The Securities and Exchange Commission (SEC) is looking to amend the “cross-trading rule,” which permits transactions in securities between a registered fund and its affiliates.
The proposed amendments would expand the cross-trading rule by allowing cross trades that are beneficial to registered funds and their shareholders. For example, this might include cross-trades that reduce a fund’s trading costs.
“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,” SEC Chairman Paul Atkins said.
Registered funds relied on the cross-trading rule to trade both equity and fixed-income securities. However, adoption of the “fund valuation rule” in 2020 effectively restricted cross trading of most fixed-income securities. This limited funds’ ability to cross-trade securities that are not quoted on an exchange, such as fixed-income investments.
The proposed amendments would restore the ability to cross trade most fixed-income securities and amend the rule’s conditions, including those related to pricing and oversight of cross trades. These changes would, among other things, recognize market developments that have led to pricing that is more verifiable and transparent. The proposal would also require aggregated reporting of trading activity and cross trades by registered funds that engage in cross trading.
The SEC will be accepting comments from the public on the proposal for 60 days after it is published in the Federal Register.
The Investment Company Institute (ICI) supports the proposal, noting that it would reduce transaction costs, improve portfolio management, and benefit fund shareholders.
In an August 2025 letter to Atkins, ICI encouraged the SEC to focus on five key elements to modernize Rule 17a-7:
- A new scoping mechanism to permit fixed-income cross-trading;
- An updated pricing provision to accommodate this expansion;
- Risk-based policies and procedures;
- Provisions facilitating board oversight; and,
- Reporting aggregated cross-trading activity to the SEC
“Cross-trading allows for more efficient portfolio management by permitting advisers to trade securities directly between funds when it’s beneficial to both,” ICI President & CEO Eric Pan said. “Modernizing Rule 17a-7 will. While the rule historically permitted funds to cross-trade fixed-income investments, those trades have been largely prohibited due to guidance that the SEC adopted alongside an unrelated fair value rule in 2020.The SEC can restore the benefits of cross-trading while maintaining strong investor protections by adopting the principles-based approach outlined in this proposal. We look forward to working with the SEC to finalize this rule and deliver big savings to investors and funds alike.”