SEC Proposes Easing Cross-Trading Rules for Fixed-Income Mutual Funds
The SEC has proposed amendments to Rule 17a-7 that would expand cross trading to include securities valued with Level 2 inputs, covering most fixed-income securities. The proposal would allow pricing from independent vendors and permit certain de minimis transaction fees. It would also shift quarterly compliance reviews from fund boards to chief compliance officers while adding pre-trade best-interest determinations and annual reviews.
Before the SEC adopted its valuation rule in 2020, mutual funds already struggled to satisfy Rule 17a-7's pricing conditions when crossing fixed-income trades. That rule made the practice even harder, in effect excluding many such securities from the exemption.
The new proposal would let funds use outside pricing services, including vendors, or prices set for net asset value calculations. It would also allow small fees to unaffiliated service providers for settlement, custody, recordkeeping, and reporting. Oversight would move quarterly compliance checks from boards to chief compliance officers, while adding pre-trade best-interest findings and yearly reviews. Eligibility would turn on GAAP concepts, and securities lacking observable pricing inputs—Level 3—would stay barred, though the SEC seeks comment.
Mutual fund investors, especially those in fixed-income funds, may benefit if cross trades execute at fairer prices and lower costs, though risks depend on safeguards. Fund boards and compliance officers could see altered workloads. Broader fixed-income markets might gain liquidity if more trades occur within fund families, but pricing uncertainty and conflicts may remain.