SEC proposes guarded crypto self-custody for advisers and funds

The Securities and Exchange Commission on Oct. 1 proposed new rules that would let registered investment advisers and regulated funds use conditional self-custody or state trust companies for certain crypto assets. The SEC said the framework is intended to address custody limits that can restrict investment options. Its announcement of the proposal describes changes under the Investment Advisers Act and Investment Company Act; the proposal remains open to public comment.

Which crypto assets would the proposal cover?

The proposal would apply to a defined subset, not crypto assets generally. Under the SEC’s proposed rule, the adviser custody amendments would cover crypto assets that are funds or securities for advisory clients, and securities or similar investments for regulated funds. The SEC says existing custody rules generally require client and fund assets to be held by permitted custodians. It argues that where such a custodian is unavailable for a crypto asset, the limits can constrain advisers’ ability to invest client assets and funds’ ability to offer related strategies.

What conditions would apply to adviser self-custody?

An adviser could hold a client’s crypto asset by controlling the private keys needed to access and transact with it, but only if it met proposed safeguards. It would have to determine in writing, initially and quarterly, that no permitted custodian is available for the asset. The adviser would also need documented safeguarding expertise and systems covering private-key management, cybersecurity and joint authorization of transactions by at least two people. Client assets would have to be held in addresses dedicated to that client.

The proposal adds recurring checks: advisers would review safeguarding and cybersecurity controls annually, obtain internal-control reports within six months of taking custody and annually after that, and send clients account statements at least quarterly. For a regulated fund using its adviser’s self-custody, the fund’s board would assess the arrangement and review the adviser’s custodian-availability determination. Those conditions create a route where an outside custodian is unavailable, while putting operational responsibility and added compliance work on the adviser and fund board.

How would state trust companies fit, and what comes next?

The SEC would add qualifying state trust companies as permitted custodians for crypto assets, subject to due diligence by advisers or funds. They would need to verify the company’s state authorization and safeguarding policies, including private-key management and cybersecurity, and review its audited financial statements and internal-control report. The proposal also requires client crypto assets to be segregated. This expands the custodian pool while requiring firms to assess protections that can vary by state.

The SEC’s filing says comments are due 60 days after publication in the Federal Register. The proposal would also modernize other custody requirements and allow required records to be maintained on a crypto network if they can be promptly produced to the Commission in a usable, human-readable electronic format. The next signals are the comment record on self-custody controls and state trust company oversight, and whether the SEC changes those conditions before adopting a final rule.