Key Takeaways
- • The SEC proposed on October 1, 2026 (Release Nos. IA-7023; IC-36353) a broad overhaul of the investment adviser custody framework, including a new cryptoasset custody regime.
- • Advisers would be permitted to self-custody cryptoassets if a permitted custodian is unavailable, subject to written quarterly determinations, safeguarding expertise, annual cybersecurity and systems reviews, and internal control reports within six months.
- • State-chartered limited purpose trust companies would be permitted to hold certain cryptoassets for advisers, consistent with recent SEC staff guidance.
- • The proposal would eliminate the requirement that accountants performing required audits or surprise examinations be registered with and inspected by the PCAOB.
- • The Custody Rule, Rule 206(4)-2, would be redesignated Rule 223-1, with new exceptions for discretionary trading, inadvertent custody, SLOA arrangements, and certain BDCs.
Summary
On October 1, 2026, the Securities and Exchange Commission proposed changes to the custody framework governing investment advisers under the Investment Advisers Act of 1940, according to a client alert from Latham & Watkins LLP. The proposal, Release Nos. IA-7023 and IC-36353, is intended to modernize custody regulations to account for cryptoassets, market developments and industry feedback. The Latham analysis notes that many provisions codify existing SEC staff guidance, but the cryptoasset provisions and several new exceptions represent substantive changes.
The most significant change concerns cryptoassets. Under the proposal, advisers could self-custody client cryptoassets, defined as holding through possession of any portion of the private keys necessary to effectuate transactions, if a permitted custodian is not available. The SEC cited the evolution of cryptoasset markets and questions about which custodians are able or willing to serve advisers in this space. To address the conflicts of interest and risks inherent in self-custody, the proposal sets conditions including a written determination of custodian unavailability made initially and quarterly; demonstrated safeguarding expertise for each cryptoasset; safeguarding systems that address private key management and joint authorization of transactions by at least two people; annual reviews of cybersecurity controls; internal control reports within six months of custody and annually thereafter; and quarterly account statements to affected clients detailing addresses, balances and transactions.
The proposal would also allow advisers to maintain assets with State-chartered limited purpose trust companies under specified conditions, reflecting recent SEC staff guidance on certain cryptoassets.
Other provisions address audit and accounting requirements. Newly formed vehicles formed within the last 90 days of their fiscal year would be exempt from delivering audited statements for that partial first year, subject to delivery timing conditions. Funds of funds and funds of funds of funds would receive extended delivery deadlines of 180 and 260 days, respectively. Advisers would no longer need to use a PCAOB-registered and -inspected accountant for custody compliance. Non-US vehicles, or those with non-US managers, could use accounting principles other than US GAAP under certain conditions.
On exceptions, advisers with custody solely from discretionary trading authority would be excepted, though delivery-versus-payment arrangements would not be required to rely on this exception. Advisers with custody only through a standing letter of authorization would be excepted from surprise examination requirements, following a 2017 SEC staff no-action position. Inadvertent custody arising solely from client custodial agreements would also be excepted, and advisers to BDCs regulated under the 1940 Act would be excepted with respect to those BDCs, except where the adviser self-custodies. The proposal would also require client account notices to include account numbers, require accountants to report material surprise examination discrepancies electronically to the SEC's Division of Examinations, and amend Form ADV to collect additional cryptoasset custody information.
The most significant change concerns cryptoassets. Under the proposal, advisers could self-custody client cryptoassets, defined as holding through possession of any portion of the private keys necessary to effectuate transactions, if a permitted custodian is not available. The SEC cited the evolution of cryptoasset markets and questions about which custodians are able or willing to serve advisers in this space. To address the conflicts of interest and risks inherent in self-custody, the proposal sets conditions including a written determination of custodian unavailability made initially and quarterly; demonstrated safeguarding expertise for each cryptoasset; safeguarding systems that address private key management and joint authorization of transactions by at least two people; annual reviews of cybersecurity controls; internal control reports within six months of custody and annually thereafter; and quarterly account statements to affected clients detailing addresses, balances and transactions.
The proposal would also allow advisers to maintain assets with State-chartered limited purpose trust companies under specified conditions, reflecting recent SEC staff guidance on certain cryptoassets.
Other provisions address audit and accounting requirements. Newly formed vehicles formed within the last 90 days of their fiscal year would be exempt from delivering audited statements for that partial first year, subject to delivery timing conditions. Funds of funds and funds of funds of funds would receive extended delivery deadlines of 180 and 260 days, respectively. Advisers would no longer need to use a PCAOB-registered and -inspected accountant for custody compliance. Non-US vehicles, or those with non-US managers, could use accounting principles other than US GAAP under certain conditions.
On exceptions, advisers with custody solely from discretionary trading authority would be excepted, though delivery-versus-payment arrangements would not be required to rely on this exception. Advisers with custody only through a standing letter of authorization would be excepted from surprise examination requirements, following a 2017 SEC staff no-action position. Inadvertent custody arising solely from client custodial agreements would also be excepted, and advisers to BDCs regulated under the 1940 Act would be excepted with respect to those BDCs, except where the adviser self-custodies. The proposal would also require client account notices to include account numbers, require accountants to report material surprise examination discrepancies electronically to the SEC's Division of Examinations, and amend Form ADV to collect additional cryptoasset custody information.
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