SEC Proposes New Custody Rules for Registered Investment Advisers and Regulated Funds Holding Crypto Assets

The US Securities and Exchange Commission (SEC) has proposed new custody rules for registered investment advisers and regulated funds holding crypto assets. The rules would allow advisers to hold certain client crypto directly when no qualified custodian is available, and add state trust companies as qualified custodians. The proposal is not a final rule, but rather an opening of a 60-day public comment period after its publication in the Federal Register. Commissioner Hester Peirce noted that the proposal's use of 'self-custody' might be misleading, as investors would not directly control their own assets. She preferred the term 'shelf-custody' to describe the situation. The SEC aims to update financial statement audit requirements for advisers and broker-dealer custody services for regulated funds, and to allow state-chartered trust companies to hold crypto for advisory clients and regulated funds. However, Peirce acknowledged that few traditional permitted custodians currently offer robust services across a substantial range of crypto assets, which is why state trust companies are being considered as qualified custodians. The proposal would require advisers to have a reasonable basis to believe that the state trust company is authorized by the relevant state banking authority, and to have written policies designed to safeguard the assets. The SEC also proposed changes to the Advisers Act custody rule, excluding authorized discretionary trading from the rule in certain cases, and creating an exception to independent verification for an adviser that has custody only because of a standing letter of authorization.