SEC Proposes Comprehensive Overhaul of Rule 17a-7

On October 9, 2026, the SEC published a release (the “Release”) containing rule (the “Proposed Rule”) and form amendments that, if adopted in their current form, would expand the scope of securities eligible for cross trades under Rule 17a-7 under the 1940 Act, update the conditions for reliance on Rule 17a-7, and impose new reporting and recordkeeping requirements for related trading activity.

• Section 17(a) of the 1940 Act prohibits certain transactions between a registered fund and its affiliates. Rule 17a-7 provides an exemption from Section 17(a) for certain transactions between a registered fund and its affiliates, subject to a number of conditions, including that the transaction involves a security “for which market quotations are readily available.” In 2020 (effective in 2022), the SEC adopted Rule 2a-5 under the 1940 Act addressing fund valuation practices, which incorporated a definition of “readily available market quotations” that effectively excluded most fixed income securities. The Proposed Rule is the SEC’s long-anticipated effort to modernize Rule 17a-7, including by expanding the scope of securities eligible for cross-trading.
• The Proposed Rule’s changes to the current Rule 17a-7 framework go well beyond restoring funds’ ability to cross trade fixed-income securities under Rule 17a-7. 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.

This Alert describes in detail the proposed changes set forth in the Release. The table in the Appendix highlights the principal differences between the current Rule 17a-7 framework and the Release’s proposed framework.

I. Eligible Securities: Expanded to Include Level 2

The Proposed Standard. As noted above, current Rule 17a-7 provides an exemption from Section 17(a) for certain cross trade transactions, but requires, among other conditions, that the transactions involve securities for which “market quotations are readily available.” Rule 2a-5(c) provides that a market quotation is readily available only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the fund can access at the measurement date (and provided the quotation is reliable). The definition is consistent with the definition of a “level 1” input in the fair value hierarchy outlined in U.S. GAAP and applies throughout the 1940 Act and its rules. As such, the scope of the existing Rule 17a-7 exemption tracks level 1 under U.S. GAAP.

Proposed Rule 17a-7(b)(1) would make this condition more flexible and permit transactions in securities “for which market quotations are readily available” or “that would be valued by the fund based on inputs that are observable, either directly or indirectly.” Thus, the Proposed Rule would retain eligibility for level 1 securities and extend eligibility to securities that would be valued by the fund based on inputs that are observable, either directly or indirectly, which is a formulation designed to track the U.S. GAAP definition of a “level 2” input (e.g., quoted prices for similar securities in active markets, quoted prices for identical or similar securities in non-active markets, and observable non-price inputs such as credit spreads, interest rates, and yield curves). This expansion would facilitate cross trades in many fixed-income and other securities without readily available market quotations.

II. Pricing

Pricing of cross trades. Proposed Rule 17a-7(b)(2) would replace the current rule’s asset- and venue-specific pricing prescriptions (e.g., last reported sale price for listed securities, average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry for over-the-counter securities) with two alternative methods, each of which would constitute the “independent current market price” at which a cross trade is permitted. A fund may switch between methods for different cross trades. Under the proposal, the independent current market price for purposes of Rule 17a-7 would be either:

• The value of the security determined in the registered fund’s next NAV computation on the business day of the cross trade (“NAV pricing”); or
• A price that reasonably represents the current market price, as determined by the registered fund’s adviser using one or more unaffiliated pricing sources (“current market pricing”), provided that the adviser periodically reviews the reasonableness of such prices.

NAV Pricing. Using NAV pricing under Proposed Rule 17a-7(b)(2)(i), the cross trade price would be current market value for level 1 securities and fair value based on observable inputs for level 2 securities, in each case subject to the fund’s existing valuation processes, Rule 2a-5 controls and board oversight. The Release notes that “[b]y leveraging existing valuation processes that are already subject to robust controls and oversight, the NAV pricing approach is designed to be a cost-effective method of pricing cross-trades that would limit the potential for abuses.” The Release indicates that if a cross trade involves two registered funds, the funds must share the same valuation processes to use the NAV pricing approach; if the funds have valuation processes that could result in different valuation outcomes under the NAV pricing approach, the cross trade price could only be determined under the current market pricing approach.

Current Market Pricing. Current market pricing under Proposed Rule 17a-7(b)(2)(ii) may be used at any time, including intra-day, and accommodates trades on days when a fund will not compute its NAV. Using this approach, the adviser might reasonably determine to apply the methodology the fund would use if it were computing NAV that day, without valuing the full portfolio.

When using the current market pricing (as opposed to NAV pricing) approach, the registered fund’s adviser must determine that a price reasonably represents the current market price for the security at the time of the transaction using one or more unaffiliated pricing sources. The Release notes that, consistent with funds’ valuation methodologies and the current pricing provisions in Rule 17a-7, the adviser’s analysis of current market price and sources for unaffiliated pricing information would generally vary by asset type. In addition to making an initial determination that a price reasonably represents the current market price, the registered fund’s adviser (not the CCO) must periodically review the reasonableness of current market prices used in cross trades. The Proposed Rule does not require a particular method of reviewing cross trade prices or the frequency at which these reviews occur. The Release notes that the investment adviser’s review of the reasonableness of prices determined using the current market pricing approach would be established by the investment adviser and should be specific to the circumstances of the fund’s cross-trading, the security type, and the volume and frequency of cross-trading activity. The Release notes that an adviser could potentially leverage Rule 2a-5 methodology testing and pricing-service evaluation as part of its review. This review is distinct from, but within the scope of, the CCO’s compliance assessments, and the information supporting the pricing determination must be retained for CCO review under proposed Rule 17a-7(c)(2).

Transaction Fees and Consideration. Proposed Rule 17a-7(b)(3) would condition the rule’s exemption on (i) the transaction involving no consideration other than cash payment against prompt delivery of the security, and (ii) no remuneration being paid in connection with the transaction other than de minimis payments to unaffiliated parties for services provided for clearing, settlement, custody, recording, or reporting of the transaction. The de minimis payments exception would replace the current rule’s carve-out for “customary transfer fees,” which commenters described as unclear when applied to clearing and settlement charges, custodian transfer fees, and recordation fees payable to administrative agents.

III. Best Interest Determination and Consistency with Fund Policies and Strategies

Adviser Best Interest Determination. Proposed Rule 17a-7(b)(5) would require the fund’s investment adviser to determine, prior to a cross trade, that the trade is in the best interest of each registered fund participating in the transaction. The determination is fund-specific and may not rest on benefits accruing to another participant. The Release states that, if “an adviser can obtain a more favorable outcome for a fund by trading in the open market . . . buying or selling a different security, or not transacting at all, the cross trade is not in the fund’s best interest.” Although no rule-based determination would be required on behalf of a non-registered fund involved in a cross trade, the Release notes that the adviser’s fiduciary duty and the anti-fraud provisions would continue to apply to that client.

The Release identifies non-exclusive factors an adviser could consider when determining if a cross trade is in the fund’s best interest:

• the investment rationale and expected effect on fund performance;
• the characteristics of the security, including liquidity;
• the pricing method, whether more favorable pricing appears available in the open market, and any cost savings;
• the execution method, quality, and speed, and associated costs;
• the timing and urgency;
• the trade size and the expected price effect of transacting that volume of securities on the open market;
• the eligible affiliate’s characteristics, including its expense and fee structure; and
• current market conditions, particularly in stressed markets.

The Release further indicates that while the best interest determination should be tailored based on the registered fund and the circumstances of the trade, standardized internal forms, including pre-populated fields or dropdown menus of pre-approved rationales, are permissible if they facilitate accurate documentation for CCO review and recordkeeping. In addition, a registered fund’s cross-trading policies and procedures should address the process and factors leading to the best interest determination.

Who Makes the Determination. Proposed Rule 17a-7 does not designate the particular advisory personnel who must make the best interest determination. The Release states that, in identifying the appropriate personnel, “the adviser should carefully consider potential conflicts of interest between potential personnel and each of the funds involved in the transaction.” The Release observes that portfolio managers have the most direct knowledge of suitability but may be conflicted where one participant pays higher fees, including performance fees, and that personnel who provide oversight, monitoring or review may be helpful in assisting but may not be in the best position to make the best interest determination alone. Where both sides to a cross trade are registered funds, a determination must be made by personnel representing each fund. The same individual may act for both participating funds but must make separate determinations based on each fund’s facts and circumstances.

The trade-by-trade, pre-trade nature of the best interest determination is the most operationally consequential new condition, particularly for complexes with automated or algorithmic crossing engines. These complexes will need to build documented human or rules-based determinations into the order workflow and reconcile them with NAV pricing, where the price is not known at the time of decision.

Consistency with Policies and Investment Strategies. Proposed Rule 17a-7(b)(4) would require that the cross trade be consistent with each fund’s policies and investment strategies as recited in its registration statement and reports filed under the 1940 Act. The adviser may make this assessment together with, or separately from, the best interest determination. The Release notes that this requirement would revise existing Rule 17a-7(c) to more clearly refer to the registered fund’s investment strategies, as the current language mentions only the fund’s policies.

IV. Oversight: Reallocation from the Board to the CCO

Elimination of Board Procedure and Quarterly Determination Requirements. The Release would codify and extend the approach reflected in the 2018 Independent Directors Council no-action letter, which permitted a fund’s 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, instead of the board itself making that determination. The Proposed Rule would eliminate current Rule 17a-7(e)(1) and (2), which require the board (including a majority of independent directors) to adopt, and approve changes to, cross trade procedures, and current Rule 17a-7(e)(3), which requires the board to determine at least quarterly that all cross trades complied with those procedures. Cross-trading policies and procedures would instead be approved under Rule 38a-1, which the SEC views as rendering Rule 17a-7 procedures duplicative.

The proposal would retain the requirement that the board satisfy the fund governance standards in Rule 0-1(a)(7).

CCO Quarterly Review. Under Proposed Rule 17a-7(b)(7)(i), the CCO must review, no less frequently than quarterly, all cross trades during the preceding quarter to determine that each transaction was executed in compliance with the rule. Results must be reported to the board quarterly under proposed Rule 17a-7(b)(7)(iii).

CCO Annual Disadvantage Review and Disposition Analysis. Under Proposed Rule 17a-7(b)(7)(ii), the CCO must review, no less frequently than annually, all cross trades during the period, as well as other transactions or information necessary to evaluate them, to determine whether any cross trade, or pattern of cross trades, may have disadvantaged the fund relative to the eligible affiliate. The review must include the timing and price of any subsequent sales of securities the fund purchased in cross trades, regardless of when the disposition occurs, although the SEC notes the analysis is especially probative for close-in-time dispositions. The Release indicates that the annual review is intended to reveal whether there has been any parking, dumping, or cherry-picking, including patterns favoring affiliates with higher or performance-based fees.

The CCO may use sampling, automated monitoring and scanning, or forensic testing for the annual review. The review may be combined with the Rule 38a-1 annual review, and vendor diligence may be combined with Rule 2a-5 pricing-service oversight.

Board Reporting and Role. The CCO must report to the board no less frequently than quarterly on the results of the CCO’s quarterly review and no less frequently than annually on the results of the CCO’s annual review. The Release notes that the timing and format of these reports would depend on facts and circumstances (e.g., that a fund with high volumes of cross-trading activity may warrant more frequent review), and that the CCO and board may determine that summaries are supporting for these reports. The annual report may address whether the policies and procedures are working as intended, whether review and reporting content and timing are appropriate, and any needed changes. The Release notes that the annual report may also include a discussion of any actions taken if a cross trade is found to disadvantage a fund.

Policies and Procedures Expectations. The Release explains that the current requirement under Rule 17a-7 relating to board-approved cross trade procedures would be removed and, instead, the board would approve policies and procedures under Rule 38a-1 that address how the fund and adviser will satisfy each Rule 17a-7 condition, including with respect to how (i) a fund’s investment adviser would determine whether a cross trade is in the best interest of the fund (including the process and factors that lead to the determination), (ii) the fund will determine whether a given fee is de minimis and whether it is being incurred for a permissible purpose, and (iii) the CCO will conduct the quarterly reviews and the annual review. Policies should be tailored to each fund, although a combined policy for multiple funds is permissible if it meets the requirements for each fund. The SEC also suggests that fund policies may employ tools such as tolerance levels between cross trade and valuation prices that trigger escalation, minimum holding periods to address parking and dumping, pre-trade compliance blocks, CCO or adviser discretion to prevent trades, and remediation measures such as trade reversal or the adviser making a disadvantaged fund whole when appropriate.

Form N-PORT and Form N-MFP Reporting. The Proposed Rule would add new items to Form N-PORT and Form N-MFP that apply if a fund has engaged in cross trades of portfolio investments in reliance on Rule 17a-7 during the preceding twelve months for each asset type (or category of investment, in the case of Form N-MFP). This would include information regarding the aggregate value of portfolio investments the registered fund purchased and sold under Rule 17a-7. Because BDCs do not file Form N-PORT or Form N-MFP, they would not be subject to these new reporting requirements.

V. Other Changes and Comments

Staff No-Action Letters. If the Proposed Rule is adopted, any inconsistent staff views would be superseded. The Release identifies a non-exhaustive list of more than two dozen staff letters and statements that would potentially be superseded with respect to Rule 17a-7 issues discussed therein.¹

Comments Deadline. The SEC seeks comments on a variety of topics throughout the Release. Comments should be received by the SEC no later than December 14, 2026.

* * *

If you would like to learn more about the developments in this Alert, please contact your usual Ropes & Gray attorney contacts.

Appendix

Comparison of Existing and Proposed Cross Trade Requirements

---

Listen to a brief AI-generated podcast based on this alert: