SEC Proposes Changes to Custody Rules
In October, the Securities and Exchange Commission (“Commission”) issued a rule proposal titled, “Adviser and Regulated Fund Custody Rules; Crypto Custody Rules” which offers amendments to the custody rules for registered funds. The Commission’s release strives to address two important issues around the custody of assets. First, the proposal outlines a framework to provide a path to allow for the custody of crypto assets. Second, the proposal also seeks to modernize the existing custody rules to better align with current practices. A few of the specific changes include:
- Advisers are permitted to self-custody crypto assets if they have a reasonable basis to believe that no qualified custodian exists. Registered funds and BDCs would also be able to hold crypto assets under this theory but subject to fund board oversight.
- Self-custody by advisers would come with ongoing obligations including the documentation of appropriate safeguarding expertise; maintaining systems; client-by-client segregation; implementation of cybersecurity controls; obtaining an independent internal control report; and conducting annual reviews, among other requirements.
- Permit advisers and regulated funds to maintain client or regulated fund crypto assets with a state trust company, subject to conditions.
In a press release, Commission Chairman Paul Atkins noted “…today’s proposal would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before—and replacing the grey of uncertainty created by custody rules crafted for a bygone era.” The Commission requests stakeholder comments by December 7.
Click here to view the Commission’s proposal on custody.
Click here to view a Commission press release covering the proposal.
Click here to read a client alert from Morgan Lewis covering the proposed changes to the custody rules.