Key Takeaways
- • The SEC proposed on October 1, 2026 amendments to the custody rules under the Investment Company Act of 1940 and the Advisers Act of 1940, establishing new custody arrangements for crypto assets while revising custody requirements for registered investment advisers and regulated funds, including those that do not invest in crypto.
- • Adviser self-custody of crypto assets would be permitted only where no qualified custodian is available, with advisers required to document custodian unavailability for each asset before self-custody and quarterly thereafter.
- • Self-custody would require restricted private key access to designated personnel, joint authorization of transactions by at least two persons including a management person, and independent control reports, with boards of regulated funds taking on added oversight duties.
- • The proposal expressly permits state trust companies to provide crypto custody services, subject to initial and annual diligence including review of audited financial statements and independent internal control reports.
- • Comments on the proposal are due December 7, 2026.
Summary
The Securities and Exchange Commission on October 1, 2026 proposed amendments to the custody rules under the Investment Company Act of 1940 and the Investment Advisers Act of 1940, according to a summary published by Sullivan & Cromwell LLP. The Proposed Rules would establish new custody arrangements for crypto assets and revise existing custody requirements for registered investment advisers and regulated funds, which include registered management investment companies and business development companies, including those that do not invest in crypto assets.
The proposal permits custody of crypto assets with state trust companies, subject to specified safeguards, and permits adviser self-custody of crypto assets where no qualified custodian is available. Self-custody is subject to additional safeguarding requirements and, for regulated funds, board oversight. An adviser that holds any part of the private key material for a client's crypto asset would be subject to the self-custody requirements, even if it cannot unilaterally transfer the asset. Among other conditions, the adviser's systems would have to restrict private key access to designated personnel, require joint authorization of transactions by at least two persons including a management person, and obtain independent control reports. Sullivan & Cromwell expects most mainstream crypto assets to remain at third-party custodians.
The proposal also creates an express exception from the Advisers Act custody rule for advisers with discretionary trading authority, including for transactions that do not settle on a delivery-versus-payment basis, such as loans and privately offered securities. The exception is conditioned on trades being executed through accounts in the client's name and on the absence of authority to transfer client assets to the adviser or related parties. The proposal further eases audit requirements, including eliminating the requirement that custody audit accountants be registered with and inspected by the PCAOB, and extending the audited financial statement delivery deadline for funds of funds from 120 days to 180 days after fiscal year-end, and to 260 days for funds of funds of funds.
The proposal follows the SEC's 2025 withdrawal of its 2023 Safeguarding Advisory Client Assets proposal, which would have expanded custody coverage to substantially all client assets. The current proposal retains the existing "funds or securities" coverage. Commissioners Uyeda and Peirce highlighted the added flexibility for crypto custody in statements accompanying the proposal. Regulated fund boards and advisers are advised to assess operational and cost implications, and comments are due by December 7, 2026.
The proposal permits custody of crypto assets with state trust companies, subject to specified safeguards, and permits adviser self-custody of crypto assets where no qualified custodian is available. Self-custody is subject to additional safeguarding requirements and, for regulated funds, board oversight. An adviser that holds any part of the private key material for a client's crypto asset would be subject to the self-custody requirements, even if it cannot unilaterally transfer the asset. Among other conditions, the adviser's systems would have to restrict private key access to designated personnel, require joint authorization of transactions by at least two persons including a management person, and obtain independent control reports. Sullivan & Cromwell expects most mainstream crypto assets to remain at third-party custodians.
The proposal also creates an express exception from the Advisers Act custody rule for advisers with discretionary trading authority, including for transactions that do not settle on a delivery-versus-payment basis, such as loans and privately offered securities. The exception is conditioned on trades being executed through accounts in the client's name and on the absence of authority to transfer client assets to the adviser or related parties. The proposal further eases audit requirements, including eliminating the requirement that custody audit accountants be registered with and inspected by the PCAOB, and extending the audited financial statement delivery deadline for funds of funds from 120 days to 180 days after fiscal year-end, and to 260 days for funds of funds of funds.
The proposal follows the SEC's 2025 withdrawal of its 2023 Safeguarding Advisory Client Assets proposal, which would have expanded custody coverage to substantially all client assets. The current proposal retains the existing "funds or securities" coverage. Commissioners Uyeda and Peirce highlighted the added flexibility for crypto custody in statements accompanying the proposal. Regulated fund boards and advisers are advised to assess operational and cost implications, and comments are due by December 7, 2026.
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