The U.S. Securities and Exchange Commission (SEC) has proposed changes to rules governing transactions between registered investment funds and certain affiliated entities, aiming to widen the range of eligible securities and potentially lower trading costs for investors.
Announced on October 9, the proposal would amend Rule 17a-7 under the Investment Company Act of 1940. The rule permits certain transactions between registered funds and affiliates under specified conditions. The SEC says its proposed revisions would modernize the framework, restore access to many fixed-income transactions and strengthen investor protections through updated pricing, oversight and reporting requirements.
The proposal is not yet in force. Its potential effects will depend on the final rule, the outcome of the public consultation and how funds implement any changes.
What the SEC wants to change
The SEC’s proposal focuses on cross trades: transactions in which a registered investment fund buys a security from, or sells one to, an affiliated fund rather than trading with an unrelated market participant.
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Rule 17a-7 was originally adopted in 1966. According to the SEC, registered funds historically used it for transactions involving both equities and fixed-income securities. However, the commission’s 2020 fund valuation rule effectively restricted cross trading in most fixed-income securities.
The new proposal seeks to reverse that practical limitation and modernize requirements that have not been substantively updated for decades. In particular, the SEC proposes restoring the ability to cross trade most fixed-income securities, subject to safeguards.
The official proposal is available through the SEC’s Investment Company Cross Trading rulemaking page.
Why fixed-income trading is central
Bonds and other fixed-income instruments are important components of many mutual funds, exchange-traded funds and other registered investment portfolios. Fund managers may need to adjust interest-rate exposure, rebalance portfolios, respond to investor redemptions or reposition holdings as credit conditions change.
In some circumstances, selling a bond on the open market can be costly, especially if the security is relatively illiquid or market conditions are stressed. A direct transaction between eligible affiliated funds could offer an alternative, provided the price is fair and the transaction meets regulatory conditions.
The SEC argues that appropriately conducted trades can help funds avoid certain open-market trading costs and potentially pass savings on to shareholders. Those savings are not guaranteed: the result would depend on the securities involved, transaction pricing, market conditions and the costs of operating the compliance framework.
The proposal also recognizes that market practices and pricing tools have evolved since the existing requirements were last substantially updated. The SEC says more verifiable and transparent pricing can support a modernized approach.
SEC Chairman Paul Atkins backs the proposal
SEC Chairman Paul S. Atkins presented the initiative as part of a broader effort to update securities regulation to reflect current market conditions.
“When executed appropriately, cross trades allow registered funds to avoid costs associated with open market trades and to then pass those savings on to investors,” Atkins said in the commission’s October 9 announcement.
His statement frames the proposal around operational efficiency and potential benefits for fund shareholders. However, the intended benefit depends on whether transactions are executed appropriately; reducing costs should not come at the expense of fair pricing or investors in either fund.
SEC Commissioner Mark T. Uyeda also emphasized the importance of liquidity. In his statement on the proposal, Uyeda said that liquidity helps market participants trade more efficiently, manage risk and direct capital toward productive uses.
Uyeda described how forced sales of thinly traded bonds during market stress can occur at steep discounts. If those prices influence valuations elsewhere, they may contribute to a wider cycle of falling net asset values, investor redemptions and further sales. In his view, carefully controlled cross trades may give some funds an alternative to selling into a distressed market.
These are the commissioners’ stated rationales for the proposal, not evidence that the changes will necessarily reduce costs or prevent market stress in every case.
Pricing, oversight and reporting safeguards
Expanding eligible transactions raises questions about conflicts of interest. Affiliated funds may share an investment adviser or belong to the same fund family, so regulators need safeguards to ensure that one portfolio is not favored at another’s expense.
The SEC says its proposed amendments would update conditions covering pricing and oversight. The goal is to allow qualifying transactions while protecting the interests of the funds and their shareholders.
The proposal would also require registered funds that engage in these transactions to provide aggregated reporting of cross trades and related activity. The SEC says this additional reporting is intended to improve transparency.
Aggregated disclosures could give regulators and other observers a clearer picture of how often funds use the mechanism and the overall value of the transactions. However, aggregated figures do not necessarily reveal the full circumstances or agreed price of every individual trade.
Uyeda raised this distinction in his statement, noting that transaction-level price reporting could provide additional information useful for price discovery. He invited consideration of whether reporting through existing market transparency systems could improve that process. This was a point for further discussion, rather than a requirement that the SEC has already adopted.
What the proposal could mean for investors
If adopted, the changes could give fund managers another tool for portfolio management, particularly in fixed-income markets. Where a suitable affiliated buyer or seller is available and the transaction satisfies regulatory requirements, a cross trade may reduce certain execution costs or help a fund manage liquidity.
Investors should not interpret the proposal as a promise of lower fees, improved performance or reduced investment risk. Any savings at the trading level may be affected by other expenses and market conditions, and the value of a transaction depends on its pricing and suitability for the funds involved.
The safeguards will therefore be as important as the expansion itself. Fair pricing, effective compliance oversight and transparent reporting help address the risk that a transaction benefits one affiliated portfolio at the expense of another.
For more context on the changing U.S. digital-asset and securities policy landscape, readers can also review CryptoQuorum’s coverage of SEC and CFTC digital-asset market regulation. The current proposal, however, concerns transactions involving registered funds; it is not a specific authorization for cryptocurrency trading or tokenized securities.
What happens next?
The SEC says the proposal will be published on its website and in the Federal Register. The public comment period will remain open for 60 days after publication in the Federal Register.
Comments may inform the commission’s assessment of the proposed eligibility criteria, pricing standards, oversight provisions and reporting requirements. The SEC may then adopt the proposal, revise it or decide not to proceed. Until a final rule is adopted and becomes effective, funds must continue to comply with the rules currently in force.
The next milestone is therefore the formal publication and comment process, rather than an immediate change to fund trading practices.
Disclaimer: This article is for informational purposes only and does not constitute investment, legal or tax advice. The SEC announcement describes a proposed rule, not a final regulatory change. Readers should consult the official SEC materials for the proposal’s terms and status.