Key Takeaways

• On Oct. 1, 2026, the U.S. Securities and Exchange Commission (“SEC”) proposed new rules under the Investment Company Act of 1940 (“Investment Company Act”) and amendments to the custody rule under the Investment Advisers Act of 1940 (“Advisers Act”) that would establish a framework governing how SEC-registered investment advisers and regulated funds may custody digital assets (the “Proposal”).[1]
• For the first time, advisers and funds would have two custody options that do not exist today: holding digital assets themselves, and placing them with a state-chartered trust company. Each would be available only on conditions the Commission has yet to settle, so neither should be treated as a reliable planning assumption while the Proposal remains pending.[2]
• The set of rule proposals are designed in part to alleviate a friction point in the growth of digital assets by seeking to eliminate or reduce uncertainty around custody issues that are seen as obstacles to wider acceptance by registered investment advisers and registered investment companies.
• The Proposal is not limited to digital assets. It would rewrite and relocate the existing custody rule and add reporting and disclosure obligations across Form ADV, Form ADV-E, and Form N-CEN, including questions on tokenized private fund interests and tokenized fund shares. Advisers and funds with no digital asset exposure should still expect compliance work.[3]
• The Proposal also addresses accountant and auditor requirements, decentralized finance considerations, and digital asset trading within the custody framework.[4]
• Comments are due 60 days after publication of the proposing release in the Federal Register.[5]
• SEC Chairman Paul S. Atkins presented the Proposal as part of a broader SEC digital asset agenda that includes no-action relief for a DTC securities tokenization pilot, Regulation Crypto Assets, and a proposed innovation exemption for the trading of tokenized NMS stock. [6]

Background: The Custody Gap

For years, a persistent barrier to institutional adoption of digital assets has been custody, or, more precisely, the absence of regulatory clarity around it. The existing Advisers Act custody rule requires SEC-registered investment advisers to maintain client funds and securities with a “qualified custodian,” a category that has included banks, registered broker-dealers, registered futures commission merchants, and certain foreign financial institutions.[7] Digital assets, segments of the industry have argued, fit poorly within that framework. Traditional qualified custodians often lacked the infrastructure to manage private keys and on-chain settlement, while technology-oriented “custodians” native to the digital asset market frequently lacked the regulatory status needed to qualify. Advisers therefore often could not identify a custodian that satisfied the rule, and digital asset custodians seeking to serve advisers could not readily obtain that status.

The prior SEC administration addressed this gap principally through enforcement actions and staff statements. The SEC’s 2023 proposed amendments to the Custody Rule, which were never adopted, would have expanded the rule’s scope to cover all client assets rather than only funds and securities, while imposing a heightened safeguarding standard.[8] The Commission formally withdrew that proposal effective June 17, 2025.[9]

Chairman Paul Atkins’s SEC has taken a different approach. Announcing the Proposal, Chairman Atkins said it would “provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before.”[10] Commissioner Hester Peirce, writing separately, described advisers as having operated without clear rules on how and where digital assets could be custodied and often without viable qualified custodians.[11]

The Proposal does not stand alone. It is one component of a coordinated SEC agenda that also includes staff guidance on digital asset securities and the Commission’s interpretive statements on digital assets and investment contracts.[12] Advisers and funds should evaluate the Proposal together with these parallel initiatives, because the final rules are likely to interact.

What the Proposal Does

The Proposal would create two custody pathways that do not exist under the current rule, and it would preserve the existing categories of qualified custodian.

Self-custody by advisers and regulated funds. The Proposal would permit SEC-registered investment advisers and regulated funds, meaning registered investment companies and business development companies, to self-custody digital assets in certain circumstances and subject to certain conditions.[13] An adviser or fund with adequate technological infrastructure, internal controls, and governance procedures could hold digital assets directly, including by managing private keys, without a third-party custodian. That departs from the current rule, which requires client funds and securities to be maintained with an independent qualified custodian.[14]

Custody with state trust companies. The Proposal would also permit advisers and regulated funds to maintain client and regulated fund digital assets with a state-chartered trust company, subject to conditions.[15] Several states, including Wyoming, South Dakota, and Nevada, have adopted charters tailored to digital asset custody. Under the current Custody Rule, the status of state trust companies as qualified custodians has been uncertain, particularly for institutions that are not federally regulated depository institutions.[16] The proposed conditions may address supervision, capital, segregation of client assets, and insurance or bonding.

Existing qualified custodian categories. Banks, registered broker-dealers, and other traditional custodians would remain permissible custodians for digital assets to the extent they have the operational capacity to hold them.[17] The Proposal supplements that framework rather than replacing it.

Modernization of Existing Custody Rules

Beyond the new pathways specific to digital assets, the Proposal would modernize the existing custody framework in several respects.

Redesignation of the Advisers Act custody rule. The Proposal would redesignate the current Custody Rule and make conforming amendments to align the rule’s structure with the expanded scope of digital asset custody.[18]

Recordkeeping requirements. Advisers and funds that custody digital assets would be subject to updated recordkeeping obligations, which may cover private-key management documentation, transaction logs, wallet addresses, reconciliation records, and internal control audits by an independent accounting firm and maintenance of records of internal control testing subject to the SEC examination.[19]

Amendments to Form ADV and Form ADV-E. The Proposal includes new disclosure items on Form ADV, the adviser’s registration and disclosure form, and on Form ADV-E, the form used in connection with surprise examinations by independent accountants.[20] Advisers would disclose whether they custody digital assets, how they do so, and what safeguards they maintain.

Amendments to Form N-CEN. For regulated funds, the Proposal would amend Form N-CEN to add questions addressing tokenized private fund interests and tokenized registered investment company shares, which would give the Commission data on the extent to which fund interests are issued or transferred on-chain.[21]

Accountant and Internal Control Requirements

The Proposal also addresses the role of independent accountants. Under the current Custody Rule, an adviser that has custody of client assets is generally subject to an annual surprise examination by an independent public accountant that has to be registered and subject to examination by the Public Company Accounting Oversight Board (“PCAOB”).[22] The Proposal would update that guidance to address the practical difficulties of verifying custody of digital assets and eliminate the requirement that audit firm be subject to PCAOB registration to make it easier for an adviser to have this examination completed.

Those difficulties include verifying control of private keys without compromising security, on-chain reconciliation and proof-of-reserves procedures, evaluating wallet security, key-management protocols, and segregation of client assets, and conducting surprise examinations when assets exist on a distributed ledger rather than in a traditional book-entry system.[23] These requirements will be significant for audit firms still building digital asset verification capabilities.

DeFi, Digital Asset Trading, and Emerging Issues

The Proposal also touches on emerging issues at the intersection of custody and decentralized finance.

DeFi protocol interactions. The Proposal addresses, at least preliminarily, whether and how an adviser’s or fund’s participation in decentralized finance protocols, including staking, lending, and liquidity provision, interacts with custody obligations.[24] Advisers and funds should examine whether the Proposal treats assets deployed to a protocol as remaining in custody or as transferred, and what operational requirements would apply.

Digital asset trading and settlement. The Proposal addresses the treatment of digital asset trading within the custody framework, including how trades settle on-chain and what the custody rule would require during the settlement window.[25]

Tokenized securities and cross-chain custody. As tokenized securities become more common, the Proposal’s treatment of wrapped tokens, cross-chain transfers, and multi-chain custody arrangements will warrant close attention. The scope limitation matters here. The Commission states that “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.”[26] Assets falling outside those categories would remain outside the proposed framework.

Compliance Dates and Transition

The Proposal contemplates a compliance timeline beginning after adoption of a final rule. Given the 60-day comment period and the scope of the Proposal, a final rule is unlikely before mid-2027.[27] The Commission may adopt phased compliance dates, with longer periods for items such as recordkeeping system upgrades and accountant readiness and shorter periods for items such as Form ADV disclosures. Advisers and funds with existing digital asset holdings or custody arrangements should assess current practices against the proposed framework rather than wait for a final rule.

Who Is Affected and How

Advisers and regulated funds. SEC-registered investment advisers should map existing digital asset custody arrangements against the proposed framework, assess the viability of self-custody, evaluate state trust company relationships, update compliance policies and Form ADV disclosures, and prepare for new recordkeeping obligations.[28] Registered investment companies and business development companies should evaluate current fund custody arrangements against the proposed Investment Company Act rules, assess Form N-CEN reporting for tokenized fund interests, and review the related board oversight implications.[29]

Custodians, broker-dealers, and tokenization platforms. Digital asset custodians and state trust companies should determine their eligibility to serve as qualified custodians under the proposed conditions and assess the operational and compliance upgrades eligibility would require. Broker-dealers should analyze how the Proposal intersects with their customer protection rule obligations and whether digital asset custody services present new opportunities.[30] Tokenization platforms and service providers should assess the treatment of tokenized fund shares and on-chain recordkeeping, along with the implications for platform design and compliance architecture.

Accountants and institutional investors. Independent accountants and audit firms should review the accountant guidance in the Proposal and assess their capacity to conduct surprise examinations and audits involving private-key verification and on-chain reconciliation.[31] Institutional investors and fund allocators should consider the Proposal’s effect on diligence of adviser and fund custody practices and whether the new pathways make previously unavailable digital asset strategies accessible.

What You Should Do Now

Advisers and funds should begin with the text of the proposing release once published in the Federal Register and inventory current digital asset custody arrangements against the Proposal’s three categories: a traditional qualified custodian, self-custody, and a state trust company.[32] Firms that use, or are considering, a state trust company should assess whether that institution is likely to satisfy the proposed conditions and what contractual or operational adjustments would be needed.

A gap analysis of Form ADV, Form ADV-E, and Form N-CEN will identify the new disclosure and reporting items the Proposal would require.[33] Firms should also confirm that existing systems capture private-key management records, transaction logs, reconciliation documentation, and internal control testing results, and should engage independent accountants early on the implications for surprise examinations and digital asset control testing.

Firms should calendar the 60-day comment deadline, decide whether to comment individually or through an industry association, and track related SEC initiatives, including Regulation Crypto Assets, the DTC tokenization pilot, and the proposed innovation exemption, because the final custody rules are likely to interact with those workstreams.[34]

Open Questions and Areas to Watch

The Proposal leaves several questions open.

Scope and self-custody conditions. How the Commission defines the digital assets subject to these rules, and whether that definition aligns with its broader statements on digital assets and investment contracts, will determine the Proposal’s practical reach. A related question is whether the operational, technological, and governance conditions for self-custody are achievable for mid-size advisers and smaller funds, or whether they limit self-custody to the largest firms.

State trust company eligibility and state law. Whether the proposed conditions effectively require bank-like supervision, capital, or insurance will determine how many state trust companies can serve as custodians. The federal framework will also overlay state money transmitter, trust company, and digital-asset custody requirements, and the interaction between the two regimes will require analysis.

DeFi, staking, and timing. Whether the Proposal provides meaningful guidance on decentralized finance protocol interactions, staking, and yield-generating activities will matter to advisers that seek to deploy digital assets actively rather than hold them. Because a final rule remains months away, firms must also decide whether to begin implementation now, a judgment that depends on each firm’s competitive position and existing digital asset exposure.

Looking Ahead

The Proposal is a significant development. It is the first time the Commission has proposed an affirmative, rulemaking-based framework for how advisers and funds may hold digital assets in compliance with the federal securities laws.[35] Its willingness to contemplate self-custody and custody with state trust companies reflects an effort to build regulatory infrastructure around current market practice.

The conditions attached to self-custody and state trust company custody, the scope of the recordkeeping and disclosure requirements, and the treatment of decentralized finance and tokenized securities will determine whether the final rule accelerates institutional adoption or restates the status quo in greater detail. The 60-day comment period is the industry’s opportunity to shape those details, and we encourage affected market participants to engage in the rulemaking.

We will continue to monitor the rulemaking and the related SEC initiatives as they progress.

​[1] See Adviser and Regulated Fund Custody Rules; Crypto Custody Rules, Release Nos. IA-7023, IC-36353, File No. S7-2026-35 (proposed Oct. 1, 2026) (“Proposing Release”); Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 to 80b-21; Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 to 80a-64.

[2] See SEC, Fact Sheet: Investment Adviser and Regulated Fund Custody Rules; Crypto Custody Rules (Oct. 1, 2026) (“Fact Sheet”).

[3] See Form ADV, 17 C.F.R. § 279.1; Form ADV-E, 17 C.F.R. § 279.8; Form N-CEN, 17 C.F.R. § 274.101.

[4] See Proposing Release, supra note 1.

[5] See Proposing Release, supra note 1.

[6] See Paul S. Atkins, Statement on Proposal to Address the Custody of Crypto Assets Under the Investment Advisers Act and the Investment Company Act (Oct. 1, 2026) (“Atkins Statement”); Regulation Crypto Assets, Release Nos. 33-11434, 34-106150, File No. S7-2026-27 (proposed Aug. 18, 2026).

[7] See Custody of Funds or Securities of Clients by Investment Advisers, 17 C.F.R. § 275.206(4)-2 (the “Custody Rule”).

[8] See Safeguarding Advisory Client Assets, Release No. IA-6240, 88 Fed. Reg. 14,672 (Mar. 9, 2023).

[9] See Safeguarding Advisory Client Assets, Release Nos. 33-11377, 34-103247, IA-6885, IC-35635 (June 12, 2025) (withdrawing fourteen proposed rules, including the 2023 custody proposal, effective June 17, 2025).

[10]  Atkins Statement, supra note 6.

[11] See Hester M. Peirce, Roller Coaster Ride: Statement on Proposed Adviser and Regulated Fund Custody Rules; Crypto Custody Rules (Oct. 1, 2026) (“Peirce Statement”).

[12]  Regulation Crypto Assets, supra note 6.

[13] See Proposing Release, supra note 1; Fact Sheet, supra note 2.

[14] See 17 C.F.R. § 275.206(4)-2(a)(1).

[15] See Proposing Release, supra note 1.

[16] See 17 C.F.R. § 275.206(4)-2(d)(6) (defining “qualified custodian” as a bank or savings association that has insured deposits that is not currently applicable to a state chartered trust company).

[17] Id.

[18] See Proposing Release, supra note 1.

[19] See 17 C.F.R. § 275.204-2; Proposing Release, supra note 1.

[20] See Form ADV, 17 C.F.R. § 279.1; Form ADV-E, 17 C.F.R. § 279.8.

[21] See Form N-CEN, 17 C.F.R. § 274.101.

[22] See 17 C.F.R. § 275.206(4)-2(a)(4) (surprise examination requirement).

[23] See Proposing Release, supra note 1.

[24] See Proposing Release, supra note 1.

[25] See Proposing Release, supra note 1.

[26] Proposing Release, supra note 1, quoted in Peirce Statement, supra note 11.

[27] See Proposing Release, supra note 1.

[28] See Form ADV, 17 C.F.R. § 279.1; 17 C.F.R. § 275.204-2.

[29] See Form N-CEN, 17 C.F.R. § 274.101.

[30] See 17 C.F.R. § 240.15c3-3 (customer protection rule).

[31] See 17 C.F.R. § 275.206(4)-2(a)(4).

[32] See Proposing Release, supra note 1.

[33] See supra note 3.

[34] See Proposing Release, supra note 1; Regulation Crypto Assets, supra note 6.

[35] See Proposing Release, supra note 1.