The U.S. Securities and Exchange Commission proposed modernizing the Investment Company Act cross trading rule to restore registered funds’ ability to cross trade most fixed income securities with affiliates, potentially reducing open market transaction costs. Eligible assets would expand from securities with readily available market quotations to include securities valued using observable level 2 inputs, while level 3 and nonleveled securities would remain excluded. Cross trades could use either the value from the fund’s next net asset value computation or a current market price determined by the adviser using unaffiliated pricing sources. The proposal would require an adviser to determine before each transaction that the cross trade is in each participating registered fund’s best interest and consistent with its policies and investment strategies. Chief compliance officers would conduct quarterly compliance reviews and annual testing for patterns that may disadvantage a fund, report results to the board and maintain supporting records. Funds that cross trade would report monthly aggregate trading and cross trading activity by asset class on Form N-PORT or Form N-MFP. The SEC estimates annual transaction cost savings of about USD 173 million and proposes compliance periods of 12 months for fund families with at least USD 10 billion in net assets and 18 months for smaller families.
U.S. Securities and Exchange Commission proposes expanding fund cross trading to most fixed income securities with enhanced safeguards
The U.S. Securities and Exchange Commission proposed allowing registered funds to cross trade most fixed income securities valued with observable level 2 inputs. The framework would add alternative pricing methods, pretrade best interest determinations, chief compliance officer reviews and aggregate reporting by asset class. The SEC estimates annual transaction cost savings of about USD 173 million.