The Proposal (the \u201cProposal\u201d) would:<\/p>\n
permit registered investment advisers and registered management investment companies and business development companies (BDCs, and together with registered management investment companies, \u201cregulated funds\u201d) to self-custody crypto assets in certain circumstances subject to conditionspermit advisers and regulated funds to maintain client or fund crypto assets with a state trust company, subject to conditionsmodernize the custody rules under both statutes, andupdate recordkeeping and disclosure requirements.2<\/a><\/p>\n Chairman Paul S. Atkins stated the Commission proposed \u201cto close a gap that has left investment advisers and funds guessing how to effect lawful custody of an asset class that their clients increasingly demand\u201d and called it \u201canother significant step toward bringing our regulatory frameworks into the modern era.\u201d3<\/a> The Proposing Release was published in the Federal Register on October 6, 2026, and the public comment period remains open for 60 days thereafter.4<\/a><\/p>\n Key takeawaysAdvisers and regulated funds would be permitted to self-custody crypto assets where no qualified custodian is available, subject to written determinations, safeguarding expertise, key management controls, cybersecurity requirements, internal control reports, and account statements.5<\/a>The Proposal would create a dedicated pathway for advisers and regulated funds to custody crypto assets with state trust companies, bypassing the fact-specific analysis of whether a state trust company satisfies the statutory definition of a bank.6<\/a>Self-custody is available only where no qualified custodian will maintain the asset, and cost is not a permissible basis. Advisers must maintain exclusive possession of key materials, obtain SOC 1 Type 2 reports, and send quarterly account statements.7<\/a>Targeted amendments to both the Advisers Act and Investment Company Act custody rules would provide exceptions for authorized discretionary trading authority, standing letters of authorization, and inadvertent custody, eliminate the Public Company Accounting Oversight Board (PCAOB) registration requirement for accountants, and broaden eligible broker-dealer custodians.8<\/a>The custody requirements reach only certain crypto assets, and the governing test differs by statute. For advisory clients that are not regulated funds, the Advisers Act custody rule covers only crypto assets that are \u201cfunds\u201d or \u201csecurities,\u201d9<\/a> so the SEC views digital commodities such as Bitcoin, Ether, and Solana as generally outside custody rule requirements. For regulated funds, the custody rule conditions reach crypto assets that are \u201csecurities or similar investments,\u201d a broader category the Commission reads to include digital commodities such as Bitcoin, Ether, and Solana.Under the Advisers Act custody rule, advisers that are deemed to have custody of shares of mutual funds (including registered money market funds) could treat such mutual fund\u2019s transfer agent as a qualified custodian.\u00a0 \u00a0New Form ADV and Form N-CEN questions would require disclosure of self-custody arrangements, state trust company use, and fund tokenization.Background<\/p>\n Current custody rules under the Advisers Act and the Investment Company Act were designed to protect adviser client and regulated fund assets from loss, theft, misuse, and misappropriation, and to address custody of traditional assets.10<\/a><\/p>\n Since the advent of Bitcoin in 2008, the crypto asset market has grown significantly; the Proposing Release notes the crypto market reached a USD2.7 trillion market capitalization in May 2026. Unlike traditional assets, a permitted custodian may not be readily available to hold certain crypto assets, and custodial capabilities may lag an asset\u2019s deployment by many months.<\/p>\n The Proposal follows a reversal in regulatory approach. The Commission\u2019s 2023 Advisers Act safeguarding proposal, which would have extended the Advisers Act custody rule to substantially all client assets, including crypto assets, was formally withdrawn in June 2025.\u00a0 In September 2025, the SEC staff issued a no-action letter stating that the staff would not recommend enforcement action against advisers and regulated funds that treated state trust companies as banks for crypto asset custody, subject to conditions, for purposes of the Advisers Act and Investment Company Act.11<\/a><\/p>\n The Proposal would replace that staff position with new rules under both the Advisers Act (Rule 223-1)12<\/a> and Investment Company Act (Rules 17f-8 and 17f-9), expanding on the staff\u2019s state trust company position, adding a self-custody pathway, and further modernizing the custody framework under both statutes.<\/p>\n Key features of the ProposalSelf-custody under the Advisers Act<\/p>\n The Proposal would introduce an exception from certain requirements of the new Advisers Act custody rule (Rule 223-1), including the qualified custodian requirement,13<\/a> for advisers that self-custody crypto assets.14<\/a><\/p>\n \u201cSelf-custody\u201d would mean, with respect to a client\u2019s crypto asset, possession of any portion of the crypto asset\u2019s key materials.15<\/a> \u201cKey materials\u201d includes any part of the private key necessary to access and effectuate transactions. The self-custody provisions apply only if an adviser actually possesses the key materials; mere authority to obtain possession confers custody but not self-custody.<\/p>\n An adviser relying on the self-custody exception must satisfy each of the following conditions:<\/p>\n The adviser must determine in writing, prior to taking self-custody and no less frequently than quarterly thereafter, that it has a reasonable basis, after due inquiry, for believing that no qualified custodian will maintain the crypto asset. Cost is not a permissible basis. If a qualified custodian becomes available, the adviser must place the asset with it as soon as reasonably practicable.The adviser must have documented expertise regarding safeguarding each crypto asset and must adopt, implement, and maintain systems addressing: (A) key management, limiting access to key materials to supervised persons designated by the adviser, with the Commission\u2019s view that the adviser must maintain exclusive possession of key materials;16<\/a> (B) joint authorization, requiring at least two designated persons (including a management person) to authorize transfers, paralleling the existing two-person requirement under Rule 17f-2(d) of the Investment Company Act; and (C) per-client segregation, maintaining each client\u2019s crypto assets in addresses storing only that client\u2019s assets.The adviser must mitigate cybersecurity risks and review its cybersecurity controls no less frequently than annually, covering risk assessment, threat identification and mitigation, and incident response and recovery.17<\/a>Within six months of taking self-custody and annually thereafter, the adviser must obtain internal control reports from an independent public accountant. A SOC 1 Type 2 Report would satisfy the requirement; a SOC 1 Type 1 Report would not.18<\/a>Quarterly statements must identify the crypto asset address, the crypto network, amounts held, all transactions during the period, and a statement urging the client to compare against on-chain balances.19<\/a>The adviser and client must agree in writing to treat each self-custodied crypto asset as a \u201cfinancial asset,\u201d and the adviser as a \u201csecurities intermediary,\u201d under Article 8 of the Uniform Commercial Code as enacted in the state law governing the agreement. The Commission describes this election as critical to client protection because a self-custodying adviser lacks the FDIC and SIPC backstops available to banks and broker-dealers; because state enactments of Article 8 vary, the governing-law clause becomes part of the custody analysis.20<\/a>Self-custody under the Investment Company Act<\/p>\n A regulated fund may maintain crypto assets in self-custody through its adviser if the adviser complies with the self-custody provisions in the Advisers Act custody rule and the fund\u2019s board oversees the arrangement. The board must review, initially and quarterly thereafter, the adviser\u2019s written report documenting the basis for its determination that no qualified custodian is available, and must determine, prior to the adviser maintaining the asset and annually thereafter, that the fund\u2019s crypto asset would be subject to reasonable care if self-custodied.5<\/a><\/p>\n State trust companies as qualified custodians<\/p>\n The Proposal would designate state trust companies as qualified custodians under both the Advisers Act and Investment Company Act, thereby permitting custody of advisory client crypto assets by state trust companies, subject to conditions.6<\/a> Prior to engaging a state trust company and annually thereafter, the adviser or regulated fund must determine in writing that it has a reasonable basis, after due inquiry, for believing that the state trust company:<\/p>\n is authorized by the relevant state banking authority to provide custody services for crypto assetsand maintains written policies and procedures reasonably designed to safeguard crypto assets.\u00a0<\/p>\n The adviser or fund must also receive and review the state trust company\u2019s most recent annual audited financial statements and internal control report. All crypto assets held at the state trust company must be segregated from the state trust company\u2019s proprietary assets.<\/p>\n The state trust company pathway would supersede the September 2025 staff no-action letter, but the proposed rule text omits that letter\u2019s contractual bar on lending, pledging, or rehypothecating client crypto assets; the Commission instead requests comment on whether to address rehypothecation and whether clients should be permitted to consent to any such rehypothecation. The Commission estimates that roughly 19 state trust companies currently specialize in crypto custody.<\/p>\n Custody modernization<\/p>\n The Proposal includes targeted modernization amendments to both the Advisers Act and Investment Company Act custody rules. Under the Investment Company Act, the Proposal would expand eligible broker-dealer custodians to all registered broker-dealers (rather than only exchange members), subject to Exchange Act rule 15c3-3 or a comparable rule.21<\/a><\/p>\n Under the Advisers Act, the Proposal would:\u00a0<\/p>\n except authorized discretionary trading authority from the custody rule, subject to conditionsprovide an exception from the surprise examination requirement where custody arises solely from a standing letter of authorizationexcept inadvertent custodyeliminate the PCAOB registration requirement for accountants engaged under the custody ruleand require the client\u2019s account number in the custodian notice.8<\/a><\/p>\n The Proposal also outlines expected revisions to the 2009 Commission Guidance on independent public accountant engagements under the custody rule.22<\/a><\/p>\n Recordkeeping and reporting<\/p>\n