SEC Issues Statement on Investment Company Cross Trading Practices Potentially Impacted by the Valuation Rule

March 15, 2021

Under Rule 17a-7 under the 1940 Act, a fund may effect transactions with certain affiliates (cross trades), so long as the cross trades satisfy the conditions of the rule. Generally, among other things, the rule requires that cross trades (i) involve a security for which “market quotations are readily available” and (ii) be effected at the independent current market price of the security.

In December 2020, the SEC adopted Rule 2a-5 (Valuation Rule), which among other things defines what it means for market quotations to be readily available. The Valuation Rule provides that “a market quotation is readily available only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the fund can access at the measurement date, provided that a quotation will not be readily available if it is not reliable.” Comments from industry participants expressed the concern that certain cross trades involving fixed-income securities may not fit within this definition.

The staff of the SEC’s Division of Investment Management released a statement on March 11, 2021 (Statement) seeking feedback in the following areas as it evaluates updating Rule 17a-7 and changes to existing staff letters interpreting Rule 17a-7 as it assesses the impact that the Valuation Rule will have on fund cross trades:
1. current cross trading practices;
2. pricing and liquidity;
3. cross trading systems;
4. compliance controls;
5. public reporting of cross trade information; and
6. potential costs and benefits of cross trades.

Industry feedback is requested by April 11, 2021. The Statement contains more information about the SEC staff’s requests for feedback and is available at: Click Here


Compliance, Investment Companies, Regulatory