SEC Releases Proposal Covering Cross-Trades of Fixed Income Products

In October, the Securities and Exchange Commission (SEC) released a rulemaking proposal titled, “Investment Company Cross Trading.” The proposal would expand the scope of securities eligible for cross trading under Rule 17a-7 to include securities that a registered fund values based on inputs that are either directly or indirectly observable. According to a Ropes & Gray client alert, the release would go beyond permitting fixed-income cross trades, “It would also (i) replace the rule’s venue-specific pricing provisions with two principles-based pricing methodologies, (ii) introduce an adviser-level, pre-trade, best interest determination for each cross trade, (iii) codify the shifting of trade-level oversight from the fund board to the fund CCO, and (iv) rework the “customary transfer fees” limitation in the existing rule.”

For fund boards specifically, the proposal would eliminate current requirements that the board (including a majority of independent directors) adopt/approve changes to cross trade procedures as well as the requirement that the board determine (at least quarterly) all cross trades complied with developed procedures. Instead the proposal would shift cross-trading policy and procedure approval to fall under Rule 38a-1. The Ropes & Gray client alert notes that this allows the fund board to “rely on quarterly written representations from the CCO that fund transactions effected pursuant to Rule 17a-7 complied with written procedures adopted by the board.”

In a statement, SEC Chair Paul Atkins stated, “The amendments we are proposing today would modernize and expand the cross-trading rule, helping to deliver additional cost savings to those investors.” Stakeholder comments on the cross-trading proposal are due December 14.

Click here to read the Commission’s proposal.

Click here to read a press release covering the proposal.

Click here to read a client alert from Ropes & Gray.