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SEC proposes restoring fixed-income cross-trading for registered funds

SEC proposes restoring fixed-income cross-trading for registered funds

Rule Changes

Rule 17a-7 amendments would reverse a 2020 restriction and modernize pricing and oversight conditions

Today: Proposal announced, comment period opens

Overview

Updated 43 minutes ago

The Securities and Exchange Commission (SEC) proposed amendments that would restore cross-trading of most fixed-income securities between registered funds and their affiliates. The practice has been largely restricted since 2020, when the agency's fund valuation rule effectively barred it.

Cross-trades let funds buy and sell bonds directly with each other, avoiding dealer fees and public market transaction costs. The proposal would modernize pricing and oversight conditions that have not been substantively updated since the 1980s. It would also require funds to report cross-trading activity.

Why it matters

If adopted, funds could trade bonds directly with affiliates at lower cost, savings that could flow to investors in mutual funds and ETFs.

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Key Indicators

60 days
Public comment period
The comment period stays open for 60 days after Federal Register publication.
Level 2
GAAP fair value hierarchy level
Securities valued with observable inputs would become eligible for cross-trading.
$242B
Level 3 assets held by closed-end funds
Interval funds and tender-offer funds hold about 38% of investments in Level 3 or non-leveled assets, which would remain ineligible.

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People Involved

Organizations Involved

Timeline

1966 October 2026

4 events Latest: Today
Tap a bar to jump to that date
  1. Proposal announced, comment period opens

    Today Announcement

    SEC announces the proposal; 60-day comment period opens after Federal Register publication.

  2. SEC releases cross-trading proposal

    Proposal

    SEC proposes amendments to Rule 17a-7 restoring Level 2 fixed-income cross-trading.

  3. Fund valuation rule restricts cross-trading

    Regulatory

    SEC's fund valuation rule effectively bars most fixed-income cross-trades.

  4. Rule 17a-7 adopted

    Regulatory

    SEC adopts Rule 17a-7, permitting cross-trades between registered funds and affiliates.

Scenarios

1

SEC adopts cross-trading rule as proposed

Likely Resolves by Q2 2027

Discussed by: Investment Company Institute, industry observers

After the 60-day comment period, the SEC adopts the rule largely as proposed. Level 2 fixed-income cross-trading is restored with new pricing conditions and chief compliance officer oversight requirements.

2

SEC expands proposal to include Level 3 securities

Possible Resolves by End of 2027

Discussed by: Interval funds, business development companies, AltsWire

After comments from the alternatives industry, the SEC expands the final rule to include Level 3 securities with additional conditions such as independent director approval. The SEC explicitly asked for comment on this possibility.

3

Rule stalls or is withdrawn

Unlikely Resolves by End of 2027

Discussed by: Regulatory skeptics

The proposal faces opposition during the comment period or the SEC shifts priorities, leaving the rule in limbo without a final adoption.

Historical Context

2 moments from history that rhyme with this story — and how they unfolded.

December 2020

Fund Valuation Rule (2020)

The SEC adopted a rule governing how funds value their portfolio securities. The rule's guidance effectively restricted cross-trading of most fixed-income securities, even though the SEC recognized at the time that revisions to the cross-trading rule were under consideration.

Then

Fixed-income cross-trades were largely prohibited.

Now

Funds lost the ability to trade bonds directly with affiliates, increasing transaction costs.

Why this matters now

The current proposal would reverse this restriction by restoring Level 2 fixed-income cross-trading.

1966

Rule 17a-7 Adoption (1966)

The SEC adopted Rule 17a-7 under the Investment Company Act, permitting cross-trades between registered funds and their affiliates under certain conditions.

Then

Funds could trade both equity and fixed-income securities with affiliates.

Now

The rule's conditions were not substantively updated until the current proposal.

Why this matters now

The current proposal would modernize conditions that have remained largely unchanged since the 1980s.

Sources

(11)