SEC Proposes Expanding Securities Eligible for Cross Trading by Registered Funds

The Securities and Exchange Commission (SEC) recently proposed updates to the Investment Company Act's cross-trading rule, which enables transactions in securities between a registered fund and its affiliates under specific conditions. The proposed changes aim to modernize and expand the cross-trading rule, allowing trades that benefit registered funds and their shareholders, such as reducing trading costs, while maintaining enhanced investor protection.

SEC Chairman Paul S. Atkins emphasized the proposal's potential to deliver further cost savings to investors. In 1966, Rule 17a-7 was initially adopted, allowing registered funds to trade various securities, including equities and fixed-income assets. However, the introduction of the Investment Company Act's "fund valuation rule" in 2020 restricted cross-trading for most fixed-income securities, despite the SEC acknowledging future potential revisions.

The proposed amendments would restore the ability to cross-trade most fixed-income securities and modernize the rule's conditions, including pricing and oversight of cross-trades. These changes would account for market developments that have led to more verifiable and transparent pricing. Additionally, the proposal would require registered funds to report aggregated trading activity and cross-trades to enhance transparency.

The SEC will publish the proposal on SEC.gov and the Federal Register, with a 60-day comment period following its release.