SEC Is Reconsidering Cross-Trading Rule
The SEC’s Division of Investment Management is re-considering the rule that allows cross-trades. In a staff statement, the Division requests a wide range of information about cross-trades including the entities involved, the types of securities, valuation, controls, and transparency. Rule 17a-7, adopted over 50 years ago, only allows cross-trades between affiliate registered funds if completed with securities where market quotations are readily available (so long as certain other conditions are met). The new valuation rule (2a-5), with its new definition of such securities, could create differing treatment of the same securities for different purposes. The staff is determining whether changing times and rules should result in a revised Rule 17a-7.
While big news in the registered fund world, many lawyers and compli-pros also apply the 17a-7 regime to private funds and separate accounts as a good process to avoid conflicts of interest. Facilitating legitimate cross-transactions could save clients a great deal of money in avoided third party brokerage commissions and bid-ask spreads.