SEC proposes new crypto custody rules for advisers and funds

The U.S. Securities and Exchange Commission proposed new rules on Oct. 1 that could let investment advisers and regulated funds hold some crypto assets themselves or use state trust companies as custodians. The SEC said the proposal is meant to address limits in existing custody rules and give investors more ways to access crypto-related strategies, according to the SEC announcement.

Which crypto assets would the proposal cover?

The proposal would apply to crypto assets that are funds or securities held for advisory clients, and to securities or similar investments held by regulated funds. It would not create a custody rule for every crypto asset. The SEC’s proposed rule also includes changes to related reporting and recordkeeping requirements.

When could advisers hold crypto themselves?

Advisers could self-custody crypto only if a permitted custodian is unavailable, under the SEC’s proposal. They would need to show they have the expertise and systems to protect assets from loss, theft, misuse or misappropriation, and review those systems each year. Advisers would also need to check whether a permitted custodian is available again every quarter.

For a regulated fund to rely on its adviser’s self-custody, the fund’s board would have to oversee the arrangement and decide that the adviser can safeguard the asset with reasonable care. The proposal also includes cybersecurity controls, internal control reports and quarterly account statements for clients whose crypto the adviser holds.

When would the rules take effect?

They are not in force. The SEC has proposed the changes under the Investment Advisers Act and Investment Company Act, and is seeking public comment for 60 days after the proposal is published in the Federal Register. The SEC has not yet adopted final rules.