SEC Proposes Amendments to Expand Eligible Securities for Fund Cross Trading

The U.S. Securities and Exchange Commission (SEC) has announced proposed amendments to the cross-trading framework under the Investment Company Act of 1940. The initiative aims to modernize the rules governing securities transactions conducted directly between registered investment funds and their affiliated entities. Under current regulations, the cross-trading rule allows registered funds to trade specific securities with affiliated accounts under strictly defined conditions, designed to avoid conflicts of interest while lowering transaction costs. The newly proposed amendments would expand the scope of securities eligible for these transactions, adjusting standard operational requirements while preserving investor protection safeguards. Cross trades enable funds to execute complementary transactions without routing orders through the open market, potentially saving investors substantial amounts in brokerage commissions, bid-ask spreads, and other market impact costs. However, regulators have historically maintained strict limitations on these practices to prevent abusive pricing and dumping of illiquid assets into fund portfolios. The SEC's proposal introduces updated criteria to ensure that any additional securities permitted for cross trading have transparent, readily available market quotations or verifiable independent pricing mechanisms. By revising the existing framework, the Commission intends to provide funds with greater execution efficiency while continuing to monitor affiliate transactions for compliance with fiduciary obligations. The proposed rule changes will be open for public comment following their publication, giving market participants, asset managers, and compliance professionals an opportunity to submit feedback on the operational and structural implications of the revised framework.