Money
The U.S. regulator has proposed modernizing Rule 17a-7 to let registered funds cross-trade fixed-income securities, aiming to lower transaction costs.
Key points
- The SEC proposed amendments to Investment Company Act Rule 17a-7, known as the cross-trading rule.
- The changes would restore the ability of registered funds to cross trade most fixed-income securities.
- A 2020 fund valuation rule had previously restricted fixed-income cross trading.
- The 60-day public comment period begins following publication in the Federal Register.
The U.S. Securities and Exchange Commission has proposed major updates to its cross-trading rule under the Investment Company Act of 1940, a move designed to lower trading expenses for registered funds and their investors. Announced by SEC Chairman Paul S. Atkins, the proposed amendments to Rule 17a-7 seek to modernize regulatory frameworks and expand the types of securities eligible for internal cross trades between registered funds and certain affiliates while introducing enhanced investor protection safeguards.
Cross trades allow funds to execute transactions internally rather than through open markets, potentially avoiding steep brokerage fees and execution costs that ultimately drag on fund performance. While the original 1966 rule permitted cross-trading across both equities and fixed-income assets, subsequent regulatory changes in 2020 largely blocked fixed-income cross-trading. The newly proposed framework aims to reverse those restrictions, leveraging modern market developments that offer greater pricing transparency and verifiable valuation mechanisms.
What this means for investors
For everyday investors holding mutual funds, exchange-traded funds, and other registered investment vehicles, trading costs quietly eat into long-term returns. When fund managers can efficiently cross-trade fixed-income securities internally, they bypass public exchange fees, spreads, and market-impact costs. These savings are retained within the fund structure, directly benefiting shareholders through lower expense ratios and better net asset value execution.
Beyond direct cost savings, the SEC proposal introduces heightened oversight and transparency requirements, including aggregated reporting of trading activity. These safeguards are designed to prevent conflicts of interest and ensure fair pricing across all participating funds. Market participants and interested parties now have a 60-day window to submit public comments after the rule is published in the Federal Register, shaping the final operational framework.
Understanding Rule 17a-7 and fixed-income markets
Rule 17a-7 was initially established to provide a streamlined, cost-effective mechanism for affiliated funds to buy and sell securities without entering the open market. However, the adoption of the SEC’s fund valuation rule in 2020 disrupted fixed-income cross-trading due to strict pricing requirements that did not align with decentralized bond market structures. The current proposal seeks to align regulatory definitions with modern electronic trading and transparent pricing data.
- Rule amended: Investment Company Act Rule 17a-7
- Historical origin: Originally adopted by the SEC in 1966
- Comment window: 60 days following Federal Register publication
Frequently asked questions
What is a cross trade for registered funds? A cross trade occurs when a fund manager buys or sells securities between two funds or accounts managed by the same firm, rather than executing the trade on an open exchange.
Why were fixed-income securities restricted? A 2020 SEC valuation rule created technical hurdles regarding verifiable pricing, effectively halting most fixed-income cross trades until this new modernization proposal.
This article is for information only and is not investment advice. Do your own research or consult a licensed adviser before investing.
Based on information published by U.S. Securities and Exchange Commission (SEC). Source: U.S. Securities and Exchange Commission (SEC). Spotted an error? corrections@moneypuran.com
