SEC Cross-Trading Proposal: Greater Flexibility, Greater Responsibility
The US Securities and Exchange Commission has proposed amendments to Rule 17a-7 that would once again permit registered funds to cross trade most fixed-income securities. The proposed changes would broaden the range of eligible securities and allow funds to use additional pricing methods, while introducing new best interest determinations, compliance reviews, and public reporting requirements. This report compares the proposal with the current rule and examines the practical considerations for funds, investment advisers, and boards.
Key Takeaways
- Most fixed-income securities valued using observable, level 2 inputs would become eligible for cross trading. Level 3 securities would generally remain ineligible.
- Funds could use the value applied in their next net asset value calculation or an adviser-determined current market price based on unaffiliated pricing sources.
- Advisers would need to determine before each cross trade that the transaction is in the best interest of each participating registered fund.
- Chief compliance officers would conduct quarterly compliance reviews and annual reviews for trades or patterns that may have disadvantaged a fund, with reporting to the board.
- The proposal would introduce additional Form N-PORT or Form N-MFP reporting and recordkeeping obligations, with transition periods of 12 or 18 months depending on fund family size.
PROPOSED CHANGES TO RULE 17A-7
Registered funds generally have been unable to cross trade most fixed-income securities under Rule 17a-7 since September 2022, when changes to the definition of readily available market quotations took effect. The SEC’s October 2026 proposal would extend cross-trading eligibility to securities valued using observable inputs, including most fixed-income securities.
The proposal would replace existing pricing formulas with two alternatives: pricing based on the fund’s next net asset value calculation or a current market price determined by the adviser using unaffiliated sources. It would also require a separate, pretrade best interest determination for each participating registered fund.
Oversight would change as well. Chief compliance officers, rather than fund boards, would review cross trades quarterly for compliance and annually for transactions or patterns that may have disadvantaged a fund. Funds engaging in cross trading would face expanded transaction records and aggregate reporting on Form N-PORT or Form N-MFP.
The report examines these proposed requirements, compares them with current Rule 17a-7, and discusses the implications for fund advisers, compliance officers, boards, and other counterparties. Comments on the proposal are due December 14, 2026.
