SEC Seeks Comment on Cross Trading by Registered Investment Companies

In a "Staff Statement on Investment Company Cross Trading," the SEC Division of Investment Management (the "Division") requested comment on "ways to enhance the regulatory regime" in light of the SEC's adoption of ICA Rule 2a-5 ("Fair value determination and readily available market quotations"), aka the "Valuation Rule." (See prior coverage.)

In conjunction with the adoption of ICA Rule 2a-5, the SEC provided a definition of the term "readily available market quotations" that is narrower than that previously used by many investment companies. That narrower definition has effectively impeded the ability of registered investment companies (or "RICs") to effect cross transactions in compliance with ICA Rule 17a-7 ("Exemption of certain purchase or sale transactions between an investment company and certain affiliated persons thereof"), as such transactions are permissible only as to securities for which there are readily available market quotations.

The Division asked for comment as to whether any changes to Rule 17a-7 may be appropriate.

The Division requested comment on, among other things:

• the circumstances in which funds currently engage in cross trading and the extent of readily available market quotations;
• the advantages and disadvantages of the threshold requirement that a security have a "readily available market quotation" under Rule 17a-7;
• the controls advisers have in place to govern cross trading; and
• the extent to which cross-trades affect market efficiency if not publicly reported.

SEC Commissioner Elad L. Roisman commended the Division for seeking comment on Rule 17a-7, particularly as to how cross trades involving fixed income securities should be regulated.