SEC proposes conditional crypto self-custody rules for advisers

The SEC proposed rules on Oct. 1 that would let registered investment advisers hold some client crypto assets themselves, giving firms a route to custody assets when a qualified custodian is unavailable. The proposal is not in force: it would amend rules under the Investment Advisers Act and Investment Company Act, and the SEC says comments will remain open for 60 days after publication in the Federal Register. The SEC’s announcement also says state trust companies could serve as custodians.

What would count as adviser self-custody?

The proposal defines it by control of the keys: an adviser has self-custody if it possesses any portion of the key materials needed to access and transact in a client’s crypto asset. That makes the adviser the custodian for regulatory purposes; it does not mean the client directly controls the asset.

The proposed adviser self-custody rule, Advisers Act rule 223-1(b)(7), would apply only to crypto assets that are funds or securities. For a regulated fund, the relevant scope is crypto assets that are securities or similar investments. The SEC’s proposed rule would also add Investment Company Act rule 17f-9, letting a regulated fund hold crypto through its adviser if the adviser meets the self-custody conditions and the fund’s board oversees the arrangement.

What safeguards would an adviser have to meet?

Before taking custody, and at least quarterly afterward, the adviser would have to determine in writing that no qualified custodian is available for the asset. It would need expertise in safeguarding that asset and systems designed to protect it against loss, theft, misuse and misappropriation.

The proposal specifies minimum system controls: manage private keys, require at least two people to jointly authorize transactions, and keep each client’s assets in network addresses that hold only that client’s crypto. Advisers would also need cybersecurity controls, an annual internal-control report from an independent public accountant, and an annual written review of their safeguarding systems and cybersecurity controls.

How would regulated fund boards oversee custody?

A fund could use its adviser’s self-custody only with board oversight under proposed rule 17f-9. Before custody begins and quarterly afterward, the board would review the adviser’s written finding that no qualified custodian will maintain the asset. Before custody begins and annually afterward, the board would also determine that the arrangement provides reasonable care.

The conditions make this a narrow proposed exception to the qualified-custodian requirement, not a blanket authorization for advisers to hold any crypto. The SEC has opened the proposal for public comment; the final rules and their effective date remain unsettled.