Proposal to expand PE cross‑trading rules

A Wall Street proposal would let affiliated funds buy and sell hard-to-price private assets to each other, if regulators add conflict checks and valuation rules. (davispolk.com) Christopher Healey, a Davis Polk partner, made that case in remarks published April 22, saying the Securities and Exchange Commission could “expand” cross-trading rules to permit affiliate trades in illiquid investments. Bloomberg Law reported the push came from lobbyists for some of the biggest alternative-asset managers. (davispolk.com) (news.bloomberglaw.com) Cross-trading is the direct transfer of an asset from one client account to another account run by the same manager, instead of selling it into the open market first. In the fund world, Rule 17a-7 under the Investment Company Act allows some affiliate trades now, but only for securities with “readily available” market quotes and an independent current market price. (sec.gov) (ecfr.gov) That “readily available” pricing test is the sticking point for private equity, private credit and other illiquid holdings, where no exchange prints a live price. SEC staff said in 2021 that the agency wanted feedback on cross-trading after a 2020 valuation rule sharpened the definition of when market quotations count as readily available. (sec.gov) The pitch is tied to retirement products that hold more private assets and need ways to meet withdrawals without waiting for a full sale process. Bloomberg Law said supporters argue looser affiliate-trading rules would help expand private assets in retirement accounts. (news.bloomberglaw.com) Supporters say a cross-trade can spare both sides a bid-ask spread and keep an asset inside the same manager’s platform when one fund needs to sell and another wants to buy. A preliminary recommendation prepared for the Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee said those mechanics can improve execution for clients when done at a fair price. (sec.gov) The risk is that one client can be favored over another if the manager sets the price or chooses which fund gets the better side of the deal. Existing SEC guidance for fund cross-trades requires board oversight, bans commissions and fees on the trade, and requires records showing how the transaction was priced and approved. (sec.gov) (ecfr.gov) Retirement law already has a narrower path for some cross-trades in public securities. Under Labor Department rules implementing the Employee Retirement Income Security Act, plans can use a statutory exemption for cross-trading of securities if managers follow written pricing and allocation policies and give advance disclosures to plan fiduciaries. (ecfr.gov) What Healey proposed goes beyond that public-securities framework by targeting “illiquid and other investments” and pairing that expansion with “appropriate safeguards.” The fight now is over what those safeguards would have to be before the Securities and Exchange Commission lets private-asset funds trade with affiliates more freely. (davispolk.com)