SEC proposes crypto custody rules for advisers and funds

The Securities and Exchange Commission proposed new crypto custody rules on Oct. 1 for registered investment advisers and regulated funds, creating possible routes to use state trust companies or hold some assets themselves. The agency said the proposal is meant to address custody barriers under federal securities laws and expand investment options.

The SEC’s announcement of the proposal covers registered investment companies and business development companies as well as advisers. It would amend rules under the Investment Advisers Act and Investment Company Act; it is a proposal, not a final rule.

When could advisers hold crypto themselves?

Under the proposal, an adviser could self-custody a client’s crypto asset if it determines that no qualified custodian is available to hold that asset. The SEC’s proposed rule text would require the adviser to document that determination and reassess it at least quarterly.

The adviser would also need expertise in safeguarding each asset and systems to protect it against loss, theft, misuse and misappropriation. Those systems would have to address private-key management, require at least two people to authorize transactions, and keep each client’s assets in separate blockchain addresses, according to the proposal.

Other proposed safeguards include cybersecurity controls reviewed at least annually and internal control reports prepared by an independent public accountant. Advisers would also provide clients with account statements at least quarterly.

What role would state trust companies have?

The SEC proposed allowing state trust companies to act as custodians for crypto assets held for advisory clients and regulated funds, subject to conditions in the rule. The agency said these companies have emerged as a custody option as advisers and funds have faced difficulty finding traditional custodians for crypto.

The proposal would also require advisers and funds to assess whether a state trust company meets the rule’s requirements. For funds whose advisers self-custody crypto, the proposal calls for fund-board oversight, including review of the adviser’s decision that a qualified custodian is unavailable.

When can the public weigh in?

The SEC said the public comment period will run for 60 days after the proposing release is published in the Federal Register. The agency has not set a calendar deadline in its announcement; the comment window’s start and closing date depend on that publication.

After the comment period, the SEC can consider submissions before deciding whether to revise, adopt or withdraw the proposed rules. Until the commission takes further action, the proposal does not change the existing custody requirements.