SEC Proposes Crypto Asset Custody Rules for Advisers and Funds

The U.S. Securities and Exchange Commission on October 1, 2026, proposed new rules and amendments to provide a tailored framework for the custody of crypto assets by registered investment advisers and regulated funds, a category the Commission defined as registered investment companies and business development companies. The SEC said the proposal would modernize its custody rules and expand investor choice by removing regulatory barriers that inhibit an adviser’s ability to provide crypto-related investment advice, and would allow regulated funds to offer clients access to a wider range of crypto asset-related investment strategies.

The proposal, issued as Release Nos. IA-7023 and IC-36353 under File No. S7-2026-35, contains new rules and amendments under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. According to the proposing release, the Advisers Act amendments would apply only to crypto assets that are funds or securities, and the new Investment Company Act rules would apply only to crypto assets that are securities or similar investments. Face-amount certificate companies and unit investment trusts would not be able to rely on the proposed fund self-custody and state trust company rules.

SEC Chairman Paul S. Atkins said in a statement that the proposal would provide “a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before.”

Self-Custody Conditions

Under the proposed adviser self-custody rule, designated rule 223-1(b)(7), a registered investment adviser could hold advisory clients’ crypto assets, including the crypto assets of regulated funds, in self-custody without maintaining them at a qualified custodian, subject to conditions. A companion provision, proposed rule 17f-9 under the Investment Company Act, would permit a regulated fund to maintain its crypto assets through the fund’s adviser if the adviser complies with the adviser self-custody rule and the fund’s board of directors oversees the arrangement.

The conditions detailed in the Commission’s fact sheet and the proposing release include:

• A written determination, made before taking self-custody and quarterly thereafter, that a permitted custodian is not available to maintain the crypto asset.
• Documented expertise in safeguarding each crypto asset, with systems that address private key management and require joint authorization of any crypto asset transactions by at least two people, reviewed no less frequently than annually.
• Maintenance of each client’s crypto assets in one or more crypto asset addresses on the crypto network that store only that client’s assets.
• Mitigation of cybersecurity risks, with at least annual reviews of cybersecurity controls and the effectiveness of their implementation.
• Internal control reports from an independent public accountant concerning control objectives relating to custodial services, obtained within six months of taking self-custody and annually thereafter.
• Account statements sent at least quarterly to each client whose crypto assets are self-custodied, or transmission of the equivalent information in a human-readable and reasonably usable electronic format.
• A written agreement between the adviser and the client to treat each self-custodied crypto asset as a financial asset, with the adviser acting as a securities intermediary under applicable state law.

Where the advisory client is a regulated fund, the fund’s board would have to review the adviser’s written determination that no qualified custodian is available, initially and quarterly, and determine before the arrangement begins and annually thereafter that the fund’s crypto asset would be subject to reasonable care if self-custodied with the adviser. The proposal also includes provisions that would deem the receipt of airdropped crypto assets not to violate the custody rules, provided the proposed conditions are met.

State Trust Companies and Custody Rule Modernization

A second pathway, under proposed Advisers Act rule 223-1(d)(13)(v) and proposed Investment Company Act rule 17f-8, would permit custody of advisory client and regulated fund crypto assets by state trust companies. Before engaging a state trust company, and annually thereafter, the adviser or fund would need a reasonable basis, after due inquiry, for believing the company is authorized by the relevant state banking authority to provide crypto asset custody and that it maintains written policies and procedures reasonably designed to safeguard crypto assets and related cash or cash equivalents from theft, loss, misuse, and misappropriation. The adviser or fund would also have to receive and review the company’s most recent annual audited financial statements and most recent internal control report. All client crypto assets would have to be segregated from the state trust company’s proprietary assets, and regulated funds would be required to enter into a custodial services agreement providing for that segregation.

State trust companies are not an enumerated category of permitted custodian under the current custody rules, so advisers and funds have had to conclude that a state trust company qualifies as a bank, a fact-specific analysis under state and federal law. Division of Investment Management staff addressed that question in a no-action letter issued September 30, 2025, to Simpson Thacher & Bartlett LLP, stating the staff would not recommend enforcement action against advisers or regulated funds that treat a state trust company as a bank for the placement and maintenance of crypto assets under certain circumstances.

The proposal would also modernize the custody rules more broadly. The Advisers Act custody rule would be redesignated from rule 206(4)-2 to new rule 223-1 under section 223 of the Advisers Act, pursuant to authority Congress granted in section 411 of the Dodd-Frank Act, with conforming amendments to Form ADV and Form ADV-E. Other adviser-side amendments would specify circumstances under which authorized discretionary trading authority is excepted from the custody rule, eliminate the requirement that accountants engaged to perform custody rule services be registered with and subject to regular inspection by the Public Company Accounting Oversight Board, require audited financial statements to be prepared in accordance with U.S. Generally Accepted Accounting Principles with an exception for foreign pooled investment vehicles, extend audited financial statement delivery deadlines for funds of funds and funds of funds of funds, provide an exception from the surprise examination requirement for advisers whose custody arises solely from a standing letter of authorization, require the client’s account number in the notice sent when an account is opened with a qualified custodian, and specify circumstances constituting an inadvertent custody exception.

For regulated funds, the proposal would amend rule 17f-1 to permit custody with all registered broker-dealers subject to the customer protection rule under the Securities Exchange Act of 1934, rather than only members of a national securities exchange, rescind rule 17f-3 on free cash accounts, and add references to business development companies throughout the Investment Company Act custody rules. Recordkeeping amendments would allow required records to be maintained on a crypto network if they can be produced promptly to the Commission in a human-readable and reasonably usable electronic format. Form ADV and Form N-CEN would be amended to collect information on the custody of crypto assets and tokenized fund shares, and the release outlines revisions the Commission expects to make to its 2009 guidance on independent public accountant engagements.

The proposing release states that the crypto asset market reached a global market capitalization of approximately $2.7 trillion in May 2026, up from $800 billion at the beginning of 2021, and cites a July 2026 working paper by the Office of Investor Research within the SEC’s Office of the Investor Advocate finding that approximately 9.2% of U.S. adults hold crypto assets. The release also recounts earlier actions that shaped the custodial landscape: a 2019 joint statement by SEC and FINRA staff on broker-dealer custody of digital asset securities, withdrawn on May 15, 2025; a December 2020 Commission statement creating a time-limited special purpose broker-dealer framework; Staff Accounting Bulletin No. 121, issued in March 2022 and rescinded in January 2025; and the January 2025 formation of the Crypto Task Force under Acting Chairman Mark Uyeda. The Commission formally withdrew its 2023 Safeguarding Proposal on June 12, 2025.

Atkins described the custody proposal as one element of a broader sequence of Commission crypto initiatives. His statement listed a December 2025 staff no-action letter to the Depository Trust Company concerning a voluntary securities tokenization pilot program, a January 2026 staff statement providing a tokenization taxonomy, a March 2026 Commission interpretation regarding which crypto assets are securities, an April 2026 staff statement on the broker-dealer registration implications of certain user interfaces used to prepare transactions in tokenized securities, the August 2026 proposal of Regulation Crypto Assets, and, most recently, an Innovation Exemption providing a pathway to facilitate the trading of tokenized NMS stock.

The release states that the Commission considered, but is not proposing at this time, amendments to the custody rules related to crypto asset trading, and it includes a discussion of decentralized finance. The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.