SEC proposes expanding fund cross-trading rule to level 2 s…

The Securities and Exchange Commission proposed on 15 October 2026 to modernize rule 17a–7, the exemption that lets registered investment companies buy and sell securities with affiliated funds, in a release published in the Federal Register. The proposal, Release No. IC–36358 (File No. S7–2026–36; RIN 3235–AN45), would broaden the securities eligible for cross trades, replace the current pricing hierarchy with two alternatives and shift oversight duties to fund compliance officers. Comments must be received on or before 14 December 2026.

Background

Rule 17a–7, adopted in 1966 and expanded in 1981, permits cross trades between a registered fund and certain affiliates subject to conditions: the security must have readily available market quotations, the trade must be priced at the independent current market price, it must be consistent with each fund’s policies, and no commission or fee may be paid except customary transfer fees. The Commission adopted rule 2a–5 in December 2020, with a compliance date of 8 September 2022, which narrowed the definition of readily available market quotations and left most fixed-income securities ineligible.

Registered funds investing mainly in fixed income grew from about $1.5 trillion in assets to roughly $7.9 trillion over two decades. An industry survey cited in the release recorded more than $200 billion in fixed-income cross trades in 2020, generating estimated savings above $300 million; 99.6% of those securities were classified as level 2.

Eligible securities and pricing

The proposal would allow cross trades of securities valued with observable inputs, directly or indirectly — that is, level 1 and level 2 of the U.S. GAAP fair value hierarchy — while continuing to exclude level 3 and non-leveled assets. Most fixed-income securities would become eligible.

Cross trades would be priced under one of two methods:

NAV pricing: the value the fund ascribes to the security in its next net asset value computation on the business day of the trade.
Current market pricing: a price the adviser determines reasonably represents the current market price using one or more unaffiliated pricing sources, subject to periodic reasonableness reviews.

Oversight and best interest

The adviser would have to determine, before each trade, that the cross trade is in the best interest of the fund, and the trade must be consistent with the fund’s policies and investment strategies. Oversight would move from the board to the fund’s chief compliance officer, who would conduct quarterly compliance reviews of all cross trades and an annual review, including back-testing of subsequent sales, and report the results to the board.

Reporting, fees and transition

Form N–PORT and Form N–MFP filers that cross traded in the preceding twelve months would report four data points by asset type in U.S. dollars:

Aggregate value of portfolio investments purchased under rule 17a–7.
Aggregate value of portfolio investments purchased.
Aggregate value of portfolio investments sold under rule 17a–7.
Aggregate value of portfolio investments sold.

The proposal would also permit de minimis payments to unaffiliated parties for clearing, settlement, custody, recording or reporting, and remove the requirement to retain cross-trading procedures permanently. A tiered transition period would apply: 12 months for larger entities and 18 months for smaller entities, defined as funds whose family of investment companies holds less than $10 billion in net assets.

Economic impact

The Commission estimates annual monetized benefits of $173,018,571 and annual monetized costs of $13,695,310, with initial costs of $15,867,600. Over a ten-year horizon from 2026 to 2035, the present value of benefits is $1,497,858,170 at a 3% discount rate and $1,257,023,044 at 7%.

For fund shareholders, the proposal could cut the transaction costs funds pay when adjusting fixed-income portfolios, but it also widens the room for conflicts of interest between affiliated funds, which is why the Commission pairs the expansion with a transaction-by-transaction best-interest test, unaffiliated pricing sources and structured public reporting.

Source: Federal Register, Vol. 91, No. 198, 15 October 2026, Proposed Rules, p. 65622 (official reference: Release No. IC–36358; File No. S7–2026–36).