SEC Proposes Broadening Cross-Trading Rules for Registered Funds
The SEC wants to expand which securities qualify for cross-trading between registered funds and their affiliates under the Investment Company Act.
The Securities and Exchange Commission has put forward proposed amendments to the Investment Company Act's cross-trading rule, a regulation that governs when registered investment funds may conduct securities transactions directly with affiliated entities without going through open-market channels.
Under current rules, cross trading between a registered fund and its affiliates is permitted only under specific, narrowly defined conditions. The SEC's proposal would expand the universe of securities eligible for such transactions, potentially giving fund managers greater operational flexibility while keeping regulatory guardrails in place.
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Cross-trading arrangements can reduce transaction costs for funds and, by extension, their investors, by cutting out intermediary commissions. However, the practice carries inherent conflicts-of-interest risk, since affiliated parties on both sides of a trade may not be acting at arm's length, which is why the Investment Company Act has long subjected these dealings to strict oversight.
The proposed amendments represent the SEC's latest effort to modernize rules governing registered funds, a sector that encompasses mutual funds, exchange-traded funds, and closed-end funds collectively managing trillions of dollars in assets on behalf of retail and institutional investors. Any final rule would be subject to a public comment period before taking effect.
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