Investment Company Cross Trading
AI Analysis
The SEC proposed amendments to Investment Company Act Rule 17a-7 that would broaden registered funds’ ability to conduct affiliated cross trades, including most securities valued using observable Level 2 inputs, while replacing prescriptive pricing and board determinations with adviser and CCO responsibilities. The proposal would also introduce six-year recordkeeping and aggregate monthly reporting through new Form N-PORT Item B.12 and Form N-MFP Item A.23, creating material compliance, data-governance, and oversight work even though the rule is not yet binding.
Key dates
- 2026-10-09
- SEC issued the proposed amendments to Investment Company Act Rule 17a-7, Release No. IC-36358, File No. S7-2026-36.
- 2026-10-15
- Proposed rule published in the Federal Register; the 60-day public-comment period begins.
- 2026-12-14 Deadline
- Public comments are due, calculated as 60 days after Federal Register publication.
Suggested considerations
- Compliance teams may wish to inventory current and potential cross trades by asset class and valuation level, distinguishing Level 1, Level 2, and Level 3 positions and identifying fixed-income portfolios that could become eligible.
- Advisers may wish to design a documented pre-trade best-interest process for each participating registered fund, including consideration of open-market alternatives, alternative securities, and the option not to trade.
- Funds and advisers may wish to assess pricing-source governance, including unaffiliated-source due diligence, periodic reasonableness reviews, NAV-pricing consistency, and controls preventing use of amortized-cost values.
- CCOs may wish to map quarterly review, annual back-testing, subsequent-sale analysis, escalation, and reporting responsibilities across fund and adviser compliance functions.
- Boards and counsel may wish to assess amendments to Rule 38a-1 policies, board reporting, and governance materials in light of the proposed shift away from board-adopted Rule 17a-7 procedures.
- Operations and regulatory-reporting teams may wish to map internal asset classifications to Form N-PORT Item B.12 and Form N-MFP Item A.23, including controls for the preceding-12-month activity test and reconciliation of cross-trade and total purchases and sales.
- Records-management teams may wish to evaluate systems capable of retaining trade records, CCO review materials, and board reports for six years.
- Interested parties may wish to submit comments by the Federal Register deadline, addressing the 79 specific requests for comment, including Level 3 eligibility, bid-side NAV pricing, review frequency, scaling, and public-reporting impacts.
What changed
Eligible securities would expand from generally Level 1 securities with readily available market quotations to securities valued using inputs that are observable directly or indirectly, provided Level 2 inputs are the lowest level of inputs significant to measurement; Level 3 securities would remain excluded. The proposed independent current market price would be either the value used in the fund’s next NAV calculation on the trade date or a price the adviser reasonably determines represents current market value using one or more unaffiliated pricing sources, subject to periodic review. NAV pricing between registered funds would be available only where the funds share the same valuation processes, and amortized-cost values could not be used. Before each cross trade, the adviser would need
Compliance impact
The proposal is not currently binding, but it would materially change cross-trade governance by moving prescriptive oversight from boards toward advisers and CCOs and by requiring documented best-interest determinations, quarterly reviews, annual back-testing, pricing controls, six-year retention, and new public reporting. Market commentary indicates that the expanded eligibility, particularly for
Who is affected
Related regulations
References
AI-generated analysis. May contain errors or omissions — verify with the original SEC source before acting. Full disclaimer.
What the SEC said
Proposed rule. The Securities and Exchange Commission (the "Commission") is proposing to amend the rule under the Investment Company Act of 1940 (the "Investment Company Act") that permits securities transactions between a registered investment company and certain affiliates (referred to as "cross trades"), subject to…
Extract from SEC . Read the full notice at the source for the authoritative text.