SEC Proposes to Revive Fixed-Income Cross-Trading for Registered Funds

At a Glance

• The SEC has proposed changes to Rule 17a-7 that would once again allow registered funds to cross trade many fixed-income securities with affiliated funds and accounts.
• The proposal would broaden the securities eligible for cross-trading and introduce two pricing methods, while requiring advisers to determine that each trade is in the fund's best interest.
• The proposal also would update oversight, compliance, recordkeeping, and regulatory reporting requirements for funds that cross trade.

On October 9, 2026, the Securities and Exchange Commission (SEC) proposed amendments to Rule 17a-7 under the Investment Company Act of 1940 (1940 Act). Rule 17a-7 allows registered funds to trade securities with certain affiliated funds and accounts if specified safeguards are followed. The proposal would reopen cross-trading for many fixed-income securities and modernize the rule's pricing, oversight, recordkeeping, and reporting requirements. Comments are due 60 days after the proposal is published in the Federal Register.

Background

Section 17(a) of the 1940 Act generally prohibits certain securities transactions between a registered fund and certain affiliates. Since 1966, Rule 17a-7 has provided an exemption that allows qualifying cross trades. A cross trade can benefit both participating accounts by avoiding dealer spreads, commissions, and other market costs. At the same time, it creates a conflict because the same adviser may be involved on both sides of the trade. Rule 17a-7 therefore conditions relief on safeguards intended to produce a fair result for each participating fund.

Funds historically used Rule 17a-7 for both equity and fixed-income trades. That changed after the SEC adopted Rule 2a-5 in 2020. Rule 2a-5 generally treats a market quotation as readily available only when the security has a quoted price in an active market for an identical investment, commonly referred to as a Level 1 input. Because most fixed-income securities are valued using other observable market information, commonly referred to as Level 2 inputs, they generally became ineligible for cross-trading under Rule 17a-7. The SEC acknowledged that result in 2020 and indicated that it intended to revisit the rule.

Key Elements of the Proposed Amendments

More Fixed-Income Securities Would Be Eligible

The proposal would expand Rule 17a-7 to cover securities valued using directly or indirectly observable market information, generally Level 2 securities. This change would make many corporate, municipal, and other fixed-income securities eligible for cross-trading. Securities valued primarily using unobservable information, generally Level 3 securities, would remain ineligible.

Two Pricing Methods

Funds could use either of two methods to price a cross trade:

• Net asset value (NAV) pricing. The fund would use the value assigned to the security in its next NAV calculation on the trade date.
• Current market pricing. The adviser would determine a price that reasonably reflects the security's current market value using one or more unaffiliated pricing sources.

The two methods are intended to accommodate current valuation and trading practices while providing an objective basis for the price paid by each side of the trade.

Best-Interest Determination

Before a cross trade, the adviser would have to determine that the trade is in the fund's best interest and is consistent with the fund's investment objectives, policies, and strategies. The analysis would be fund-specific: a benefit to another affiliated account or to the fund complex as a whole would not, by itself, be sufficient. The adviser also would have to document the basis for its determination.

Updated Oversight and Compliance

The existing rule requires the fund's board to adopt cross-trading procedures and determine at least quarterly that the fund's cross trades complied with those procedures.

The proposal would modernize that framework by assigning more specific responsibilities to the adviser, designated responsible parties, the fund's chief compliance officer, and the board. Funds would be required to maintain written cross-trading policies and procedures, and the proposal would require periodic reviews and testing of cross-trading activity, including pricing and best-interest determinations, together with reporting to the board. The board would retain oversight responsibility for the cross-trading program but would not be responsible for reviewing each trade individually.

Limited Third-Party Fees

The proposal would allow de minimis payments to unaffiliated service providers for clearing, settlement, custody, and similar services connected to a cross trade. It would continue to restrict compensation paid to affiliated intermediaries, preserving the principle that cross trades should not be used to generate fees for an affiliate.

New Reporting and Recordkeeping

Funds that cross trade would have to report aggregated information about their overall trading and cross-trading activity on Form N-PORT or Form N-MFP, as applicable. Funds also would have to maintain records supporting their cross trades, including the pricing used and compliance with the rule's conditions. These requirements would give the SEC additional information about the extent and operation of fund cross-trading.

Practical Implications

• Potential savings. Fund groups with significant fixed-income trading should consider which transactions could become eligible for cross-trading and whether expanded use of the rule could reduce transaction costs.
• Pricing and valuation processes. Advisers should assess how the proposed pricing methods would work with existing valuation policies, pricing-vendor arrangements, and trading workflows.
• Best-interest documentation. Advisers would need a consistent process for evaluating and documenting why a proposed trade is appropriate for each participating fund.
• Board and compliance oversight. Advisers, chief compliance officers, and boards should consider how the proposed reviews, testing, and reporting would fit within current Rule 17a-7 and Rule 38a-1 processes.
• Systems readiness. Funds and service providers may need to capture and retain additional trade and pricing data to support regulatory reporting and recordkeeping.

What's Next?

The proposal is not yet effective. Comments are due 60 days after publication in the Federal Register, and any final amendments may differ from the proposal. If the amendments are adopted, fund groups that intend to rely on the expanded rule would need to update their policies, procedures, oversight arrangements, and reporting processes before the applicable compliance date.

For More Information

For further information about the proposed amendments to Rule 17a-7, please contact the authors or another member of the investment management team.