BDA Submits Comments in Support of FIMSAC Rule 17a-7 Proposal

Following the June 1st FIMSAC meeting, the BDA submitted comments to the SEC in support of the Committees proposal titled, Preliminary Recommendation Regarding Modernizing Rule 17a-7 under the 1940 Act. 

The BDA believes the proposal would provide significant benefits for investors in certain fixed bond mutual funds without any threat to safety, or fair pricing, however asks, If the SEC decides to act on the FIMSAC proposal, we urge you to provide a means for crossed trades facilitated by RIAs to be reported to FINRA’s TRACE system in the interest of transparency.” 

The BDA comments can be viewed here.


One area of focus of the FIMSAC  has been on the ability of an investment adviser registered under the Investment Advisers Act of 1940  to sell a fixed-income security from the account of one of the adviser’s clients to an account of a different client. An adviser generally may engage in a cross trade so long as the transaction is effected in a manner that is consistent with the adviser’s fiduciary duty and obligation to achieve best execution. However, when a cross trade involves an investment company registered under the Investment Company Act of 1940, the adviser must abide by the conditions in Rule 17a-7 under the 1940 Act.

Advisers face significant challenges because, although Rule 17a-7 permits funds to participate in certain cross trades, the conditions as a general matter make it difficult to impossible to cross trade fixed income securities. The consequence is that retail investors, who generally obtain exposure to fixed income securities through funds, may not obtain the benefits associated with cross trades that other investors, investing through other vehicles or their own accounts, might obtain. The benefits of cross trades include the fact that neither account involved in the cross trade pays a bid-ask spread and thus, assuming that the transaction is executed at “mid”, the price to both clients would be better than would be received in the market. In addition, if an adviser has a positive view of a fixed-income security, but is forced to sell it out of an account due to external factors, the adviser can move that fixed- income security to another account which otherwise might not be able to obtain it

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