SEC Proposal Would Reopen Most Fixed-Income Cross Trading by Funds

The Securities and Exchange Commission on Oct. 9, 2026 proposed amendments to Rule 17a-7, the Investment Company Act cross-trading rule, that would restore the ability of registered funds to cross trade most fixed-income securities, which have generally been ineligible for cross trading since September 2022. The rule permits securities transactions between a registered fund and its affiliates under certain conditions.

The proposal, issued as Release No. IC-36358 (File No. S7-2026-36), would expand the scope of eligible securities, replace the rule’s prescriptive pricing conditions with two pricing methods, shift routine oversight of cross trades from fund boards to chief compliance officers, and require aggregated reporting of trading and cross-trading activity on Form N-PORT and Form N-MFP, according to the proposing release and a Commission fact sheet.

“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,” Chairman Paul S. Atkins said in a statement. Atkins said the rule’s conditions have not been substantively updated since the 1980s, and he said the proposal was developed by the Division of Investment Management with support from the Division of Economic and Risk Analysis.

Statutory Background and the 2020 Valuation Rule

Section 17(a) of the Investment Company Act generally prohibits an affiliated person of a registered fund, or an affiliated person of an affiliated person, from knowingly selling securities to or purchasing securities from the fund as principal, a prohibition the release describes as protecting funds and their investors against overreaching and self-dealing. Section 17(b) directs the Commission to exempt affiliated principal transactions when the terms are reasonable and fair without overreaching, when the transaction is consistent with each fund’s disclosed policies, and when it is consistent with the Act’s general purposes. The Commission adopted Rule 17a-7 in 1966 so that funds would not need individual exemptive orders for trades likely to satisfy those criteria. The rule initially covered equity securities traded on a national securities exchange; a 1981 amendment extended it to any security with readily available market quotations, and funds over time came to rely on it to cross trade fixed-income securities.

The current rule conditions a cross trade on the security having readily available market quotations, on execution at the independent current market price as prescribed (for exchange-listed securities, the last reported sale price; for over-the-counter securities, the average of the highest current independent bid and lowest current independent offer determined on reasonable inquiry), on no brokerage commission, fee other than customary transfer fees, or other remuneration being paid, and on consistency with each participating fund’s policy. A fund’s board must adopt compliance procedures and determine at least quarterly that all cross trades complied with them. The release also notes that Rule 17a-7 provides no exemptive relief from the Investment Advisers Act, including section 206(3), and that the proposed amendments likewise would not; business development companies may rely on the rule under section 57(i) of the Investment Company Act.

In December 2020, the Commission adopted Rule 2a-5, which defines readily available market quotations as an unadjusted quoted price in an active market for identical investments that the fund can access, a definition the release states is consistent with a level 1 input in the GAAP fair value hierarchy. Because most fixed-income securities trade infrequently and are not valued solely by reference to level 1 inputs, they generally have not been eligible for cross trading since Sept. 8, 2022, the Rule 2a-5 compliance date. The Commission acknowledged at adoption that some securities might become ineligible and said amendments to Rule 17a-7 were on its rulemaking agenda. The Fixed Income Market Structure Advisory Committee had recommended in 2020 that the rule’s pricing conditions be expanded for level 1 and level 2 securities, and Commission staff issued a statement soliciting feedback on cross trading in March 2021.

Registered funds investing primarily in fixed-income instruments expanded from around $1.5 trillion in assets to approximately $7.9 trillion over the last twenty years, the release states, citing Investment Company Institute fact books. According to an Institute survey submitted to the Commission in April 2021 and cited in the release, registered funds engaged in more than $200 billion of fixed-income cross trades in 2020, with estimated savings for the funds and their shareholders of over $300 million; the survey authors estimated that such cross trading represented approximately 3.7% of the funds’ total fixed-income trading activity and that 99.6% of the cross-traded fixed-income securities were classified as level 2. A Commission review of Form N-PORT filings as of February 2026 found that less than 1% of the total value of all reporting funds’ investments were in level 3 investments.

Pricing, Oversight, and Reporting Conditions

The proposal would make eligible any security a registered fund values based on directly or indirectly observable inputs, a standard designed to be consistent with the level 2 definition in the GAAP fair value hierarchy. Securities valued using unobservable inputs that are significant to the entire measurement (level 3) and investments not categorized within the fair value hierarchy would not be eligible. The release states the approach limits cross trading to securities with an independent basis for pricing, reducing the risk of subjectivity, bias, or error in determining the trade price.

Under the proposed pricing conditions, a cross trade would be effected at the independent current market price using one of two methods. NAV pricing would use the value ascribed to the security in the fund’s next net asset value computation on the business day of the trade; the amortized cost values some money market funds are permitted to use could not be used, funds that do not compute net asset value daily could use the method only on days they compute it, and two registered funds trading with each other would have to share the same valuation processes. Under current market pricing, the fund’s investment adviser would determine a price that reasonably represents the current market price using one or more unaffiliated pricing sources, defined as persons other than first- or second-tier affiliates of the fund, and would periodically review the reasonableness of those prices; non-firm indications of interest or accommodation quotes would not qualify. A fund could switch between the two methods for different cross trades.

The amendments would retain the rule’s bar on brokerage commissions, fees, and other remuneration, as well as its requirement of cash payment against prompt delivery, while expressly permitting de minimis payments to unaffiliated parties for services such as clearing, settlement, custody, recording, or reporting of the transaction. Before effecting a cross trade, the fund’s adviser would have to determine that the trade is in the best interest of each registered fund involved, and the trade would have to be consistent with the fund’s policies and investment strategies.

In place of the current requirement that the board review cross trades quarterly, the fund’s chief compliance officer would perform quarterly reviews of cross trades for compliance with the rule and report the results to the board, and would conduct back testing at least annually that includes analyses of the ultimate prices realized when a security purchased through a cross trade is later sold, looking for patterns suggesting disadvantages to the fund relative to affiliates. Funds would have to maintain records of each cross trade, of the information and material the chief compliance officer used to make the required determinations, and of reports provided to the board.

The release identifies potential abuses the conditions are designed to guard against: parking, in which an adviser pre-arranges a cross trade intending to repurchase the securities at prices that disadvantage clients; cherry-picking, in which more desirable investments are cross traded to a favored or more profitable client; and dumping, in which less desirable investments are moved to a less favored client. It cites settled enforcement actions alleging such practices involving Morgan Stanley (MS ) Investment Management and a portfolio manager in December 2015, Western Asset Management in January 2014, SeaCrest Wealth Management in December 2024, and Macquarie Investment Management Business Trust in September 2024.

Form N-PORT and Form N-MFP would be amended to require funds that engage in cross trading to report aggregate information, by asset class, about the value of securities the fund traded during the preceding month and corresponding information about cross-trading activity. The release states that funds do not currently report their cross trades in a structured way and that the lack of transparency about cross-trade prices and volumes may negatively affect price discovery and distort perceptions of liquidity.

Commissioner Mark T. Uyeda said in a statement that fixed-income cross trades are often used for liquidity management, index rebalancing, duration adjustments, and meeting redemptions, and that during market distress the ability to cross trade can give a fund an alternative to selling a thinly traded bond at a fire-sale price that then feeds into mark-to-model valuations, depressed marks at other funds, further redemptions, and additional forced sales. “Cross-trading can help interrupt this cycle and mitigate systemic risk concerns,” he said. Uyeda also asked whether transaction-level reporting of cross-trade prices to post-trade transparency systems such as the Trade Reporting and Compliance Engine or the Real-Time Transaction Reporting System would assist price discovery and market efficiency.

The proposal will be published on SEC.gov and in the Federal Register, and the comment period will remain open for 60 days after Federal Register publication. Comments may be submitted through the Commission’s internet comment form, by email to [email protected], or by paper to the Commission’s secretary; all submissions should refer to File No. S7-2026-36.