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SEC proposes expanding fund cross trading to Level 2 securities

Official document: Federal Register — proposed rule (opens in a new tab)

Last updated Oct 15, 1:28 PM ET

The gist

The SEC proposed amending Rule 17a-7 under the Investment Company Act to permit cross trades between affiliated registered funds in securities with observable pricing inputs.
The proposal aims to modernize cross-trading rules for fixed-income securities while introducing new pricing, compliance oversight, and aggregated reporting obligations.

Next: Comment deadline Dec 14

How does this affect me?

Claims so far

5 Confirmed1 Reported

ConfirmedBacked by an official document, the subject on record, or two independent outlets.
DisputedCredible sources disagree about it.
DeniedThe subject has denied it on the record.
ReportedReported by a credible source, but not yet independently confirmed.
UnverifiedStill unclear: Only anonymous or attributed sources so far.
CorrectedA source published a correction.

All6Confirmed5Reported1

What’s confirmed5

Confirmed
The SEC proposed amending Rule 17a-7 to permit registered funds to cross trade securities valued using direct or indirect observable inputs.
Why: The SEC published the proposed rule in the Federal Register.
- Federal Register · supports
  “The proposed amendments would permit cross trading of securities that would be valued by a registered fund based on inputs that are observable, either directly or indirectly, in addition to those with readily available market quotations.”
  open Federal Register article (opens in a new tab)
Checked Oct 15, 1:28 PM ET
LabeledConfirmedOct 15
The SEC published the proposed rule in the Federal Register.
Confirmed
Under the proposal, cross trades would be restricted to securities categorized as Level 1 or Level 2 in the U.S. GAAP fair value hierarchy.
Why: The SEC proposal explicitly excludes non-leveled and Level 3 investments from cross trading.
- Federal Register · supports
  “we propose to permit cross trading under rule 17a-7 only of securities corresponding to assets whose fair value measurement is categorized as level 1 or level 2 within the current U.S. GAAP fair value hierarchy.”
  open Federal Register article (opens in a new tab)
Checked Oct 15, 1:28 PM ET
LabeledConfirmedOct 15
The SEC proposal explicitly excludes non-leveled and Level 3 investments from cross trading.
Confirmed
The proposed pricing conditions require cross trades to execute at either the next computed net asset value or a price determined using unaffiliated pricing sources.
Why: The SEC set forth two specific permissible pricing methods in the proposed rule.
- Federal Register · supports
  “The first pricing method would use the value of the security determined in the registered fund's next computation of NAV. Under the second method, the cross trade would be effected at a price that the registered fund's investment adviser determines reasonably represents the current market price”
  open Federal Register article (opens in a new tab)
Checked Oct 15, 1:28 PM ET
LabeledConfirmedOct 15
The SEC set forth two specific permissible pricing methods in the proposed rule.
Confirmed
The SEC proposed requiring registered investment companies to report aggregated trading and cross-trading activity on Form N-PORT and Form N-MFP.
Why: The regulatory notice proposes new structured reporting requirements on SEC forms.
- Federal Register · supports
  “The Commission also proposes to require aggregated reporting of trading activity and cross trades in Form N- PORT and Form N-MFP.”
  open Federal Register article (opens in a new tab)
Checked Oct 15, 1:28 PM ET
LabeledConfirmedOct 15
The regulatory notice proposes new structured reporting requirements on SEC forms.
Confirmed
A fund chief compliance officer would be required to conduct quarterly compliance reviews and at least annual back testing of cross trades for the board.
Why: The SEC proposal outlines specific responsibilities for fund compliance officers and boards.
- Federal Register · supports
  “Additionally, the registered fund's CCO would be required to perform quarterly reviews of cross trades to determine compliance with the rule and report the results to the fund's board. The CCO would also be required to conduct at least annual back testing of cross trades”
  open Federal Register article (opens in a new tab)
Checked Oct 15, 1:28 PM ET
LabeledConfirmedOct 15
The SEC proposal outlines specific responsibilities for fund compliance officers and boards.

Reported, not yet confirmed1

Reported
An industry survey cited by the SEC reported that registered funds conducted over $200 billion in fixed-income cross trades in 2020, saving over $300 million.
Why: The SEC release cites an industry survey from the Investment Company Institute.
- Federal Register · supports
  “Further, according to an industry survey, registered funds engaged in more than $200 billion in cross trades of fixed-income securities in 2020 alone, resulting in estimated savings for those registered funds and their shareholders of over $300 million.”
  open Federal Register article (opens in a new tab)
Checked Oct 15, 1:28 PM ET
LabeledReportedOct 15
The SEC release cites an industry survey from the Investment Company Institute.

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What’s confirmed5

The SEC proposed amending Rule 17a-7 to permit registered funds to cross trade securities valued using direct or indirect observable inputs.

Under the proposal, cross trades would be restricted to securities categorized as Level 1 or Level 2 in the U.S. GAAP fair value hierarchy.

The proposed pricing conditions require cross trades to execute at either the next computed net asset value or a price determined using unaffiliated pricing sources.

The SEC proposed requiring registered investment companies to report aggregated trading and cross-trading activity on Form N-PORT and Form N-MFP.

A fund chief compliance officer would be required to conduct quarterly compliance reviews and at least annual back testing of cross trades for the board.

Reported, not yet confirmed1

An industry survey cited by the SEC reported that registered funds conducted over $200 billion in fixed-income cross trades in 2020, saving over $300 million.