SEC Proposes Expanding Investment Adviser Custody Rules to Crypto Assets

The Securities and Exchange Commission (SEC) has proposed expanding its rules around custody to include cryptocurrency.

The agency said in a Wednesday (Feb. 15) press release that its proposed rule changes, if adopted, would amend the SEC’s custody rule that applies to registered investment advisers as well as related recordkeeping and reporting obligations.

SEC Chair Gary Gensler said in the release that Congress gave the commission authority to expand the custody rule to apply to all assets, not just funds or securities.

“Further, investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide,” Gensler said in the release. “Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.”

The SEC’s proposed changes would broaden the custody rule from client funds and securities to any client assets held by an investment adviser, according to the press release.

The changes are designed to ensure that qualified custodians — such as certain banks and broker-dealers — keep client assets segregated and protected in case of insolvency of the custodian, the release said.

They also expand the availability of use of the audit provision, in which an independent public accountant can verify client assets, per the release.

“I support this proposal because, in using important authorities Congress granted us after the financial crisis, it would help ensure that advisers don’t inappropriately use, lose or abuse investors’ assets,” Gensler said in the release.

The SEC’s proposal is to remain open to public comment for 60 days after its publication in the Federal Register.

PYMNTS reported in December 2022 that the crisis engulfing crypto can be traced, in part, to custody.

Putting custody of consumers’ and institutions’ digital holdings on exchanges, which are lightly regulated entities at best, has proven to be a stumbling block to crypto’s mainstream embrace.

Consumers have found that following the money is no easy task, that they may learn just how vulnerable they have been to losses only after the fact and that they can lose some or all of the money that’s been held on an exchange if it goes bust.