SEC Modernizes Asset Custody Rules to Address Digital Assets and Investment Management
The Securities and Exchange Commission issued proposals on October 1, 2026, to update custody frameworks for investment advisers and companies that have remained largely unchanged since 1941 and 1962, respectively. The proposals establish new rules for cryptocurrency asset custody, permitting state-chartered trust companies and, in limited cases where third-party custodians are unavailable, allowing self-custody of digital assets. Additional amendments modernize rules for investment companies and advisers by expanding eligible custodians and eliminating obsolete requirements.
The SEC's October 2026 proposal addresses custody frameworks that have operated with minimal substantive updates for decades. The investment company custody structure originated in 1941, while the adviser custody rule was established in 1962. Over time, technological advancement and the emergence of digital assets have created gaps between existing regulations and current market practices. The proposal directly tackles this disconnect by establishing pathways for cryptocurrency holdings to be secured through state-chartered trust companies and, in specific circumstances where third-party solutions are unavailable, through self-custody arrangements.
The modernization extends beyond digital assets to traditional investment management. Proposed changes would broaden which broker-dealers can serve as custodians for funds, removing restrictions that previously limited eligibility to exchange members. Additionally, the SEC would eliminate outdated provisions governing cash accounts that no longer serve a practical regulatory function. These adjustments aim to reduce administrative burdens while maintaining investor protections.
The changes could simplify compliance for investment firms managing digital and traditional assets, potentially lowering operational costs that might be passed to investors. However, expanded self-custody provisions may introduce new risks requiring careful monitoring by regulators and advisers. Asset managers and fund operators would need to assess whether the framework adequately protects client holdings, particularly given cryptocurrency's volatility and custodial vulnerabilities. The proposal's effectiveness will likely depend on how carefully firms implement safeguards in practice.