The Securities and Exchange Commission proposed amendments on October 9 to let registered funds cross trade most fixed-income securities again. Cross trades are transactions between a registered fund and certain affiliates. The proposal also adds oversight and reporting conditions. It is not a final rule.
Why the rule matters
The Investment Company Act generally prohibits such affiliate trades to protect funds and shareholders from self-dealing or overreaching. Rule 17a-7 provides an exception under specified conditions.
SEC says funds historically used it for equity and fixed-income transactions. A definition adopted with the 2020 fund-valuation rule effectively excluded most fixed-income securities. The proposal would expand eligibility to securities valued using directly or indirectly observable inputs, consistent with the level 2 category in the accounting fair-value hierarchy.
The commission says avoiding open-market transaction costs can benefit shareholders. Its press release and fact sheet do not establish how much any particular investor would save.
Proposed safeguards
Before a cross trade, the investment adviser would have to determine it is in each involved fund's best interest. The transaction would also have to fit the fund's policies and investment strategies.
The fact sheet describes two pricing methods: the security's value in the fund's next same-day net-asset-value calculation, or a price the adviser determines reasonably represents the current market price using unaffiliated pricing sources.
A fund's chief compliance officer would conduct quarterly compliance reviews and annual back testing, reporting results to the board. The annual work would examine eventual sale prices for securities bought through cross trades to look for patterns disadvantaging the fund relative to affiliates. Funds would preserve trade and review records.
Forms N-PORT and N-MFP would also require aggregate monthly trading and cross-trading information by asset class from funds engaging in cross trading. These are proposed disclosure requirements, not information already reported under the proposal.
The comment clock
SEC says comments remain open for 60 days after Federal Register publication. Neither document read here gives a closing calendar date or establishes that publication has occurred. October 9 is the proposal announcement date; adding 60 days to it would use the wrong starting point.
The full proposing release contains the operative detail. This record is limited to the commission's release and fact sheet and does not assess a particular fund's trading arrangements.