1. Current Requirements and the Proposed Changes
Rule 17a-7 provides a conditional exemption from certain affiliated-transaction restrictions under Section 17(a) of the Investment Company Act. It applies to eligible transactions involving registered funds and qualifying affiliates, not simply any portfolios sharing an adviser.
The SEC issued the proposal on October 9, 2026. As of October 14, 2026, existing requirements remain applicable. The comment period runs for 60 days after Federal Register publication.
Current conditions include eligible counterparties, readily available market quotations, prescribed independent pricing, and consistency with participating funds’ policies. The rule also limits transaction compensation and requires cash payment against prompt delivery. A proposed expansion of eligible securities would not eliminate the need to satisfy the other applicable conditions.
The Rule 2a-5 Connection
Rule 2a-5’s definition of readily available market quotations also governs current cross-trading eligibility. Since its September 2022 compliance date, that definition has generally excluded most fixed-income securities previously cross traded.
The proposal would expand eligibility to securities valued using directly or indirectly observable inputs consistent with the GAAP Level 2 definition. Many bonds could qualify, but asset type alone would not establish eligibility. Compliance teams would need to examine the valuation inputs supporting the particular security.
An evaluated price can support portfolio valuation without establishing eligibility under the current exemption. Under the proposed framework, the analysis would focus on qualifying observable inputs while keeping transaction pricing and other safeguards separate.
2. Proposed Pricing Methods and Fund Interests
The proposal offers two pricing methods while retaining conditions intended to address affiliated-transaction conflicts. A supportable price would not, by itself, establish that a trade benefits each participating fund.
| Proposed method | Pricing basis |
|---|---|
| NAV-based pricing | Security value used in the fund’s next NAV computation on the trade date |
| Current market pricing | Adviser determination using unaffiliated pricing sources, with periodic reasonableness reviews |
NAV-based pricing
- Pricing basisSecurity value used in the fund’s next NAV computation on the trade date
Current market pricing
- Pricing basisAdviser determination using unaffiliated pricing sources, with periodic reasonableness reviews
The operational question is whether another reviewer can reconstruct the pricing decision. A preparation review should identify the source, valuation time, and reasons for resolving conflicting prices. Retaining only the final execution price may leave those questions unanswered.
Separate Reasons for Buying and Selling
Before execution, the adviser would need to determine that the trade serves each registered fund’s best interests and fits its policies and investment strategies. Lower combined trading costs would not replace that assessment.
The buyer may face concentration limits while the seller needs liquidity. Investment management teams should document each portfolio’s rationale, relevant constraints, and pricing support. The proposal also would expressly permit certain de minimis payments to unaffiliated providers for clearing, settlement, and custody.
3. CCO Oversight, Records, and Reporting
The proposal would assign quarterly compliance reviews and annual backtesting to the chief compliance officer, with results reported to the board. Annual testing would include later sale prices for securities purchased through cross trades to identify patterns suggesting disadvantage relative to affiliates.
A later loss would not, by itself, establish that the original trade was improper. Market movements, holding periods, and portfolio circumstances can affect subsequent prices. Review materials should provide enough context to distinguish those effects from recurring concerns about pricing or preferential treatment.
Preparing Reviewable Transaction Data
Proposed records would cover transactions, review materials, and board reports. Transaction records would retain a six-year preservation period from the relevant fiscal year’s end, with the first two years easily accessible. Form N-PORT and Form N-MFP amendments would add aggregate trading and cross-trading information by asset class.
A regulatory compliance review can identify whether existing systems can:
- Preserve pricing sources and transaction terms.
- Connect cross-trade purchases with subsequent sales.
- Produce review materials and asset-class reporting data.
These are preparation steps. They do not authorize trades that fail current requirements.
4. Frequently Asked Questions
Counterparty status and overlapping adviser obligations require separate analysis from security eligibility.
A registered fund may transact with a qualifying private fund or advised account under Rule 17a-7 if the applicable affiliation and transaction conditions are satisfied. The exemption is not limited to two mutual funds. Transactions involving only private funds or separate accounts require a different analysis.
Rule 17a-7 does not resolve an adviser’s obligations under other laws. Fiduciary duties and Section 206(3) requirements may apply depending on the adviser’s role and transaction structure. Shared management alone does not determine those obligations.
5. Reviewing Policies before Expanding Cross Trading
Before adding asset categories or changing pricing procedures, an attorney can assess current permissions, qualifying counterparties, and overlapping securities regulations. Current policies, sample trades, and pricing-provider records allow the review to address actual operational gaps while the proposal remains pending.
14 Oct, 2026
