Proposed Rule2026-20466
Adviser and Regulated Fund Custody Rules; Crypto Custody Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 6, 2026
Effective
October 6, 2026
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission (the "Commission" or the "SEC") is proposing new custody rules under the Investment Company Act of 1940 (the "Investment Company Act") and amendments to related reporting and recordkeeping requirements to address how regulated investment companies may custody crypto securities and similar investments, and amendments to the custody rule and related reporting and recordkeeping rules under the Investment Advisers Act of 1940 (the "Advisers Act") to address how registered investment advisers may custody client crypto funds and securities. We are also proposing to amend the current custody rules to modernize their requirements, to better address current industry practices and feedback, and to implement certain conforming amendments. We are also proposing amendments to the recordkeeping rules under the Investment Company Act and Advisers Act related to these proposed modernization amendments to the custody rules. Additionally, we are proposing to redesignate the custody rule under the Advisers Act and to make corresponding amendments to Form ADV and Form ADV-E for registered investment advisers to reflect the Advisers Act custody rule redesignation. We are also proposing amendments to Form ADV for registered investment advisers and Form N-CEN for regulated investment companies and to improve the quality of public disclosures made on these forms. We are also proposing to add new questions to Form ADV and Form N-CEN related to tokenized private funds and regulated investment company shares, respectively.
Full Text
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<title>Federal Register, Volume 91 Issue 192 (Tuesday, October 6, 2026)</title>
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[Federal Register Volume 91, Number 192 (Tuesday, October 6, 2026)]
[Proposed Rules]
[Pages 63870-64103]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-20466]
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Vol. 91
Tuesday,
No. 192
October 6, 2026
Part IV
Securities and Exchange Commission
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17 CFR Parts 270, 274, 275, et al.
Adviser and Regulated Fund Custody Rules; Crypto Custody Rules;
Proposed Rule
Federal Register / Vol. 91, No. 192 / Tuesday, October 6, 2026 /
Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270, 274, 275, and 279
[Release Nos. IA-7023; IC-36353; File No. S7-2026-35]
RIN 3235-AN46
Adviser and Regulated Fund Custody Rules; Crypto Custody Rules
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or
the ``SEC'') is proposing new custody rules under the Investment
Company Act of 1940 (the ``Investment Company Act'') and amendments to
related reporting and recordkeeping requirements to address how
regulated investment companies may custody crypto securities and
similar investments, and amendments to the custody rule and related
reporting and recordkeeping rules under the Investment Advisers Act of
1940 (the ``Advisers Act'') to address how registered investment
advisers may custody client crypto funds and securities. We are also
proposing to amend the current custody rules to modernize their
requirements, to better address current industry practices and
feedback, and to implement certain conforming amendments. We are also
proposing amendments to the recordkeeping rules under the Investment
Company Act and Advisers Act related to these proposed modernization
amendments to the custody rules. Additionally, we are proposing to
redesignate the custody rule under the Advisers Act and to make
corresponding amendments to Form ADV and Form ADV-E for registered
investment advisers to reflect the Advisers Act custody rule
redesignation. We are also proposing amendments to Form ADV for
registered investment advisers and Form N-CEN for regulated investment
companies and to improve the quality of public disclosures made on
these forms. We are also proposing to add new questions to Form ADV and
Form N-CEN related to tokenized private funds and regulated investment
company shares, respectively.
DATES: This release was published in the Federal Register on October
6, 2026. Comments should be received on or before December 7, 2026.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/comments/s7-2026-35/adviser-regulated-fund-custody-rules-crypto-custody-rules">https://www.sec.gov/comments/s7-2026-35/adviser-regulated-fund-custody-rules-crypto-custody-rules</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1260677e773f717d7f7f777c6661526177713c757d64"><span class="__cf_email__" data-cfemail="b9cbccd5dc94dad6d4d4dcd7cdcaf9cadcda97ded6cf">[email protected]</span></a>. Please include
File Number S7-2026-35 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-2026-35. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method of submission. The Commission will post all
comments on the Commission's website (<a href="https://www.sec.gov/rules-regulations/public-comments/s7-2026-35">https://www.sec.gov/rules-regulations/public-comments/s7-2026-35</a>). Do not include personally
identifiable information in submissions; you should submit only
information that you wish to make available publicly. The Commission
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on
the Commission's website (<a href="https://www.sec.gov/rules-regulations/2006/10/s7-2026-35">https://www.sec.gov/rules-regulations/2006/10/s7-2026-35</a>).
FOR FURTHER INFORMATION CONTACT: Janet Jun and Jill Pritzker, Senior
Counsels; Samuel Thomas, Branch Chief; Robert Holowka, Assistant
Director, Investment Adviser Regulation Office; Andrew Deglin, Alexis
Hassell, and Gregory Scopino, Senior Counsels; Zeena Abdul-Rahman,
Branch Chief; Amanda Hollander Wagner, Senior Special Counsel; and
Brian M. Johnson, Assistant Director, Investment Company Regulation
Office; Meghan Ryan, Assistant Chief Accountant, Chief Accountant's
Office, Division of Investment Management, at (202) 551-6787,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment: amendments to 17 CFR 270.17f-1 (``rule 17f-1''), 17 CFR
270.17f-2 (``rule 17f-2''), 17 CFR 270.17f-4 (``rule 17f-4''), 17 CFR
270.17f-5 (``rule 17f-5''), 17 CFR 270.17f-6 (``rule 17f-6''), 17 CFR
270.17f-7 (``rule 17f-7''), 17 CFR 270.31a-1 (``rule 31a-1''), 17 CFR
270.31a-2 (``rule 31a-2''), and 17 CFR 274.101 (``Form N-CEN'') under
the Investment Company Act; \1\ 17 CFR 270.17f-8 (``proposed rule 17f-
8'') and 17 CFR 270.17f-9 (``proposed rule 17f-9'') under the
Investment Company Act; to rescind 17 CFR 270.17f-3 (``rule 17f-3'')
and 17 CFR 274.219 (``Form N-17f-1'') under the Investment Company Act;
and amendments to 17 CFR 275.206(4)-2 under the Advisers Act \2\
(``rule 206(4)-2'') and to redesignate it as 17 CFR 275.223-1 under the
Advisers Act (``proposed rule 223-1''), 17 CFR 275.204-2 (``rule 204-
2''), 17 CFR 275.279.1 (``Form ADV''), and 17 CFR 275.279.8 (``Form
ADV-E''), under the Advisers Act.
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\1\ Unless otherwise noted, when we refer to the Investment
Company Act, we are referring to 15 U.S.C. 80a, and when we refer to
rules under the Investment Company Act, we are referring to title
17, part 270 of the Code of Federal Regulations [17 CFR 270].
\2\ Unless otherwise noted, when we refer to the Advisers Act,
we are referring to 15 U.S.C. 80b, and when we refer to rules under
the Advisers Act, we are referring to title 17, part 275 of the Code
of Federal Regulations [17 CFR 275].
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[GRAPHIC] [TIFF OMITTED] TP06OC26.071
Table of Contents
I. Introduction
A. Custody of Crypto Assets
1. Development and Growth of Crypto Asset Market
2. Challenges of Custodial Compliance for Crypto Assets
B. Overview of the Proposal
II. Discussion
A. Adviser Self-Custody
1. Adviser Self-Custody Rule Overview
2. Qualified Custodian Determination
3. Safeguarding Expertise and Systems
4. Cybersecurity
5. Annual Review
6. Internal Control Report
7. Self-Custody Account Statements to Clients
8. Financial Asset Election
B. Self-Custody of Regulated Fund Crypto Assets
C. Custody of Crypto Assets by State Trust Companies
1. Overview and Scope
2. Initial and Annual Determinations
3. Financial Statement Audit
4. Internal Control Report
5. Segregation of Assets
6. Request for Comment on Other State Trust Company Issues
D. Decentralized Finance
E. Crypto Asset Trading
F. Investment Company Custody Rule Modernization
1. Business Development Companies
2. Broker-Dealer Custody
3. Free Cash Accounts
4. Other Amendments to Regulated Fund Custody Rules
5. Request for Comment on Other Regulated Fund Custody Issues
G. Investment Adviser Custody Rule Modernization
1. Redesignation to Section 223
2. Discretionary Trading Authority
3. PCAOB-Registered Accountant Requirement
4. Audit Provision
5. Standing Letters of Authorization
6. Treatment of Business Development Companies
7. Account Number in Notice to Clients
8. Notice to the Commission of Material Discrepancies
9. Inadvertent Custody
10. Segregation
11. Accommodation Reporting Guidance
H. Recordkeeping Requirements
1. Adviser Recordkeeping
2. Regulated Fund Recordkeeping
3. Records Related to Crypto Assets from a Crypto Network
I. Guidance for Accountants Updates
1. Revisions for Independent Verification
2. Revisions for Internal Control Report
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3. Other Revisions
J. Disclosure and Reporting Requirements
1. Amendments to Form ADV
2. Amendments to Custody Reporting on Form N-CEN
3. Adviser and Regulated Fund Risk Disclosure Requirements
4. Conforming Amendments to Form ADV-E
K. Existing Staff No-Action Letters and Other Staff Statements
L. Compliance Date
III. General Request for Comment
IV. Economic Analysis
A. Introduction
B. Economic Baseline
1. Crypto Assets and Market Overview
2. Regulatory Baseline
3. Affected Parties and Industry Statistics
4. Market Practice
C. Benefits and Costs
1. General Economic Considerations
2. Adviser Self-Custody
3. Regulated Fund Self-Custody of Crypto Assets
4. Custody of Crypto Assets by State Trust Companies
5. Investment Company Custody Rule Modernizations
6. Investment Adviser Custody Rule Modernization
7. Recordkeeping Requirements
8. Guidance for Accountants Updates
9. Disclosure and Reporting Requirements
10. Aggregate Monetized Benefits and Costs
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Alternative Qualified Custodian Determination Criteria in
Adviser Self-Custody
2. Alternative Protective Measures in Adviser Self-Custody
3. Alternative Board Oversight Measure in Regulated Fund Self-
Custody
4. State Trust Companies as Permitted Custodians
5. Alternative Conditions Attached to the Use of State Trust
Companies as Custodians for Crypto Assets
6. Crypto Asset Trading
7. Other Alternatives for Investment Company Custody Rule
Modernization
8. Alternative to the Independent Verification Requirement
9. Adviser Account Statements
10. Sharing Key Materials
F. Request for Comments
V. Paperwork Reduction Act Analysis
A. Introduction
B. Advisers Act Custody Rule 223-1
C. Investment Company Act
1. Proposed Rule 17f-9
2. Proposed Rule 17f-8
3. Proposed Rule 17f-1
4. Inclusion of BDCs in Investment Company Act Custody and
Recordkeeping Rules
D. Recordkeeping Rules
1. Rule 204-2
2. Rule 31a-2
E. Disclosure
1. Form ADV
2. Form N-CEN
3. Rescission of Form N-17F-1
F. Request for Comments
VI. Initial Regulatory Flexibility Analysis
A. Reason for and Objectives of the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Rule and Rule Amendments
D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Solicitation of Comments
VII. Congressional Review Act
VIII. Other Matters
Incorporation by Reference
Statutory Authority
I. Introduction
A. Custody of Crypto Assets
Section 17(f) of the Investment Company Act and the rules
thereunder (collectively, the ``Investment Company Act custody rules'')
govern the custody of securities and similar investments of registered
management investment companies and business development companies
(``BDCs,'' and together with registered management investment
companies, ``regulated funds'').\3\ The Investment Company Act custody
rules require that a regulated fund maintains fund securities and
similar investments with certain specified custodians (``Investment
Company Act custodians'') and subject to conditions designed to assure
the safety of the regulated fund's assets.\4\ Additionally, regulated
funds are required to maintain a bond for officers and employees that
singly, or jointly with others, have access to securities or funds.\5\
The purpose of this bond is to protect shareholders against larceny and
embezzlement by these officers or employees. This rule and any related
bonding apply to crypto assets that are securities or similar
investments.
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\3\ Given the very limited universe of face-amount certificate
companies (``FACCs'') and their particular regulatory requirements,
the proposed rules related to regulated fund self-custody of crypto
assets and custody of crypto assets by State trust companies (as
proposed to be defined in proposed rule 17f-8) would not be
applicable to FACCs. See 15 U.S.C. 80a-28(b). See also proposed
rules 17f-8 and 17f-9. A FACC may apply for an order under section
28(c) of the Investment Company Act if they wish to hold crypto
assets in the manner discussed in this release. Unit investment
trusts (``UITs'') would similarly not be able to rely on the
proposed rules related to regulated fund self-custody of crypto
assets and custody of crypto assets by State trust companies. Given
that UITs lack investment advisers and are unmanaged, it would not
be possible for them to comply with certain aspects of the proposed
rules.
\4\ 15 U.S.C. 80a-17(f). See also 17 CFR 270.17f-1 (rule 17f-1)
(custody with members of national securities exchanges); 17 CFR
270.17f-2 (rule 17f-2) (custody with the regulated fund); 17 CFR
270.17f-4 (rule 17f-4) (custody with a securities depository); 17
CFR 270.17f-5 (rule 17f-5) (custody of assets outside the U.S. with
a foreign bank custodian); 17 CFR 270.17f-6 (rule 17f-6) (custody
with a futures commission merchant or commodity clearing
organization); 17 CFR 270.17f-7 (rule 17f-7) (custody with a foreign
securities depository).
\5\ See 15 U.S.C 80a-17(g); 17 CFR 270.17g-1.
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Rule 206(4)-2 under the Advisers Act (the ``Advisers Act custody
rule'' and, collectively with the Investment Company Act custody rules,
the ``custody rules'') regulates the custodial practices of registered
investment advisers (``advisers'').\6\ The Advisers Act custody rule is
designed to safeguard client funds and securities from loss, theft,
misuse, misappropriation, and the adviser's financial reverses,
including insolvency.\7\
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\6\ As used in this release, all references to registered
investment advisers refer to SEC-registered investment advisers or
investment advisers required to be SEC-registered, unless otherwise
indicated.
\7\ See Custody or Possession of Funds or Securities of Clients,
Advisers Act Release No. 123 (Feb. 27, 1962) [27 FR 2149 (Mar. 6,
1962)] (``1962 Adopting Release''). See also Custody of Funds or
Securities of Clients by Investment Advisers, Advisers Act Release
No. 2176 (Sept. 25, 2003) [68 FR 56692 (Oct. 1, 2003)] (``2003
Adopting Release''); Custody of Funds or Securities of Clients by
Investment Advisers, Advisers Act Release No. 2968 (Dec. 30, 2009)
[75 FR 1456 (Jan. 11, 2010)] (``2009 Adopting Release''). In 2023,
the Commission proposed, but did not adopt, a new rule under the
Advisers Act that would have redesignated and amended the Advisers
Act custody rule. See Safeguarding Advisory Client Assets, Advisers
Act Release No. 6240 (Feb. 15, 2023) [88 FR 14672 (Mar. 9, 2023)]
(``2023 Safeguarding Proposal''). The Commission formally withdrew
the 2023 Safeguarding Proposal on June 12, 2025. See Withdrawal of
Proposed Regulatory Actions, Advisers Act Release No. 6885 (June 12,
2025) [90 FR 25531 (June 17, 2025)].
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Among other things, the Advisers Act custody rule requires that an
adviser that has custody of client funds or securities maintain such
funds or securities with a qualified custodian (collectively with
Investment Company Act custodians, ``permitted custodians''), subject
to specified exceptions.\8\ An adviser has custody if it holds,
directly or indirectly, client funds or securities or has any authority
to obtain possession of them.\9\ Under the Advisers Act custody rule,
qualified custodians are limited to banks or savings associations,
registered broker-dealers, registered futures commission merchants, and
certain foreign financial
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institutions.\10\ The Commission has historically taken the view that
maintaining client assets with only certain types of entities helps to
guard against the risk that the adviser or its related person loses,
misuses, or misappropriates client assets, or subjects them to an
adviser's financial reverses or insolvency. When the custodian is a
third party, there is a clear distinction between the roles of the
adviser (advising the client on the buying and selling of assets and
implementing the client's investment strategy) and of the custodian
(safekeeping the assets). To effectuate a trade, the adviser must
contact the custodian for the assets to be moved. An adviser is less
likely to engage in unauthorized trading in a client's account when the
adviser knows that the client will be receiving from the custodian an
account statement detailing any trading activity. When the adviser and
the custodian are the same party, the adviser can directly move the
assets.
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\8\ The scope of investments subject to the custody rule under
the Advisers Act custody rule differs from the scope under the
Investment Company Act custody rules. The Advisers Act custody rule
only applies to custody of client funds or securities, while the
Investment Company Act custody rules apply to a regulated fund's
securities and similar investments. See rule 206(4)-2(a) and section
17(f)(1).
\9\ See rule 206(4)-2(d)(2) (defining ``custody'' for purposes
of the Advisers Act custody rule).
\10\ See rule 206(4)-2(d)(6) (defining ``qualified custodian''
for purposes of the Advisers Act custody rule).
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Shortly before the adoption of the Advisers Act custody rule in
1962, the Commission asked Congress for rulemaking and inspection
authority under the Advisers Act's anti-fraud provisions because it was
concerned about the custodial practices of advisers and the safety of
client assets. Congress amended the Advisers Act to give the Commission
rulemaking and inspection authority under the Advisers Act's antifraud
provisions. The Advisers Act custody rule, when it was first adopted,
required all advisers with custody of client funds and securities to
deposit client funds into a bank account that was maintained in the
adviser's name as agent or trustee and contained only client funds and
to segregate client securities and hold them in safekeeping.\11\
Similarly, the requirements of section 17(f) indicate that Congress
intended fund investments to be kept by financially secure entities
that have sufficient safeguards against misappropriation.\12\
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\11\ See 1962 Adopting Release, supra footnote 7; see also
Custody of Funds or Securities of Clients by Investment Advisers,
Advisers Act Release No. 2044 (July 18, 2002) [67 FR 48579 (July 25,
2002)], at nn.3-4 and accompanying text.
\12\ See Investment Trusts and Investment Companies: Hearings on
S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 264 (1940). Cf. 10 SEC ANN.REP. 169
(1994) (discussing section 17(f) of the Investment Company Act and
its protections against theft and embezzlement by affiliated
persons).
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The current custody rules were designed to address the custody and
safekeeping of traditional assets. Since the Commission last amended
the custody rules, there has been significant growth in the crypto
asset market, with investors increasingly seeking investment exposure
to crypto assets.\13\ Crypto assets have unique attributes that present
challenges under the current custodial frameworks, and advisers and
regulated funds have encountered obstacles in attempting to comply with
the current custody rules for crypto assets.\14\
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\13\ See infra section I.A.1 for discussion of development and
growth of crypto asset market, including the definition of ``crypto
asset'' as used herein.
\14\ See infra section I.A.2 for discussion of challenges
presented by crypto assets to the existing custodial framework.
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In January 2025, the Commission's Acting Chairman, Mark T. Uyeda,
established the Crypto Task Force to focus on developing a
comprehensive and clear regulatory framework for crypto assets.\15\ As
a part of its public engagement, the Crypto Task Force solicited
feedback and hosted a series of roundtables on a variety of compliance
topics related to crypto assets, including issues related to adviser
and regulated fund custody of crypto assets.\16\ Among other topics,
roundtable participants and commenters provided feedback on the current
custody rules and the obstacles to compliance for crypto assets.\17\
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\15\ See SEC Press Release, SEC Crypto 2.0: Acting Chairman
Uyeda Announces Formation of New Crypto Task Force, Press Release
No. 2025-30 (Jan. 21, 2025), available at <a href="https://www.sec.gov/newsroom/press-releases/2025-30">https://www.sec.gov/newsroom/press-releases/2025-30</a>. See also SEC, Crypto Task Force
Designation Letter from Acting Chairman Mark T. Uyeda (Feb. 4,
2025), available at <a href="https://www.sec.gov/files/crypto-task-force-designation-letter.pdf">https://www.sec.gov/files/crypto-task-force-designation-letter.pdf</a>. See also SEC, Crypto Task Force, available
at <a href="https://www.sec.gov/about/crypto-task-force">https://www.sec.gov/about/crypto-task-force</a>.
\16\ See SEC, Crypto Task Force Roundtables, available at
<a href="https://www.sec.gov/about/crypto-task-force/crypto-task-force-roundtables">https://www.sec.gov/about/crypto-task-force/crypto-task-force-roundtables</a>. See also Statement of Commissioner Hester Peirce, There
Must Be Some Way Out of Here (Feb. 21, 2025), available at <a href="https://www.sec.gov/newsroom/speeches-statements/peirce-statement-rfi-022125">https://www.sec.gov/newsroom/speeches-statements/peirce-statement-rfi-022125</a>; SEC, Crypto Task Force Written Input, available at <a href="https://www.sec.gov/about/crypto-task-force/crypto-task-force-written-input">https://www.sec.gov/about/crypto-task-force/crypto-task-force-written-input</a>;
SEC, Crypto Task Force Meetings, available at <a href="https://www.sec.gov/about/crypto-task-force/crypto-task-force-meetings">https://www.sec.gov/about/crypto-task-force/crypto-task-force-meetings</a>.
\17\ See SEC, Crypto Task Force Roundtable--Know Your Custodian:
Key Considerations for Crypto Custody (Apr. 25, 2025), available at
<a href="https://www.sec.gov/newsroom/meetings-events/know-your-custodian-key-considerations-crypto-custody">https://www.sec.gov/newsroom/meetings-events/know-your-custodian-key-considerations-crypto-custody</a>. The written input letters
submitted to the Commission's Crypto Task Force are available at
<a href="https://www.sec.gov/about/crypto-task-force/crypto-task-force-written-input">https://www.sec.gov/about/crypto-task-force/crypto-task-force-written-input</a>. Unless otherwise specified, all references in this
release to comment letters are to the written input letters
submitted to the Crypto Task Force.
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Further, in January 2025, President Donald J. Trump issued an
executive order titled ``Strengthening American Leadership in Digital
Financial Technology.'' \18\ Executive Order 14178, among other things,
established the President's Working Group on Digital Asset Markets (the
``Digital Assets PWG''), which comprises the Chairman of the Commission
and the heads of several other Federal financial regulators.\19\ It
furthermore directed the Digital Assets PWG to issue a report that
recommends regulatory actions to advance the policy goals established
in the Executive Order.\20\ Pursuant to Executive Order 14178, the
Digital Assets PWG issued a report (the ``Digital Assets PWG Report'')
containing several regulatory recommendations related to crypto
assets.\21\ Among other recommendations, the Digital Assets PWG Report
recommended that the Commission consider using its regulatory and
exemptive authority under the Advisers Act and Investment Company Act
to ``[p]rovide clarity on the custody of digital assets that are
securities'' for advisers and regulated funds.\22\ Following the
publication of the Digital Assets PWG Report, Chairman Paul S. Atkins
announced the launch of the Project Crypto initiative to, among other
things, modernize the securities rules and regulations and develop rule
proposals to implement the Digital Assets PWG Report's recommendations,
including to modernize the Commission's crypto asset custody
requirements.\23\
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\18\ See Exec. Order No. 14178, Strengthening American
Leadership in Digital Financial Technology (Jan. 23, 2025) [90 FR
8647 (Jan. 31, 2025)] (``Executive Order 14178'').
\19\ See id. at Sec. 4.
\20\ See id. at Sec. 4(c)(i).
\21\ See Digital Assets PWG, Strengthening American Leadership
in Digital Financial Technology (July 30, 2025), available at
<a href="https://www.whitehouse.gov/wp-content/uploads/2025/07/Digital-Assets-Report-EO14178.pdf">https://www.whitehouse.gov/wp-content/uploads/2025/07/Digital-Assets-Report-EO14178.pdf</a>.
\22\ See id., at 52. The Digital Assets PWG Report also
recommended that the Commission evaluate whether certain State-
chartered trusts should be deemed a `qualified custodian' under the
Advisers Act custody rule or a `bank' under the Investment Company
Act.
\23\ See Statement of Chairman Paul S. Atkins, American
Leadership in the Digital Finance Revolution (July 31, 2025),
available at <a href="https://www.sec.gov/newsroom/speeches-statements/atkins-digital-finance-revolution-073125">https://www.sec.gov/newsroom/speeches-statements/atkins-digital-finance-revolution-073125</a>.
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To address the evolution and growth of the crypto asset market and
the Digital Assets PWG Report's recommendations to the Commission, the
Commission is proposing new custody rules under the Investment Company
Act and amendments to the Advisers Act custody rule to provide a
tailored framework for crypto asset custody. We also considered
feedback received by the Commission's Crypto Task Force. We are also
proposing amendments to the recordkeeping and
[[Page 63874]]
disclosure requirements related to the proposed custody rules.
The proposed custody rules and related recordkeeping and disclosure
amendments consider the unique aspects of crypto assets and are
designed to maintain fair, orderly, and efficient crypto asset markets,
facilitate investment in crypto assets, and protect crypto asset
investors. In addition, we are also proposing several amendments to the
Advisers Act and Investment Company Act custody rules to modernize the
custody rules, better address current industry practices and feedback,
and implement certain conforming amendments. These proposed amendments
are designed to facilitate compliance, enhance investor protection, and
help support the Commission's regulatory oversight function.
1. Development and Growth of Crypto Asset Market
A crypto asset is any digital representation of value that is
recorded on a cryptographically secured distributed ledger.\24\ The
Commission's proposed definition of ``crypto asset'' is generally
consistent with the definition of ``Digital Asset'' in section 2(6) of
the GENIUS Act.\25\ The term distributed ledger generally refers to
technology in which data is shared across a network that creates a
digital ledger of verified transactions or information among network
participants, and in which cryptography is used to link the data to
maintain the integrity of the ledger and execute other functions.\26\
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\24\ See Application of the Federal Securities Laws to Certain
Types of Crypto Assets and Certain Transactions Involving Crypto
Assets, Securities Act Release No. 11412 (Mar. 17, 2026) [91 FR
13714 (Mar. 23, 2026)] (``Commission Security Status
Interpretation''), at n.1.
\25\ See section 2(6) of the Guiding and Establishing National
Innovation for U.S. Stablecoins Act, Public Law 119-27, 139 Stat.
419 (2025) (``GENIUS Act'').
\26\ See section 2(8) of the GENIUS Act.
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Crypto assets are generated, issued, and transferred using a
blockchain or similar distributed ledger technology network (a ``crypto
network''). Ownership of a crypto asset is recorded on a crypto
network, and access to the asset is controlled by a private
cryptographic key (a ``private key'') that, when paired with the
asset's public cryptographic key, allows the holder to transfer the
asset, or participate in certain associated rights of many crypto
assets, such as staking, yield farming, and exercising governance
rights.\27\ Private keys can be divided into distinct pieces, or
``shards,'' to disperse control of the crypto asset to more than one
party. Transactions or data that are processed and recorded directly on
a crypto network, or ``onchain,'' are immutable and verifiable by other
market participants, and assets transferred onchain generally cannot be
restored or recovered once transferred.\28\ Some crypto assets
(referred to as privacy tokens or privacy coins) are designed to
preserve anonymity and mask identifying features of the holders or the
transaction. Such transactions on the blockchain are only verifiable by
the transacting parties.\29\ In addition to digitally native crypto
assets, traditional assets can also be formatted as or represented by
crypto assets, or ``tokenized,'' where the record of ownership is
maintained in whole or in part on or through one or more crypto
networks.\30\
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\27\ See, e.g., U.S. Securities and Exchange Commission,
Division of Corporation Finance, Statement on Certain Protocol
Staking Activities (May 29, 2025) (``Protocol Staking Statement''),
available at <a href="https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925">https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925</a>; U.S.
Securities and Exchange Commission, Division of Corporation Finance,
Statement on Certain Liquid Staking Activities (Aug. 5, 2025)
(``Liquid Staking Statement''), available at <a href="https://www.sec.gov/newsroom/speeches-statements/corpfin-certain-liquid-staking-activities-080525">https://www.sec.gov/newsroom/speeches-statements/corpfin-certain-liquid-staking-activities-080525</a>. Staff reports, statistics, and other staff
documents (including those cited herein) represent the views of
Commission staff and are not a rule, regulation, or statement of the
Commission. Furthermore, the Commission has neither approved nor
disapproved these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any person.
\28\ See, e.g., Tuongvy Le and Austin Campbell, Crypto and the
Evolution of the Capital Markets (May 12, 2025), available at
<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5250986">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5250986</a>.
\29\ See Gemini, What Are Privacy Tokens (Nov. 7, 2024),
available at <a href="https://www.gemini.com/cryptopedia/what-are-privacy-tokens">https://www.gemini.com/cryptopedia/what-are-privacy-tokens</a>.
\30\ See Commission Security Status Interpretation, supra
footnote 24, at section III.E; see also Comment Letter to Crypto
Task Force of Securitize Inc. (May 7, 2025); Comment Letter to
Crypto Task Force of Robinhood Markets, Inc. and Robinhood Crypto
(Apr. 25, 2025).
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Since the advent of Bitcoin in 2008,\31\ the crypto asset markets
have grown significantly to reach a global market capitalization of
approximately $2.7 trillion in May 2026, up from $800 billion at the
beginning of 2021.\32\ As the crypto asset market continues to grow and
evolve, investors are demanding access to crypto assets as a part of
their investment portfolios, although the extent of that ownership is
subject to some uncertainty. According to a 2026 report by the Office
of Investor Research within the Commission's Office of the Investor
Advocate, approximately 9.2% of U.S. adults hold crypto assets.\33\
This level of crypto asset ownership has remained relatively stable in
recent years.\34\ According to another survey in 2025, approximately
22% of U.S. surveyed respondents owned crypto assets, up from 14% in
2021.\35\
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\31\ See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic
Cash System (Oct. 31, 2008), available at <a href="https://bitcoin.org/bitcoin.pdf">https://bitcoin.org/bitcoin.pdf</a>.
\32\ See CoinGecko, Global Cryptocurrency Market Cap Charts,
available at <a href="https://www.coingecko.com/en/charts">https://www.coingecko.com/en/charts</a> (last visited May
20, 2026); see also Darren Aiello, Scott R. Baker, et. al., The
Effects of Cryptocurrency Wealth on Household Consumption and
Investment (Feb. 9, 2024), available at <a href="https://www.fdic.gov/system/files/2024-07/johnson-paper.pdf">https://www.fdic.gov/system/files/2024-07/johnson-paper.pdf</a>.
\33\ See U.S. Securities and Exchange Commission, Office of the
Investor Advocate (``OIAD''), Experiences with Crypto Assets in the
U.S. Population, OIAD Working Paper 2026 No. 4 (July 2026),
available at <a href="https://www.sec.gov/files/experiences-crypto-assets-us-population.pdf">https://www.sec.gov/files/experiences-crypto-assets-us-population.pdf</a> (``OIAD Report I'') (finding that 9.2% of adults in
the U.S. hold crypto assets based on July 2025 survey results)]; see
also Board of Governors of the Federal Reserve System (the ``Federal
Reserve Board''), Economic Well-Being of U.S. Households in 2025
(May 13, 2026), available at <a href="https://www.federalreserve.gov/publications/files/2025-report-economic-well-being-us-households-202605.pdf">https://www.federalreserve.gov/publications/files/2025-report-economic-well-being-us-households-202605.pdf</a> (stating that, as of 2025, approximately one in ten U.S.
adults bought or held cryptocurrencies for investment purposes in
the prior 12 months).
\34\ See U.S. Securities and Exchange Commission, OIAD,
Cryptocurrency Owners in the U.S. Population, OIAD Working Paper
2026 No. 3 (July 2026), available at <a href="https://www.sec.gov/files/cryptocurrency-owners-findings-us-population.pdf">https://www.sec.gov/files/cryptocurrency-owners-findings-us-population.pdf</a> (``OIAD Report
II'').
\35\ See,e.g., Gemini, Global State of Crypto 2025, 2025 Trends
Data-Driven Insights Into the Crypto Market, available at <a href="https://www.gemini.com/state-of-crypto-2025">https://www.gemini.com/state-of-crypto-2025</a> (the ``Gemini Global State of
Crypto 2025''); Gemini, State of U.S. Crypto 2021, available at
<a href="https://www.gemini.com/gemini-2021-state-of-crypto-us.pdf">https://www.gemini.com/gemini-2021-state-of-crypto-us.pdf</a> (the
``Gemini Global State of Crypto 2021''); see also Chris Wheat &
George Eckerd, JPMorgan Chase, Crypto investor waves since 2017:
What retail investor behavior reveals about digital asset adoption
(Aug. 27, 2025), available at <a href="https://www.jpmorganchase.com/institute/all-topics/financial-health-wealth-creation/crypto-investor-waves-since-2017-what-retail-investor-behavior-reveals-about-digital-asset-adoption">https://www.jpmorganchase.com/institute/all-topics/financial-health-wealth-creation/crypto-investor-waves-since-2017-what-retail-investor-behavior-reveals-about-digital-asset-adoption</a> (finding 17% of customer accounts were
invested in crypto assets from Jan. 2017 to May 2025).
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2. Challenges of Custodial Compliance for Crypto Assets
Advisers and regulated funds face challenges in complying with the
current custody rules, which were designed to address safekeeping of
traditional assets. These rules generally limit the types of financial
institutions that are eligible to serve as custodians:
<bullet> For an adviser, a qualified custodian is limited to a bank
or savings association, broker-dealer, futures commission merchant, or
certain foreign financial institutions.\36\
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\36\ See rule 206(4)-2(d)(6).
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<bullet> For a regulated fund, securities and similar investments
must be maintained with certain specified custodians that include
banks, broker-dealers that are members of a national securities
[[Page 63875]]
exchange, and securities depositories, among others.\37\
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\37\ See section 17(f) and rules 17f-1 through 17f-7.
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While the current custody rules rely on permitted custodians to
provide custodial services, in practice, few such traditional
custodians have offered robust custodial services for a substantial
range of crypto assets in part due to prior Commission action and staff
statements, as well as other applicable regulatory guidance.\38\
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\38\ See, e.g., Comment Letter to Crypto Task Force of The
Digital Chamber (May 12, 2025) (``TDC Comment Letter I''); Comment
Letter to Crypto Task Force of Neel Maitra, Dechert LLP (Apr. 15,
2025) (``Dechert Comment Letter''); see also The Future of Digital
Assets: Identifying the Regulatory Gaps in Digital Asset Market
Structure, Hearing Before the Subcomm. on Digit. Assets, Fin. Tech.,
and Inclusion of the H. Comm. on Fin. Servs., 118th Cong. (2023),
available at <a href="https://www.congress.gov/event/118th-congress/house-event/115821/text">https://www.congress.gov/event/118th-congress/house-event/115821/text</a>.
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For example, with respect to broker-dealers, in July 2019, the
staff of our Division of Trading and Markets (``TM'') and the Financial
Industry Regulatory Authority (``FINRA'') issued a joint statement that
reminded broker-dealers of their responsibilities under the securities
laws, including under rule 15c3-3 (the ``customer protection rule'')
under the Securities Exchange Act of 1934 (the ``Exchange Act''), when
maintaining custody of digital asset securities and provided examples
of broker-dealer activities involving digital asset securities that
would not involve the broker-dealer engaging in custody functions.\39\
In December 2020, the Commission issued a statement regarding custody
of digital asset securities by broker-dealers, which created a time-
limited special-purpose broker-dealer (``SPBD'') safe harbor for
broker-dealers seeking to custody digital asset securities in the
circumstances where such SPBDs did not provide custody of traditional
securities or any non-security digital assets.\40\ According to some
commenters, market participants interpreted this framework as
restricting traditional broker-dealers from providing custodial
services for crypto assets, and few broker-dealers offered crypto asset
custodial services under the SPBD framework, due in part to limitations
of the framework.\41\
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\39\ See Division of Trading and Markets and FINRA, Joint Staff
Statement on Broker-Dealer Custody of Digital Asset Securities (July
8, 2019), available at <a href="https://www.sec.gov/newsroom/speeches-statements/joint-staff-statement-broker-dealer-custody-digital-asset-securities-joint-staff-statement-broker-dealer-custody-digital-asset-securities-withdrawn-may-15-2025">https://www.sec.gov/newsroom/speeches-statements/joint-staff-statement-broker-dealer-custody-digital-asset-securities-joint-staff-statement-broker-dealer-custody-digital-asset-securities-withdrawn-may-15-2025</a> (the ``2019 FINRA
Joint Statement''). The 2019 FINRA Joint Statement was withdrawn on
May 15, 2025. See Division of Trading and Markets, SEC, Office of
General Counsel, FINRA, Withdrawal of Joint Staff Statement on
Broker-Dealer Custody of Digital Asset Securities (May 15, 2025),
available at <a href="https://www.sec.gov/newsroom/speeches-statements/withdrawal-joint-staff-statement-broker-dealer-custody-digital-asset-securities">https://www.sec.gov/newsroom/speeches-statements/withdrawal-joint-staff-statement-broker-dealer-custody-digital-asset-securities</a>.
\40\ See Custody of Digital Asset Securities by Special Purpose
Broker-Dealers, Exchange Act Release No. 90788 (Dec. 23, 2020) [86
FR 11627 (Feb. 26, 2021)]. This statement was limited to the custody
of digital asset securities and did not address the custody of
crypto assets that are not offered or sold as securities.
\41\ See, e.g., Comment Letter to Crypto Task Force of Coinbase
Global, Inc. (Mar. 19, 2025); Comment Letter to Crypto Task Force of
Securities Industry and Financial Markets Association (May 9, 2025)
(``SIFMA Comment Letter''); Comment Letter to Crypto Task Force of
Blockchain Association (May 2, 2025).
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For banks, applicable regulatory guidance historically oscillated
between permitting banks to engage in certain crypto asset activities
and dissuading banks from offering crypto asset custody services.\42\
Although prior guidance from the OCC permitted national banks to engage
in crypto asset custodial services,\43\ subsequent guidance was
interpreted by market participants to restrict the ability of banks to
offer crypto asset custodial services, due to the conditions with which
a bank would have to comply.\44\ Further, in March 2022, Commission
staff issued Staff Accounting Bulletin No. 121, which provided that, in
the staff's view, it would be appropriate for entities with an
obligation to safeguard crypto assets to record a safeguarding
liability and corresponding asset on its balance sheet measured at the
fair value of the crypto asset.\45\ Some commenters stated that this
guidance, along with guidance from the banking regulators, acted as an
impediment to bank crypto asset custodians and dissuaded these
custodians from offering crypto custodial services.\46\ In January
2025, Commission staff rescinded SAB 121.\47\
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\42\ See, e.g., Office of the Comptroller of the Currency (the
``OCC''), Authority of a National Bank to Provide Cryptocurrency
Custody Services for Customers, Interpretive Letter No. 1170 (July
22, 2020), available at <a href="https://www.occ.gov/topics/charters-and-licensing/interpretations-and-decisions/2020/int1170.pdf">https://www.occ.gov/topics/charters-and-licensing/interpretations-and-decisions/2020/int1170.pdf</a>; OCC, OCC
Chief Counsel's Interpretation on National Bank and Federal Savings
Authority to Hold Stablecoin Reserves, Interpretative Letter No.
1172 (Sept. 21, 2020), available at <a href="https://www.occ.gov/topics/charters-and-licensing/interpretations-and-decisions/2020/int1172.pdf">https://www.occ.gov/topics/charters-and-licensing/interpretations-and-decisions/2020/int1172.pdf</a>; OCC, OCC Chief Counsel's Interpretation on National
Bank and Federal Savings Association Authority to Use Independent
Node Verification Networks and Stablecoins for Payment Activities,
Interpretative Letter No. 1174 (Jan. 4, 2021), available at <a href="https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2a.pdf">https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2a.pdf</a>;
Federal Reserve Board, Federal Deposit Insurance Corporation (the
``FDIC''), and OCC, Joint Statement on Crypto-Asset Risks to Banking
Organizations (Jan. 3, 2023), available at <a href="https://www.fdic.gov/news/press-releases/2023/pr23002a.pdf">https://www.fdic.gov/news/press-releases/2023/pr23002a.pdf</a> (withdrawn).
\43\ See OCC, Authority of a National Bank to Provide
Cryptocurrency Custody Services for Customers, Interpretive Letter
1170 (July 22, 2020), available at <a href="https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf">https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf</a>.
\44\ See OCC, Chief Counsel's Interpretation Clarifying: (1)
Authority of a Bank to Engage in Certain Cryptocurrency Activities
and (2) Authority of the OCC to Charter a National Trust Bank,
Interpretive Letter 1179 (Nov. 18, 2021), available at <a href="https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/int1179.pdf">https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/int1179.pdf</a> (rescinded) (``OCC Interpretative Letter
1179''); see also OCC, Letter Addressing Certain Crypto-Asset
Activities, Interpretive Letter No. 1183 (Mar. 7, 2025), available
at <a href="https://www.occ.treas.gov/topics/charters-and-licensing/interpretations-and-decisions/2025/int1183.pdf">https://www.occ.treas.gov/topics/charters-and-licensing/interpretations-and-decisions/2025/int1183.pdf</a> (``OCC Interpretative
Letter 1183'') (rescinding Interpretative Letter 1179); OCC,
Clarification of Bank Authority Regarding Crypto-Asset Custody
Services, Interpretive Letter 1184 (May 7, 2025), available at
<a href="https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2025/int1184.pdf">https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2025/int1184.pdf</a> (``OCC Interpretative Letter 1184'')
(confirming, in relevant part, that national banks and Federal
savings associations may buy and sell crypto assets held in custody
at the customer's direction in a manner consistent with the customer
agreement and applicable law). See Financial Stability Oversight
Council, Report on Digital Asset Financial Stability Risks and
Regulation 27 (2022), available at <a href="https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf">https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf</a>, at 18 (stating ``some
banks have indicated publicly that they have interest in offering
crypto-asset products and services but are waiting on regulatory
clarity before doing so.'').
\45\ See Staff Accounting Bulletin No. 121, Release No. SAB 121
(Mar. 31, 2022) (``SAB 121'').
\46\ See,e.g., Dechert Comment Letter; TDC Comment Letter I.
\47\ See Staff Accounting Bulletin No. 122, Release No. SAB 122
(Jan. 23, 2025) (rescinding SAB 121).
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During this period, certain alternative custodians emerged, most
prominently among them State-chartered limited purpose trust companies
(``State trust companies''). State trust companies, as creations of
State law, are subject to State law and regulatory oversight, which
varies depending on the applicable jurisdiction. Some State law
frameworks specifically regulate these entities for crypto asset
custodial services.\48\ However, whether a State trust company is a
permitted custodian under the Commission's custody rules requires
additional legal and factual analysis from advisers and regulated
funds, and as described below, the outcome of such analysis may not be
clear.
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\48\ See, e.g., NY Banking Law, Article 3, Sec. 102-a; Wyo.
Stat. Ann. Sec. 34-29-104; SDCL Chapter 51A-6A.
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Because State trust companies are not an enumerated category of
permitted custodian under the current custody rules, regulated funds
and advisers typically must first conclude that a State trust company
is a bank for purposes of the custody rules and therefore eligible to
be a custodian under the current applicable custody rule. However,
determining whether an entity is a bank for purposes of the custody
rules is a
[[Page 63876]]
fact-specific inquiry that requires analysis of applicable State and
Federal banking laws. For example, a State trust company is a ``bank,''
and thus a permitted custodian for an adviser or regulated fund if,
among other conditions, a substantial portion of the business of the
State trust company consists of receiving deposits or exercising
fiduciary powers similar to those permitted to national banks under the
authority of the OCC. Legal counsel to State trust companies have
historically identified challenges in determining whether crypto asset
custodial activities, including crypto custodial activities
characterized as fiduciary in nature under applicable State law, could
satisfy this standard.\49\ Given the historic uncertainty in
determining whether a particular State trust company is a bank for
purposes of the custody rules, regulated funds and advisers may have
been reluctant to engage State trust companies as crypto asset
custodians.
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\49\ The OCC has since stated that custody and safekeeping
activities are generally considered to be non-fiduciary activities
of national banks. See OCC, National Bank Chartering, 91 FR 9977
(Mar. 2, 2026).
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In recognition of the emergence of State trust companies as crypto
asset custodians, Division of Investment Management (``IM'') staff
issued a no-action letter on September 30, 2025, regarding the use of
State trust companies as crypto asset custodians for purposes of the
custody rules.\50\ Specifically, the 2025 State Trust Company NAL
stated that IM staff would not recommend enforcement action to the
Commission against advisers or regulated funds if they elect to treat a
State trust company as a bank for purposes of the custody rules for the
placement and maintenance of advisory or regulated fund crypto assets
and related cash and/or cash equivalents under certain
circumstances.\51\ Although the 2025 State Trust Company NAL sets forth
the staff's position on enforcement actions against advisers or
regulated funds treating State trust companies as banks for purposes of
the custody rules, the 2025 State Trust Company NAL, like all staff
statements, has no legal force or effect and does not alter or amend
applicable law.
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\50\ See Simpson Thacher & Bartlett LLP, SEC Staff No-Act.
Letter (pub. avail. Sept. 30, 2025), available at <a href="https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-investment-management-staff-no-action-interpretive-letters/simpsonthacherbartlett093025">https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-investment-management-staff-no-action-interpretive-letters/simpsonthacherbartlett093025</a> (the ``2025 State Trust Company
NAL'').
\51\ See id. In addition to the custody rules, the 2025 State
Trust Company NAL also addresses section 26(a) of the Investment
Company Act.
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Custodians, including State trust company custodians, that do offer
custodial services for crypto assets are not able to support all crypto
assets given the large and continuously growing number of crypto assets
in the market. Although there has been an increase in the number of
permitted custodians offering custodial services for crypto assets, and
this trend may continue, there may be few or no permitted custodians
for certain crypto assets.\52\ For example, as nascent or novel crypto
assets are created, custodians must determine which crypto assets they
will support and update their technology and other systems accordingly.
Custodians may not yet offer custodial services for nascent or novel
assets due to market demand and/or high upfront costs to set up the
necessary custodial infrastructure.\53\
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\52\ See infra footnotes 877 through 879 and accompanying text.
\53\ See, e.g., Comment Letter to Crypto Task Force of Veda Tech
Labs Inc. (Mar. 23, 2026); Comment Letter of Wave Digital Assets LLC
Regarding Application of the Federal Securities Laws to Certain
Types of Crypto Assets and Certain Transactions Involving Crypto
Assets, File No. S7-2026-09 (Apr. 28, 2026), available at <a href="https://www.sec.gov/comments/S7-2026-09/s7202609-764287-2345754_0.pdf">https://www.sec.gov/comments/S7-2026-09/s7202609-764287-2345754_0.pdf</a>
(``Wave Digital Assets Comment Letter'') (stating that crypto asset
custodial infrastructure is ``developing but incomplete'').
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The continued development of the crypto asset market may further
strain the availability of crypto asset custodial services. However, an
adviser may determine, consistent with its fiduciary duties, that
investing in a particular nascent or novel crypto asset is in the best
interest of its client.\54\ The lack of available custodial services
for a particular crypto asset may constrain an adviser's ability to
advise clients to invest in such crypto assets because, for example,
existing crypto asset custodians have not yet developed or started
offering custodial services for such assets.\55\ The continued growth
and development of the crypto asset market may continue to increase the
demand for crypto asset custodial services, which could outpace the
availability of custodians that are both permitted custodians under the
current custody rules and willing and able to provide these highly
technical and specialized custodial services for any given crypto
asset. Additionally, a limited pool of custodians--that are both
technically capable of offering competent crypto asset custodial
services and eligible under the custody rules to act as a custodian--
may create concentration risk and ultimately increase risks and costs
to investors. In the context of regulated funds, rule 17f-2 under the
Investment Company Act permits holding fund assets in the custody of
the regulated fund itself, rather than a permitted custodian.
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\54\ See, e.g., Comment Letter to Crypto Task Force of Unit 410,
LLC (May 7, 2025) (``Unit 410 Comment Letter'').
\55\ See, e.g., Wave Digital Assets Comment Letter.
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However, even for regulated funds, this rule does not address the
challenges posed by the limited pool of permitted custodians for crypto
assets because its conditions do not contemplate crypto assets.\56\ For
example, regulated fund assets maintained in the custody of the fund
under the rule must be deposited in the safekeeping of, or in a vault
or other depository maintained by, a bank or other company whose
functions and physical facilities are supervised by Federal or State
authority.\57\ This and other conditions in rule 17f-2 are designed for
stock certificates but do not address crypto assets. While rule 17f-2's
conditions are not designed for crypto assets,\58\ the rule does
provide a framework designed to protect regulated fund assets from the
risk of misappropriation, which can be applied to crypto assets, such
as implementing access restrictions, requiring multiple authorized
persons to act jointly in effecting transactions, maintaining certain
specified records of all transactions in such assets, and requiring
independent public accountants to verify assets held in self-custody.
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\56\ Rule 17f-2 provides that a fund's investments are deemed to
be in the custody of the fund if directors, officers, or employees
or agents of the fund are authorized or permitted to withdraw the
investments from a bank (or certain other companies) ``upon their
mere receipt.'' See rule 17f-2(a).
\57\ See rule 17f-2(b).
\58\ See, e.g., Comment Letter to Crypto Task Force of Kimber
Labs Inc. (d/b/a Plume) (Apr. 23, 2026).
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Further, crypto assets may be subject to unique custodial risks due
to their nature. Crypto assets are transferred via crypto networks that
may vary in security or other access vulnerabilities. Many crypto asset
transactions are immutable once executed and may be difficult or
impossible to reverse. Further, crypto assets may be subject to
cybersecurity risks that differ from those applicable to traditional
assets. These challenges can increase the risk of loss, theft, misuse,
and misappropriation of custodied crypto assets and may limit the pool
of capable and permitted custodians.
B. Overview of the Proposal
In light of the challenges discussed above, and based on our
experience and public feedback, we are proposing
[[Page 63877]]
amendments to the Advisers Act custody rule and new custody rules under
the Investment Company Act to help facilitate crypto asset custody.
These proposed amendments and new custody rules would help to enhance
investor protection by imposing protective conditions, and to promote
investor choice and ability to invest by tailoring the custody rules to
address the existing limitations of the custody rules as applied to
crypto assets.\59\ Without a workable regulatory framework that would
expand the universe of permitted custodians, advisory clients
(including regulated funds) would be limited in their ability to invest
in certain crypto assets. Advisers would be unable to invest client
assets in crypto assets for which permitted custodians are not
available, which would limit investor choice and prevent investors from
obtaining exposure to crypto assets with the investor protections
provided by the involvement of an adviser or from obtaining that
exposure through an investment in a regulated fund.\60\
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\59\ As discussed further below in section II.D, the Commission
also considered, but is not proposing at this time, amendments to
the custody rules related to crypto asset trading.
\60\ However, in such a circumstance, the adviser would not be
limited in its ability to provide nondiscretionary investment advice
to its client regarding investing in a particular crypto asset where
the client then makes the investment on its own and not through the
adviser.
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Although a crypto asset may or may not meet the definition of a
``security'' under the Federal securities laws, the proposed Advisers
Act custody rule amendments would only apply with respect to crypto
assets that are funds or securities (or, with respect to the account of
a regulated fund, a security or similar investment), and the proposed
Investment Company Act custody rules would only apply with respect to
crypto assets that are securities or similar investments.\61\
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\61\ See proposed rule 223-1(d)(3); see also infra section
II.A.1.b) for discussion of the proposed adviser self-custody rule
terms and definitions. See also proposed rules 17f-8 and 17f-9.
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Self-Custody: We are proposing to amend the Advisers Act custody
rule to add a new provision that would permit advisers to hold advisory
clients', including regulated funds', crypto assets for which they
provide investment advice in self-custody (the ``adviser self-custody
rule'') and to add a new Investment Company Act custody rule to permit
a regulated fund to maintain its crypto assets in custody through the
regulated fund's adviser if the adviser complies with the adviser self-
custody rule, and if the regulated fund's board of directors engages in
oversight of the custody arrangement (the ``fund self-custody rule,''
and together with the adviser self-custody rule, the ``proposed self-
custody rules'').\62\ For purposes of this proposal, self-custody means
the adviser holding a client's crypto asset through possession of any
portion of the private keys that is necessary to access and effectuate
transactions in the crypto asset, or a regulated fund holding the
crypto asset through an adviser that complies with the adviser self-
custody rule, in each case without maintaining the crypto asset at a
permitted custodian.\63\ This is consistent with the way the term
``self-custody'' often is used in the asset management industry,
although we recognize that the term self-custody also is often used to
refer to circumstances where the owner of a crypto asset holds the
asset directly.\64\
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\62\ The proposed adviser self-custody rule under the Advisers
Act is rule 223-1(b)(7). The proposed fund self-custody rule under
the Investment Company Act is rule 17f-9.
\63\ See infra section II.A for discussion of the proposed
definition of ``self-custody'' under the Advisers Act custody rule.
\64\ See, e.g., Comment Letter to Crypto Task Force of
Alternative Investment Management Association (Mar. 25, 2025)
(``AIMA Comment Letter'') (stating that ``an exemption should allow
investment advisers to engage in self-custody subject to certain
conditions--such as maintaining written risk controls--if the
investment adviser can document that no qualified custodian with
appropriate capabilities exists for a particular asset''); Dechert
Comment Letter (stating that allowing registered investment advisers
to ``self-custody crypto assets'' would free them ``from having to
find qualified custodians at a time when very few crypto asset
custodians clearly meet the Advisers Act's definition of a qualified
custodian''); Comment Letter to Crypto Task Force of World
Federation of Exchanges (Mar. 18, 2025) (``World Federation of
Exchanges Comment Letter'') (describing ``self-custody'' as the
owner directly holding the crypto asset, using a ``personal digital
wallet'' and where ``the owner is responsible for the safekeeping of
their private keys'').
---------------------------------------------------------------------------
The proposed self-custody rules' conditions, which are designed to
address the inherent conflicts of interest associated with self-custody
and the risks of maintaining custody of crypto assets, include the
following:
<bullet> Qualified custodian determination. The proposed adviser
self-custody rule would require that the adviser determine in writing,
as an initial matter and on a quarterly basis, that a permitted
custodian is not available to maintain the crypto asset.\65\
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\65\ Proposed rule 223-1(b)(7)(i).
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<bullet> Safeguarding expertise and systems. The proposed adviser
self-custody rule would require the adviser to have expertise regarding
the safeguarding of each crypto asset (and to document the basis of its
determination that it has the safeguarding expertise) and to adopt,
implement, and maintain the systems to safeguard each crypto asset
against loss, theft, misuse, and misappropriation,\66\ and to review
its safeguarding systems and the effectiveness of their implementation
on an annual basis.\67\ The adviser's safeguarding systems would be
required to address private key management and joint authorization of
any crypto asset transactions by at least two people, and to maintain
each client's (including a regulated fund's) crypto assets in one or
more addresses, corresponding only to such client's crypto assets on
the crypto network.\68\
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\66\ Proposed rule 223-1(b)(7)(ii).
\67\ Proposed rule 223-1(b)(7)(v).
\68\ Proposed rule 223-1(b)(7)(ii).
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<bullet> Cybersecurity. The proposed adviser self-custody rule
would require that an adviser mitigate cybersecurity risks associated
with safeguarding clients' crypto assets held in self-custody and
review its cybersecurity controls and the effectiveness of their
implementation no less than annually.\69\
---------------------------------------------------------------------------
\69\ Proposed rule 223-1(b)(7)(iii).
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<bullet> Internal control reports. The proposed adviser self-
custody rule would require that the adviser obtain internal control
reports concerning its safeguarding of crypto assets within six months
of maintaining custody of crypto assets and on an annual basis
thereafter.\70\
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\70\ Proposed rule 223-1(b)(7)(iv).
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<bullet> Self-custody account statements. The proposed adviser
self-custody rule would require account statements to be sent at least
quarterly to each client whose crypto assets the adviser self-
custodies, identifying the crypto asset address on the crypto network
that stores the client's crypto assets and the crypto network on which
such crypto asset address operates, the amounts of crypto assets stored
in the client's crypto asset address at the end of the period and
setting forth all transactions from that crypto asset address during
that period, and a statement urging the client to compare the account
statements from the adviser with the crypto asset balances and
transaction information indicated under the client's crypto asset
address (the ``self-custody account statement requirement''). Advisers
may satisfy this requirement if, in lieu of an account statement, they
transmit, or arrange for the transmission, to clients of the
information required to be provided in the account statement in a
human-readable and reasonably usable electronic format, provided that a
notice is sent to the client identifying the crypto asset address that
stores the client's crypto assets and the crypto
[[Page 63878]]
network on which such crypto asset address operates.\71\
---------------------------------------------------------------------------
\71\ Proposed rule 223-1(b)(7)(vi).
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<bullet> Financial asset election. The proposed adviser self-
custody rule would require that the adviser and the client agree, in
writing, to treat each crypto asset that is in the adviser's self-
custody as a financial asset, and that the adviser holding the client's
crypto asset in self-custody is a securities intermediary, pursuant to
applicable State law that governs the written agreement between the
adviser and the client.\72\
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\72\ Proposed rule 223-1(b)(7)(viii). State law governs the
written contractual treatment of an asset as a financial asset and a
party to the written agreement as a securities intermediary pursuant
to the applicable State's enacted version of Article 8 of the
Uniform Commercial Code (``UCC'').
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<bullet> Board oversight requirements for regulated funds. The
proposed fund self-custody rule would require a regulated fund's board
to determine that a crypto asset of the fund would be subject to
reasonable care if self-custodied with the fund's investment adviser
prior to the investment adviser maintaining the crypto asset and
annually thereafter.\73\ The board also would be required to review the
adviser's qualified custodian determination prior to the investment
adviser maintaining the crypto asset and quarterly thereafter.\74\
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\73\ Proposed rule 17f-9(b)(1)(ii).
\74\ Proposed rule 17f-9(b)(1)(i).
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<bullet> Distributed crypto assets. The proposed Advisers Act
custody rule and the proposed fund self-custody rule would include
provisions that would deem the receipt of a distributed (i.e.,
airdropped) crypto asset to not be in violation of the Commission's
custody rules under the Advisers Act and the Investment Company Act, as
applicable, provided that the adviser or the regulated fund meets the
proposed conditions of these respective provisions.\75\
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\75\ Proposed rule 223-1(b)(11); proposed rule 17f-9(c).
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<bullet> Recordkeeping. We are also proposing corresponding
recordkeeping requirements related to the proposed self-custody
rules.\76\
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\76\ Proposed rule 204-2(a)(26); proposed rule 31a-2(a)(10).
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The proposed self-custody rules are intended as generally
applicable requirements informed by the Commission's current
understanding of crypto assets and custodial practices involving crypto
assets, including the typical transactional and structural features of
crypto assets and crypto networks and the typical characteristics of
custodial arrangements for crypto assets. However, the Commission
recognizes that crypto asset features and custodial practices for
crypto assets continue to evolve and that certain crypto assets as well
as novel arrangements and transactions involving crypto assets may
present circumstances not addressed in this proposal and the framework
for the proposed self-custody rules. To help inform the Commission's
ongoing consideration of these issues, we encourage members of the
public to contact the Commission with any such unique or novel
arrangements involving crypto assets that raise questions about custody
and safeguarding of crypto assets in compliance with the Commission's
custody rules.
State Trust Company Custody: We are also proposing to amend the
custody rules to permit custody of client and regulated fund crypto
assets by State trust companies (together, the ``proposed State trust
company rules''),\77\ subject to the following proposed conditions.
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\77\ The proposed State trust company rule under the Advisers
Act is rule 223-1(d)(13)(v). The proposed Investment Company Act
State trust company rule is rule 17f-8.
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<bullet> State regulation: The proposed State trust company rules
would require that prior to engaging a State trust company as a
permitted custodian and annually thereafter, the adviser or regulated
fund must have a reasonable basis, after due inquiry, for believing
that the State trust company is authorized by the relevant State
banking authority to provide crypto asset custody.\78\
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\78\ Proposed rule 223-1(d)(13)(v)(A)(1); proposed rule 17f-
8(a)(1)(i).
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<bullet> Policies and procedures. The proposed State trust company
rules would require that, prior to engaging a State trust company as a
permitted custodian and annually thereafter, the adviser or regulated
fund must have a reasonable basis, after due inquiry, for believing
that the State trust company maintains and implements written policies
and procedures reasonably designed to safeguard crypto assets and
related cash and/or cash equivalents from the risk of theft, loss,
misuse, and misappropriation.\79\
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\79\ Proposed rule 223-1(d)(13)(v)(A)(2); proposed rule 17f-
8(a)(1)(ii).
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<bullet> Audited financial statements. Under the proposed rules,
the adviser or regulated fund would be required to receive and review
the State trust company's most recent annual audited financial
statements as an initial matter and on an annual basis thereafter.\80\
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\80\ Proposed rule 223-1(d)(13)(v)(B); proposed rule 17f-
8(a)(2).
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<bullet> Internal control reports. Under the proposed rules, the
adviser or regulated fund would be required to receive and review the
State trust company's most recent internal control report as an initial
matter and on an annual basis thereafter.\81\
---------------------------------------------------------------------------
\81\ Proposed rule 223-1(d)(13)(v)(C); proposed rule 17f-
8(a)(3).
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<bullet> Segregation of assets. Under the proposed rules, all
advisory client (including regulated fund) crypto assets would be
required to be segregated from the State trust company's proprietary
assets.\82\ Regulated funds would be required to enter into a custodial
services agreement with the State trust company that provides for this
asset segregation.\83\
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\82\ Proposed rule 223-1(a)(1); proposed rule 17f-8(b).
\83\ Proposed rule 17f-8(b).
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<bullet> Recordkeeping. We are also proposing corresponding
recordkeeping requirements related to the proposed State trust company
rules.\84\
---------------------------------------------------------------------------
\84\ Proposed rule 204-2(a)(27); proposed rule 31a-2(a)(9).
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Similar to the proposed self-custody rules, the proposed protective
conditions are intended to address the risks inherent to the custody of
crypto assets and help ensure that the State trust company custodian
can provide secure and effective crypto asset custodial services.
Regulated Fund Custody Modernization and Adviser Custody
Modernization: We are proposing several amendments to the Investment
Company Act and Advisers Act custody rules to modernize the custody
rules, better address current industry practices and address feedback
from industry participants, and implement certain conforming
amendments.\85\
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\85\ Certain of these proposed amendments are also consistent
with previously stated staff views.
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For the Investment Company Act custody rules:
<bullet> First, we are proposing to add references to BDCs
throughout the Investment Company Act custody rules to clarify that
BDCs, like registered investments companies, may rely on the rules to
use permitted custodians other than banks.
<bullet> Second, we are proposing to amend rule 17f-1, the rule
related to broker-dealer custodians, to expand eligible broker-dealer
custodians to include all registered broker-dealers, rather than just
members of a national securities exchange, and to replace the numerous
conditions in the rule with the condition that regulated fund
securities and similar investments may be placed or maintained with a
broker-dealer whose custody of those securities or similar investments
is subject to the
[[Page 63879]]
requirements of the customer protection rule.
<bullet> Third, we are proposing to rescind rule 17f-3 (the ``free
cash accounts rule'') as we understand that regulated funds are no
longer using this rule, and we do not perceive a need in modern markets
for regulated funds to maintain free cash accounts.
<bullet> Fourth, we are proposing conforming amendments to rules
related to domestic and foreign depositories to correct an outdated
address and a cross reference to a provision that no longer exists.
<bullet> Fifth and finally, we are requesting comment on whether
and how to modernize and update rule 17f-2, the fund self-custody rule,
and other Investment Company Act custody rules.
We are proposing to amend the Advisers Act custody rule in several
respects. First, pursuant to the authority that Congress has given us
under the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the ``Dodd-Frank Act'') specifically to prescribe investment adviser
custody rules, we are proposing to redesignate the Advisers Act custody
rule to new rule 223-1 and make certain conforming amendments to
reflect the proposed redesignation.\86\ Second, we are also proposing
several amendments to modernize the Advisers Act custody rule, along
with conforming amendments to update outdated references. In certain
cases, such amendments are consistent with previously issued
interpretive releases, staff FAQs, and staff no-action letters. These
additional proposed amendments would facilitate compliance with the
Advisers Act custody rule, better address industry practices, and
reduce burdens. Third, we are also providing our views on several
topics related to the application of the Advisers Act custody rule to
improve advisers' compliance with the Advisers Act custody rule and
therefore enhance investor protection. Our proposed amendments to the
Advisers Act custody rule and related views include:
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\86\ See section 411 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
<bullet> Redesignation to section 223--As noted, we are proposing
to redesignate the Advisers Act custody rule to new rule 223-1 and to
make certain conforming amendments to reflect the proposed
redesignation.
<bullet> Discretionary trading authority exception--We are
proposing amendments to the Advisers Act custody rule to specify
circumstances under which authorized discretionary trading authority is
excepted from application of the Advisers Act custody rule.\87\
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\87\ Proposed rule 223-1(b)(9).
---------------------------------------------------------------------------
<bullet> PCAOB-registered accountant requirement--We propose to
amend the Advisers Act custody rule to eliminate the requirements that
the independent public accountants engaged to perform audit and
examination services under the Advisers Act custody rule must be
registered with, and subject to regular inspection by, the Public
Company Accounting Oversight Board (the ``PCAOB'').
<bullet> Audit provision--The proposed amendments would address
several aspects of the audit provision. First, the proposed amendments
would specify that all audited financial statements must be prepared in
accordance with U.S. Generally Accepted Accounting Principles (``U.S.
GAAP''), with an exception for foreign pooled investment vehicles.
Second, the proposed amendments would extend the audited financial
statements delivery deadlines for funds of funds and funds of funds of
funds pooled investment vehicles and permit the delivery of audited
financial statements to an independent representative of the investor.
Third, the proposed amendments would modify the timing requirements for
delivery of audited financial statements for pooled investment vehicles
that are formed toward the end of their fiscal year.
<bullet> Standing letters of authorization--The proposed amendments
would provide an exception from the surprise examination requirement
for an adviser that has custody of client funds and securities solely
because of a standing letter of authorization. We also propose to amend
the Advisers Act recordkeeping rule to add a corresponding
recordkeeping obligation.
<bullet> Treatment of BDCs--The proposed amendments would indicate
that the Advisers Act custody rule's exception for registered
investment companies also includes BDCs that elect to be regulated as
investment companies under the Investment Company Act.
<bullet> Account number in notice to clients--The proposed
amendments would require that the client notice sent by an adviser upon
opening an account with a qualified custodian include the client's
account number.
<bullet> Notice to the Commission of material discrepancies--We are
proposing a conforming amendment to provide that accountants must send
the notice of a finding of any material discrepancies during the course
of a surprise examination to the Commission by electronic means to the
Division of Examinations.
<bullet> Inadvertent custody--The amendments would specify the
circumstances under which an adviser that becomes aware it has
inadvertent custody of client funds or securities would not be
considered to have custody of such funds or securities for purposes of
the Advisers Act custody rule.
<bullet> Segregation of assets--We are setting forth our views on
the Advisers Act custody rule's asset segregation requirement with
respect to client funds and securities held at qualified custodians and
client cash held at banks, as well as the use of escrow accounts for
transaction purposes used in connection with the sale of portfolio
companies owned by pooled investment vehicles.
<bullet> Accommodation reporting--We are providing our views on the
circumstances under which accommodation reporting is permissible.
Recordkeeping: We are proposing amendments to the recordkeeping
rules under the Advisers Act and Investment Company Act to provide that
records required to be maintained and preserved under the applicable
recordkeeping rules may be maintained and preserved on a crypto
network, provided that the adviser or regulated fund \88\ can provide,
promptly upon request by the Commission (including its examiners and
other representatives), such records to the Commission in a human-
readable and reasonably usable electronic format. We are also proposing
amendments to the recordkeeping rules under the Investment Company Act
to specify the applicability of these rules to BDCs.
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\88\ See infra footnote 652. As used here, regulated fund would
refer to all registered investment companies and BDCs and would
include UITs and FACCs.
---------------------------------------------------------------------------
Accounting Guidance: We discuss revisions we expect to make to the
2009 Commission Guidance Regarding Independent Public Accountant
Engagements.\89\
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\89\ See Commission Guidance Regarding Independent Public
Accountant Engagements Performed Pursuant to Rule 206(4)-2 Under the
Investment Advisers Act of 1940, Advisers Act Release No. 2969 (Dec.
30, 2009) [75 FR 1492 (Jan. 11, 2010)] (the ``2009 Guidance for
Accountants'').
---------------------------------------------------------------------------
Form Amendments: Finally, we are proposing amendments to certain
Commission forms. We are proposing amendments to Form ADV to: (1)
implement the proposed rule amendments related to adviser crypto asset
self-custody; (2) improve the readability of Item 9; (3) add new
questions to Schedule D of Form ADV
[[Page 63880]]
regarding tokenized private funds; \90\ and (4) make certain conforming
amendments, including to implement the proposed redesignation of the
Advisers Act custody rule as rule 223-1.\91\ These proposed amendments
to Form ADV would support accurate and complete disclosure on Form ADV.
---------------------------------------------------------------------------
\90\ Unlike investment advisers registered with the SEC, which
must complete all of Form ADV, exempt reporting advisers (``ERAs'')
that are not also registering with any State securities authority
only need to complete certain items of Form ADV, Part 1A (Items 1,
2, 3, 6, 7, 10, and 11, as well as corresponding schedules). Because
such ERAs are required to complete Item 7 of Form ADV Part 1A to
which Schedule D relates, such ERAs would also be required to
respond to the proposed additional questions related to tokenized
funds. See infra section II.J.1.c) for further discussion. ERAs that
are registering with any State securities authority must complete
all of Form ADV, Part 1A. See Form ADV Instruction 3. An ERA is an
investment adviser that is not registered with the Commission
because the adviser relies on an exemption from registering with the
Commission under section 203(l) or 203(m) of the Advisers Act. ERAs
are subject to certain reporting, recordkeeping, and other
obligations. See rule 204-4 [17 CFR 275.204-4].
\91\ We are also proposing to amend Item 1.I of Form ADV and
section 1.I. of Schedule D to Form ADV to remove a parenthetical
that lists examples of social media platforms. Additionally, we are
also proposing conforming amendments to Form ADV-E to implement the
proposed redesignation of the Advisers Act custody rule to rule 223-
1. See infra sections II.J.1.d) and II.J.4.
---------------------------------------------------------------------------
For regulated funds other than BDCs, we are proposing amendments to
Form N-CEN to require reporting of the use of crypto asset self-custody
or of a State trust company to custody crypto assets, as well as to
require reporting of whether a registered investment company, other
than a FACC, (or Series or Class thereof) is a tokenized fund.\92\ In
addition, we are providing our views on disclosures related to the
proposed self-custody rules and the proposed State trust company rules
(together, the ``proposed crypto custody rules'') for Part 2 of Form
ADV for advisers and Forms N-1A and N-2 for regulated funds to help
improve the quality of disclosure made to the Commission and the public
on these forms related to any material facts and risks associated with
crypto asset self-custody and custody of crypto assets by State trust
company custodians.
---------------------------------------------------------------------------
\92\ See General Instruction A to Form N-CEN.
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II. Discussion
A. Adviser Self-Custody
1. Adviser Self-Custody Rule Overview
(a) Summary and Scope of the Proposed Adviser Self-Custody Rule
The Advisers Act custody rule generally requires advisers to
maintain client assets at a qualified custodian (the ``qualified
custodian requirement'').\93\ However, as demand for crypto asset
custodial services grows with the continued growth of the crypto asset
market, the range of crypto assets that can be supported by qualified
custodians that are both technically capable of offering custodial
services and eligible under the Commission's custody rules to act as a
custodian is limited.\94\ Third-party custodians may not be capable of
providing custodial services initially or quickly after launch of a
particular crypto asset.\95\ The timing delay in the offering of
custodial services for a particular crypto asset may impair investors'
ability to realize the available investment value for that crypto
asset.\96\
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\93\ See current rule 206(4)-2(a)(1).
\94\ See, e.g., TDC Comment Letter I (stating that the range of
crypto assets supported by qualified custodians is limited because
of the ``fast-moving space where new tokens and protocols are
constantly being launched'' and due to the fact that ``every
blockchain protocol generally requires the development of a custom
technology build, which takes a significant amount of engineering
work''); Dechert Comment Letter (stating that of the categories of
qualified custodians permitted to hold client assets under the
Advisers Act custody rule, ``very few are qualified to custody
crypto assets, and even these few serve a relatively small number of
crypto assets'').
\95\ See, e.g., Unit 410 Comment Letter.
\96\ See, e.g., TDC Comment Letter I (stating that some advisers
have ``declined token allocations at the potential detriment of
investors or asked portfolio companies to hold tokens until a
custodial solution becomes available'').
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In these instances, adviser self-custody may be a viable option to
address this gap of custodial services for crypto assets. In
particular, an adviser that conducts extensive due diligence of a
crypto asset beginning in its early stage development as a novel or
nascent crypto asset may have expertise on the functioning and
operation of the crypto network, potentially allowing them to be well-
positioned to securely self-custody the crypto asset. Advisers may be
able to provide secure custodial services on a timelier basis than a
third-party permitted custodian that may have less knowledge of the
crypto asset and the operations of the crypto network.
We are also cognizant that an adviser's self-custody is subject to
higher custodial risks such as the risk of loss, theft, misuse,
misappropriation as well as the adviser's financial condition, as
compared to maintaining a client's funds or securities at a qualified
custodian, because advisers are not customarily engaged in the business
of custody and therefore, many of them may lack the relevant
experience, expertise and/or necessary controls to effectively
safeguard an asset. In addition, there may be heightened custodial risk
when the adviser and the custodian are the same party so that the
adviser can move client assets without contacting an unaffiliated
custodian. When there is a clear distinction between the roles of the
adviser (advising the client on the buying and selling of assets and
implementing the client's investment strategy), an adviser is less
likely to engage in unauthorized trading in a client's account. Because
an adviser self-custodial role goes beyond the services customarily
associated with advisory businesses and presents heightened concerns on
conflicts of interest, the proposed requirements under the adviser
self-custody rule are necessary to ensure that the adviser has the
qualifications and experience necessary to adequately safeguard client
assets.
We are thus proposing an adviser self-custody rule under the
Advisers Act that would permit an adviser to hold client crypto assets
for which it provides investment advice without maintaining them at a
qualified custodian; provided that the adviser complies with conditions
designed to safeguard the self-custodied crypto assets from loss,
theft, misuse and misappropriation as well as the adviser's financial
condition.\97\ As discussed further below, an adviser that possesses
any portion of the key materials to a client's crypto asset would have
``self-custody'' of the client's crypto asset, and would thus be
required to comply with the proposed adviser self-custody rule with
respect to that crypto asset.\98\
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\97\ See supra section I.B for a more detailed discussion of the
reasons we are proposing an adviser self-custody rule that would
allow advisers to self-custody clients' crypto assets.
\98\ See proposed rule 223-1(d)(16) for the proposed definition
of ``self-custody'' and proposed rule 223-1(b)(7).
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The application of the adviser self-custody rule's heightened
safeguards to the protection of key materials is critical to the
safekeeping of a client's crypto asset because, unlike mechanisms used
to transact in more traditional assets, access to crypto assets
generally requires the use of public and private cryptographic key
pairings, and the loss or theft of key materials can result in the
irreversible loss of crypto assets.\99\ Whereas processes and protocols
exist to reverse erroneous or fraudulent transactions with respect to
traditional
[[Page 63881]]
assets, crypto networks, by design, generally make it difficult or
impossible to reverse erroneous or fraudulent crypto asset
transactions. Custodial risks associated with the immutability of
records on crypto networks may be heightened in the context of
permissionless crypto networks where anyone can participate in the
network without permission, as opposed to permissioned crypto networks
where participants must be approved in order to access the crypto
network.\100\ These specific characteristics of crypto assets put
clients at risk of permanently losing their crypto assets or being
unable to reverse erroneous or fraudulent transactions when key
materials are lost or stolen. Because of these features and the highly
interconnected nature of crypto networks, crypto assets are subject to
heightened risks, such as the risk of loss and theft from cybersecurity
attacks, as compared to the risks associated with traditional assets,
thus necessitating highly specialized technical knowledge and
capabilities as well as proficiency in cybersecurity practices, to
adequately safekeep crypto assets and their associated key materials.
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\99\ See, e.g., U.S. Securities and Exchange Commission, Office
of Investor Education and Assistance, Crypto Asset Custody Basics
for Retail Investors--Investor Bulletin (Dec. 12, 2025), available
at <a href="https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/crypto-asset-custody-basics-retail-investors-investor-bulletin-0">https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/crypto-asset-custody-basics-retail-investors-investor-bulletin-0</a> (``OIEA
Investor Bulletin'') (describing Commission staff's observations
that the loss of private keys can result in permanent loss of access
to the crypto assets).
\100\ See Changelly, Permissioned vs. Permissionless Blockchains
(Oct. 31, 2025), available at <a href="https://changelly.com/blog/permissioned-vs-permissionless-blockchain/">https://changelly.com/blog/permissioned-vs-permissionless-blockchain/</a>.
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Although accounts of regulated funds are excepted from the
application of the Advisers Act custody rule, the term ``client,'' for
purposes of the proposed adviser self-custody rule would include
regulated funds.\101\ The current exception in the Advisers Act custody
rule recognizes that the custody of regulated funds' assets is
addressed by section 17(f) of the Investment Company Act and the rules
thereunder.\102\ The Investment Company Act and the rules thereunder,
however, currently do not address self-custody of crypto assets by
regulated funds. The heightened risk of loss and custodial challenges
associated with crypto assets arise to the same extent across all
advisory clients including regulated funds. Therefore, the safeguards
in the proposed adviser self-custody rule are designed to protect
crypto assets in the self-custody of registered advisers, regardless of
the type of advisory client.
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\101\ See current rule 206(4)-2(b)(5); proposed rule 223-
1(b)(7); and proposed rule 223-1(b)(5).
\102\ See 2003 Adopting Release, supra footnote 7, at section
II.D.1 (stating that adviser need not comply with the Advisers Act
custody rule with respect to clients that are registered investment
companies because registered investment companies and their advisers
must comply with the strict requirements of section 17(f) of the
Investment Company Act and the custody rules adopted by the
Commission under that section).
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Rather than duplicating protections provided under the proposed
fund self-custody rule under the Investment Company Act, the proposed
adviser self-custody rule under the Advisers Act would apply to
accounts of regulated funds as well. An adviser that has self-custody
of crypto assets for accounts of regulated funds would thus be required
to comply with the requirements of the proposed adviser self-custody
rule under the Advisers Act with respect to those assets, although the
adviser will continue to be excepted from the rest of the Advisers Act
custody rule with respect to accounts of regulated funds.\103\
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\103\ See proposed rule 223-1(b)(5); proposed rule 223-1(a). But
see proposed rule 223-1(b)(7)(vii) which would except advisers from
the proposed requirement to send account statements to clients for
which the adviser maintains crypto assets in self-custody with
respect to the account of any regulated fund. See infra section
II.A.7 for a detailed discussion of the proposed self-custody
account statement requirement. See also infra section II.B for a
detailed discussion of the proposed fund self-custody rule under the
Investment Company Act that would apply to regulated funds with
self-custody of crypto assets.
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Consistent with the current scope of assets subject to the
Investment Company Act and its custody rules for regulated funds, which
apply to a regulated fund's securities and similar investments, when an
adviser complies with the proposed adviser self-custody rule with
respect to regulated funds, the scope of the rule would apply with
respect to crypto assets that are ``securities and similar
investments,'' to be consistent with the scope of the Investment
Company Act custody rules. In order to effect this change, we are
proposing to revise the lead-in language of the Advisers Act custody
rule, which currently says, ``If you are an investment adviser
registered or required to be registered under section 203 of the Act
(15 U.S.C. 80b-3), it is a fraudulent, deceptive, or manipulative act,
practice or course of business within the meaning of section 206(4) of
the Act (15 U.S.C. 80b-6(4)) for you to have custody of client funds or
securities unless . . .'' This proposal would amend the lead-in of the
Advisers Act custody rule to state as follows: ``If you are an
investment adviser registered or required to be registered under
section 203 of the Act (15 U.S.C. 80b-3), you must take the following
steps to safeguard client funds and securities of which you have
custody; provided that, where this section (17 CFR 275.223-1) applies
to the account of a registered investment company or a business
development company, references to funds and securities shall be
understood to refer to the securities and similar investments held for
such account.'' \104\ The scope of the Advisers Act custody rule will
continue to apply to funds and securities with respect to advisory
clients that are not regulated funds.
---------------------------------------------------------------------------
\104\ See proposed rule 223-1(a).
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Moreover, in addition to the safeguards required of registered
advisers with self-custody of crypto assets under the proposed adviser
self-custody rule, a regulated fund's board of directors would need to
engage in the oversight of the self-custody arrangement as required
under the proposed fund self-custody rule under the Investment Company
Act. This would allow regulated funds to place and maintain crypto
assets with an adviser to the regulated fund, subject both to the
protections in the proposed adviser self-custody rule and the regulated
fund's board of director's oversight of the arrangement under the
proposed fund self-custody rule.\105\
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\105\ See infra section II.B for a detailed discussion of the
proposed fund self-custody rule for regulated funds.
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An adviser that has self-custody of crypto assets would be required
to comply with the proposed adviser self-custody rule's requirements.
As discussed in more detail in subsequent sections below, as an initial
matter and no less than quarterly, the adviser would need to determine,
and record in writing, that a qualified custodian is not available to
maintain the crypto asset.\106\ In order to help ensure that only those
advisers who are well-suited and have the capabilities to safeguard
crypto assets have self-custody of client crypto assets, the proposed
adviser self-custody rule would also require the adviser to have
expertise regarding the safeguarding of each crypto asset; to document
in writing the basis of such determination; and to adopt, implement,
and maintain the systems necessary to safeguard each crypto asset
against loss, theft, misuse, and misappropriation.\107\
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\106\ Proposed rule 223-1(b)(7)(i). See also discussion infra
Section II.A.2.
\107\ Proposed rule 223-1(b)(7)(ii).
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Although the proposed adviser self-custody rule would not prescribe
specific technical requirements for the adviser's safeguarding systems,
the adviser's safeguarding systems would need to address, at a minimum,
the following core elements designed to safeguard the crypto assets:
<bullet> private key management,
<bullet> joint authorization of any crypto asset transactions by at
least two persons, and
<bullet> segregation of each client's crypto assets by the crypto
asset addresses
[[Page 63882]]
storing only such client's crypto assets on the crypto network.\108\
---------------------------------------------------------------------------
\108\ Proposed rule 223-1(b)(7)(ii)(A) through (C). See also
discussion infra Section II.A.3(a).
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Other required safeguards under the proposed adviser self-custody
rule include implementing cybersecurity controls \109\ and obtaining an
annual internal control report prepared by an independent public
accountant.\110\ The proposed adviser self-custody rule would also
require an adviser to annually review, and to document its review in
writing, the adviser's safeguarding systems and cybersecurity controls
implemented pursuant to the adviser self-custody rule and the
effectiveness of their implementation.\111\ In addition, the proposed
adviser self-custody rule would require an adviser to send quarterly
account statements, or alternatively, to transmit or arrange for the
transmission of information required in account statements at least
quarterly in a human-readable and reasonably usable electronic format,
to advisory clients for which they self-custody crypto assets.\112\
Finally, the proposed adviser self-custody rule would require an
adviser and its client to agree in writing to treat each crypto asset
in the adviser's self-custody as a financial asset and that the adviser
holding the client's crypto asset in self-custody is a securities
intermediary pursuant to applicable State law that governs the written
agreement between the adviser and the client.\113\
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\109\ Proposed rule 223-1(b)(7)(iii).
\110\ Proposed rule 223-1(b)(7)(iv).
\111\ Proposed rule 223-1(b)(7)(v).
\112\ Proposed rule 223-1(b)(7)(vi).
\113\ Proposed rule 223-1(b)(7)(viii).
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Structurally, the proposed adviser self-custody rule would be an
exception from certain requirements of the Advisers Act custody rule,
including the qualified custodian requirement.\114\ The proposed
adviser self-custody rule would also be an exception from the
requirement to notify the client in writing of certain information if
the adviser opens an account with a qualified custodian on the client's
behalf and to have a reasonable basis, after due inquiry, for believing
that the qualified custodian sends quarterly account statements to
clients.\115\ Advisers would remain subject to the other applicable
portions of the Advisers Act custody rule unless eligible for a
specific exception. For example, advisers subject to the Advisers Act
custody rule must obtain a surprise examination at least once each
calendar year verifying client funds and securities of which the
adviser has custody, unless, for instance, the adviser manages a pooled
investment vehicle subject to an annual financial statement audit by an
independent public accountant.\116\ Advisers with self-custody of
crypto assets on behalf of an account of a regulated fund would only
need to comply with the proposed adviser self-custody rule with respect
to such crypto assets, and would remain excepted from the other parts
of the Advisers Act custody rule with respect to the account of a
regulated fund.\117\
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\114\ See proposed rule 223-1(b)(7).
\115\ See current rule 206(4)-2(a)(2) (to be redesignated under
this proposal as rule 223-1(a)(2) (``notice requirement'')) and
current rule 206(4)-2(a)(3) (to be redesignated under this proposal
as rule 223-1(a)(3) (``account statement delivery requirement'')).
\116\ See current rule 206(4)-2(a)(4) which would be
redesignated as rule 223-1(a)(4) under this proposal (the ``surprise
examination requirement''); current rule 206(4)-2(b)(4), which would
be redesignated as rule 223-1(b)(4) under this proposal (the ``audit
provision''). See also infra section II.G.4 for a detailed
discussion of the proposed amendments to the audit provision.
\117\ See proposed rule 223-1(b)(5).
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In connection with the proposed adviser self-custody rule, we are
proposing amendments to the Form ADV, Part 1A, to add new questions
that would require the adviser to disclose certain information
regarding its crypto asset self-custody practices.\118\ We also discuss
below disclosures regarding the material risks and conflicts of
interest associated with self-custody of client crypto assets that
advisers may need to provide in their brochures as well as separately
to their clients pursuant to their fiduciary duty.\119\
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\118\ See infra section II.J.1 for a detailed discussion of the
proposed amendments to Form ADV, Part 1A.
\119\ See infra section II.J.3 for a detailed discussion of
disclosures regarding adviser self-custody of crypto assets.
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Although the proposed adviser self-custody rule is designed to be
generally flexible and principles-based in order to adapt to
developments over time, we remind advisers to also consider, as
fiduciaries, their fiduciary obligations when they have self-custody of
client crypto assets. An adviser's fiduciary duty, which comprises a
duty of loyalty and a duty of care, requires the investment adviser to
act in the best interests of its client at all times and to not
subordinate its client's interest to its own.\120\ Under its duty of
loyalty, an investment adviser must eliminate or make full and fair
disclosure of all conflicts of interest which might incline an
investment adviser--consciously or unconsciously--to render advice
which is not disinterested such that a client can provide informed
consent to the conflict. This fiduciary duty extends to client funds
and securities, and securities and similar investments with respect to
advisory clients that are regulated funds, in the adviser's
custody.\121\ Therefore, an adviser that fails to take reasonable steps
to safeguard self-custodied crypto assets or that misappropriates or
misuses those assets would be acting in a manner inconsistent with the
client's best interests and the adviser's fiduciary duty. Loss of
client crypto assets in the adviser's self-custody resulting from the
adviser's failure to take such reasonable steps may be a violation of
its duty of care, while an adviser that misappropriates client crypto
assets in self-custody would be breaching its duty of loyalty. An
adviser's failure to make full and fair disclosure of the conflicts of
interest arising from the self-custodial arrangement in order to allow
the client to provide informed consent to such conflicts would be a
breach of the adviser's duty of loyalty. Although the specific
obligations that flow from the adviser's fiduciary duty depend on what
functions the adviser has agreed to assume for the client, the
relationship in all cases remains that of a fiduciary to the client and
may not be waived.\122\ We request comment on the proposed adviser
self-custody rule under the Advisers Act:
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\120\ See, e.g., SEC v. Moran, 944 F. Supp. 286, 297 (S.D.N.Y
1996) (``Investment advisers are entrusted with the responsibility
and duty to act in the best interest of their clients.''). See also
Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, Investment Advisers Act Release No. 5248 (June
5, 2019) [84 FR 33669 (July 12, 2019)] at section II (``Standard of
Conduct Release'') at section II and n.23 (discussing various
interpretations of an adviser's fiduciary duty spanning several
decades); Compliance Programs of Investment Companies and Investment
Advisers, Advisers Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714
(Dec. 24, 2003)] (``Compliance Program Adopting Release''), at n.22
and accompanying text (in discussing this fiduciary obligation in
the context of business continuity plans, stating that an adviser's
fiduciary obligation to its clients includes the obligation to take
steps to protect the clients' interests from being placed at risk as
a result of the adviser's inability to provide advisory services).
\121\ See Standard of Conduct Release, supra footnote 120, at n.
17 (discussing the broad scope of the fiduciary duty in a variety of
contexts); 2003 Adopting Release, supra footnote 7, at n.22 (in
discussing an adviser's selection of a foreign financial institution
to hold clients' assets, stating that an adviser's fiduciary
obligations require it either to have a reasonable basis for
believing that the foreign institution will provide a level of
safety for client assets similar to that which would be provided by
a ``qualified custodian'' in the United States or to fully disclose
to clients any material risks attendant to maintaining the assets
with the foreign custodian).
\122\ See Standard of Conduct Release, supra footnote 120, at
section II.A.
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1. Pursuant to the proposed adviser self-custody rule, an adviser
would be permitted to have self-custody of a client's crypto asset
without maintaining it at a qualified custodian,
[[Page 63883]]
provided that the adviser complies with the requirements of the
proposed adviser self-custody rule. Should an adviser be permitted to
have self-custody of client crypto assets, including crypto assets of a
regulated fund, as proposed? Why or why not?
2. Do commenters agree that qualified custodian availability is a
particularly acute problem for certain kinds of crypto assets, such as
nascent or novel crypto assets? If so, what types of crypto assets
raise heightened challenges to finding available qualified custodians
to maintain them? To what extent would the proposed rule permitting
crypto asset custody at State trust companies discussed below (see
section II.C) alleviate these challenges? \123\
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\123\ See infra section II.C for a detailed discussion of the
proposed rule that would allow custody of crypto assets at State
trust companies. See also supra section I.A.2 for a discussion of
related staff actions such as the rescission of SAB 121 and the
staff issuance of the 2025 State Trust Company NAL.
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3. The Advisers Act custody rule excepts securities that meet the
description of privately offered securities from the qualified
custodian requirement on the basis that they are hard to steal.\124\
Privately offered securities are securities that are: (i) acquired from
the issuer in a transaction or chain of transactions not involving any
public offering; (ii) uncertificated, and ownership thereof is recorded
only on the books of the issuer or its transfer agent in the name of
the client; and (iii) transferable only with prior consent of the
issuer or holders of the outstanding securities of the issuer. Crypto
assets would not be able to meet this exception if, for example,
records of their ownership are not recorded only on the books of the
issuer or its transfer agent in the name of the client, or if they can
be transferred without the prior consent of the issuer. Are there
crypto assets that could qualify as privately offered securities? If
so, what characteristics of such crypto assets and/or their crypto
networks satisfy the conditions of the privately offered securities
exception? If there are crypto assets that could qualify as privately
offered securities, should the privately offered securities exception
be amended to except the adviser from the conditions of the proposed
adviser self-custody rule with respect to any such crypto assets in the
adviser's self-custody? Why or why not? If yes, how should the
privately offered securities exception be amended, if at all, to
accommodate characteristics unique to securities that are crypto assets
and what conditions should apply to such crypto assets under the
exception to ensure that the privately offered securities exception
continues to exempt only those crypto assets that have features similar
to privately offered securities that provide external safeguards
against the kinds of abuse the custody rule seeks to prevent?
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\124\ See current rule 206(4)-2(b)(2) which would be
redesignated as rule 223-1(b)(2) under this proposal (``privately
offered securities exception'').
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4. Is our understanding correct that some advisers engage in
extensive due diligence of a crypto asset beginning in its early stage
development, and that such advisers may acquire expertise on the
functioning and operation of the associated crypto network, potentially
allowing them to be well-positioned to securely self-custody the crypto
asset? If not, why not? How does the adviser's due diligence of the
crypto asset position the adviser to be better situated than a
traditional custodian to custody the crypto asset? Does the adviser's
involvement via the due diligence of the crypto asset create or enhance
any conflicts of interest that the proposed custody rule amendments
should uniquely address?
5. In a Commission interpretation addressing the application of
certain Federal securities laws to certain types of crypto assets and
certain transactions involving crypto assets, the Commission stated
that non-security crypto assets may be offered and sold subject to an
investment contract, which is a security.\125\ Is any guidance or
additional changes to the Commission's custody rules needed to address
non-security crypto assets that are subject to an investment contract?
---------------------------------------------------------------------------
\125\ See Commission Security Status Interpretation, supra
footnote 24, at section IV.
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6. Would the proposed safeguards under the adviser self-custody
rule raise any particular challenges for smaller advisers or regulated
funds with smaller advisers? If so, what could we do to help mitigate
those challenges?
7. Are there any services or business practices engaged in by
advisers that could cause an adviser to become subject to regulation or
become regulated entities under other regulatory frameworks outside of
the Commission's rules (for example, regulations governing banks and
money transmitters) if advisers were permitted to hold crypto assets in
self-custody pursuant to the adviser self-custody rule?
(b) Adviser Self-Custody Rule Terms and Definitions
We propose to amend the Advisers Act custody rule to add the
following terms in connection with the proposed adviser self-custody
rule: ``crypto network,'' ``crypto asset,'' ``crypto asset address,''
``key materials,'' ``self-custody,'' ``distributed crypto asset,'' and
``management persons.'' As a relatively novel and highly technological
asset class, it is important that terms related to crypto assets be
defined appropriately so that they can be understood by all market
participants, regardless of their technological sophistication. Given
the rapid pace of innovation in the crypto asset markets, it also is
important that the terms be both accurate with respect to the current
state of the technology and sufficiently flexible to cover potential
developments in the market to avoid a need to continually revisit and
update the definitions. The definitions proposed herein are intended to
be consistent with the definitions of applicable terms used in a prior
Commission interpretation and staff statements.\126\
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\126\ See Commission Security Status Interpretation, supra
footnote 24, at n.1; U.S. Securities and Exchange Commission,
Division of Corporation Finance, Division of Investment Management,
Division of Trading and Markets, Statement on Tokenized Securities
(Jan. 28, 2026), available at <a href="https://www.sec.gov/newsroom/speeches-statements/corp-fin-statement-tokenized-securities-012826-statement-tokenized-securities">https://www.sec.gov/newsroom/speeches-statements/corp-fin-statement-tokenized-securities-012826-statement-tokenized-securities</a> (``Tokenization Statement''), at n.1; U.S.
Securities and Exchange Commission, Division of Trading and Markets,
Staff Statement Regarding Broker-Dealer Registration of Certain User
Interfaces Utilized to Prepare Transactions in Crypto Asset
Securities (Apr. 13, 2026), available at <a href="https://www.sec.gov/newsroom/speeches-statements/staff-statement-regarding-broker-dealer-registration-certain-user-interfaces-utilized-prepare-staff-statement-regarding-broker-dealer-registration-certain-user-interfaces-utilized#_ftn3">https://www.sec.gov/newsroom/speeches-statements/staff-statement-regarding-broker-dealer-registration-certain-user-interfaces-utilized-prepare-staff-statement-regarding-broker-dealer-registration-certain-user-interfaces-utilized#_ftn3</a> (``User Interface Statement''), at n.3.
---------------------------------------------------------------------------
The proposed amendments to the Advisers Act custody rule would thus
set forth the following definitions that would apply to crypto assets
pursuant to the proposed adviser self-custody rule:
``Crypto asset'' would mean any digital representation of value
that is recorded on a cryptographically secured distributed
ledger.\127\ Consistent with the current scope of assets subject to the
custody rule for advisers under the Advisers Act (which only applies to
custody of client funds or securities) and the Investment Company Act
and its custody rules for regulated funds (which apply to a regulated
fund's securities and similar investments), crypto assets subject to
the Advisers Act custody rule would only include crypto assets that are
digital representations of funds (e.g., cash, bank accounts, payment
stablecoins issued by stablecoin issuers that are permitted payment
stablecoin issuers under the GENIUS Act or foreign payment
[[Page 63884]]
stablecoin issuers registered pursuant to section 18 of the GENIUS
Act,\128\ tokenized deposits) or securities, or with respect to crypto
assets self-custodied for the accounts of regulated funds, that are
securities or similar investments.\129\ For purposes of the Advisers
Act custody rule, crypto assets would include, but are not limited to,
crypto assets that are native to a particular crypto network.\130\
Crypto assets native to a crypto network include native digital
commodities (e.g., Bitcoin (BTC), Ether (ETH), Solana (SOL)) that,
although they are generally not subject to the Advisers Act custody
rule with respect to advisory clients that are not regulated funds
because they are not funds or securities,\131\ would qualify as
``securities and similar investments'' subject to the proposed Advisers
Act custody rule to the extent an adviser holds them in self-custody
pursuant to the proposed adviser self-custody rule for the account of a
regulated fund.\132\ Crypto assets would also include digital
securities (commonly known as ``tokenized'' securities), which are
financial instruments enumerated in the definition of ``security''
under the Federal securities laws that are formatted as or represented
by a crypto asset, where the record of ownership is maintained in whole
or in part on or through one or more crypto networks.\133\
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\127\ See proposed rule 223-1(d)(3).
\128\ A ``payment stablecoin'' is, subject to certain
exclusions, defined as a digital asset that is, or is designed to
be, used as a means of payment or settlement, and the issuer of
which is obligated to convert, redeem, or repurchase the digital
asset for a fixed amount of monetary value, not including a digital
asset denominated in a fixed amount of monetary value, and
represents that it will maintain, or create the reasonable
expectation that it will maintain, a stable value relative to the
value of a fixed amount of monetary value. See section 2(22) of the
GENIUS Act. The term ``digital asset'' in the GENIUS Act is
generally consistent with the proposed definition of ``crypto
asset'' in the proposed Advisers Act custody rule. See section 2(6)
of the GENIUS Act. A ``permitted payment stablecoin issuer'' is
defined as a person formed in the United States that is: (1) a
subsidiary of an insured depository institution that has been
approved to issue payment stablecoins under section 5 of the GENIUS
Act; (2) a Federal qualified payment stablecoin issuer; or (3) a
State qualified payment stablecoin issuer. See section 2(23) of the
GENIUS Act. A ``foreign payment stablecoin issuer'' is defined as an
issuer of a payment stablecoin that is: (1) organized under the laws
of or domiciled in a foreign country, a territory of the United
States, Puerto Rico, Guam, American Samoa, or the Virgin Islands;
and (2) not a permitted payment stablecoin issuer. See section 2(12)
of the GENIUS Act.
\129\ See rule 206(4)-2(a) under the Advisers Act and section
17(f)(1) of the Investment Company Act. See also proposed rule 223-
1(a) and proposed rule 223-1(b)(5).
\130\ See Commission Security Status Interpretation, supra
footnote 24, at n.49 (providing that the term ``native'' in the
context of a crypto asset refers to a crypto asset generated for use
on a particular crypto system). See also id., at section VII.A.
(defining ``crypto system'' to refer collectively to crypto networks
and software applications running on a crypto network (``crypto
applications'')).
\131\ However, as discussed in the Commission Security Status
Interpretation, digital commodities may be offered and sold subject
to an investment contract, which is a security. See supra footnote
24.
\132\ See also Commission Security Status Interpretation, supra
footnote 24, at section III.A (discussing digital commodities).
\133\ See also Commission Security Status Interpretation, supra
footnote 24, at section III.E.
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``Crypto asset address'' would mean the unique identifier on the
crypto network that designates the destination for sending, receiving,
and storing a crypto asset on the crypto network.\134\ This term is
used in the proposed segregation and self-custody account statement
requirements under the proposed adviser self-custody rule.\135\
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\134\ See proposed rule 223-1(d)(4).
\135\ See proposed rule 223-1(b)(7)(ii)(C) and infra section
II.A.3.b)(3) for a detailed discussion of the proposed segregation
requirement; proposed rule 223-1(b)(7)(vi) and infra section II.A.7
for a detailed discussion of the proposed self-custody account
statement requirement.
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``Crypto network'' would mean a blockchain or similar distributed
ledger technology network.\136\
---------------------------------------------------------------------------
\136\ See proposed rule 223-1(d)(5).
---------------------------------------------------------------------------
``Key materials'' would mean the cryptographic private keys or any
part thereof that is necessary to access and effectuate transactions in
the corresponding crypto asset.\137\ Because private keys control
access to and movements of crypto assets, it is appropriate in our view
to define key materials to refer specifically to private keys. The term
``key materials'' appears in the proposed definition of self-
custody.\138\ The term also appears in the proposed adviser self-
custody rule's provision requiring advisers to adopt, implement and
maintain systems that manage and protect key materials.\139\ It is
appropriate to include, in the definition for key materials, ``any
part'' of the private key necessary to access and effectuate
transactions in a crypto asset, because the loss of any portion of the
private key could result in the inability to access the crypto asset,
and the safekeeping of any and all parts of the private key held with
an adviser in accordance with the proposed adviser self-custody rule's
conditions is essential to the safeguarding of the crypto asset.
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\137\ See proposed rule 223-1(d)(10).
\138\ See proposed rule 223-1(d)(16).
\139\ See proposed rule 223-1(b)(7)(ii)(A).
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``Self-custody'' would mean, with respect to crypto assets,
possession of any portion of a client crypto asset's key
materials.\140\ Self-custody of crypto assets, however, would not
include possession of key materials by the adviser or its related
person solely in its capacity as a qualified custodian maintaining the
crypto asset under proposed rule 223-1(a)(6) (the ``related person QC
rule''), as discussed further below in section II.A.1(c)(2). Relatedly,
we also propose to amend the first prong of the definition of
``custody'' in the Advisers Act custody rule that addresses custody by
way of possession of client funds or securities, to include possession
of client crypto assets via self-custody.\141\ This is because self-
custody of the key materials to a client's crypto asset effectuates
possession of the crypto asset. Moreover, registered investment
advisers are subject to the Advisers Act custody rule only if they have
custody of client funds or securities (or, under the proposed custody
rule, custody of securities and similar investments with respect to
advisory clients that are regulated funds) as ``custody'' is defined in
the Advisers Act custody rule, and, by characterizing self-custody as a
type of possession in the first prong of the custody definition, the
proposed amendment is intended to help ensure that the crypto assets in
the adviser's self-custody are afforded the protections under the
proposed adviser self-custody rule.
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\140\ See proposed rule 223-1(d)(16).
\141\ See proposed rule 223-1(d)(6)(i) (stating that custody
includes possession of client funds or securities (including
possession of client crypto assets via self-custody of crypto
assets) (but not of checks drawn by clients and made payable to
third parties) unless the adviser receives them inadvertently and
the adviser returns them to the sender promptly but in any case
within three business days of receiving them).
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``Distributed crypto asset'' would mean a crypto asset received as
a distribution for no or nominal consideration in connection, or as a
result of activity associated, with a client's crypto asset in an
adviser's custody.\142\ This term, which is intended to be synonymous
and used interchangeably with airdropped crypto assets in this
proposal, is used in the proposed provision for distributed crypto
assets that would allow advisers a grace period to come into compliance
with the Advisers Act custody rule with respect to distributed crypto
assets received unexpectedly.\143\
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\142\ See proposed rule 223-1(d)(7).
\143\ See proposed rule 223-1(b)(11).
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Finally, ``management persons'' would have the same meaning as set
forth in Form ADV, Glossary of Terms.\144\ This term is used in the
proposed joint authorization requirement under the adviser self-
[[Page 63885]]
custody rule, which would require that at least one of the persons
jointly authorizing a crypto asset transfer be a management
person.\145\
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\144\ See infra section II.A.3.b)(2) for further discussion of
how the Form ADV, Glossary of Terms, defines ``Management Persons,''
and examples of persons that could qualify as management persons.
\145\ See proposed rule 223-1(b)(7)(ii)(B).
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We request comment on the proposed terms and definitions in
connection with the adviser self-custody rule:
8. Are the terms and definitions proposed in connection with the
proposed adviser self-custody rule (``crypto network,'' ``crypto
asset,'' ``crypto asset address,'' ``key materials,'' ``self-custody''
and ``distributed crypto asset'') clear? Why or why not? Do they
accurately reflect the current technology for crypto assets and are
they flexible enough to accommodate technological developments in the
future? Are there other definitions of these terms we should use? For
example, given how fundamental the term ``crypto asset'' is to this
proposal, is there a more specific definition we should consider? Is
the definition too limiting or too encompassing? Does the definition
for ``crypto asset'' scope in the appropriate range of assets as
applied to registered advisers and regulated funds? Is the term ``self-
custody,'' as used in this proposal, appropriate to describe an adviser
holding a client's crypto asset, or a regulated fund holding through an
adviser a crypto asset, without maintaining it with a permitted
custodian? Instead of ``self-custody,'' is there a more apt term to
describe such custodial arrangements for crypto assets?
9. Are there any defined terms that we either should not adopt or
that we should change in the final rule? If so, please identify those
defined terms along with any recommended changes to the definitions.
10. Are there additional terms used in the proposed adviser self-
custody rule that we should define?
11. As noted above, the proposed Advisers Act custody rule would
continue to apply to client assets that are funds or securities (and
would be amended to apply to securities and similar investments held
for the accounts of regulated funds that are subject to the proposed
adviser self-custody rule), and we express our view that tokenized
deposits and payment stablecoins issued by stablecoin issuers that are
permitted payment stablecoin issuers under the GENIUS Act and foreign
payment stablecoin issuers registered pursuant to section 18 of the
GENIUS Act are crypto assets that are digital representations of funds
subject to the Advisers Act custody rule. Are there other types of
crypto assets, if any, that need clarification as to whether they are
digital representations of ``funds'' subject to the Advisers Act
custody rule, and why?
12. As noted above, ``crypto asset'' for purposes of this proposal
would include digital securities, commonly known as ``tokenized''
securities. There are a variety of models used to tokenize securities,
which may vary in terms of structure and the rights afforded to
holders.\146\ What guidance or adjustments to the Commission's custody
rules, if any, are needed to address the custody of tokenized
securities? Are there any circumstances in which maintaining the
associated crypto asset at a permitted custodian, or in self-custody by
an adviser pursuant to the proposed adviser self-custody rule, would
not be sufficient to effectively hold the tokenized security in custody
under the Commission's custody rules?
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\146\ See Commission Security Status Interpretation, supra
footnote 24, at section III.E. (discussing digital securities).
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(c) Scope of Activity Subject to the Proposed Adviser Self-Custody Rule
Under this proposal, an adviser that has self-custody of client
crypto assets would be required to comply with the proposed adviser
self-custody rule with respect to those crypto assets. An adviser would
have self-custody of a crypto asset if the adviser possesses any
portion of a client crypto asset's key materials. As mentioned above,
the proposal would add a new term ``self-custody'' to mean, with
respect to a client's crypto asset, possession of any portion of the
crypto asset's key materials.\147\
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\147\ See proposed rule 223-1(d)(16).
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The proposed self-custody definition is intended to confer self-
custody of a client's crypto asset and the attendant obligations under
the proposed adviser self-custody rule on an adviser if the adviser
possesses any portion of the key materials to the crypto asset. For
purposes of the proposed adviser self-custody rule, an adviser would
have self-custody of a crypto asset and would need to comply with the
adviser self-custody rule's requirements with respect to such crypto
asset only if the adviser actually possesses (rather than merely having
the authority to obtain possession of) the key materials to the crypto
asset.\148\
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\148\ But see infra section II.A.1(c)(2) for a discussion of how
custody (though not self-custody) and the attendant obligations
under the Advisers Act custody rule may still be imputed to an
adviser if an adviser has the authority to obtain possession of (but
does not actually possess) the key materials to a client's crypto
asset.
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The proposed crypto self-custody definition reflects a longstanding
principle of the definition of custody, under which the Advisers Act
custody rule applies when an adviser has the ability to change a
client's ownership and possession of its assets, since an adviser with
this ability can subject a client's assets to the risks of loss,
misuse, misappropriation, theft, or financial reverses of the adviser.
For example, an adviser that physically holds a check drawn by the
advisory client and made payable to a third party is not subject to the
rule solely as a result of holding the check, since the adviser cannot
use the check to change ownership of the client's underlying cash
holdings.\149\ An adviser with the full set of key materials over a
crypto asset would have unilateral ability to change a client's
ownership and possession of the crypto asset.
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\149\ See current rule 206(4)-2(d)(2)(i).
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However, an adviser's possession of even a non-controlling portion
of the key materials would subject its client's crypto assets to
custody risks because loss of or unauthorized access to even a portion
of the key materials could potentially result in the permanent loss of
ownership and possession of the crypto asset, and consequently, harm to
clients. Moreover, an adviser holding a crypto asset's key materials,
regardless of whether they constitute a non-controlling share of the
crypto asset's private keys, raises misappropriation risks because an
adviser could coordinate with one or more other private key holders to
conduct unauthorized actions with the crypto asset.
Guarding against potential loss and fraud is particularly important
in the context of crypto assets due to the immutability of most crypto
asset transactions and the bearer nature of many crypto assets and
their associated key materials, which create a heightened risk that any
loss of the crypto assets would be irreversible. Moreover, crypto
assets held with an adviser are subject to higher custodial risks such
as the risk of loss, theft, misuse, misappropriation as well as the
adviser's financial reverses, as compared to maintaining them at a
qualified custodian, because advisers are not customarily engaged in
the business of custody and therefore, many of them may lack the
relevant experience, expertise and/or necessary controls to effectively
safeguard a crypto asset. The application of the proposed adviser self-
custody rule's heightened safeguarding requirements to an adviser with
self-custody of client crypto assets is intended to ensure that an
adviser that holds any key materials to the
[[Page 63886]]
crypto assets takes affirmative steps to safeguard them against the
custodial risks that the Advisers Act custody rule is designed to
protect against. Moreover, an adviser may self-custody crypto assets
only in the limited circumstances when a qualified custodian is not
available and when the adviser has the appropriate expertise and
custodial infrastructure to mitigate against such risks.
(1) Use of Service Providers
The proposed adviser self-custody rule is not intended to preclude
an adviser from engaging third parties (including related persons) as
service providers to support its crypto asset self-custody and to help
administer the required safeguards under the proposed adviser self-
custody rule, provided the adviser exercises appropriate oversight and
continues to comply with the substantive requirements of the adviser
self-custody rule. For example, an adviser may engage the services and
personnel of a third party or a related person with cybersecurity
expertise in order to implement cybersecurity controls required under
the proposed adviser self-custody rule.\150\ In these instances,
however, the adviser would ultimately remain responsible for its
compliance with the requirements of the proposed adviser self-custody
rule, and violations of the adviser self-custody rule resulting from
the adviser's use of third parties or related persons engaged to
administer the adviser's self-custody program would not waive nor
reduce the adviser's obligation to comply with the custody rule or to
meet its fiduciary duty.
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\150\ See proposed rule 223-1(b)(7)(iii) and infra section
II.A.4 for a detailed discussion of the cybersecurity requirement
under the proposed adviser self-custody rule.
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An adviser may also engage a service provider to license the
provider's cryptographic wallet technology and/or software platform to
manage the key materials rather than build its own technology in-house,
provided that the service provider of the wallet technology does not
have access to the crypto asset's key materials nor otherwise have the
ability to unilaterally move a client's crypto asset. For purposes of
this release, a cryptographic wallet (also referred to as ``wallet'' or
``crypto wallet'' herein) is software or hardware that is used to store
a crypto asset's private key.\151\ For example, providers may provide
the wallet technology to generate and/or maintain the key materials as
well as backup recovery services to reset a crypto asset's key
materials when they are lost or damaged.\152\ In some instances, the
crypto wallet provider may also be the provider of the user interface,
provided by a website, browser extension, or other software application
(e.g., mobile application), that may be embedded in a wallet or
separately available for download, designed to assist users engaging in
user-initiated crypto asset transactions on blockchain protocols (or
blockchain-based smart contracts) utilizing the user's wallet
(``covered user interface'').\153\ A crypto wallet is self-custodial if
neither the provider of the wallet nor the wallet's associated covered
user interface has custody of, or access to, the wallet user's
encrypted or decrypted private key.\154\
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\151\ Commission staff has taken a similar view. See User
Interface Statement (defining for purposes of that staff statement a
wallet as software or hardware that is used to store a crypto asset
security investor's private key, which is used to engage in crypto
asset securities transactions).
\152\ See, e.g., Ledger, Manage Your Private Keys, Own Your
Crypto (Oct. 31, 2025), available at <a href="https://support.ledger.com/article/360000380313-zd">https://support.ledger.com/article/360000380313-zd</a> (``When you set up your device, a unique set
of private keys is created by Ledger's secure hardware and
software.''); Fireblocks, Digital Asset Custody and Transaction
Processing Leading Practices Using Fireblocks' MPC Solution (June
26, 2025), available at <a href="https://www.fireblocks.com/report/digital-asset-custody-and-transaction-processing-leading-practices-using-fireblocks-mpc-solution">https://www.fireblocks.com/report/digital-asset-custody-and-transaction-processing-leading-practices-using-fireblocks-mpc-solution</a> (stating that Fireblocks provides multi-
party computational (``MPC'') wallet infrastructure that offers
``governance, generation, storage and recovery of key shares''). See
infra section II.A.3.b)(2) for a more detailed discussion of MPC
solutions for private key management.
\153\ See User Interface Statement (stating that covered user
interfaces can be used for a variety of purposes, such as preparing
code enabling users to interact with blockchain protocols or
providing users with market data, such as potential execution
routes, asset prices, and estimated transaction costs for crypto
asset transactions).
\154\ Commission staff has taken a similar view. See id.
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An adviser could not satisfy the proposed adviser self-custody rule
if it places a client's crypto asset in a wallet technology or other
key management platform that is not self-custodial, or if such service
provider otherwise is able to access and/or unilaterally move a
client's crypto asset through its services. For example, the adviser
would not be able to satisfy the rule requirement to limit access to
key materials to only designated persons that are supervised persons of
the adviser, if a third party has access to a client's crypto
asset.\155\ Therefore, in order to ensure their compliance with the
proposed adviser self-custody rule, it is our view that advisers would
need to determine as part of their due diligence of these service
providers prior to engaging them whether or not the service providers'
capabilities give them access to the key materials and/or other means
to unilaterally move a client's crypto asset.
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\155\ See proposed rule 223-1(b)(7)(ii)(A) and infra section
II.A.3.b)(1) for further discussion of the proposed key management
requirement.
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(2) Crypto Asset Custody Not Subject to Adviser Self-Custody Rule
An adviser that does not have self-custody of a client's crypto
assets (i.e., because the adviser does not possess any portion of the
crypto asset's key materials) would not be required to comply with the
proposed adviser self-custody rule, although it would be required to
comply with other applicable provisions of the Advisers Act custody
rule with respect to client crypto assets of which the adviser has
custody for other reasons besides self-custody.
The Advisers Act custody rule defines ``custody'' as holding,
directly or indirectly, client funds or securities, or having any
authority to obtain possession of them.\156\ An adviser also has
custody if a related person holds, directly or indirectly, client funds
or securities, or has any authority to obtain possession of them, in
connection with advisory services the adviser provides to clients.\157\
Proposed rule 223-1(d)(6) would retain the three prongs provided in the
current definition of custody where custody of client funds or
securities is conferred on an adviser in the following arrangements:
(i) Possession of client funds or securities (including, pursuant to
this proposal, possession of client crypto assets via self-custody)
(but not of checks drawn by clients and made payable to third parties)
unless the adviser receives them inadvertently and returns them to the
sender promptly but in any case within three business days of receiving
them; (ii) any arrangement (including a general power of attorney)
under which the adviser is authorized or permitted to withdraw client
funds or securities maintained with a custodian upon the adviser's
instruction to the custodian; and (iii) any capacity (such as general
partner of a limited partnership, managing member of a limited
liability company or a comparable position for another type of pooled
investment vehicle, or trustee of a trust) that gives the adviser or
its supervised person legal ownership of or access to client funds or
securities.\158\
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\156\ See current rule 206(4)-2(d)(2), which would be
redesignated as rule 223-1(d)(6) under this proposal.
\157\ See id.
\158\ Compare current rule 206(4)-2(d)(2) with proposed rule
223-1(d)(6).
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Custody could arise pursuant to paragraph (ii) or paragraph (iii)
under the definition of ``custody'' in the Advisers Act custody rule.
For instance, mere authority to obtain possession of
[[Page 63887]]
the key materials to a client's crypto asset, without actually
possessing the key materials, would not impute self-custody of the
crypto asset to an adviser. However, such authority would nevertheless
confer on the adviser custody of the crypto asset, because the adviser
effectively has the authority to obtain possession of the crypto
asset.\159\ An adviser with custody, but not self-custody, of the
crypto asset, would not need to comply with the proposed adviser self-
custody rule. The adviser would, however, be subject to other
applicable portions of the custody rule, for instance, the qualified
custodian requirement and the annual surprise examination requirement,
unless an exception applies.
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\159\ See id.
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An adviser would also, under paragraphs (ii) and (iii) of the
definition of custody, have custody of crypto assets in which a private
fund client is invested if the adviser or its related person has power
of attorney with respect to the private fund's crypto assets and/or is
a general partner of the private fund; however, the adviser would not
have self-custody of those crypto assets, and would not be required to
comply with the proposed adviser self-custody rule with respect to
those assets, if the private fund's crypto assets and their associated
key materials are maintained at a qualified custodian. To avoid having
self-custody and being subject to the attendant requirements, an
adviser intending to place and maintain a client's crypto asset at a
qualified custodian would not be able to hold any portion of the crypto
asset's private key materials. In such a case, the adviser would not be
able to satisfy the self-custody requirement, because an adviser can
only hold a crypto asset in self-custody if no permitted custodian is
available.\160\
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\160\ See proposed rule 223-1(b)(7)(i).
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The proposed adviser self-custody rule would not apply to crypto
assets that are maintained by an adviser or its related person, in each
case acting in its capacity as a qualified custodian. The proposed
self-custody definition would state that an adviser does not have self-
custody of a crypto asset if the adviser or a related person possesses
key materials associated with that crypto asset solely in its capacity
as a qualified custodian maintaining the crypto asset under the related
person QC rule. Likewise, although custody would be imputed to an
adviser if its related person maintains client crypto assets as a
qualified custodian in connection with advisory services provided by
the adviser, the adviser would not have self-custody of the crypto
assets if all of their associated key materials are held by the related
person acting as a qualified custodian. In both instances, where the
adviser itself or its related person acts as a qualified custodian to
hold client crypto assets and their key materials, the related person
QC rule, rather than the proposed adviser self-custody rule, would
apply.
Advisers relying on the related person QC rule in these custodial
arrangements would remain obligated to comply with the other applicable
provisions under the Advisers Act custody rule such as the notice and
account statement delivery requirements, unless an exception applies
(for instance, the audit provision).\161\ The application of the
related person QC rule, as opposed to the proposed adviser self-custody
rule and the heightened safeguards thereunder, is appropriate in these
arrangements, because crypto assets in those instances would be
maintained by a traditional custodian entity that is customarily
engaged in the business of custody and is subject to other extensive
regulatory requirements that govern traditional custodians.
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\161\ See current rule 206(4)-2(a)(2), 206(4)-2(a)(3), and
206(4)-2(b)(4), which would be redesignated as rule 223-1(a)(2),
rule 223-1(a)(3), and rule 223-1(b)(4) respectively.
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We request comment on the proposed scope of activities that would
be subject to the adviser self-custody rule and the related proposed
definition of self-custody:
13. Is the proposed definition for self-custody appropriate in
imputing self-custody to an adviser that possesses any portion
(including a non-controlling share) of the key materials associated
with its client's crypto asset? If not, what portion of a crypto
asset's key materials in an adviser's possession should confer self-
custody on the adviser and trigger the application of the self-custody
requirements to the adviser? For example, should self-custody be
conferred on an adviser only when the adviser holds all or a
controlling share of the key materials? How should a ``controlling''
private key share be defined for this purpose? If the custody rule did
not confer self-custody on an adviser that holds a non-controlling
portion of the key materials, what protections, if any, should instead
apply to ensure that the key materials held with the adviser are
appropriately safeguarded and how, if at all, should such protections
differ from the conditions in the proposed adviser self-custody rule?
14. Currently, under what circumstances, if any, is the private key
to a client's crypto asset shared among the adviser and third parties?
Which parties in those circumstances would hold the shares of a private
key, and for what purpose? For example, do wallet solution providers
ever need to retain a portion of the user's key materials? Is doing so
necessary to enhance the security of key materials?
15. Under this proposal, a qualified custodian maintaining a
client's crypto asset would not be able to share the key materials to
the crypto asset with an adviser because, if the adviser held any
portion of the key materials, the adviser would be required to comply
with the self-custody requirements, which are limited to circumstances
where no qualified custodian is available. Are there circumstances
today in which a qualified custodian (e.g., a bank) would maintain a
client's crypto asset and some portion of its key materials while the
adviser retains a non-controlling portion of the key materials, such
that the adviser does not have the unilateral ability to access and/or
move the crypto asset? If so, what would be the purpose of these
arrangements? Are custodial risks, such as the risk of misappropriation
by the adviser or the loss of the crypto asset resulting from the loss
of any private key held with the adviser, mitigated in these
arrangements, so that only some of the proposed adviser self-custody
rule's requirements (or none at all) should apply to the adviser? If
yes, which of the proposed adviser self-custody rule's requirements
should apply to the adviser in these arrangements? In such
arrangements, should the adviser self-custody rule apply only to the
portion of the key materials held with the adviser, and should other
applicable requirements under the Advisers Act custody rule (e.g., the
qualified custodian requirement, the notice requirement, and the
account statement delivery requirement) apply to the portion of the key
materials held with a qualified custodian? Would it be possible, in
practice, to apply the Advisers Act custody rule to different shares of
key materials distributed between a qualified custodian and an adviser?
16. Alternatively, are there circumstances in which a qualified
custodian would share the key materials to a client's crypto asset with
the adviser, such that neither the adviser nor the qualified custodian
would have exclusive control over the crypto asset? If so, what would
be the purpose of these arrangements? If yes, would the qualified
custodian and the adviser share control over the crypto asset, or would
each independently have control
[[Page 63888]]
over the crypto asset, in that each party independently would have the
unilateral ability to access and move the crypto asset? Is the loss of
the crypto asset resulting from the loss of any private key share
mitigated or increased in these arrangements where neither the adviser
nor the qualified custodian has exclusive control over the crypto
asset?
17. Under this proposal, the proposed related person QC rule, as
opposed to the adviser self-custody rule, would apply to custodial
arrangements where the adviser, or its related person, holds all of the
key materials to a client's crypto asset, in each case in its capacity
as a qualified custodian. Should the proposed adviser self-custody rule
apply instead of the related person QC rule to these arrangements? Why
or why not? Would the proposed related person QC rule and the internal
control report requirement thereunder, as proposed, sufficiently
address risks of adviser fraud and misappropriation through the adviser
and its related persons that are qualified custodians maintaining
client crypto assets? \162\
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\162\ See infra footnotes 550 and 551 and accompanying text for
further discussion of the proposed changes to the related person QC
rule.
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18. Are there circumstances today in which an adviser's related
person that is a qualified custodian would share a client crypto
asset's key materials with a qualified custodian that is not the
related person of an adviser? How should the requirements of the
related person QC rule apply to those arrangements?
19. The Advisers Act custody rule sets forth conditions that must
be met in order to overcome the presumption that a related person of
the adviser is not operationally independent of the adviser.\163\ Are
there circumstances today in which an adviser's use of a related person
that is operationally independent of the adviser would raise issues
related to the proposed adviser self-custody rule? For example, do
advisers today utilize related persons that are operationally
independent of the adviser to hold client crypto assets outside of a
traditional custodian, and if so, what functions do such related
persons serve for purposes of self-custody, and how do advisers oversee
the practices of such related persons in light of their operational
independence from the adviser?
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\163\ See current rule 206(4)-2(d)(5)(stating that a related
person is presumed not to be operationally independent unless each
of the following conditions is met and no other circumstances can
reasonably be expected to compromise the operational independence of
the related person: (i) Client assets in the custody of the related
person are not subject to claims of the adviser's creditors; (ii)
advisory personnel do not have custody or possession of, or direct
or indirect access to client assets of which the related person has
custody, or the power to control the disposition of such client
assets to third parties for the benefit of the adviser or its
related persons, or otherwise have the opportunity to misappropriate
such client assets; (iii) advisory personnel and personnel of the
related person who have access to advisory client assets are not
under common supervision; and (iv) advisory personnel do not hold
any position with the related person or share premises with the
related person).
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20. In what circumstances, if any, would multiple qualified
custodians need to hold copies of the key materials to a crypto asset
or share portions of the key materials to a crypto asset? Should the
Advisers Act custody rule prohibit the sharing of access to a client
crypto asset's key materials by multiple qualified custodians? Why or
why not?
21. Is our view provided under section II.A.1c)(1) (``Use of
Service Providers'') regarding the use of service providers and related
persons sufficiently clear? Should we provide any additional
clarification regarding an adviser's use of service providers and
related persons for purposes of the proposed adviser self-custody rule?
If so, what clarifications are needed? What, if any, additional
protections are needed in self-custody arrangements for crypto assets
that involve the use of service providers and related persons? What
arrangements involving the use of service providers and/or related
persons for purposes of crypto asset custody that are commonly in place
today would be prohibited by limiting access to crypto asset key
materials to qualified custodians and registered investment advisers
complying with the adviser self-custody rule?
22. Are there any instances today where a service provider
(including a related person that is not a registered adviser) could
have possession and control of a crypto asset even without access to
the key materials to such crypto asset? If so, for what services are
those providers used, and what protections are in place to prevent such
service providers from unilaterally and impermissibly moving a crypto
asset for unauthorized purposes?
23. In what circumstances, if any, does a service provider have
access to a portion, but not all, of a crypto asset's key materials? Do
service providers in those instances have possession and control of the
crypto asset, or otherwise the ability to unilaterally move a crypto
asset? Notwithstanding whether a service provider in those instances
has the unilateral ability to move a crypto asset, does a service
provider having access to a portion of the key materials still raise
custodial risks such as the risk of loss resulting from the loss of the
key share? If not, should the adviser be permitted to engage such
service provider, and if so, what protections should apply to those
arrangements where a service provider has access to a portion of the
key materials, to ensure that such access does not result in the loss
or theft of the crypto asset?
24. Are commenters aware of any examples of advisers using related
persons that are not qualified custodians to safeguard crypto assets
including their key materials? If so, what type of entities are such
related persons that provide custodial services for client crypto
assets in an adviser's custody? Are these examples necessary and
helpful to investor protection? Why or why not?
25. Do advisers anticipate that they would enter into separate
custodial agreements with clients for whom they hold crypto assets in
self-custody, or would advisers specify the terms and conditions of
self-custody services within the client's overall investment advisory
agreement? Whether reflected in a separate agreement with the client or
otherwise, an adviser holding a client's crypto asset in self-custody--
and not any third party assisting the adviser in these efforts--would
be responsible for the safekeeping of the crypto asset and compliance
with the proposed adviser self-custody rule. Should the adviser be
required to acknowledge and clearly delineate this responsibility in an
agreement with the client?
26. Is our understanding correct that some third-party service
providers offer key backup and recovery services? From a technical
standpoint, what steps are involved in the key recovery process and
which parties (e.g., the adviser, the client, the service provider) are
required to be involved when the service provider recovers key
materials? Could the key materials ever be recovered or reset in a way
that would grant the service provider access to and control of the key
materials, or deny the adviser exclusive access to and control over the
key materials? If yes, under what circumstances could this occur? If
not, what technology prevents this from happening? Could an adviser's
non-payment for the provider's services ever result in the service
provider gaining control of the adviser's key materials or the service
provider preventing the adviser from accessing the key materials? What
technology prevents the service provider from doing this?
27. In what circumstances, if any, would an adviser have the
authority to obtain possession of a client's crypto asset's key
materials, but not actually possess the key materials? In what
circumstances, if any, would an adviser have the authority to obtain
possession
[[Page 63889]]
of, but not actually possess, only a portion of the key materials to a
client's crypto asset? Is it more difficult for an adviser to
misappropriate or lose a crypto asset when it has the authority to
obtain possession of only a portion of a crypto asset's key materials?
Why or why not? If yes, should the custody rule's protections apply to
such crypto asset differently, and if so, how?
(d) Airdropped Crypto Assets
The proposed Advisers Act custody rule would include a provision
that would deem the receipt of distributed crypto assets (i.e.,
airdropped crypto assets) to not be in violation of the Advisers Act
custody rule, provided that, as soon as reasonably practicable, the
adviser either (i) comes into compliance with the requirements of the
adviser self-custody rule with respect to such distributed crypto
asset; or (ii) places and maintains the distributed crypto asset at a
permitted custodian (``adviser airdrop provision'').\164\
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\164\ See proposed rule 223-1(b)(11); proposed rule 223-1(d)(7)
(defining ``distributed crypto asset'' as a crypto asset received as
a distribution for no or nominal consideration in connection, or as
a result of activity associated, with a client's crypto asset in the
adviser's custody).
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For clients that are regulated funds, we are also proposing a
parallel provision under the Investment Company Act that, consistent
with the proposed amendments to the Advisers Act custody rule, would
deem the receipt of distributed crypto assets to not be in violation of
section 17(f) of the Investment Company Act and the rules thereunder,
provided that, as soon as reasonably practicable, the regulated fund
places and maintains the distributed crypto asset with (i) an
investment adviser to the regulated fund in compliance with proposed
rule 17f-9(b); or (ii) a permitted custodian in compliance with section
17(f) of the Investment Company Act or the rules thereunder (``fund
airdrop provision,'' and together with ``adviser airdrop provision,''
``airdrop provisions'').\165\ The proposed fund airdrop provision, part
of the fund self-custody rule, would apply to all regulated funds and
would provide that a ``distributed crypto asset'' has the same meaning
as in the proposed adviser airdrop provision.\166\
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\165\ See rule 17f-9(c); see also infra section II.B for a
discussion of the proposed regulated fund self-custody rule.
\166\ See rule 17f-9(d).
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In some circumstances, a crypto asset may be broadly distributed,
or ``airdropped,'' to a large number of crypto wallet addresses in
exchange for no or nominal consideration.\167\ For example, an issuer
of a crypto asset may, usually in the early stages of development of a
crypto system, effectuate an airdrop by transferring its crypto asset
to specific cryptographic wallets or other addresses.\168\ An issuer of
a crypto asset may airdrop crypto assets to recipients that it chooses
for a variety of reasons. For example, crypto assets may be airdropped
to cryptographic wallets holding another specified crypto asset, with
or without minimum ownership thresholds of that other crypto asset, or
to selected users of a crypto system for meeting specific criteria,
such as holding a minimum amount of the crypto asset or based on their
prior or current level of activity with the associated crypto
system.\169\ An adviser that has self-custody of a crypto asset could
receive a separate, new crypto asset in an airdrop by virtue of holding
the first crypto asset on behalf of a client. Advisers may also receive
new crypto assets through an airdrop as reward distributions on the
crypto network in connection with staking or trading a client's crypto
asset on that network.\170\ Airdrops may facilitate the implementation
of a client's investment objectives because the airdropped crypto asset
may allow an adviser to generate returns for the client, for example by
selling the airdropped crypto asset to generate returns for a profit.
---------------------------------------------------------------------------
\167\ See Commission Security Status Interpretation, supra
footnote 24, at section VII.A.
\168\ Id. (stating that airdrops may be used for a variety of
reasons, ``such as to generate interest in and expand ownership and
use of . . . crypto assets, reward early users or loyalty of users
of a crypto system, promote a software application, build a
community, decentralize governance authority with respect to an
open-source crypto system, or award high-scoring players of an
associated video game'').
\169\ Id.
\170\ See, e.g., Kraken, What is a crypto airdrop? (June 11,
2025), available at https://www.kraken.com/learn/what-are-crypto-
airdrops#:~:text=In%20crypto%2C%20an%20airdrop%20refers,for%20being%2
0a%20loyal%20client; Coinbase, Earning Through Crypto Airdrops
(2025), available at <a href="https://www.coinbase.com/learn/crypto-basics/what-is-a-crypto-airdrop">https://www.coinbase.com/learn/crypto-basics/what-is-a-crypto-airdrop</a>.
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An adviser holding a client's crypto asset at a qualified custodian
or in self-custody under the proposed adviser self-custody rule may
receive a new crypto asset through an airdrop with little or no advance
notice. Likewise, a regulated fund holding a crypto asset in self-
custody through its investment adviser, may also unexpectedly receive a
new crypto asset through an airdrop. In some cases, a permitted
custodian may not immediately offer custodial services for the
airdropped crypto asset, and immediate compliance with the proposed
adviser and fund self-custody rules' requirements with respect to an
airdropped crypto asset received with little or no advance notice would
not be possible. For example, an adviser may receive a new crypto asset
through an airdrop in connection with a crypto asset held in self-
custody before the adviser has had an opportunity to assess whether an
appropriate qualified custodian is available to maintain the airdropped
crypto asset and to determine whether holding such crypto asset in
self-custody would be compliant with the adviser self-custody
rule.\171\ A crypto asset may also be airdropped into a wallet held for
a regulated fund with no advance notice and before the regulated fund's
board makes the requisite determinations under the proposed fund self-
custody rule regarding the availability of a permitted custodian to
hold the airdropped crypto asset and the adviser's self-custody
arrangement for the asset.\172\
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\171\ See proposed rule 223-1(b)(7)(i); infra section II.A.2 for
a detailed discussion of the proposed qualified custodian
determination requirement.
\172\ See proposed rule 17f-9(b).
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As the proposed adviser self-custody rule requires an adviser to
have the relevant expertise and safeguarding systems particularized to
each crypto asset in self-custody, an adviser may also need time to
evaluate whether its existing expertise and systems in place are
appropriate to self-custody the airdropped crypto asset, and if
necessary, time to develop and onboard the relevant expertise and
systems to safeguard the airdropped crypto asset.\173\
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\173\ See proposed rule 223-1(b)(7)(ii); infra section II.A.3
for a detailed discussion of the proposed safeguarding expertise and
systems requirement.
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Accordingly, in these circumstances, the proposed adviser airdrop
provision on distributed crypto assets would provide that the receipt
of a distributed crypto asset would not be in violation of the Advisers
Act custody rule provided that, as soon as reasonably practicable, the
adviser complies fully with the requirements of the proposed self-
custody rule with respect to such distributed crypto asset, or,
alternatively, places and maintains the distributed crypto asset with a
qualified custodian, if available. We are also proposing the fund
airdrop provision for regulated funds for the same reasons discussed
above. A regulated fund, like any other client of an adviser, may
receive a new crypto asset through an airdrop with little or no advance
notice and face the same custodial challenges discussed above.
The proposed airdrop provisions are intended to provide an adviser
and a regulated fund a grace period to comply
[[Page 63890]]
with the Advisers Act and the Investment Company Act custody rules, as
applicable, upon an unexpected receipt of an airdropped crypto asset
with little or no advance notice. Both airdrop provisions do not
specify the time period by which the adviser or the regulated fund must
come into compliance with the applicable custody rules, because the
amount of time needed depends on the facts and circumstances.
Accordingly, under the proposed airdrop provisions, the adviser or a
regulated fund, as applicable, must, as soon as reasonably practicable,
either comply with the applicable self-custody rules if the adviser
will hold the crypto asset in self-custody, or otherwise place and
maintain the distributed crypto asset with a permitted custodian.
An adviser that seeks to self-custody a distributed crypto asset in
reliance on the proposed adviser airdrop provision would need to build
or adapt as necessary and as quickly as its systems and resources
practicably allow its safeguarding systems and self-custody controls to
accommodate the airdropped crypto asset. Consequently, we expect that
an adviser that self-custodies the distributed crypto asset in reliance
on the proposed adviser airdrop provision would be able to satisfy, and
should come into compliance with, certain provisions of the proposed
adviser self-custody rule more quickly than others, for instance, the
self-custody account statement and the financial asset election
requirements discussed later in this proposal.\174\
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\174\ See proposed rule 223-1(b)(vi); proposed rule 223-
1(b)(7)(viii).
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We request comment on all aspects of the proposed airdrop
provisions:
28. Are there any circumstances where an adviser would receive
distributed crypto assets in connection with its advisory services but
of a different kind from the crypto assets already in the adviser's
self-custody or maintained at a qualified custodian? How much advance
notice, if any, would an adviser typically have of an upcoming airdrop?
If the adviser receives an airdrop in connection with a crypto asset
held in custody for a client, whether in the adviser's self-custody or
maintained at a qualified custodian, to what extent would the custodial
infrastructure developed in connection with the client's initial crypto
asset be expected to apply to the airdropped crypto asset? To what
extent would a qualified custodian be able to accommodate, or an
adviser be able to adapt its self-custody infrastructure in order to
hold, an airdropped crypto asset in full compliance with the Advisers
Act custody rule upon receipt of the airdropped crypto asset?
29. Do advisers enter into written agreements with clients that
include provisions relating to the custody treatment of distributed
crypto assets? What do custodial agreements typically provide for with
respect to the custody treatment of distributed crypto assets?
30. Should the airdrop provisions impose an outer limit of the time
period within which an adviser and a regulated fund must come into full
compliance with the Advisers Act and Investment Company Act custody
rules, as applicable, with respect to an airdropped crypto asset, and
if so, what should that time period be (e.g., no later than 30 business
days, 60 days, or 90 days, after receipt of the airdrop), and why? In
the case of airdropped crypto assets received for the account of a
regulated fund, should the time period within which the regulated
fund's board must make the requisite determination pursuant to rule
17f-9 be more specific (for example, within 2 months of receiving the
airdropped crypto asset or by the next regularly scheduled board
meeting)?
31. When an adviser receives a distributed crypto asset in
connection with its advisory services relating to crypto assets in its
self-custody, how does the adviser ensure that the distributed crypto
asset is correctly allocated to the relevant client? Does the adviser
receive the distributed crypto asset in the wallet that holds the key
materials to the crypto asset self-custodied for the corresponding
client? Are there any circumstances where the distributed crypto asset
is distributed into an adviser's proprietary wallet, or the wallet of
another client? Would the proposed segregation requirement under the
adviser self-custody rule as discussed later in this proposal help
ensure that distributed crypto assets are correctly allocated to the
relevant parties? Are there any circumstances where an adviser treats a
distributed crypto asset received in connection with its advisory
services as belonging to the adviser, as opposed to the client, and if
so, what are those circumstances? Should any amendments to the Advisers
Act custody rule address the allocation of distributed crypto assets
received in connection with the adviser's custody of client crypto
assets?
32. Are there any limited exigent circumstances where an adviser or
a regulated fund could unexpectedly receive a crypto asset, other than
an airdropped crypto asset, in connection with the adviser's advisory
services provided to a client including a regulated fund? If so, what
are those circumstances? For example, if the permitted custodian
holding a client's crypto asset suddenly becomes unavailable to hold
the crypto asset, should the adviser be required to comply immediately
with the proposed self-custody rules or otherwise cease to hold the
crypto asset? Should the airdrop provisions be expanded to more
generally cover such crypto assets received in these or other limited
exigent circumstances?
33. The proposed fund airdrop provision would largely mirror the
conditions set forth in the proposed adviser airdrop provision. We
request comment on all of the matters discussed in the above requests
for comment as applied to the proposed fund airdrop provision for
regulated funds. Is there a reason to address the receipt of
distributed crypto assets differently for regulated funds as compared
to other kinds of advisory clients?
34. Is the scope of the proposed fund airdrop provision under the
Investment Company Act for regulated funds, i.e., registered management
investment companies and business development companies, appropriate?
Do UITs, which hold an unmanaged portfolio, receive airdrops such that
the fund airdrop provision under the Investment Company Act should
include UITs in addition to registered management investment companies?
2. Qualified Custodian Determination
The proposed adviser self-custody rule would require an adviser to
make a determination in writing, prior to taking self-custody of each
crypto asset and no less frequently than quarterly thereafter, that the
adviser has a reasonable basis, after due inquiry, for believing that
no qualified custodian will maintain the crypto asset (a ``QC
determination'').\175\ This QC determination would be a prerequisite to
an adviser taking self-custody of a client's crypto asset. For accounts
of regulated funds, advisers would be required to make this
determination as to the availability of custodians authorized to serve
as a custodian for the regulated fund under the Investment Company Act
and applicable rules thereunder.\176\ This is because an
[[Page 63891]]
adviser assessing the availability of, and services provided by,
custodians for a regulated fund would have to assess the types of
custodians permitted to serve as the regulated fund's custodian. If the
adviser determines that a qualified custodian has become available to
maintain the client's crypto asset, the adviser must place such crypto
asset with the qualified custodian as soon as reasonably practicable.
---------------------------------------------------------------------------
\175\ See proposed rule 223-1(b)(7)(i). We are also proposing an
amendment to Advisers Act rule 204-2 to include the adviser's
written QC determination as a required record. See proposed rule
204-2(a)(26)(i) and infra section II.H.1 for a detailed discussion
of the proposed amendments to rule 204-2.
\176\ See proposed rule 223-1(b)(7)(i) (stating that for
purposes of any of any qualified custodian determination made with
respect to the account of a regulated fund, qualified custodian
shall be understood to refer to a bank or other person authorized to
hold assets for the regulated fund under section 17(f) of the
Investment Company Act or the rules thereunder). Commission staff
issued no-action letters stating that the staff would not recommend
enforcement actions if certain entities custodied assets for
regulated funds subject to certain conditions, and this proposal
would not withdraw those letters. See, e.g., Franklin Templeton
Investments, SEC Staff No-Act. Letter (pub. avail. June 19, 2009),
available at <a href="https://www.sec.gov/divisions/investment/noaction/2009/franklintempleton061909.htm">https://www.sec.gov/divisions/investment/noaction/2009/franklintempleton061909.htm</a>; The Brink's Company, SEC Staff No-Act.
Letter (pub. avail. Feb. 11, 2014), available at <a href="https://www.sec.gov/divisions/investment/noaction/2014/brinks-021114-17f1.htm">https://www.sec.gov/divisions/investment/noaction/2014/brinks-021114-17f1.htm</a>; Depository Trust Company of Delaware, LLC dba Delaware
Depository, SEC Staff No-Act. Letter (pub. Avail. Sept. 12, 2026),
available at <a href="https://www.sec.gov/divisions/investment/noaction/2016/depository-trust-company-of-delaware-091216.html">https://www.sec.gov/divisions/investment/noaction/2016/depository-trust-company-of-delaware-091216.html</a>; See also infra
section II.K for discussion and requests for comment on status of
certain no-action letters in connection with this proposal.
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The proposed QC determination requirement is meant to mitigate
custodial compliance challenges for certain crypto assets that advisers
may face today.\177\ While maintaining client crypto assets at a
qualified custodian would decrease the risk of misappropriation of
those assets by the adviser as compared to holding crypto assets in the
adviser's self-custody, there may be limited availability of
traditional custodians offering custodial services for certain types of
crypto assets of interest to investors.\178\ For example, an adviser
may struggle to find a qualified custodian for a particular type of
crypto asset, such as a nascent crypto asset, because no qualified
custodian has yet developed the requisite technological sophistication
or procedural safeguards to hold that crypto asset while an adviser,
for example, that had conducted extensive due diligence of the nascent
crypto asset and its associated crypto network in its early-stage
development, may have already developed the expertise to well-position
itself as a potential custodian of that crypto asset.\179\ The QC
determination requirement is thus designed to allow adviser self-
custody of client crypto assets only when, as a threshold matter, there
is a need for an alternative to a qualified custodian. This approach is
also consistent with the approach suggested in many of the Crypto Task
Force comment letters that advocated for a crypto self-custody
solution.\180\
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\177\ See supra section I.A.2 for a more detailed discussion of
challenges of custodial compliance for crypto assets.
\178\ See supra section I.A for a detailed discussion of the
view the Commission has historically taken about maintaining client
assets with only certain types of entities. See also 2009 Adopting
Release, supra footnote 7, at section II.C for a discussion of the
rationale for prophylactic safeguards under the custody rule applied
to advisers and their related persons holding client assets in
custody rather than keeping them at an independent custodian.
\179\ See Unit 410 Comment Letter (stating that nascent and
novel crypto networks heighten the challenges of supporting early-
stage digital assets).
\180\ See, e.g., Comment Letter to Crypto Task Force of
Andreessen Horowitz (Apr. 9, 2025) (``A16z Comment Letter II'')
(supporting a self-custody solution where a qualified custodian is
not readily available); Dechert Comment Letter (stating that an
adviser should be required to determine that no qualified custodian
can provide the full scope of services required to custody a crypto
asset prior to such adviser holding the crypto asset in self-
custody, among other conditions).
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The proposed adviser self-custody rule would require an adviser to
make the QC determination, in writing, prior to taking self-custody of
each crypto asset.\181\ This means that an adviser would need to make a
QC determination individualized to each crypto asset; an adviser would
not be allowed to make a blanket QC determination covering all types of
crypto assets. This is because the custodial capabilities and
availability of qualified custodians may differ depending on the
particular crypto asset in question, and the individualized
determination would enable advisers to conduct the requisite due
inquiry to form its reasonable basis for believing that an appropriate
qualified custodian is not available with respect to each crypto asset.
---------------------------------------------------------------------------
\181\ See proposed rule 223-1(b)(7)(i).
---------------------------------------------------------------------------
We do not intend for the proposed adviser self-custody rule to
require an adviser to conduct boundless analysis or the identification
of every possible custodian to confirm no qualified custodian exists to
hold the crypto asset. Rather, the proposed adviser self-custody rule
would require an adviser to form a reasonable basis, upon due inquiry,
for believing that no qualified custodian will maintain a crypto asset.
We anticipate that the adviser's reasonable basis for its QC
determination would be formed by due inquiry of material facts
concerning, among other things, each individual crypto asset and its
characteristics; the custodial marketplace for the crypto asset; and
whether custodians generally known in the custodial marketplace provide
custodial services for a crypto asset in question. For example, an
adviser could form its QC determination if reasonable due diligence of
generally known custodians in the crypto custody market reveal that
those custodians have not developed the infrastructure to support
custody of a particular crypto asset. The proposed adviser self-custody
rule would not permit the adviser to make the QC determination based on
the costs associated with engaging a qualified custodian. The cost of
utilizing a custodian is not relevant to whether a custodian has the
appropriate capabilities to custody and safeguard client assets against
loss, theft, misuse and misappropriation, and therefore does not serve
the custody rule's policy objective of protecting investors and their
assets from harm.
The proposed adviser self-custody rule would also require an
adviser to reassess the QC determination, in writing, no less
frequently than quarterly after taking self-custody of each crypto
asset.\182\ This quarterly reassessment is designed to permit an
adviser to continue holding clients' crypto assets in self-custody only
if the adviser has a reasonable basis to believe, after due inquiry,
that no qualified custodian will maintain the crypto asset. As the
custodial market for crypto assets continues to evolve with an
increasing number of sophisticated entrants, including traditional
asset custodians potentially developing the technology to effectively
custody crypto assets, and custodians expanding the types of crypto
assets they custody, the quarterly reassessment of the QC determination
would enable advisers to consider whether more suitable custodial
options have emerged following their prior QC determination and to
timely place client crypto assets with a qualified custodian that has
become available. For example, whereas an adviser may have initially
faced challenges finding a qualified custodian to maintain a crypto
asset (e.g., a nascent crypto asset), with time, qualified custodians
in many cases will emerge. In those circumstances, placing the crypto
assets with a third-party qualified custodian that is customarily
engaged in the business of custody would reduce the risk of advisers
misplacing or misappropriating client crypto assets.\183\
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\182\ See proposed rule 223-1(b)(7)(i).
\183\ See supra section I.A for a detailed discussion of the
view the Commission has historically taken with respect to
maintaining client assets with only certain types of entities.
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The proposed adviser self-custody rule would require the adviser to
conduct this quarterly reassessment of its QC determinations only with
respect to the crypto assets still held in the adviser's self-custody
at the time of the
[[Page 63892]]
reassessment.\184\ Moreover, in the event an adviser has taken self-
custody of different crypto assets at different points in time over the
course of the quarter, it is our view that an adviser would be
permitted to conduct this quarterly reassessment for all the different
crypto assets in its self-custody at the same time, as long as the
adviser conducts the review for each crypto asset no more than a
quarter after the adviser has taken self-custody of it.
---------------------------------------------------------------------------
\184\ See proposed rule 223-1(b)(7)(i) (stating that the
quarterly reassessment of the QC determination must be done ``with
respect to crypto assets in [the adviser's] self-custody'').
---------------------------------------------------------------------------
Under the proposed requirement, an adviser that determines a
qualified custodian has become available to maintain a client's crypto
asset would be required to place such crypto asset with the qualified
custodian as soon as reasonably practicable. This obligation would
arise when an adviser discovers a newly available qualified custodian
from its quarterly reassessment of its QC determination as well as when
the adviser becomes aware of an available qualified custodian between
quarterly reassessments. The proposed requirement is designed to
provide an adviser a grace period to move the crypto asset from its
self-custody to an available qualified custodian and does not specify
the time period by which the crypto asset must be moved in order to
provide an adviser flexibility to transfer the crypto asset as quickly
as its systems and resources practicably allow.
We request comment on the proposed QC determination requirement:
35. Is the QC determination requirement, as proposed, appropriate
and necessary to protect investors and to further the policy goals of
the custody rule with respect to crypto assets? Why or why not?
Alternatively, should the adviser be able to self-custody crypto assets
without making the QC determination, as long as the adviser determines
that holding the client's crypto asset in self-custody is consistent
with its fiduciary duty? Why or why not?
36. The proposed adviser self-custody rule would require the
adviser to determine in writing that it has a reasonable basis, after
due inquiry, for believing that no qualified custodian will maintain
the crypto asset. Are there concerns that the ``reasonable basis''
standard in the proposed QC determination requirement would enable
advisers to avoid using a qualified custodian, even where qualified
custodians are generally available to custody a particular crypto
asset? Should the Commission instead apply a different standard to the
adviser's QC determination? If so, what alternative approaches to the
QC determination would be necessary and appropriate to protect clients
and to further the policy goals of the custody rule?
37. As an alternative, or in addition, to the proposed QC
determination requirement, should an adviser that seeks to self-custody
crypto assets be required to provide custodial services at the same
level of quality as those typically provided by a qualified custodian
for crypto assets or, alternatively, as those provided by a similarly
situated qualified custodian? What should be the criteria or standard
to determine which qualified custodian is appropriate as a benchmark
for the quality of an adviser's self-custody services? Alternatively,
should the adviser self-custody rule require an adviser to provide
custodial services in accordance with r
[…truncated; see source link]Indexed from Federal Register on October 6, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.