On October 9, 2026, the Securities and Exchange Commission proposed amendments to Rule 17a-7 under the Investment Company Act of 1940 (Release No. IC-36358; File No. S7-2026-36). The proposal would modernize and expand the cross-trading exemption, restoring the ability of registered investment companies to cross-trade most fixed-income securities with affiliates—activity that has been effectively restricted since the compliance date of Rule 2a-5 (the fund valuation rule) in September 2022.
Background
Section 17(a) of the Investment Company Act generally prohibits principal transactions between a registered fund and its affiliates. Rule 17a-7 provides an exemption for certain cross trades when specified conditions are met, including that the security has “readily available market quotations” and that the trade is effected at the independent current market price.
Rule 2a-5 defined “readily available market quotations” consistent with Level 1 inputs under the GAAP fair value hierarchy (unadjusted quoted prices in active markets for identical assets). Because most fixed-income securities are valued using Level 2 inputs (observable but not Level 1), they became ineligible for Rule 17a-7 after the 2022 compliance date. The Commission had previously acknowledged this consequence and indicated that amendments to Rule 17a-7 were under consideration. An Investment Company Institute (ICI) survey cited in the proposing release indicated that registered funds engaged in more than $200 billion of fixed-income cross trades in 2020, with estimated savings exceeding $300 million.
Key Elements of the Proposal
Expanded Eligibility (Level 2 Securities)
The proposal would make eligible any security a registered fund values based on directly or indirectly observable inputs (consistent with Level 2 under the GAAP fair value hierarchy). Securities valued using significant unobservable inputs (Level 3) and non-leveled assets (e.g., private fund interests valued at NAV) would remain ineligible. The Commission requests comment on whether certain Level 3 securities should be permitted.
Updated Pricing Conditions
Cross trades would be effected at the independent current market price using one of two methods:
- NAV pricing: The value ascribed to the security in the fund’s next NAV computation on the business day of the trade (amortized cost values permitted for certain money market funds could not be used; funds that do not compute NAV daily could use the method only on days they do so; two registered funds trading with each other would need to share the same valuation processes).
- Current market pricing: A price the adviser determines reasonably represents the current market price, based on one or more unaffiliated pricing sources (with periodic reasonableness reviews). Unaffiliated pricing sources are defined as persons other than first- or second-tier affiliates of the fund (that should cover most current pricing services for advisers, i.e., Markit, BVAL, ICE, LSEG and Pricing Direct). The adviser will be required to periodically review the reasonableness of the prices obtained from these sources. Non-firm indications of interest or accommodation quotes would not qualify.
Funds could use either method for different trades.
Best-Interest Determination and Other Conditions
Before effecting a cross trade, the adviser must determine that the trade is in the best interest of each participating registered fund. The trade must also be consistent with each fund’s policies and investment strategies. The prohibition on brokerage commissions, fees, or other remuneration is retained, but the proposal would expressly permit certain de minimis payments to unaffiliated parties for clearing, settlement, custody, recording, or reporting. Cash payment against prompt delivery would continue to be required.
Oversight and Compliance
Routine quarterly compliance reviews would shift from the board to the fund’s chief compliance officer (CCO). The CCO would review cross trades for compliance with the rule and report results to the board. The CCO would also conduct back-testing at least annually, including analyses of subsequent sales of securities purchased in cross trades to identify patterns that may disadvantage the fund relative to affiliates. Recordkeeping requirements would cover each cross trade, materials supporting CCO determinations, and board reports.
Reporting
Funds engaging in cross trading would be required to report, on Form N-PORT or Form N-MFP, the aggregate value of portfolio investments (by asset class) purchased or sold under Rule 17a-7 during the reporting period. This would provide the first structured reporting of cross-trading activity.
Compliance Periods
If adopted, larger fund complexes (generally $10 billion or more in net assets) would have 12 months to comply; smaller entities would have 18 months.
Rationale and Industry Reaction
The Commission and Chairman Paul S. Atkins have highlighted the potential for reduced transaction costs that can be passed on to shareholders, improved portfolio management flexibility (including for liquidity management, index rebalancing, duration adjustments, and meeting redemptions), and the ability to avoid fire-sale pricing in stressed markets. Commissioner Mark T. Uyeda noted that cross trading can help interrupt cycles of forced sales and depressed markets that amplify market stress. The ICI has publicly supported the principles-based approach.
Next Steps
Comments are due 60 days after publication in the Federal Register. The proposing release, fact sheet, and related materials are available on the SEC’s website (Release No. IC-36358). Vedder’s Investment Services group is available to discuss the implications of the proposal for your firm’s compliance program, policies and procedures, board reporting, valuation processes, and Form N-PORT/N-MFP preparation. Please contact a member of the group with any questions.
