency, volume, and nature of affiliate transactions, ensuring that the cost-saving benefits of cross-trading are realized fairly and without exposing portfolios to undue risk.
The comprehensive proposal will soon be published on the official SEC website, SEC.gov, and entered into the Federal Register for public review. True to the agency’s standard rulemaking procedures, the Commission has established a 60-day public comment period that will officially commence upon publication in the Federal Register, giving industry stakeholders, institutional investors, compliance experts, and the public ample opportunity to submit feedback, data, and recommendations regarding the proposed regulatory updates.
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