On 9 October 2026, the US Securities and Exchange Commission (SEC) proposed changes to Rule 17a-7 under the Investment Company Act of 1940, the rule that allows a registered fund to trade securities with certain affiliates, thereby widening the range of securities that funds can cross-trade.
"When executed appropriately, cross trades allow registered funds to avoid costs associated with open market trades and to then pass those savings on to investors. The amendments we are proposing today would modernize and expand the cross-trading rule, helping to deliver additional cost savings to those investors," said Paul S. Atkins, Chairman of the SEC, in a statement.
The proposal opens a 60-day comment period that begins once the proposed rule is published in the Federal Register.
How fixed income dropped out of the rule
The Investment Company Act generally prohibits registered funds from executing transactions with first- and second-tier affiliates, establishing a statutory safeguard against self-dealing and conflicts of interest. In 1966, the Securities and Exchange Commission introduced Rule 17a-7 as a narrow exemptive carve-out, permitting cross-trading under prescribed conditions to capture transaction cost efficiencies that would otherwise be lost in open-market execution. For decades, asset managers relied extensively on the rule across both equity and fixed-income portfolios.
That changed with Rule 2a-5, the fund valuation rule adopted in December 2020. Rule 2a-5 defines "readily available market quotations," and Rule 17a-7 relies on that definition to determine which securities may be cross-traded. According to the SEC's fact sheet, the definition has in practice excluded most fixed-income securities, which are typically level 2 rather than level 1 assets under US accounting standards. The proposed release says fixed-income securities that funds previously cross-traded have generally not been eligible since 8 September 2022, the compliance date of Rule 2a-5.
The Commission flagged the issue when it adopted the valuation rule, noting that changes to Rule 17a-7 were on its agenda. SEC staff followed up with a statement on cross-trading in March 2021. Atkins said the rule's conditions have not been substantively updated since the 1980s.
What the proposal would change
Under the proposed framework, an instrument qualifies if it is valued using observable inputs, either directly or indirectly, aligning with Level 2 inputs under the US GAAP fair value hierarchy. Given that observable pricing inputs exist for most debt instruments, this standard would effectively bring most fixed-income securities back within the safe harbour's perimeter.
In place of rigid legacy pricing mechanisms, funds would be permitted to elect between two valuation methodologies:
- Next NAV Calculation: Pricing the cross-trade at the valuation determined for the fund’s next net asset value calculation on the trade date; or
- Independent Market Pricing: Applying an adviser-determined fair value that reasonably reflects prevailing market levels, derived from unaffiliated third-party pricing services and subject to periodic reasonableness assessments.
A bigger role for the chief compliance officer
Oversight would shift from the fund board to the chief compliance officer (CCO). The SEC presents this as a way to reduce the board's burden while strengthening oversight. Under the proposal, the CCO would:
- check each quarter's cross trades against the rule and tell the board what it found; and
- run a yearly backtest that tracks securities bought in cross trades through to their eventual sale, examining the prices achieved for signs that the fund underperformed its affiliates, with the findings also going to the board.
Funds would have to keep records of each cross trade, of the information the CCO used for the quarterly and annual reviews, and of the reports given to the board. The SEC would also amend Form N-PORT and Form N-MFP so that funds that cross-trade report monthly aggregate figures, by asset class, on the value of securities they traded and their cross-trading activity.
The proposal fits a wider pattern at the Commission this autumn of revisiting long-standing rules, alongside its plan to scrap Rule 14a-8 and modernise proxy solicitation.
What compliance teams should prepare for
The CCO function would carry most of the new load. Quarterly reviews and annual backtesting that follow securities through to their eventual sale are data-heavy tasks, and many firms will need trade surveillance and pricing systems that can link a cross trade to its later disposal and compare outcomes across affiliated accounts. The monthly asset-class reporting on Form N-PORT and Form N-MFP would present the same activity to the regulator, which also matters for how firms prepare for SEC examinations.
The SEC has proposed a tiered transition period if the amendments are adopted: 12 months for larger entities and 18 months for smaller ones. A fund counts as larger if, together with its family of investment companies, it had net assets of US$10 billion or more at the end of its most recent fiscal year.
What comes next
Comments can be filed for 60 days after Federal Register publication. Fund groups that stopped cross-trading fixed income after 2022 now have a chance to shape the conditions that would apply if it resumes, particularly on pricing sources and the scope of the CCO's backtesting. The full proposing release and the Chairman's statement are available on SEC.gov.
