SEC proposes wider fund crosses under Rule 17a-7

The Securities and Exchange Commission (SEC) has proposed amendments to Rule 17a-7 that would let registered funds and business development companies cross trade securities valued with observable inputs, not only those with readily available market quotations. Release No. IC-36358, issued on October 9, 2026, is open for comment until December 14, 2026.

Section 17(a) bars an affiliate from buying a security from a registered fund, or selling one to it, as principal. Rule 17a-7 is the exemption. Most fixed-income securities left it on September 8, 2022, when Rule 2a-5 tied readily available market quotations to a level 1 input. The proposing release puts those funds' assets at about $7.9 trillion, up from around $1.5 trillion in 20 years.

Key facts

• October 9, 2026: Release No. IC-36358, File No. S7-2026-36, RIN 3235-AN45. Source: the rulemaking page and the fact sheet.
• Federal Register: October 15, 2026, 91 FR 65622. Comments are due on or before December 14, 2026.
• Eligible securities: level 1, and level 2 only where observable inputs are the lowest level significant to the measurement. Level 3 stays out.
• Industry survey in the release: more than $200 billion of fixed-income crosses in 2020, with savings above $300 million.
• Form N-CEN, fiscal year-end 2025: 2,294 funds reported reliance on Rule 17a-7, across 303 families.
• Annual monetised benefit: $173,018,571 in 2026 dollars, a lower bound. Quarterly corporate-bond volume fell from about $6.24 billion to about $0.85 billion.
• If adopted: 12 months at or above $10 billion of net assets, 18 months below that, on Form N-CEN Item B.5. No clock runs before a final rule.

Methodology and sources

The documents read on October 18, 2026 are the fact sheet, press release 2026-104, the statements of Chairman Atkins and Commissioner Uyeda, the File No. S7-2026-36 page, and the Federal Register at 91 FR 65622. The rule in force is 17 CFR 270.17a-7, and the valuation definition is 17 CFR 270.2a-5. Level labels follow US generally accepted accounting principles (US GAAP). The window runs from 1966 to the comment close. The comparison is the US proposal, Canada's National Instrument 81-107, and the EU directives on undertakings for collective investment in transferable securities (UCITS). Survey figures stay attributed to the release. The 12-month and 18-month periods are proposed. On the regulation desk, the Advisers Act custody proposal is a separate Investment Company Act file and does not amend Rule 17a-7.

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What Rule 17a-7 would actually permit

The Commission adopted the rule in 1966, widened it in the early 1980s, and in 1981 set the over-the-counter price at the average of the highest independent bid and the lowest independent offer. Rule 2a-5, adopted in December 2020, then limited "readily available" to an unadjusted quote for the identical investment. Municipal crosses have continued under staff letters, so the benefit maths leaves them out.

Rule 17a-7 under the Investment Company Act of 1940 is the exemption that lets a registered fund buy a security from, or sell a security to, certain affiliates without an order under section 17(b). Release No. IC-36358, issued on October 9, 2026, would keep securities with readily available market quotations, which Rule 2a-5 aligns with a level 1 input, and would add securities valued on inputs observable directly or indirectly. The release treats that second set as level 2, and only when level 2 inputs are the lowest level significant to the entire measurement. Level 3 securities, and holdings US GAAP does not level, including some private-fund interests at net asset value as a practical expedient, would stay outside. Most fixed-income securities fail the level 1 test because they do not trade frequently as the identical instrument, so they generally left the rule on September 8, 2022. The fact sheet would require a pre-trade finding that the cross is in the best interest of each registered fund.

Price is the next net asset value that day, or an unaffiliated current market price reviewed later for reasonableness. One client must not be favoured. Remuneration stays barred except for de minimis clearing, settlement, and custody fees to unaffiliated parties. The chief compliance officer (CCO) reports a quarterly finding and an annual sale-price back-test to the board. Forms N-PORT and N-MFP show the preceding month by asset class. Business development companies (BDCs) may rely under section 57(i). Advisers Act section 206(3) and the Employee Retirement Income Security Act (ERISA) are not waived.

How the United States, Canada and the EU compare

The US text is a numbered exemption. Canada and the European Union police the same conflict, an adviser on both sides of a portfolio trade, without copying Rule 17a-7. The release says large advisers already cross a registered fund against other accounts, including UCITS, when both hold the security. A US best-interest note does not, by itself, clear a Canadian committee or a UCITS execution file.

Sources: 91 FR 65622; File No. 3-20039; OSC notice on National Instrument 81-107; AMF text in force from April 22, 2026; OSC court proceedings; Directive 2009/65/EC, Chapter XII; Directive 2010/43/EU. Last updated: October 18, 2026.

A cross under the proposed Rule 17a-7 is a match the adviser may print only after finding it in the best interest of each registered fund, and only at one of two prices. The fact sheet for Release No. IC-36358 sets those prices as the next net asset value on the day of the trade, or a current market price from unaffiliated sources, reviewed later for reasonableness. Remuneration stays barred aside from de minimis payments to unaffiliated parties for clearing, settlement, and custody. The chief compliance officer reviews the quarter, reports to the board, and once a year back-tests later sale prices for patterns that disadvantage the fund. Canada stops that trade under National Instrument 81-107 section 5.2(1)(a) until the independent review committee approves it. Article 99(6)(e) of Directive 2009/65/EC sets an EU floor of at least €5 million, or 10% of turnover, for a legal person. The release prices the US benefit at $173,018,571 a year, in 2026 dollars, and calls that sum a lower bound.

"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. The amendments we are proposing today would modernize and expand the cross-trading rule, helping to deliver additional cost savings to those investors."

— Paul S. Atkins, Chairman, Securities and Exchange Commission (SEC press release 2026-104)

Enforcement context: the Palmer Square crosses

On September 21, 2020, the Commission settled with Palmer Square Capital Management LLC in File No. 3-20039. The order finds that from July 2014 through September 2016 the adviser prearranged buys and sells of the same security, in the same amount, between client accounts, more than 350 times. Approximately 40 accounts were involved, including registered funds. The buyer paid a markup, which the broker-dealer kept. The firm did not test the average of the highest independent bid and the lowest independent offer, and it told the boards, inaccurately, that it had not crossed.

The order finds wilful violations of Advisers Act sections 206(3) and 206(4) and Rule 206(4)-7, and that the firm caused breaches of sections 17(a)(1) and 17(a)(2) and Rule 38a-1. Palmer Square accepted a cease-and-desist order, a censure, and a $450,000 civil penalty, without admitting or denying the findings. The failure was an untested price, a paid broker, and a wrong board report. The proposal would move that quarterly finding to the CCO. The annual back-test is a record, not a safe harbour.

What this means for fund managers, boards and compliance teams

An adviser needs a pre-trade note: why the cross serves each registered fund, which price was used, and why the source was unaffiliated. Rule 17a-7 does not satisfy Advisers Act section 206(3), so a cross with a separate account or a pension can still need disclosure and consent. A cross with a UCITS still has to meet Article 25 of Directive 2010/43/EU. A complex with a Canadian public fund cannot skip National Instrument 81-107 section 5.2 because the US rule would allow the print.

Boards would no longer make the quarterly finding. They would receive the CCO's quarter and the annual back-test. Directors told, as the Palmer Square boards were told, that no crosses had occurred will want asset class, method, and exceptions. The fact sheet does not remove the board. It changes the question put to it.

CCOs would own the review, the sale-price back-test, and the file examiners can set beside Form N-PORT. The public line is an asset-class total, not a bond tape. BDCs stay on section 57(i), and the release could not price their savings because they do not file Form N-CEN or Form N-PORT. The current rule governs until a final rule is adopted. Early compliance must be the whole amended rule.

"While this aggregated reporting would provide some visibility into funds’ cross-trading practices, transaction-level reporting of the agreed-upon price in a cross-trade might offer additional informational value to third parties engaged in price discovery for subsequent transactions."

— Mark T. Uyeda, Commissioner, Securities and Exchange Commission (statement of October 9, 2026)

His illustration is a bond crossed at $98.0 against a prior level 2 mark of $98.5. That gap disappears inside an asset-class total. The FCA's CP26/34 consultation is a 2028 UK tape under a different statute. Release No. 34-106339 dropped Inline XBRL from broker-dealer audits.

What is next on the comment file

No new duty is in force. Comments should be received on or before December 14, 2026, the 60 days the fact sheet describes from publication on October 15, 2026. Paper comments go to Vanessa A. Countryman, Secretary, 100 F Street NE, Washington, DC 20549-1090, under File No. S7-2026-36. The date is printed and has not been extended. The Federal Reserve's extension on Regulation O shows a different agency reprinting a close when it wants one moved.

If the amendments are adopted, inconsistent staff views would be superseded. The release lists letters and says the list may be incomplete. Municipal letters still matter: United Municipal Bond Fund, January 27, 1995 and July 30, 1992, and Federated Municipal Funds, November 20, 2006. The $173,018,571 estimate excludes them because those crosses have continued.

The release also asks whether any level 3 security should be eligible, and whether the $10 billion split between 12 and 18 months should go. A cross in any security, and a public trade-level tape, were not proposed. A compliance date exists only in a final rule. Until then a level 2 corporate bond is still generally outside Rule 17a-7.

TL;DR

Rule 17a-7 exempts certain crosses between a registered fund and affiliates. Release No. IC-36358, issued on October 9, 2026 and published at 91 FR 65622 on October 15, 2026, would add level 2 securities so most fixed-income instruments could cross again after Rule 2a-5's compliance date of September 8, 2022. Level 3 stays out. Price is the next net asset value or an unaffiliated market price, and the adviser must first find the trade in each fund's best interest. The chief compliance officer would review each quarter, back-test once a year, and report both to the board. The Commission's lower-bound annual benefit is $173,018,571 in 2026 dollars. Comments close on December 14, 2026. The 12-month and 18-month clocks run only if a final rule is adopted.

FAQ

What is a cross trade under Rule 17a-7?

It is a purchase or sale of a security between a registered fund and an affiliate, often another fund with the same adviser. Section 17(a) of the Investment Company Act of 1940 generally prohibits that trade when the affiliate acts as principal. Rule 17a-7, at 17 CFR 270.17a-7, is the 1966 exemption. The security needs readily available market quotations, the trade is for cash against prompt delivery, and brokerage is limited to customary transfer fees. The board determines at least quarterly that the crosses complied. Release No. IC-36358 would change several conditions. It would not repeal section 17(a).

Which securities would become eligible?

Two groups. Securities with readily available market quotations under Rule 2a-5, aligned with a level 1 input, and securities valued with observable inputs, aligned with a level 2 input, but only when those inputs are the lowest level significant to the measurement. Similar-security quotes and observable credit spreads are the release's examples. Level 3 securities, and holdings US GAAP does not level, including some private-fund interests at net asset value, would not qualify. The Commission says this would cover most fixed-income securities. It does not say every bond a fund holds.

How would the cross be priced?

The fact sheet offers two methods. One is the value in the next net asset value on the day of the cross. The other is a price the adviser determines reasonably represents the current market price, from unaffiliated sources, reviewed later for reasonableness. The adviser must also decide, before the trade, that the cross is in the best interest of each registered fund. A broker markup of the kind in Palmer Square, File No. 3-20039, is outside the allowance. That allowance is only a de minimis payment to an unaffiliated party for clearing, settlement, or custody.

What would the chief compliance officer review?

Each quarter the chief compliance officer would decide whether the crosses complied and would report that finding to the board. Once a year the officer would back-test later sale prices and look for patterns that disadvantage the fund. The fund keeps each cross, the material used, and the reports. Public reporting is an asset-class total for the preceding month on Form N-PORT or Form N-MFP. Commissioner Uyeda has said a print such as $98.0 against a $98.5 level 2 mark would tell the market more. The proposal does not require that print.

Can a business development company rely on the proposal?

Yes, until the Commission adopts rules under section 57. Section 57(i) lets a business development company use Rule 17a-7 where the rule would permit a cross that section 57 would otherwise restrict. The release applies its discussion to these companies and does not estimate their savings, because they do not file Form N-CEN or Form N-PORT and sit outside the $173,018,571 figure. The same level 1 and level 2 limit and the same two prices would apply. Advisers Act section 206(3) still applies to a principal trade.

When do comments close, and when would compliance start?

Comments should be received on or before December 14, 2026, the date printed at 91 FR 65622. The fact sheet's 60 days after publication on October 15, 2026 is the same period. There is no compliance date, because the amendments are not adopted. If they are, a family with net assets of $10 billion or more would have 12 months, and a smaller family 18 months, using Item B.5 of Form N-CEN. Until then the current rule applies. Early compliance must take the amended rule as a whole.

This article is informational analysis only and does not constitute legal, regulatory, tax, or investment advice. Regulatory frameworks change frequently and interpretation depends on facts and circumstances; primary documents and official regulator guidance always supersede summaries. Firms should consult qualified legal counsel and their relevant supervisory authority before taking any action based on the analysis above.