SEC Proposes Material Liberalization of Adviser/Fund Custody Requirements

The SEC proposed (i) allowing investment advisers to act as custodians (referred to in the proposal as "self-custody") for the crypto assets of their clients (including clients that are regulated funds) subject to a variety of conditions, (ii) authorizing advisers and regulated funds to determine that a state trust company is a permitted custodian, and (iii) facilitating the legal authority of broker-dealers to act as custodians for regulated funds. For purposes of the SEC's proposal, the term "regulated fund" would include both SEC-registered investment companies and business development companies.

In order to "self-custody" a client's assets, an adviser would be required (i) to determine before providing custody (and reconfirming on a quarterly basis) that no SEC-permitted custodian is available to provide custody for crypto assets, (ii) to keep the crypto assets of each client separate from that of other clients, and (iii) to adopt a variety of other safety measures, including obtaining periodic reports from an independent public accountant. Where the relevant client is a regulated fund, the fund's board would also be required to review the adviser's custodial procedures.

To engage a state trust company as a custodian, an adviser or a fund would be required, among other obligations, to determine, after due inquiry, that (i) the relevant state banking authority has authorized the trust company to provide custody services for crypto assets and (ii) the trust company has written policies and procedures reasonably designed to protect crypto assets and related cash from loss.

The proposal would also remove a number of conditions that have effectively prevented broker-dealers from serving as custodian for the assets of regulated funds.

The proposal also covers custody issues beyond crypto, including the timing requirements for delivery of audited financial statements for pooled investment vehicles formed near fiscal year-end and the obligations of an adviser that becomes aware it has inadvertent custody of client funds or securities.

Commissioner Hester Peirce, whose tenure at the SEC ended October 2, 2026, supported the proposal but said she would have preferred the term "shelf-custody" to distinguish adviser custody from situations in which investors custody their own assets without intermediation. Chair Paul Atkins said the proposal would give advisers and funds a compliant path for the custody of crypto assets where none existed previously (see prior coverage). Commissioner Mark Uyeda listed guardrails on self-custody, including cybersecurity protections and client disclosures.

The Alternative Investment Management Association called the proposal meaningful progress but said issues remain on shared-control arrangements, staking, and DeFi.

Comments are due 60 days after Federal Register publication.