SEC Proposes Rule 17a-7 Cross-Trading Expansion to Level 2 Fixed Income
SEC proposal would reopen fund cross trading in level 2 securities, add NAV and current-market pricing, shift oversight to CCOs and add N-PORT reporting; comments due December 14, 2026.
On October 9, 2026 (91 Fed. Reg. 65,622 on October 15), the SEC proposed amendments to Rule 17a-7 under the Investment Company Act, which since Rule 2a-5's September 2022 compliance date has limited cross trading to level 1 securities, effectively excluding most fixed income. The proposal would extend eligibility to level 2 securities, with level 3 and non-leveled holdings remaining ineligible, and replace existing pricing rules with two alternatives: NAV pricing at the next NAV computation, available only when both funds share valuation processes, or a current market price set using unaffiliated pricing sources with periodic reasonableness reviews. De minimis payments to unaffiliated clearing, settlement, custody and reporting providers would be permitted.
Oversight would shift from quarterly board reviews to the chief compliance officer, who would conduct quarterly compliance reviews, annual disposition-based back testing, and report to the board. Advisers would need a written, transaction-level best interest determination before each trade; the SEC seeks comment on automated determinations without human oversight. New gross cross-trading reporting on Forms N-PORT and N-MFP could expose repositioning and capacity constraints for concentrated strategies, while BDCs would be exempt. Fund families of $10 billion or more would have 12 months to comply, smaller families 18 months. Comments are due December 14, 2026, so sponsors should assess pricing infrastructure, CCO resourcing, and systems mapping.