The Long-Awaited Custody Rule Proposal: What a Modernized Rule Could Mean for Crypto, Private Funds, and Investment Advisers
October 6, 2026
What happened?
On October 1, 2026, the SEC proposed new rules and amendments to the Investment Advisers Act and Investment Company Act to provide a custody framework for crypto assets and to modernize the current Custody Rule. Chairman Atkins said the proposal would close the custody gap for crypto assets by providing “a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before.” This long-awaited rule proposal also fits into the commission and executive branch’s policy goal of making the United States the “crypto capital of the world.”
Impact to Crypto
- Self-Custody – The proposal would permit adviser self-custody of covered crypto assets when no permitted custodian is available. Advisers with self-custody would be exempt from the qualified custodian, client notice, and custodian account statement requirements so long as all seven factors within the rule proposal are met, which include cybersecurity controls, annual reviews, quarterly account statements, and documented determinations among other requirements.
- State Trust Company Custody – The proposal would codify recent no-action letter guidance by amendments to both the Investment Advisers Act and the Investment Company Act. To engage a state trust company as custodian, the adviser would be required to have a reasonable basis for believing the company is authorized by the relevant banking authority, maintains written policies and procedures to safeguard crypto assets, delivers to the adviser annual audited financial statements, and also delivers internal control reports for review.
Impact to Private Funds
- Removes PCAOB Registered Accountant Requirement – The proposal would eliminate the requirement for accounting firms performing audits or surprise examinations to be registered with the Public Company Accounting Oversight Board (PCAOB). The accounting firm would still need to be an independent public accountant. The SEC stated that this could reduce costs by increasing the number of potential auditors.
- Stub Year Audits – The proposal would modify current annual audit delivery requirements for private funds created in the last 90 days prior to fiscal year end. An adviser would be permitted to avoid an audit for that “stub” period in the first year provided that (1) unaudited financial statements are delivered within 90 days after that year-end, (2) the following year’s audited financial statements would cover the prior unaudited period.
- Codifies Existing Guidance – The proposal would codify existing guidance on the preparation of audited financial statements in accordance with U.S. GAAP, except where the pooled vehicle is organized under non-U.S. law or has foreign principal places of business for its general partner or other manager. Financial statements for these foreign vehicles would be permitted to be prepared according to accounting principles of another jurisdiction so long as they contain substantially similar information to statements prepared in accordance with U.S. GAAP. The proposal would also codify existing guidance on extended delivery deadlines for audited financial statements of fund of funds and fund of fund of funds to 180 days and 260 days, respectively, after fiscal year end.
Impact to Investment Advisers
If adopted, the proposal would move the Custody Rule from Section 206 of the Investment Advisers Act and redesignate the rule under Section 223 and include a number of modernizations, including:
- SLOAs – Codifies the Standing Letter of Authorization (“SLOA”) no-action letter that exempts advisers with custody solely due to SLOAs from the surprise examinations requirement.
- Inadvertent Custody Exception – Under specified circumstances, the proposal would exempt advisers from the Custody Rule requirements for certain inadvertent custody of client funds and securities.
- Business Development Companies – The proposal would explicitly state that the exception for registered investment companies also includes business development companies that elect to be regulated as investment companies under the Investment Company Act.
The public comment period will be open for 60 days from the publication of the proposal in the Federal Register.
What does this mean for me?
The push for crypto continues. After this year’s SEC and CFTC interpretive guidance on crypto assets and the proposal of Regulation Crypto Assets, we now have a custody rule proposal primarily focused on crypto assets. From the creation of the Crypto Task Force to the nomination of Chairman Atkins, an ally to crypto, the current administration continues to move towards a regulatory framework for this new asset class.
Outside of crypto assets, the modernization of the rule to codify prior guidance will be welcome by those working under those exceptions to the more burdensome requirements of the custody rule.
The proposal is open for public comment. If finalized, firms could take advantage of the new rule’s self-custody provisions for crypto assets on the effective date without waiting any further. If your firm anticipates taking the self-custody route, start working now. You must determine not only that no custodian is available, but you must also satisfy all of the requirements for holding client assets in self-custody.
We will continue to monitor new developments that impact investment advisers and compliance programs. If you have questions, contact us. Fairview is here to help.
