IM Staff Seeks Feedback on Cross-Trading Practices As it Reviews Rule
The Staff of the SEC’s Investment Division released a statement seeking feedback on ways to enhance the regulatory regime governing cross trading. Under rule 17a-7 of the 1940 Act, securities transactions may be effected between a fund and certain affiliates (referred to as “cross trades”), provided the transactions meet certain protective conditions. Among the protective conditions, rule 17a-7 generally requires that cross trades: (a) involve a security for which market quotations are readily available; and (b) be effected at the independent current market price of the security. The SEC’s recently adopted Valuation Rule, however, includes a definition of the term “readily available market quotations” that may affect cross-trading practices under rule 17a-7. Among other issues, the staff has found that certain securities that may have previously been viewed as having readily available market quotations and being available to cross trade under rule 17a-7 may not meet the definition pursuant to the Valuation Rule and thus would not be available for such trades after September 8, 2022, the compliance date of the Valuation Rule. The staff statement also noted that the SEC has observed that many cross trades historically were conducted taking into consideration certain letters issued by the staff that address, among other things, the application of the term readily available market quotations in the context of rule 17a-7 and that these letters are being reviewed to determine whether they, or certain portions of these letters, should be withdrawn. The staff requested feedback and recommendations from industry participants as it evaluates these and other matters. The staff also provided a list of areas where feedback would be particularly helpful, including on cross trading practices, pricing and liquidity and controls.