On October 9, 2026, the Securities and Exchange Commission proposed amendments to Rule 17a-7 under the Investment Company Act of 1940, as amended, that would expand the types of securities eligible for cross trading between registered investment companies (“registered funds”) and certain affiliated persons. The proposed amendments are a welcome development for the industry, and effectively serve to reverse an unexpected regulatory development from 2020 that significantly narrowed the scope of securities eligible for Rule 17a-7 cross trading. In addition, the proposal would generally modernize the rule’s requirements (which could result in more efficient portfolio management and reduced transaction costs for registered funds and their shareholders) while maintaining appropriate safeguards against conflicts of interest and affiliated-party overreach. More specifically, the proposed amendments would, among other things, permit cross trading in most securities valued using observable market inputs, including securities classified as Level 2 under the fair value hierarchy established under U.S. generally accepted accounting principles; establish alternative pricing methodologies for cross trades; reallocate the responsibilities of cross trading oversight between registered fund chief compliance officers and boards of directors; and require aggregated reporting of cross-trading activity on Forms N-PORT and N-MFP.

The proposal represents a significant change for registered funds, particularly for those that invest in fixed-income securities, as well as for fund complexes that manage multiple registered funds with overlapping investment strategies and trading needs. In this Legal Update, we discuss the proposal and its potential implications in more detail.