On October 1, 2026, the U.S. Securities and Exchange Commission (SEC) unveiled a sweeping set of proposed amendments to its long-standing custody rules under both the Investment Company Act of 1940 and the Investment Advisers Act of 1940. These proposed rules, collectively referred to as the "Proposed Rules," aim to establish a comprehensive framework for the custody of digital assets, particularly cryptocurrencies, while simultaneously modernizing existing requirements for registered investment advisers and regulated funds. This significant regulatory initiative signals a proactive stance by the SEC in addressing the evolving landscape of financial assets and investor protection in the digital age.
The Proposed Rules represent a departure from previous SEC proposals, most notably the 2023 "Safeguarding Advisory Client Assets" rule proposal, which was withdrawn in 2025. That earlier proposal would have broadly expanded the scope of the Advisers Act custody rule to encompass virtually all client assets, imposing substantial new requirements on qualified custodians. The current proposals, however, appear to offer greater flexibility, particularly for crypto asset custody, a point highlighted by Commissioners Uyeda and Peirce in their accompanying statements. While retaining the existing focus on "funds or securities" within the Advisers Act custody rule, the new framework specifically carves out provisions for the secure handling of crypto assets, acknowledging their growing presence in investment portfolios.
Regulated funds and registered investment advisers are now faced with a critical juncture, needing to meticulously assess the potential ramifications of these proposed changes on their current custody arrangements. The SEC has set a firm deadline of December 7, 2026, for public comments, urging industry participants to submit their feedback on issues directly relevant to their operations. This period of public comment is crucial, as it will shape the final contours of these pivotal regulations.
Key Takeaways and Implications of the Proposed Rules
The SEC’s proposed amendments are multifaceted, touching upon several key areas of custody regulation. A central theme is the accommodation of crypto assets, a class of assets that has previously presented significant regulatory challenges due to its novel nature and unique technological underpinnings.
If adopted as proposed, the rules are generally expected to become effective upon their official publication, without an extended transition period. However, the SEC has indicated its openness to considering requests for additional time for specific compliance requirements, acknowledging that certain operational adjustments may necessitate a phased implementation.
Modernizing Existing Custody Requirements
The Proposed Rules introduce significant revisions to the existing custody requirements under both the Investment Advisers Act and the Investment Company Act, aiming to streamline processes and enhance investor protection.
Revising Advisers Act Custody Rule Exceptions
Under the Advisers Act, several aspects of the custody rule are slated for revision. Notably, the proposed amendments will alter certain audit requirements. While specific details on the nature of these revisions are still unfolding, they are expected to align with the SEC’s broader objectives of enhancing transparency and accountability in asset safeguarding.
Beyond audit requirements, the Proposed Rules offer clarification on operational matters. The segregation of client assets will now explicitly permit client cash to be held in standard bank deposit accounts. Furthermore, the commingling of client and non-client assets in specific escrow accounts, particularly those established in connection with portfolio company sales, will be permissible under clearly defined conditions. This offers a degree of operational flexibility that was previously less defined.
The SEC also plans to issue interpretive guidance concerning "accommodation reporting." This practice occurs when custodians include assets they do not directly hold on client account statements. The proposed guidance emphasizes that advisers utilizing such reporting must ensure that statements clearly delineate the custodian’s limited responsibilities for these off-balance-sheet assets, thereby preventing investor confusion. Additional amendments will mandate the inclusion of client account numbers in account opening notices, a measure designed to improve traceability and record-keeping. Moreover, accountants will be required to electronically report material discrepancies identified during surprise examinations directly to the SEC, bolstering oversight capabilities.
Form ADV, the primary disclosure document for investment advisers, will also see revisions to its custody reporting requirements. Advisers will be obligated to identify applicable custody rule exceptions and to modify how they report custody arrangements that arise from fee deduction authority or involve related persons. These changes underscore the SEC’s commitment to more granular and accurate disclosure regarding how client assets are managed and secured.
Investment Company Act Custody Rule Changes
The Investment Company Act’s custody rules are also subject to substantial updates. Rule 17f-1, which governs the custody of securities and similar investments for regulated funds, is set to be amended to permit these assets to be held with any registered broker-dealer. This expands the current restriction that limits custody to broker-dealers who are members of national securities exchanges. The crucial caveat is that such custody must remain subject to the robust protections of Exchange Act Rule 15c3-3, commonly known as the "customer protection rule," or another SEC-approved rule offering equivalent safeguards.
Significantly, the proposed amendments would eliminate several existing conditions currently imposed under Rule 17f-1. These include requirements for periodic independent accountant examinations, the necessity of written custodial agreements approved by the fund’s board, and annual board ratification of these agreements. Certain segregation and other safeguarding requirements are also slated for removal, streamlining the custodial process for regulated funds.
Business Development Companies (BDCs) will also benefit from clearer regulatory treatment. The Proposed Rules expressly confirm that BDCs may rely on the Investment Company Act custody rules, aligning with prevailing industry practices. Corresponding amendments to the Advisers Act custody rule will extend the existing exception for registered investment company accounts to BDC accounts, thereby avoiding redundant compliance obligations.
In further efforts to modernize, Rule 17f-3, pertaining to free cash accounts, will be rescinded. Technical corrections are also planned for the depository rules, Rules 17f-4 and 17f-7. The SEC is actively soliciting public comment on the potential modernization of Rule 17f-2 and other related custody rules, indicating an ongoing commitment to adapting its regulations to the current market environment.
A New Framework for Crypto Asset Custody
A cornerstone of the SEC’s proposal is the establishment of a dedicated framework for the custody of crypto assets, recognizing their unique characteristics and the associated risks. The scope of these proposed requirements will differ depending on whether the custody falls under the Investment Company Act or the Advisers Act.
For general advisory clients, the Advisers Act custody rule will apply to crypto assets deemed to be "funds or securities." This definition encompasses digital representations of funds, such as certain payment stablecoins and tokenized deposits, as well as tokenized securities. For regulated funds, the Investment Company Act’s custody requirements will extend to crypto assets that qualify as securities and similar investments. Notably, the SEC’s Release clarifies that under these proposed rules, certain non-security crypto assets, including prominent ones like Bitcoin, Ether, and Solana, when held for regulated funds, would also be subject to the proposed adviser self-custody requirements. This broad interpretation underscores the SEC’s intention to provide comprehensive oversight for crypto asset holdings within registered entities.
State Trust Company Custody Rule Changes
The Proposed Rules introduce significant clarity regarding the role of state trust companies in crypto asset custody. Amendments to the Advisers Act custody rule and the adoption of a new Rule 17f-8 under the Investment Company Act will expressly permit advisers and regulated funds to maintain crypto assets, along with related cash or cash equivalents, with state trust companies. This initiative aims to replace the uncertainty previously addressed by the SEC Staff’s September 2025 no-action letter, which clarified whether state trust companies qualified as "banks" under existing custody rules.
Under the Proposed Rules, eligible state trust companies will be required to be supervised and examined by state banking authorities and possess authorization to exercise fiduciary powers under state law. Critically, these state trust companies will only need to be authorized to exercise fiduciary powers, rather than meeting the more stringent current definition of a "bank" which necessitates a substantial portion of their business involving receiving deposits or exercising fiduciary powers. This distinction offers a more accessible pathway for state trust companies to engage in crypto custody.
Before engaging a state trust company and annually thereafter, advisers and regulated funds will be required to conduct due diligence. This includes a written determination, based on reasonable inquiry, that the state trust company is authorized by the relevant state banking authority to provide crypto asset custody and maintains robust written policies and procedures addressing private key management and cybersecurity risks. The acquisition and review of the state trust company’s audited financial statements, prepared in accordance with U.S. GAAP and audited by an independent public accountant, will also be mandatory. The SEC has indicated that consolidated financial statements of a parent or affiliate may be acceptable under certain circumstances. Furthermore, advisers and regulated funds must obtain and review the most recent independent internal control report at the time of engagement and annually thereafter. A key safeguard stipulated is that client crypto assets must be held in accounts segregated from the state trust company’s proprietary assets, and custodial services agreements for regulated funds must explicitly provide for this segregation.
Adviser Self-Custody of Crypto Assets
A particularly noteworthy aspect of the Proposed Rules is the potential for adviser self-custody of crypto assets. Proposed Rule 223-1(b)(7) under the Advisers Act would allow advisers to hold client crypto assets without engaging a qualified custodian, including on behalf of regulated funds under specific conditions. Correspondingly, Proposed Rule 17f-9 under the Investment Company Act would permit regulated funds, including BDCs, to maintain crypto assets directly with their advisers, provided they comply with the proposed Advisers Act requirements and adhere to additional board oversight protocols.
The definition of "self custody" under these proposals is precise: an adviser would be considered to have self-custody over a crypto asset at any time it has actual possession of any portion of the private keys necessary to access and transact with that asset. This definition excludes situations where an adviser holds key materials solely in its capacity as a qualified custodian under proposed Rule 223-1(a)(6). This distinction is crucial for understanding the boundaries of adviser responsibility and control.
The SEC has also initiated discussions on broader crypto custody issues, including those related to decentralized finance (DeFi) activities like staking, liquid staking, and lending through smart contracts. While no specific rules are proposed for these complex arrangements at this stage, the SEC is actively seeking public comment on when crypto assets deposited into smart contracts would be considered under self-custody or with an authorized custodian. The agency is also exploring whether additional relief or guidance is necessary for these emergent areas. Furthermore, the SEC considered, but did not propose, separate relief allowing advisers and regulated funds to hold crypto assets on trading platforms that do not meet the criteria of qualified custodians. Advisers and regulated funds involved in such practices are encouraged to provide feedback on whether the proposed framework adequately accommodates their operational needs.
Recordkeeping and Reporting Updates for Digital Assets
To support the new custody arrangements, the Proposed Rules include amendments to recordkeeping and reporting requirements under both the Advisers Act and the Investment Company Act. These updates are designed to accommodate crypto custody, including provisions that would permit records related to crypto assets to be maintained on a crypto network itself, leveraging blockchain technology for record-keeping.
Further amendments to Form ADV will mandate reporting on crypto self-custody, the utilization of state trust company custodians, and the presence of tokenized fund shares. Similarly, proposed amendments to Form N-CEN will require additional disclosures concerning crypto custody arrangements and tokenized fund shares. The SEC’s Release also emphasizes the importance of disclosing material risks associated with crypto custody arrangements, outlining specific disclosure requirements for Form ADV, Form N-1A (for open-end funds), and Form N-2 (for closed-end funds and BDCs).
The SEC’s proactive engagement through these proposed rules signals a significant shift in how digital assets will be managed within the regulated investment management industry. The comment period offers a critical opportunity for stakeholders to influence the final regulations, ensuring that they strike a balance between investor protection, market innovation, and operational feasibility.
