Wall Street Watchdog Seeks to Expand Investment Fund Cross-Trading

The US Securities and Exchange Commission has proposed changes to rules governing transactions between registered investment funds and their affiliates, seeking to expand cross-trading in fixed-income securities and reduce transaction costs for investors.

The proposal would amend Rule 17a-7 under the Investment Company Act of 1940, which permits certain securities transactions between registered funds and affiliated entities subject to specific conditions. The proposed changes would widen the range of eligible transactions while strengthening investor safeguards.

Cross-trading allows affiliated funds to buy and sell securities directly between themselves rather than execute trades in the open market. When appropriately priced and managed, such transactions can reduce brokerage fees and other trading costs, potentially lowering expenses for fund shareholders.

The proposed amendments would restore the ability of registered funds to cross-trade most fixed-income securities, which became subject to tighter restrictions following the adoption of the SEC's fund valuation rule in 2020.

First adopted in 1966, Rule 17a-7 has provided a framework for cross-trading between registered funds. The commission said developments in financial markets have improved the verifiability and transparency of securities pricing, creating scope to modernise the rule's requirements.

The proposal would revise conditions governing pricing and oversight of cross-trades. It would also require registered funds engaging in such transactions to report their cross-trading activity on an aggregated basis, giving investors and regulators greater transparency into the practice.

"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," SEC Chairman Paul S. Atkins said in a statement.

The proposal will be published on the commission's website and in the Federal Register. The public comment period will remain open for 60 days after publication in the Federal Register.

The amendments remain proposals and would need to be adopted by the commission before taking effect.

Source: FSX Business News