What You Need To Know:
- The SEC proposed new rules under the Investment Company Act and amendments to Advisers Act Rule 206(4)-2 (the Custody Rule) to address the custody of crypto assets held on behalf of clients of investment advisers and regulated funds.
- State Trust Companies will not need to determine whether their activities fall within the definition of “bank” to determine whether they can custody assets on behalf of investment advisers and regulated funds. Instead, State Trust Companies are explicitly included as a “qualified custodian” subject to initial and annual diligence, financial reporting, internal control reporting, and meeting the segregation requirements.
- Under the Proposal, investment advisers and regulated funds would be permitted, subject to certain conditions, to self-custody crypto assets through the possession of private keys, without a qualified custodian, provided they (i) determine, initially and every quarter thereafter, that no qualified custodian is available, and (ii) satisfy conditions addressing safeguarding expertise, private key management, joint authorization, cybersecurity, internal control reports, quarterly account statements, and a financial asset election under applicable state law (i.e., Uniform Commercial Code (UCC)).
- The Proposal also includes broad modernization amendments, including eliminating the Public Company Accounting Oversight Board (PCAOB) registration and inspection requirement for accountants under the Custody Rule, a new exception for discretionary trading authority, extended audit deadlines for funds of funds, and a streamlined approach to broker-dealer custody of fund assets under Investment Company Act Rule 17f-1.
- State Trust Companies should expect investment adviser and fund clients to request authorization evidence, safeguarding policies addressing private key management and cybersecurity, audited financial statements, and independent internal control reports on an annual basis, together with segregation terms in custody agreements.
On October 1, the Securities and Exchange Commission (SEC) proposed new rules and amendments (the Proposal) under the Investment Advisers Act of 1940, as amended (Advisers Act), and the Investment Company Act of 1940, as amended (Investment Company Act), addressing crypto asset custody on behalf of investment advisers and regulated funds. Under the Proposal, investment advisers and regulated funds would be permitted to, subject to specific conditions, self-custody crypto assets. Additionally, the Proposal would add state-chartered trust companies (State Trust Companies) to the enumerated list of qualified custodians and open Investment Company Act Rule 17f-1 to all registered broker-dealers who are subject to the custody provisions of Rule 15c3-3 under the Securities Exchange Act of 1934, as amended (Exchange Act). The public comment period will remain open for 60 days following publication of the SEC’s proposing release in the Federal Register.
Self-Custody of Crypto Assets
Proposed Rule 223-1(b)(7) (for investment advisers) and proposed Rule 17f-9 (for regulated funds) would permit investment advisers and regulated funds to self-custody crypto assets through possession of the private keys necessary to transact in those crypto assets, without the use of a qualified custodian, if a qualified custodian is not available to maintain such crypto assets and the following conditions are met:
- Qualified custodian determination. Before taking self-custody and at least quarterly thereafter, the investment adviser must determine in writing, after due inquiry, that no qualified custodian will maintain the particular crypto asset. The determination is asset-specific and must be revisited as custodial capabilities develop.
- Safeguarding and cybersecurity. An investment adviser relying on the exception must document safeguarding expertise and maintain systems addressing private key management, joint authorization by at least two persons, client-specific addresses, cybersecurity, and annual review of the systems and controls.
- Independent reporting. The investment adviser must obtain an internal control report from an independent public accountant within six months of first taking self-custody and annually thereafter, and must provide quarterly account statements or equivalent electronic information to affected clients.
- Financial asset election and fund oversight. The investment adviser and client must agree in writing to treat each self-custodied crypto asset as a “financial asset” and the adviser as a “securities intermediary” under applicable state law. For regulated funds, the board must review the qualified-custodian determination and make the required reasonable-care determination; distributed crypto assets and related records would receive separate treatment.
Custody by Broker-Dealers and State Trust Companies
The current custody rules were designed for traditional assets, and a qualified custodian may not be readily available for some crypto assets. Some State Trust Companies have offered crypto custody to fill that gap. Under the current rules, however, whether a State Trust Company is a “bank” turns on a fact-specific analysis of state and federal law. The Proposal would replace that analysis with express paths for State Trust Company and broker-dealer custody, subject to conditions.
- StateTrust Company c The Proposal defines “State Trust Company” as “a legal entity organized under state law that is supervised and examined by a state authority having supervision over banks and permitted to exercise fiduciary powers under applicable state law.” State Trust Companies under the Proposal would be limited to custody activities in connection with crypto assets and related cash and/or cash equivalents. Before engaging a State Trust Company and annually thereafter, an investment adviser or fund must determine in writing, after due inquiry, that the State Trust Company both is authorized by its state banking authority to custody crypto assets and maintains written safeguarding policies addressing, at a minimum, private key management and cybersecurity. The investment adviser or fund may consider a legal opinion of counsel and/or a certification from the State Trust Company. A State Trust Company that independently qualifies as a bank may continue to be used under the existing rules.
- Broker-dealer custody. Rule 17f-1 would be amended to permit a regulated fund to custody securities or similar investments with any broker-dealer registered under Exchange Act Section 15(b)(1), not only a member of a national securities exchange, when the custody is subject to Exchange Act Rule 15c3-3 or comparable customer protection. The amendment would replace the existing contract, board-ratification, accountant-verification, and related conditions, and Form N-17f-1 would be rescinded. The December 2025 Trading and Markets staff statement regarding possession or control of crypto asset securities under Rule 15c3-3(b)(1) remains relevant. The Proposal does not otherwise change broker-dealer crypto custody under the Exchange Act or under FINRA rules.
Other Investment Company Act and Advisers Act Modernization
- Other Investment Company Act amendments. The Proposal would expressly incorporate business development companies into the Investment Company Act custody rules, rescind Rule 17f-3 relating to free cash accounts, and make conforming changes to Rules 17f-4 and 17f-7. The SEC also requests comment on Rule 17f-2 self-custody, foreign custody under Rule 17f-5, affiliated custodians, uncertificated securities, and cleared swap collateral.
- Custody Rulechanges. The Proposal would amend the Custody Rule and add an exception for custody arising solely from discretionary trading authority, eliminate the PCAOB registration and inspection requirement for accountants under the rule, and provide a new exception for standing letters of authorization.
- Audit and reporting changes. The audit provision would clarify U.S. GAAP requirements, extend certain fund-of-funds deadlines, permit delivery to an independent representative, and address newly formed funds. Form ADV and Form N-CEN would receive conforming and crypto-custody disclosures, and the Proposal would address inadvertent custody and related recordkeeping.
Practical Takeaways
- Assess asset coverage. Broker-dealers, banks, and State Trust Companies should map the crypto assets and related cash or cash equivalents they can support, identify gaps, and prioritize onboarding of assets for which adviser self-custody may otherwise be the only option.
- Prepare the diligence p Investment advisers and regulated funds will be required to conduct due diligence for any State Trust Company that they seek to engage to custody crypto assets. State Trust Companies should work with legal counsel to prepare an opinion or memorandum determining that the State Trust Company is duly authorized under applicable state law, maintains written safeguarding policies addressing private key management and cybersecurity, and that the State Trust Company is otherwise authorized to custody crypto assets on behalf of investment advisers and regulated funds.
- Plan for internal control reporting. Custodians should confirm that an independent public accountant can provide an opinion on the design, implementation, and operating effectiveness of custodial controls, including crypto asset safeguarding.
- Review custody agreements. Agreements should address segregation of client assets from proprietary assets and, for funds using a State Trust Company, include the required segregation terms; parties should also evaluate potential UCC Article 8 financial asset-election provisions where relevant.
- Evaluate charter strategy. State Trust Companies should assess whether a national trust bank charter is necessary for their planned custody business.
- Self-custody is a backstop, not a substitute. The Proposal would include self-custody for investment advisers and regulated funds as a backstop, not a substitute for a qualified custodian. Investment advisers and regulated funds will need to determine, after due inquiry, whether a qualified custodian that will maintain the particular crypto assets held is available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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