SEC Moves to Restore Bond Cross Trades for Funds but Keeps Level 3 Assets Off Limits

Chief compliance officers, not fund boards, would oversee cross trades day to day, and would have to back-test whether funds lost out to affiliates.

October 14, 2026

The Securities and Exchange Commission on Oct. 9 proposed a rewrite of Rule 17a-7, the Investment Company Act exemption that lets a registered fund buy and sell securities with affiliated funds and accounts. The central change would return most fixed-income securities to the rule after more than four years outside it. Level 3 assets, which the SEC says BDCs hold in significant amounts, would stay ineligible.

Cross trades let affiliated funds with opposite trading interests in the same security match the trade internally rather than paying dealer spreads in the open market. The Commission first adopted Rule 17a-7 in 1966 to permit those trades under conditions meant to protect funds from overreaching by their affiliates.

The current problem traces to Rule 2a-5, the fund valuation rule adopted in December 2020. Rule 17a-7 relies on Rule 2a-5's definition of readily available market quotations to decide which securities can be crossed, and in practice that definition has excluded most fixed-income securities. Bonds that funds once crossed have generally been ineligible since Sept. 8, 2022, the Rule 2a-5 compliance date. Certain municipal bonds have continued to trade under SEC staff no-action letters.

The proposal would extend eligibility to securities a fund values using observable inputs, direct or indirect. That corresponds to Level 2 in the U.S. GAAP fair value hierarchy. The SEC cited an industry survey finding that 99.6% of the fixed-income securities that responding funds cross traded in 2020 were Level 2. Two groups would remain excluded: securities valued on significant unobservable inputs (Level 3), and non-leveled investments, including private fund shares carried at NAV as a practical expedient.

What It Means for BDCs and Closed-End Funds

BDCs fall under a separate affiliated-transaction regime in section 57 of the Investment Company Act. However, section 57(i) lets them rely on Rule 17a-7 until the Commission adopts BDC-specific rules, which it has not done. The release says its discussion applies equally to BDCs.

The SEC's own economic analysis expects limited benefit for that sector. BDCs generally hold significant Level 3 assets, and those assets would remain ineligible. For that reason, the agency said the amendments may not materially expand the trades available to BDCs and are less likely to benefit them than other fund types. BDCs are also left out of the SEC's savings estimate because they do not file the forms the agency used to measure cross-trading activity.

Registered closed-end funds, the category that includes interval and tender-offer funds, also hold a sizable block of assets the proposal would not reach. SEC data as of September 2025 put closed-end fund holdings at $637 billion:

• $160 billion in Level 1 assets
• $235 billion in Level 2 assets
• $242 billion in Level 3 or non-leveled assets

Across all reporting funds, Level 3 investments were less than 1% of total value as of February 2026, according to the release. Loans, preferred equity and real estate were more commonly reported as Level 3 than other asset classes.

The release does address one closed-end feature directly. Some funds do not compute NAV every day. Their advisers could use the proposed current-market-price method to cross trade on a day without a NAV calculation, applying the same valuation methodology the fund would use on a NAV date.

Level 3 Left for Another Day

The Commission considered letting funds cross trade any security regardless of pricing inputs. It concluded that the main added effect would fall on Level 3 holdings. There, subjective valuations could shift value between accounts in ways that are harder to detect. The SEC also said BDCs would see the largest expansion under that approach.

That stops short of what parts of the industry wanted. Lobbyists for large alternative asset managers had urged the SEC to allow cross trading in private assets, arguing it would help move those holdings into retirement accounts.

The door is not fully closed. The release asks whether all or certain types of Level 3 securities should be eligible and, if so, what added conditions should apply. One option it raises is requiring prior approval of each such trade by the board, or by a board committee with a majority of independent directors.

New Pricing and Oversight Conditions

The proposal would replace the rule's prescriptive pricing conditions with two options:

• NAV pricing: the fund crosses at the value set in its next NAV calculation on the trade date.
• Current market pricing: the fund crosses at a price the adviser determines reasonably represents the current market price, based on one or more unaffiliated pricing sources. Under this method, the adviser would have to periodically review whether those prices are reasonable.

Before each trade, the adviser would have to determine that the cross trade is in the best interest of each participating fund. The trade would also have to be consistent with the fund's policies and investment strategies. The rule would expressly allow de minimis payments to unaffiliated parties for clearing, settlement and custody.

Oversight would shift away from the board. In place of the current board oversight requirements, the fund's chief compliance officer would review cross trades quarterly for compliance. The CCO would also run back testing at least once a year, including an analysis of the prices a fund ultimately gets when it sells a security it bought through a cross trade. The CCO would report the results of both reviews to the board. Funds would keep records of each trade, the CCO's supporting materials and the board reports.

For managers that run both registered and private funds, the release also clarifies a limit on counterparties. Advisory clients such as private funds and separately managed accounts can be eligible affiliates only when the affiliation arises from a shared adviser, common directors or common officers. The SEC noted that many private funds may not qualify because the adviser or an affiliate holds an economic interest in them.

Reporting, Costs and Timing

Funds that file Form N-PORT or Form N-MFP would report two figures for each month, by asset class: the value of securities bought and sold under Rule 17a-7, and their total purchases and sales. BDCs and SBICs do not file those forms and would fall outside the requirement. The Commission asks whether it should require cross-trading disclosure from those vehicles elsewhere, such as in BDC annual reports on Form 10-K.

The SEC estimates annual transaction-cost savings of $173 million in 2026 dollars from renewed fixed-income cross trading. It says that figure likely understates the benefit because it excludes BDCs and asset classes without usable data. The agency estimates that about 700 registered funds and BDCs would rely on the amended rule.

The proposal sets a 12-month transition for fund families with $10 billion or more in net assets and 18 months for smaller families. Funds could comply early, but only by adopting the amended rule in full. Comments are due 60 days after publication in the Federal Register.

The proposal is the latest in a run of SEC actions touching registered alternatives. It follows the Commission's Sept. 30 package on performance fees, interval funds and closed-end share classes and a staff statement on how funds value private credit.