The Proposal also would establish a tailored framework for crypto custody. It would, for the first time, permit registered investment advisers to self-custody certain crypto assets when no qualified custodian is available, codify conditions for state trust company custodians, modernize fund custody rules, and update adviser custody requirements more broadly.² Chairman Atkins characterized the Proposal as providing “a compliant pathway where none existed before—and replacing the grey of uncertainty created by custody rules crafted for a bygone era.”³ The crypto provisions are important, but they appear alongside general changes that are likely to have the widest day-to-day impact on the investment adviser industry—including a new exception for discretionary trading authority, revised audit requirements, and codified exceptions for standing letters of authorization and inadvertent custody.

This client alert first explains the current custody framework, then places the Proposal in the context of the Commission’s recent crypto-related guidance and rulemaking—including the December 2025 broker-dealer custody guidance discussed in our prior client alert⁴—describes the Proposal’s key provisions, and identifies implications for registered investment advisers, private fund managers, regulated funds, and their boards. Particular attention is warranted for the general Advisers Act custody amendments, which may require changes to advisers’ agreements, policies and procedures, audit arrangements, client notices, and regulatory filings even where crypto assets are not involved.

Background: The Current Custody Framework

Advisers Act Custody Rule

Under current rule 206(4)-2 under the Advisers Act (the “Custody Rule”), an investment adviser that has “custody” of client funds or securities must maintain those assets with a “qualified custodian.”⁵ “Custody” is defined broadly to include holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.⁶ Qualified custodians are limited to banks and savings associations, registered broker-dealers, registered futures commission merchants (“FCMs”), and certain foreign financial institutions. The Custody Rule is designed to safeguard client assets from loss, theft, misuse, misappropriation, and adviser financial reverses. Advisers with custody are generally subject to an annual surprise examination by an independent public accountant, unless they qualify for the pooled vehicle audit provision.

Investment Company Act Custody Rules

Regulated funds—including registered investment companies and business development companies (“BDCs”)—are subject to a separate custody framework under Section 17(f) of the Investment Company Act and rules 17f-1 through 17f-7.⁷ Rule 17f-2 permits a regulated fund to self-custody securities, but its conditions were designed for traditional stock certificates, requiring assets to be maintained in a vault or depository at a supervised bank.⁸ These requirements are ill-suited to digital assets maintained on cryptographically secured distributed ledgers.

Why Crypto Assets Strain the Framework

Qualified custodian availability. For many crypto assets—especially nascent or novel digital assets—no qualified custodian may be available or willing to provide custody services. State trust companies have emerged as significant custodians for crypto assets, but they are not enumerated in the Custody Rule’s list of qualified custodians. Whether a state trust company qualifies as a “bank” for purposes of the rule requires a fact-specific analysis of whether a substantial portion of its business consists of fiduciary powers similar to those of national banks.

Immutability and cybersecurity. Crypto transactions are generally immutable once validated on a blockchain, meaning that errors or unauthorized transfers may not be reversible. This characteristic elevates the importance of private key management and cybersecurity controls. Unlike traditional custodial arrangements, where intermediaries can reverse erroneous transactions, crypto custody demands robust preventive controls.

Concentration risk. The limited number of entities able and willing to custody crypto assets creates concentration risk, potentially undermining the diversification principles that inform the existing custody framework. These limitations help explain the Commission’s recent efforts to address crypto custody while also reconsidering the broader Advisers Act custody framework.

Recent Crypto Regulatory Developments

The Proposal is not an isolated initiative. The Commission and its staff have taken several recent steps addressing crypto assets, tokenized securities, market structure, and broker-dealer custody. Four developments are especially relevant to understanding the Proposal and its place in the Commission’s broader regulatory approach.

The Innovation Exemption

On September 17, 2026, the Commission issued an order granting temporary, conditional exemptive relief that permits a qualifying “Tokenized Securities Venue” to trade “Tokenized NMS Stock” through permissioned automated market makers and liquidity pools without being treated as an “exchange” under the Securities Exchange Act of 1934 (the “Exchange Act”) (the “Innovation Exemption”). The order also provides conditional relief from the “dealer” definition for certain liquidity providers that supply Tokenized NMS Stock using proprietary capital and do not hold or custody customer assets.

The relief runs from September 17, 2026 through September 17, 2031 and is subject to conditions including advance public notice, real-time public transaction reporting, symbol and volume caps, equivalent-rights and issuer-objection requirements, and prohibitions on leverage. The Innovation Exemption followed by two days the failure of the Digital Asset Market Clarity Act to advance in the Senate, underscoring the SEC’s willingness to act under existing statutory authority while Congress debates market-structure legislation. It does not provide relief under the Investment Company Act, and broker-dealers that hold Tokenized NMS Stock for customers remain subject to the customer protection rule. For a fuller discussion, see King & Spalding’s prior client alert on the Innovation Exemption.⁹

Regulation Crypto Assets

On August 18, 2026, the Commission proposed “Regulation Crypto Assets,” a tailored Securities Act offering regime for investment contracts involving non-security crypto assets (“covered investment contracts”). The proposal would create a one-time startup exemption for offerings of up to $5 million over a four-year period, a two-tier fundraising exemption for offerings of up to $20 million (Tier 1) or $75 million (Tier 2) in any 12-month period, a non-exclusive investment contract safe harbor, and preemption of state registration and qualification requirements.

For asset managers, the proposed safe harbor addresses only the definitions of “security” under the Securities Act and the Exchange Act; it does not extend to the parallel definitions in the Investment Company Act or the Advisers Act, although the Commission requested comment on that question. Sponsors and investment advisers therefore must continue to analyze investment company status, adviser registration, and custody obligations independently. The comment period on Regulation Crypto Assets closes on October 20, 2026.

SEC Guidance Regarding Crypto Taxonomy: When Is Crypto a Security?

On March 17, 2026, the Commission issued an interpretation addressing when crypto assets and transactions involving crypto assets are subject to the federal securities laws (the “2026 Interpretation”). The 2026 Interpretation establishes five categories of crypto assets—digital commodities, digital collectibles, digital tools, stablecoins, and digital securities—and identifies only digital securities as inherently securities. Payment stablecoins issued under the GENIUS Act are excluded from the securities definition, while other stablecoins may or may not be securities depending on the facts and circumstances.

The 2026 Interpretation also explains when a non-security crypto asset becomes subject to an investment contract and when the asset separates from that investment contract. It expressly supersedes the SEC staff’s 2019 “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The threshold question for any adviser or fund holding crypto assets will therefore remain whether a given asset is a security under the 2026 Interpretation. The proposed custody amendments apply only to crypto assets that are “funds or securities” (or, for regulated fund accounts, “securities or similar investments”).

SEC Staff Guidance Regarding Broker-Dealer Possession and Control of Crypto Assets

On December 17, 2025, the staff of the SEC’s Division of Trading and Markets published a statement describing how it applies the possession and control requirements of Exchange Act Rule 15c3-3 (the “Customer Protection Rule”) to crypto asset securities (the “2025 BD Custody Statement”). The staff stated that it would not object if a broker-dealer deemed itself to have “physical possession” of a crypto asset security, provided that the broker-dealer implements controls addressing access to and the ability to transfer the asset on its distributed ledger, assessment of the relevant distributed ledger technology and network, protection of private keys, and contingency planning for events such as forks, airdrops, and insolvency.¹⁰

The 2025 BD Custody Statement replaced the more restrictive special purpose broker-dealer framework established in December 2020.¹¹ The growth of broker-dealer crypto custody may affect whether a qualified custodian is “available” for a particular crypto asset, a threshold condition for adviser self-custody under the Proposal. The Proposal also draws expressly on the statement’s network-assessment factors as a model for the safeguarding expertise required for adviser self-custody.

Other recent developments also inform the Proposal. In 2023, the Commission proposed the Safeguarding Advisory Client Assets rule, which would have broadened the Custody Rule’s scope; that proposal was withdrawn on June 12, 2025.¹² In January 2025, the SEC rescinded Staff Accounting Bulletin No. 121 through SAB 122,¹³ and the Office of the Comptroller of the Currency issued Interpretive Letters 1183 and 1184, providing further guidance relevant to bank custody of digital assets.¹⁴ On September 30, 2025, the staff issued the 2025 State Trust Company NAL, providing a non-binding pathway for advisers to use qualifying state trust companies as qualified custodians.¹⁵ The SEC’s Crypto Task Force, formed in January 2025, held a “Know Your Custodian” roundtable on April 25, 2025, which informed the Proposal.¹⁶¹⁷

Overview of the Proposal

Four Pillars of the Proposal

The Proposal is organized around four principal components:

Adviser self-custody (proposed rule 223-1(b)(7)). Establishes conditions under which a registered investment adviser may self-custody client crypto assets when no qualified custodian is available.¹⁸

State trust company custody (proposed rules 223-1(d)(13)(v) and 17f-8). Codifies conditions under which a state trust company may serve as a qualified custodian for crypto assets.¹⁹

Fund custody modernization. Amends rules 17f-1 through 17f-7 to update regulated fund custody provisions, including permitting all registered broker-dealers (not just exchange members) to serve as fund custodians.²⁰

Adviser custody modernization. Redesignates the Custody Rule as new rule 223-1 and introduces a range of updates, including a discretionary trading authority exception, elimination of the PCAOB registration/inspection requirement for accountants, and modernized audit provisions.²¹

Forms and Accounting Guidance

The Proposal includes new Form ADV Item 9.F disclosures (regarding self-custody, approximate values, crypto asset addresses, internal control reports, and quarterly statements), Form N-CEN reporting requirements for regulated funds, conforming amendments to Form ADV-E, and expected revisions to the 2009 Guidance for Accountants regarding material discrepancy definitions, IT control objectives, and crypto-specific control objectives (including private key lifecycle safeguarding, on-chain event monitoring, and reconciliation to crypto networks).²²²³

Key Proposed Requirements

Qualified Custodian Standards

QC determination. Before taking self-custody of any crypto asset, an adviser must determine in writing, and reaffirm at least quarterly, that it has a reasonable basis, after due inquiry, to conclude that no qualified custodian will maintain custody of the asset.²⁴ For regulated funds, the determination must establish that no custodian meeting the requirements of Section 17(f) of the Investment Company Act is available. Once a qualified custodian becomes available, the adviser must move the crypto asset to the qualified custodian as soon as reasonably practicable.

State trust company conditions. Under the Proposal, an adviser or regulated fund may treat a state trust company as a qualified custodian if, before engagement and annually thereafter, the adviser determines in writing that the state trust company: (1) is authorized by the relevant state banking authority to provide crypto asset custody; (2) maintains and implements written policies and procedures reasonably designed to safeguard crypto assets and related cash, addressing at minimum private key management and cybersecurity; and (3) provides audited annual financial statements (U.S. GAAP, audited by an independent public accountant) and a current internal control report with an opinion.²⁵ All client or fund crypto assets must be segregated from the state trust company’s proprietary assets. For regulated funds, a custodial services agreement providing for segregation is required. The Release estimates one-time costs of approximately $30,460 and recurring annual costs of approximately $10,153 for state trust company determinations.²⁶ The Release also requests comment on whether SEC staff should delay rescinding the 2025 State Trust Company NAL.

Segregation and Safekeeping

The Proposal imposes detailed safekeeping requirements on advisers that self-custody crypto assets. The adviser must document in writing its expertise for safeguarding each crypto asset and maintain systems (technology, software, and hardware) that satisfy, at minimum, the following:

Key management. Access to key materials must be limited to supervised persons designated by the adviser (for regulated funds, designated by board resolution). The adviser must have exclusive possession of key materials and may not share key materials with the client.²⁷

Joint authorization. All crypto asset transfers must require joint authorization by two or more designated persons, at least one of whom must be a management person (for regulated funds, a fund officer).²⁸

Address segregation. Each client’s crypto assets must be held in one or more crypto asset addresses that store only that client’s assets.²⁹ The Release discusses cold, hot, and warm wallets; multi-party computation (“MPC”); multi-signature arrangements; whitelisting; hardware security modules (“HSMs”); and air-gapping, though none of these specific technologies is mandated.

Cybersecurity. The adviser must conduct at least annual written risk assessments; implement measures to detect, mitigate, and remediate cybersecurity threats; and maintain an incident response and recovery plan.³⁰

Financial asset election. The adviser and client must agree in writing to treat each crypto asset held in self-custody as a “financial asset” and the adviser as a “securities intermediary” under applicable state UCC Article 8.³¹ This election is designed to provide clarity regarding the client’s rights in insolvency.

State trust company segregation. Where a state trust company serves as custodian, all client and fund crypto assets must be segregated from the state trust company’s proprietary assets.

Recordkeeping, Reporting, and Disclosure

The Proposal adds new recordkeeping requirements under rules 204-2(a)(26) and (27) for advisers and rules 31a-2(a)(9) and (10) for regulated funds.³²

Self-custody records (rule 204-2(a)(26)). Advisers that self-custody crypto assets must maintain: the QC determination memorandum; safeguarding expertise documentation; records of designated persons; annual reviews; internal control reports; account statements; financial asset elections; and records sufficient to reconstruct positions, including client name, account number, crypto asset address, amount, destination, authorization, and metadata.

State trust company records (rule 204-2(a)(27)). Advisers relying on a state trust company must maintain the determination memorandum, audited financial statements, and internal control reports.

On-chain records. Records may be maintained on a crypto network, provided they can be produced promptly to the SEC in a human-readable, reasonably usable electronic format.³³

Form ADV Item 9.F. The Proposal would add a new Item 9.F to Form ADV requiring advisers to disclose whether they self-custody crypto assets, the approximate U.S. dollar amount, the number of clients and crypto asset addresses, whether an internal control report has been obtained (and the identity of the accountant), whether quarterly statements are provided, and whether pooled vehicle audits are conducted.³⁴

Form N-CEN. Regulated funds would report self-custody arrangements, state trust company use, and tokenized fund status.³⁵

Quarterly account statements. Advisers self-custodying crypto assets must deliver quarterly statements to clients identifying each crypto asset address and network, period-end amounts, all transactions during the period, and a legend urging the client to compare the statement to on-chain records. Alternatively, the adviser may transmit the statement electronically in a human-readable format with notice of the relevant address. Exceptions apply for audited pooled vehicles and regulated funds.³⁶

Internal Control Reports, Surprise Examinations, and Independent Verification

An adviser that self-custodies crypto assets must obtain an internal control report from an independent public accountant within six months of taking self-custody and at least once each calendar year thereafter.³⁷ The accountant must opine on whether the adviser’s controls are suitably designed, implemented, and operating effectively, and must verify that the crypto assets are reconciled to the crypto network. Additionally, the adviser must conduct an annual written review of its safeguarding systems and cybersecurity controls (which may be part of the rule 206(4)-7 compliance program annual review).

Advisers with self-custody remain subject to annual surprise examinations by an independent public accountant, unless the pooled vehicle audit provision applies.³⁸

Regulated Fund Board Oversight

Under proposed rule 17f-9, a regulated fund may hold crypto assets through its adviser’s self-custody arrangement, subject to board oversight.³⁹ The fund’s board of directors (including a majority of independent directors) must: (i) review the adviser’s QC determination report before the adviser takes self-custody and quarterly thereafter; (ii) determine, before the adviser takes self-custody and annually thereafter, that each crypto asset will be subject to reasonable care; and (iii) receive from the adviser the safeguarding expertise and systems report, the annual review, and each internal control report. Serious safeguarding issues—including loss or theft—must be reported to the board promptly.

Other Modernization Amendments to the Advisers Act Custody Rule

The Proposal’s general Custody Rule amendments are likely to affect a much broader group of advisers than the crypto provisions. The Commission would redesignate current rule 206(4)-2 as new rule 223-1, recast it as an affirmative safeguarding rule, and codify or revise several interpretive positions that advisers have addressed through staff guidance, no-action letters, compliance practices, and contractual arrangements. These changes merit careful review even for advisers that never hold crypto assets.

Redesignation as Rule 223-1

The custody rule was adopted in 1962 under Section 206(4) of the Advisers Act. The Proposal would redesignate it as rule 223-1 under Section 223, which authorizes the Commission to require registered advisers to take steps to safeguard client assets over which they have custody. The proposed text would replace the current antifraud lead-in with a direct statement that a registered adviser “must take the following steps to safeguard client funds and securities” of which it has custody.⁴⁰

Although the Commission characterizes the redesignation as aligning the rule with its specific statutory authority, advisers should consider whether grounding the rule in Section 223 rather than Section 206(4) has practical implications. References to rule 206(4)-2 in compliance manuals, investment management agreements, Form ADV, Form ADV-E, and the recordkeeping rule would need to be updated if the amendment is adopted.

New exception for discretionary trading authority

For more than two decades, the custody status of advisers with discretionary trading authority has been uncertain. The Commission’s 2003 guidance focused on delivery-versus-payment settlement, while later staff guidance raised questions about non-DVP trading and created concern that ordinary trading authority could sweep in loans, derivatives, private fund interests, and foreign assets. The 2023 Safeguarding Proposal would have expressly treated discretionary authority as custody. The current Proposal goes in the opposite direction by creating an exception from the Custody Rule altogether.

Under proposed rule 223-1(b)(9), an adviser would not be required to comply with the Custody Rule with respect to funds and securities over which it has custody solely because of its discretionary trading authority, provided that: (1) the adviser executes trades only from and into designated client accounts in the client’s name, or the transfer is recorded in the client’s name by the issuer; (2) the adviser has no authority to transfer client funds or securities to itself, a related person, an account it or a related person controls, or any account that is not the client’s, absent client direction; and (3) the adviser complies with the Custody Rule for any other activity, right, or authority that independently gives it custody.

This exception warrants particular attention because it could materially reduce compliance burdens for advisers trading loans, derivatives, private fund interests, foreign assets, and other instruments that may not settle through traditional DVP arrangements. It would not, however, eliminate custody obligations arising from fee-deduction authority, broad powers of attorney, wire authority, or other independent sources of custody. An adviser with fee-deduction authority would remain subject to the other Custody Rule requirements—other than the surprise examination—for the affected assets.

The Commission encourages advisers to review contractual grants of authority and consider expressly prohibiting transfers to the adviser, its related persons, or third parties absent client direction. Advisers relying on the exception should also consider policies and procedures addressing other sources of custody, designated-account requirements, transaction monitoring, multiple-employee authorization, and periodic CCO testing. The Commission has requested comment on whether the exception should be available for crypto assets and whether a qualified custodian should nevertheless be required.

Elimination of the PCAOB registration and inspection requirement

The Proposal would eliminate the requirement that the independent public accountant performing a pooled vehicle’s annual audit under the audit provision—or performing a surprise examination or preparing an internal control report where the adviser or a related person acts as qualified custodian—be registered with and inspected by the PCAOB. The Commission reasons that the PCAOB does not inspect custody-rule engagements, making PCAOB status an imperfect proxy for the quality of those engagements, and that the requirement increases costs. Accountants would still be required to be independent.

The practical effect could be significant for smaller and emerging managers, which may have access to a broader pool of firms and lower audit or verification costs. Advisers should nevertheless consider whether the absence of a PCAOB requirement creates quality or comparability concerns and whether an alternative standard, such as AICPA peer review, should be required. The Proposal would delete corresponding PCAOB-status questions from Form ADV and replace “unqualified opinion” with “unmodified opinion.”

Amendments to the audit provision

The audit provision is a high-priority area for private fund managers. It permits an adviser to a pooled investment vehicle to satisfy the surprise examination requirement—and to be excepted from the client notice and account statement requirements—by distributing audited financial statements to investors annually. The Proposal would specify that those financial statements must be prepared in accordance with U.S. GAAP. A pooled vehicle organized outside the United States, or whose general partner or manager has its principal place of business outside the United States (a “foreign PIV”), could use other accounting principles only if the statements contain information substantially similar to U.S. GAAP statements, including a reconciliation for material differences, and the reconciliation is delivered to the vehicle’s U.S. investors.

The current 120-day delivery deadline would be extended to 180 days for funds of funds and 260 days for funds of funds of funds. The Commission also states that a failure to meet a deadline because of reasonably unforeseeable circumstances—such as unexpected technology issues or a force majeure event—generally would not violate the rule if the adviser reasonably believed delivery would be timely and the statements are delivered promptly once the circumstances are resolved. Managers should assess whether their audit calendars, fund-of-funds structures, and investor communications reflect these proposed deadlines and conditions.

For a vehicle formed within the last 90 days of its fiscal year, the delivery requirement would be satisfied if financial statements—which may be unaudited—for the first fiscal year are distributed within 90 days after year-end, with audited financial statements covering both the first and second fiscal years distributed after the end of the second fiscal year. Audited financial statements also could be delivered to an investor’s designated independent representative. These provisions could provide meaningful operational relief, but managers should confirm that their governing documents and investor-reporting processes can accommodate them.

Standing letters of authorization

Many advisers have custody solely because clients have authorized them to direct a qualified custodian to transfer funds or securities to designated third parties—for example, to pay bills or fund a family member’s account. The Proposal would codify an exception from the surprise examination requirement for an adviser whose sole basis for custody is a standing letter of authorization (“SLOA”), defined as an arrangement among the adviser, client, and the client’s qualified custodian under which the adviser is authorized in writing to direct transfers to a third-party recipient on a specified schedule or from time to time.

The exception would require that the qualified custodian not be the adviser or a related person; that the SLOA include the client’s signature, the recipient’s name, and either the recipient’s address or account number; and that the adviser have no ability or authority to designate or change information about the recipient. Advisers relying on the exception would need to maintain the SLOAs and related records under proposed rule 204-2(b)(6). Because the 2017 no-action letter would be superseded, advisers should compare their existing SLOA arrangements against the proposed definition and recordkeeping requirement.

Inadvertent custody

Advisers sometimes discover that a client’s own agreement with its custodian purports to grant the adviser broad authority—such as the ability to initiate wire transfers—that the adviser never sought and that exceeds the authority in the advisory agreement. Because advisers are rarely parties to those custodial agreements, they often have little ability to change them. Proposed rule 223-1(b)(10) would except an adviser from the Custody Rule for funds and securities over which it has custody arising solely from such an agreement, provided the adviser did not recommend, request, or require the client’s selection of the custodian.

The adviser also would need either not to have a copy of the agreement and lack actual knowledge or reason to know that it confers custody, or, upon learning that it does, promptly to notify the client and custodian in writing, repudiate the authority, and request in writing that the authority be removed or superseded by a new agreement. The Commission would not require advisers to review every custodial agreement, but expects policies and procedures to identify and address unwanted authority in agreements to which the adviser has access or of which it has knowledge. The “did not recommend” condition may make the exception unavailable to wealth managers that commonly recommend custodians and warrants careful review.

BDCs, account-number notices, and material discrepancies

The existing registered investment company exception would be extended expressly to business development companies, which are subject to the Investment Company Act custody rules. In addition, the written notice an adviser sends when opening an account with a qualified custodian—and upon changes—would be required to include the client’s account number. This new affirmative requirement would apply as of the effective date, so advisers should update client-notice templates and workflows.

Accountants also would send notices of material discrepancies identified during a surprise examination to the Division of Examinations by electronic means, replacing outdated references to facsimile, first-class mail, and the former Office of Compliance Inspections and Examinations. Advisers and their accountants should review examination procedures and notice protocols if the amendment is adopted.

Commission views on segregation, escrow accounts, and accommodation reporting

The Commission expects to state that the Custody Rule requires client funds and securities to be segregated from the proprietary assets of both the adviser (and its related persons) and the qualified custodian. It also expects to confirm that client cash held as a general deposit at a custodian bank—and reflected on the bank’s balance sheet as a liability to the client—does not violate the rule.

The Commission also expects to state that an adviser may maintain pooled-vehicle sale proceeds in an escrow account commingled with funds of other clients and non-client co-sellers in connection with a portfolio-company sale if specified conditions are met. Those conditions include reliance on the audit provision, reflection of the vehicle’s share in its financial statements, a qualified-custodian escrow account, and contractual requirements governing the escrow’s purpose, duration, and distribution of remaining funds. Private equity managers should compare existing escrow arrangements against these conditions.

For accommodation reporting, where a custodian lists assets on an account statement that it does not hold, the Commission expects the statement to disclose clearly that the custodian does not hold or have authority over those assets, that related information (including valuation) comes from the adviser or another external source, and that the assets may not receive protections typically available at the custodian, such as FDIC or SIPC protection. Advisers to private credit, real estate, and other illiquid strategies should review their custodial statements against these expectations.

Form ADV, accountant guidance, and recordkeeping

Form ADV Item 9 would be restructured so that an adviser answers “yes” if it or a related person has custody of client funds or securities, even if the adviser relies on an exception. A new Item 9.A.(2) would require identification of the exceptions relied upon, including privately offered securities, fee deduction, an operationally independent related person, SLOAs, discretionary trading authority, and inadvertent custody. Advisers whose only basis for custody is discretionary trading authority and/or inadvertent custody would skip the remainder of Item 9. A new Schedule D question also would ask whether each private fund (or series or class) is a tokenized fund and on which crypto networks its ownership is recorded. Advisers should anticipate a Form ADV filing project if the amendments are adopted.

The Commission also expects to update its 2009 guidance for accountants for all custody engagements, including by defining “material discrepancy,” adding information-technology control objectives, revising reconciliation testing, and identifying AICPA attestation standards that would satisfy the internal control report requirement. The recordkeeping rule would be amended so that custody-related records need not be duplicated where another required record contains the same information. Advisers with related-person qualified custodians should discuss these changes with their accountants and recordkeeping providers.

Fund custody modernization

The Proposal would amend rule 17f-1 to permit all registered broker-dealers—not only exchange members—to serve as custodians for regulated fund assets, provided custody is subject to the Customer Protection Rule or another rule providing similar protections. Rule 17f-3 and Form N-17f-1 would be rescinded, and conforming amendments to rules 17f-4 and 17f-7 are proposed. The Commission also requests comment on modernizing rule 17f-2.⁴¹

Comparison of Current and Proposed Custody Provisions

The following table summarizes the principal proposed amendments to the Advisers Act Custody Rule. A second comparison within the same table preserves the key differences between the adviser self-custody proposal and the December 2025 broker-dealer custody framework.⁴²

Implications for Investment Advisers and Funds

The Proposal carries different implications depending on an adviser’s or fund’s role and current exposure to crypto assets. The broader custody-rule amendments also require attention from advisers with no crypto exposure.

Registered investment advisers. Advisers that currently have custody of crypto assets—or plan to—would benefit from the self-custody framework’s clarification of previously uncertain obligations. However, the compliance costs are significant: the Release estimates approximately $173,499 in initial costs and $433,833 in recurring annual costs per adviser for self-custody compliance, plus approximately $376,000 per year for internal control reports.⁴³ These fixed costs may effectively limit self-custody to advisers with sufficient assets under management to absorb them. The qualified-custodian unavailability prerequisite also means the self-custody framework is available only as a last resort, not a first choice. All advisers should separately assess the proposed discretionary-trading, SLOA, inadvertent-custody, audit, Form ADV, and client-notice amendments.

Private fund managers. Advisers to private funds holding crypto assets must evaluate whether the self-custody framework applies. The financial asset election requirement may present particular challenges for fund structures where investor consent is obtained through limited partnership agreements or side letters rather than individualized bilateral agreements. Private fund managers should also prioritize the proposed U.S. GAAP and foreign pooled-vehicle reconciliation requirements, extended fund-of-funds deadlines, newly formed vehicle relief, PCAOB change, SLOA exception, inadvertent-custody condition, and accommodation-reporting views.

Regulated funds and boards. Fund boards face new oversight responsibilities under proposed rule 17f-9. The quarterly qualified-custodian determination review, annual reasonable-care determination, and prompt reporting of safeguarding issues represent a meaningful expansion of board duties. Fund directors should begin assessing their capacity and expertise to perform these functions. The Proposal’s tokenization provisions intersect with the TSV exemptive order discussed in King & Spalding’s recent client alert on tokenized securities,⁴⁴ but the TSV Order does not provide Investment Company Act relief.

DeFi and crypto trading. The Release discusses decentralized finance protocols and crypto asset trading but the Commission is not proposing amendments on these topics at this time.⁴⁵ The Proposal is expected to be a deregulatory action under Executive Order 14192.⁴⁶

Next Steps and Comment Period

Comments on the Proposal are due 60 days after publication in the Federal Register. Comments may be submitted via the SEC’s internet comment form or by email to rule-comments@sec.gov, referencing File No. S7-2026-35.

The Release requests comment on a wide range of topics, including: whether non-controlling key shares should be treated differently; whether there should be an outer time limit for moving assets to a qualified custodian once one becomes available; the treatment of key materials stored outside the United States; whether entities other than independent public accountants should be permitted to prepare internal control reports; and whether advisers inadvertently holding key material portions should receive additional transition time.

Compliance timeline. Advisers and funds may rely on the self-custody and state trust company rules as of the effective date once they are able to comply, and may rely on the rules pending any required form updates. Modernization amendments and fund custody rule amendments would take effect on the effective date. The Commission has asked whether additional compliance time (six months or one year) would be needed.

Market participants should begin assessing the Proposal’s impact on their businesses and preparing comment letters addressing the numerous open questions posed by the Release.

Conclusion

The Proposal would, for the first time, give investment advisers and regulated funds a defined regulatory pathway for custody of crypto assets—through adviser self-custody where no qualified custodian is available and through state trust companies—while imposing conditions designed to address the conflicts of interest and technological risks inherent in those arrangements. Taken together with the Innovation Exemption, Regulation Crypto Assets, the 2026 Interpretation, and the 2025 BD Custody Statement, the Proposal is a further step in the Commission’s effort to build a comprehensive regulatory framework for crypto assets under existing statutory authority while Congress continues to debate market-structure legislation.

At the same time, the most consequential changes for many of our clients have little to do with crypto assets. Buried in the Proposing Release is the most significant revision of the Advisers Act custody rule in more than fifteen years: a new rule designation, new exceptions for discretionary trading authority, standing letters of authorization and inadvertent custody, the elimination of the PCAOB requirement, significant changes to the audit provision, new Commission views on segregation, escrow accounts and accommodation reporting, and a restructured Form ADV Item 9. In general, these changes would reduce burdens and resolve longstanding uncertainties, but they also contain conditions and new requirements that will require advisers to review their agreements, policies and procedures and regulatory filings.

Investment advisers, including fund managers, should review these proposed changes closely. The 2026 Custody Rule Proposals are proposals only. They must proceed through the notice-and-comment process and may be modified, potentially in material respects, before any final rules are adopted. The Commission has requested comment on hundreds of specific questions, and the comment period will close 60 days after publication of the Proposing Release in the Federal Register. King & Spalding will continue to monitor developments related to the Proposal and its implications for investment advisers, private fund managers, and regulated funds.

For any questions regarding the Proposal, or for assistance in preparing a comment letter, please contact any member of the King & Spalding team.