On October 9, 2026, the Securities and Exchange Commission (SEC) proposed amendments to Rule 17a-7 under the Investment Company Act of 1940 that would significantly change the framework governing “cross trades” between registered funds and certain affiliates.
The proposal would expand the securities eligible for cross trading, revise the rule’s pricing requirements, shift oversight responsibilities from fund boards to chief compliance officers (CCOs), and establish new reporting and recordkeeping requirements.
SEC Chair Paul S. Atkins said cross trades “allow registered funds to avoid costs associated with open market trades and to then pass those savings on to investors.” The amendments are intended to extend those cost benefits to investors.
How Rule 17a-7 Works Today
Section 17(a) of the Investment Company Act generally prohibits cross trades between a registered fund and its first- and second-tier affiliates to protect funds and their shareholders from overreaching or self-dealing. Recognizing that cross trades can benefit funds by avoiding brokerage commissions, bid-ask spreads, and other costs associated with open market transactions, the SEC adopted Rule 17a-7 in 1966 to permit cross trades subject to protective conditions.
For decades, registered funds relied on Rule 17a-7 to cross trade both equity and fixed-income securities. That changed following the adoption of Rule 2a-5, the fund valuation rule, adopted in December 2020.
Rule 2a-5 defines “readily available market quotations”—the standard Rule 17a-7 uses to determine which securities may be cross traded—as unadjusted quoted prices in active markets for identical investments, consistent with a Level 1 input under the U.S. generally accepted accounting principles (GAAP). Because fixed-income securities often trade less frequently and may be very similar but not identical, they are more likely to be Level 2 investments excluded from cross trading since Rule 2a-5’s adoption.
The SEC staff has since acknowledged that potential revisions to Rule 17a-7 were being considered, along with updates to other conditions of the rule.
Proposal Would Expand Eligible Securities
The proposal would expand Rule 17a-7 to cover securities that a registered fund values based on directly or indirectly observable inputs, consistent with Level 2 inputs under the GAAP fair-value hierarchy, in addition to securities with readily available market quotations using Level 1 inputs.
Because only observable inputs are available for most fixed-income securities, the amendments would permit cross trading of most fixed-income instruments. Level 3 securities and securities not assigned a fair-value level would remain ineligible.
Two Pricing Methods Would Be Permitted
The proposal would replace Rule 17a-7’s prescriptive pricing conditions (e.g., last reported sale price, or the average of the highest current independent bid and lowest current independent offer obtained through reasonable inquiry) with two alternatives establishing the required “independent current market price”:
- NAV pricing. Funds could use the value of the security determined in the fund’s next computation of net asset value (NAV) on the day of the cross trade.
- Current market pricing. A fund’s investment adviser could determine a price that reasonably represents the current market price using one or more unaffiliated pricing sources. Advisers using this method would be required to periodically review the reasonableness of those prices.
The SEC notes that these changes are intended to reflect market developments in pricing and the enhanced valuation framework under Rule 2a-5. They also would eliminate the need to obtain multiple dealer quotes, which commenters described as increasingly difficult to source.
Proposal Adds New Conditions for Cross Trades
- Best-interest determination. Before executing a cross trade, the fund’s adviser would be required to determine that the transaction is in the best interest of each participating registered fund, helping to ensure the adviser does not place its own interests ahead of the fund’s or favor one client over another.
- Consistency with fund policies. Each cross trade would need to be consistent with the fund’s policies and investment strategies, which the fund’s CCO would confirm as part of the required quarterly review.
- De minimis fees. As an exception to the rule’s prohibition on remuneration, funds could make de minimis payments to unaffiliated parties for services such as clearing, settlement, and custody when necessary to complete the transaction.
Oversight Shifts Toward CCOs
To reduce burdens on fund boards and better align with Rule 38a-1, the proposal would eliminate the board’s obligations to adopt and approve changes to cross-trade procedures and to determine quarterly that cross trades complied with those procedures.
Building on current practice under the 2018 Independent Directors Council letter, the proposal would codify the practice of permitting boards to rely on CCOs to conduct quarterly compliance reviews and annual back testing.
For the quarterly review, the CCO would review all cross trades at least quarterly to determine compliance with the rule, including requirements governing eligible affiliate, eligible security, compliant pricing, permissible fees, consistency with fund policies, and a documented best-interest determination. The CCO would report the results to the board.
For annual back testing, the CCO would review cross trades at least annually, including the timing and price ultimately realized when a security purchased in a cross trade is later sold. The review would look for patterns (e.g., parking, dumping, or cherry-picking) that suggest the fund may have been disadvantaged relative to affiliates. The CCO would also report the results to the board.
The board’s oversight would therefore involve a more typical compliance function. Boards would approve cross-trading policies and procedures under Rule 38a-1 rather than Rule 17a-7 and continue to review reporting and engage on the conflicts inherent in cross trading.
New Recordkeeping and Reporting Requirements
Funds would be required to maintain and preserve records of each cross trade, the information and materials used by the CCO to make the required quarterly and annual determinations, and reports provided to the board. The records generally would have to be preserved for six years from the end of the fiscal year in which the transaction occurred, with the first two years in an easily accessible place.
The current requirement to permanently retain written cross-trade procedures would be eliminated as duplicative of Rule 38a-1.
Registered funds engaging in cross trading would report aggregate information by asset class on Form N-PORT or Form N-MFP, including the value of securities traded during the preceding month and corresponding information about cross-trading activity. Currently, cross-trading disclosure is largely limited to a yes/no indicator on Form N-CEN.
Transition Period
The SEC has proposed a tiered transition period. Fund families with $10 billion or more in net assets would have 12 months to comply, while smaller fund families would have 18 months.
Until the applicable compliance date, cross trades would remain subject to the current rule. Funds could comply early, but only by relying on the amended rule, including the new conditions, in its entirety.
What the Proposal Could Mean for Advisers and Funds
The proposal could reopen cross-trading opportunities for fixed-income managers and fund complexes with multiple bond funds by restoring a meaningful cost-saving tool that has been largely unavailable since implementation of Rule 2a-5.
At the same time, the proposal would introduce new operational and compliance demands. Advisers would need to coordinate cross-trading processes with their Rule 2a-5 valuation designee and pricing vendor due diligence. The required pre-trade best-interest determination would also create a new documentation obligation for each trade, which the SEC acknowledges could discourage marginal cross trades and present challenges for fully automated or algorithmic strategies.
Fund CCOs would assume expanded responsibilities and would need access to data and systems capable of identifying cross-traded securities and tracking subsequent dispositions and performing the required annual back testing.
The proposed Form N-PORT and Form N-MFP reporting would make cross-trading volume visible to the SEC, investors, and the market, potentially increasing examination and reputational scrutiny.
What Advisers and Fund Boards Should Consider Now
Although the proposal is not final, advisers and fund boards may wish to begin evaluating:
- Whether and how they intend to use cross trading for Level 2 fixed-income securities and which pricing method best fits their operations.
- How existing Rule 17a-7 procedures would need to be restated as Rule 38a-1 policies.
- Workflow and documentation needed for pre-trade best-interest determinations.
- The CCO’s capacity, data access, and reporting templates for quarterly reviews and annual disposition-based testing.
- Recordkeeping and Form N-PORT and Form N-MFP reporting systems, including coordination with pending Form N-PORT reporting changes.
The proposal is available on the SEC's website. Comments may be submitted under File No. S7-2026-36 and are due 60 days after publication in the Federal Register.
Alston & Bird’s Investment Funds Group will continue to monitor the rulemaking and is prepared to help clients assess the potential impact of these amendments.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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