SEC Proposes Expanding Securities Eligible for Cross Trading by Registered Funds

Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers; Compliance Officers

Quick Take: On October 9, 2026, the SEC proposed amendments to Rule 17a-7 under the 1940 Act that would significantly expand the securities eligible for cross trading by registered funds to Level 2 assets. The proposal would modernize the pricing framework, impose new adviser and compliance obligations, establish new reporting and recordkeeping requirements, and once again permit the cross trading of most fixed-income securities. The proposed amendments are intended to preserve the benefits of cross trading while strengthening investor protections.

Section 17(a) of the 1940 Act generally prohibits principal transactions between a registered fund and its affiliates, including cross trades, to protect the fund and its shareholders from overreaching and self-dealing by affiliates. Recognizing that cross trades can benefit registered funds and their shareholders by reducing transaction costs and avoiding certain market impacts associated with open-market trading, the SEC adopted Rule 17a-7 in 1966 to permit certain cross trades between a registered fund and certain of its affiliates (including affiliated registered funds and others sharing a common adviser) subject to specified conditions.

Registered funds historically relied on Rule 17a-7 to cross trade both equity and fixed-income securities. The practical availability of the rule changed following the SEC’s adoption of Rule 2a-5 in 2020, which established a definition of “readily available market quotations” that applies throughout the 1940 Act, including Rule 17a-7. Because most fixed-income securities are valued using observable market inputs rather than quoted prices in active markets for identical securities (Level 2 securities), most fixed-income securities generally became ineligible for reliance on Rule 17a-7 following Rule 2a-5’s compliance date. The proposal is intended largely to address that consequence while also modernizing Rule 17a-7’s pricing, oversight, and reporting framework.

Expansion of Eligible Securities

The proposal would permit cross trading not only of securities with readily available market quotations, but also of Level 2 securities that a registered fund values using observable inputs, either directly or indirectly, consistent with Level 2 inputs under the U.S. GAAP fair value hierarchy. Because observable inputs are available for most fixed-income securities, the proposal would effectively restore the ability of registered funds to cross trade most fixed-income securities. Securities valued using significant unobservable inputs—generally, Level 3 securities—would remain ineligible.

Modernized Pricing Framework

The proposal would replace Rule 17a-7’s existing asset-specific pricing provisions with two methods for determining a security’s independent current market price. A cross trade could be effected either at the value used in the fund’s next computation of net asset value after the transaction occurs or at a price that the fund’s investment adviser determines reasonably represents the security’s current market price using one or more unaffiliated pricing sources. An adviser using the latter method would be required to periodically review the reasonableness of the prices obtained from those sources. The proposed pricing framework reflects developments in valuation practices, pricing transparency, and market structure since Rule 17a-7’s pricing provisions were originally adopted.

The proposed amendments would add defined terms to Rule 17a-7 relating to the registered funds that may rely on the rule and the eligible affiliates with which they may engage in cross trades, while leaving unchanged the scope of affiliates currently eligible under the rule.

Additional Conditions and Investor Protections

The proposed amendments would add a new best-interest requirement under which a fund’s investment adviser would be required to determine, prior to effecting a cross trade, that the transaction is in the best interest of each participating registered fund.

Cross trades also would be required to be consistent with the participating fund’s policies and investment strategies. In addition, the proposed amendments would modify Rule 17a-7’s restrictions on remuneration by permitting de minimis payments to unaffiliated parties for services relating to clearing, settlement, custody, recording, or reporting of the transaction.

Enhanced Compliance Oversight

The proposed amendments would substantially revise Rule 17a-7’s oversight framework by shifting primary responsibility for reviewing cross-trading activity from fund boards to fund chief compliance officers. Specifically, boards would no longer be required under Rule 17a-7 to adopt cross-trading procedures, approve changes to those procedures, or make quarterly compliance determinations.

A fund’s CCO would be required to conduct quarterly reviews of cross trades to assess compliance with Rule 17a-7 and annual reviews to determine whether a cross trade, or pattern of cross trades, may have disadvantaged the fund relative to an affiliate. As part of the annual review, the CCO would review the timing and price of subsequent sales of securities acquired through cross trades, together with other information relevant to evaluating the cross-trading activity. The results of both reviews would be reported to the fund’s board.

Reporting and Recordkeeping

The proposed amendments would establish new reporting and recordkeeping requirements. The proposal would also amend Forms N-PORT and N-MFP to require a fund that engages in cross trading to report aggregate information about cross-trading activity by asset class.

The comment period for the proposal will remain open for 60 days following publication in the Federal Register.

The SEC’s proposed rule can be accessed here.