On October 1, 2026, the SEC proposed comprehensive amendments to the custody rule framework under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 that would permit advisers as well as registered investment companies and business development companies (BDCs) (together, regulated funds) to self-custody crypto assets, permit advisers and regulated funds to maintain client or regulated fund crypto assets with a state trust company, and modernize custody rules to better address current industry practices and feedback.
Crypto Asset Self-Custody. Proposed amendments to the Advisers Act custody rule would permit an adviser to self-custody a client’s crypto assets if the adviser determines before taking custody—and at least quarterly thereafter—that no permitted custodian is available to maintain those assets. Among other conditions, the adviser would be required to maintain (and review annually) systems to safeguard each crypto asset as well as cybersecurity controls, segregate each client’s crypto assets from assets of other clients, obtain internal control reports from an independent public accountant concerning the adviser’s safeguarding of crypto assets, send quarterly account statements to each client for which the adviser is self-custodying crypto assets, and enter into a written agreement with each such client to treat the crypto assets as a “financial asset” under applicable state law.
Similarly, a proposed new custody rule under the Investment Company Act would permit a regulated fund to maintain its crypto assets in self-custody through the fund’s adviser if the adviser complies with the adviser self-custody rule and if the fund’s board of directors oversees the custody arrangement. Board oversight would require that before the adviser self-custodies a fund’s crypto asset, the fund’s board, including a majority of its independent directors, (i) review the adviser’s custodian-availability determination and continue to review the determination on a quarterly basis thereafter and (ii) determine that the fund’s crypto asset would receive reasonable care under the arrangement and continue to make that determination annually thereafter. To facilitate the board’s determination, the fund’s adviser would be required to furnish, and the board would be required to evaluate, such information as may reasonably be necessary for the board to evaluate the fund’s custody arrangement of the crypto asset. The proposed rule sets forth specific information that the adviser must provide, at a minimum, for the board’s review.
State Trust Company Custody. The proposal would permit advisers and regulated funds to maintain crypto assets with certain state trust companies. Before engagement, and annually thereafter, the adviser or regulated fund would be required to conduct due diligence and form a reasonable basis for believing that the state trust company is authorized by its state banking authority to provide crypto asset custody and that the state trust company maintains and implements written policies and procedures to safeguard crypto assets. The adviser or regulated fund would also be required to review the state trust company’s audited financial statements and internal control report, and the state trust company must segregate the crypto assets.
Additional Modernization of Custody Rules. The proposal also seeks to modernize the broader custody framework. With respect to the custody rule under the Advisers Act (Rule 206(4)-2), the proposal would, among other things, redesignate the existing rule to be Rule 223-1, specify circumstances under which authorized discretionary trading authority is exempt from custody rule requirements, eliminate certain PCAOB-related requirements, exempt advisers from custody rule requirements under specified circumstances when the adviser has inadvertent custody of client assets, and expand the custody rule’s exemption for registered funds to include BDCs that elect to be regulated under the Investment Company Act. Custody rules under the Investment Company Act would be modernized by, among other things, removing antiquated conditions currently required for broker-dealer custody, rescinding Rule 17f-3 regarding free cash accounts, and specifying that BDCs may use the Investment Company Act custody rules.
The rule proposal also includes corresponding amendments to the recordkeeping rules under the Advisers Act and the Investment Company Act and amendments to Forms ADV and N-CEN to collect additional information regarding the custody of crypto assets and tokenized fund shares.
Comments on the rule proposal must be submitted by December 7, 2026.
The SEC’s proposing release is available here, a related press release is available here and a related fact sheet is available here.
