On 1 October 2026, the US Securities and Exchange Commission (SEC) published a proposal to amend the custody rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, accompanied by a fact sheet.

Alongside new options for crypto asset custody, the proposal includes changes relevant to private fund managers and advisers managing separately managed accounts. Several would formalise existing SEC staff positions or provide relief reflecting current industry practices. The proposal also cites AIMA’s comment letter to the SEC Crypto Task Force .

The principal proposed changes include:

• Crypto asset custody: Registered investment advisers could self-custody client crypto assets where a qualified custodian is unavailable for the relevant asset, subject to an initial assessment and quarterly reassessment. Safeguards would include private-key controls, transaction authorisation by at least two people, separate client addresses, annual safeguarding and cybersecurity reviews, and independent internal control reports. Regulated funds could use their adviser for self-custody, subject to additional board oversight.

• State trust companies: Advisers and regulated funds could use state trust companies to custody crypto assets, subject to initial and annual due diligence and segregation of client assets from the custodian’s proprietary assets.

• Discretionary trading and other custody exceptions: Conditional exceptions would address custody arising solely from authorised discretionary trading authority, including certain trading outside delivery-versus-payment arrangements, and inadvertent custody. A further exception would remove independent verification requirements where custody arises solely from a qualifying standing letter of authorisation.

• Private fund audits: The proposal would remove the requirement for accountants engaged under the Advisers Act custody rule to be registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board. It would also extend audited financial statement delivery deadlines to 180 days for funds of funds and 260 days for funds of funds of funds, and provide flexibility for newly formed funds.

• Accounting and reporting: Audited financial statements would expressly need to follow US generally accepted accounting principles, with a conditional exception for foreign pooled investment vehicles. Amendments to Form ADV and Form N-CEN would collect additional information on crypto custody and tokenised fund shares.

The proposal would also modernise custody requirements for regulated funds. For advisory clients other than regulated funds, the Advisers Act custody rule would continue to apply to funds and securities; the proposal would not bring every crypto asset within scope.

The SEC would redesignate the adviser custody rule from rule 206(4)-2 to new rule 223-1, to align with the rulemaking authority Congress gave it in section 223 of the Advisers Act under the Dodd-Frank Act. The rule would keep its focus on client funds and securities rather than all client assets. The SEC withdrew its broader 2023 safeguarding proposal on June 12, 2025.

The most consequential change for private credit managers is a new exception in proposed rule 223-1(b)(9) for custody that arises from discretionary trading authority. The SEC drops the distinction between delivery-versus-payment and non-DVP settlement, a question open since staff guidance in 2017 and a staff letter in 2019, and instead conditions relief on three requirements:

• The adviser executes, and has authority to execute, trades only from and into designated client accounts in the client's name, or where the issuer records the transfer in the client's name.
• The adviser has no authority, under the trading arrangement or otherwise, to transfer assets from the designated account to itself, to an account it or a related person controls, or to any account that is not the client's, except transfers the client directs in connection with the trading, and cannot have the issuer record a transfer in its own or a related person's name.
• The adviser complies with the rule, and any applicable exception, for any other activity or authority that gives it custody.

The third condition limits the relief. An adviser with fee deduction authority, wire or broad power of attorney authority, or a general partner position in a private fund has custody on that separate basis and must satisfy it independently. For fee deduction, every requirement other than the surprise examination continues to apply. Payments unrelated to trading, such as bill pay, do not qualify. The SEC encourages advisers to review their investment management agreements, because broad grants of authority could disqualify them, and expects advisers relying on the exception to maintain policies and procedures that monitor the conditions. It asks whether the rule should say more about loans, CLOs, derivatives and private fund interests, and, if the exception is adopted, expects to rescind its 2003 discussion of trading authority. My read: the third condition will decide how much practical relief this provides, because many managers have custody on more than one basis.

For private fund audits, the proposal would remove the requirement that the accountant be registered with, and subject to regular inspection by, the PCAOB. That covers the annual audit of a pooled investment vehicle and the surprise examination and internal control report required when an adviser or its related person acts as qualified custodian. The accountant must still be independent under rule 2-01(b) and (c) of Regulation S-X. The SEC reasons that the PCAOB does not inspect engagements required solely by the custody rule, and that dropping the requirement should widen the pool of auditors and lower costs.

The proposal would also change delivery of audited financial statements. The current 120-day deadline would extend to 180 days for funds of funds and 260 days for funds of funds of funds. Financial statements could be delivered to an investor's independent representative, which the rule allows today only for notices and account statements. The SEC also states its view that a short delay caused by reasonably unforeseeable circumstances generally would not violate the rule if the adviser reasonably expected timely delivery and delivers promptly once the circumstances resolve. For a vehicle formed within the 90 days before its fiscal year end, the adviser could deliver financial statements, which may be unaudited, within 90 days after that year end, followed by audited statements covering both the first and second fiscal years after the end of the second year. That initial 90-day deadline is shorter than the 120 days for audited statements, and the relief turns on the formation date.

The rule would expressly require US GAAP, which the release describes as the Commission's longstanding view, and would define the term in proposed rule 223-1(d)(19). A pooled investment vehicle organized under non-US law, or with a general partner or other manager whose principal place of business is outside the US, could use other accounting principles if its statements contain information substantially similar to US GAAP statements and include a reconciliation of material differences to US GAAP, delivered to US investors. The adviser must keep a record of the reconciliation. The release asks whether offshore vehicles with US advisers should be treated differently, whether the relief should depend on a threshold of non-US investment, and how it should apply to CFTC-registered commodity pools. Managers of offshore funds should review the implications for their reporting arrangements.

Three further exceptions and one notice change would apply to advisers:

• Standing letters of authorization. An adviser with custody solely because of a standing letter of authorization would be excepted from independent verification, but not from the rest of the rule. The letter must be signed by the client and name the recipient with an address or account number, the qualified custodian cannot be the adviser or a related person, and the adviser cannot have authority to change the recipient's details. Advisers would have to keep copies of the letters. The SEC staff took a similar position in a 2017 no-action letter.
• Inadvertent custody. An adviser would be excepted from the rule where it did not recommend, request or require the client's custodian and either has no copy of the custodial agreement and no knowledge or reason to know that it confers custody, or, once it knows or has reason to know, promptly notifies the client and custodian in writing, repudiates the authority and asks in writing that it be removed or superseded by a new agreement. The SEC acknowledges the custodian may not agree to the change, and expects advisers to maintain policies and procedures for identifying this authority.
• Business development companies. The adviser rule's exception for registered investment company accounts would expressly extend to BDCs, which the SEC says matches current market practice.
• Account numbers. The notice an adviser sends when it opens a custodial account for a client would have to include the account number.

The Form ADV changes deserve attention because the data is public and feeds investor due diligence. Advisers would answer "yes" to the Item 9 custody question whenever they or a related person have custody, even where the only basis is fee deduction or an operationally independent related person, which the current instructions treat as "no." New questions would require advisers to identify reliance on each custody rule exception. Reported custody amounts and client counts would exclude assets and clients where custody arises solely from fee deduction, an operationally independent related person, a standing letter of authorization, discretionary trading authority or inadvertent custody. Managers should consider whether revised answers affect their due diligence responses.

The release also previews Commission views the SEC expects to issue as guidance. A seller escrow account following the sale of a portfolio company could commingle client and non-client funds if the client relies on the audit provision and the escrow is included in its financial statements, the escrow relates to the sale and holds an amount and runs for a period negotiated in good faith, it sits with a qualified custodian, and the sellers' representative must promptly distribute what remains. An adviser that asks a custodian to list assets on an accommodation basis should have a reasonable basis to believe the account statement clearly discloses that the custodian does not hold them.

For regulated funds and BDCs, proposed rule 17f-1 would let funds use any broker-dealer registered under section 15(b)(1) of the Exchange Act, not only exchange members, provided its custody of the assets is subject to rule 15c3-3 or a similar SEC rule. The prescriptive segregation, lien, rehypothecation and examination conditions would give way to the broker-dealer regime, and the release contemplates margin liens and rehypothecation of margin securities where a fund finances purchases. The SEC asks whether funds that use broker-dealers outside rule 15c3-3 would need time to move their assets. Rule 17f-3, the $500 free cash account rule, would be rescinded, and the Investment Company Act custody rules would expressly refer to BDCs.

The SEC does not propose loan-specific relief, but it asks whether a rule should let regulated funds self-custody uncertificated loan interests in place of the rule 17f-2 vaulting, access, notation and examination requirements. It points to the safeguards in the January 13, 2021 K&L Gates no-action letter, including limits on who may issue instructions, monthly reconciliation to administrative agent records, recording ownership in the fund's name, and an annual audit with confirmation of loan holdings, and asks whether an audit verifying the loans plus an internal control report should suffice. It also asks whether regulated funds should have an exception for privately offered securities like the one in the adviser rule. My read: these questions are the most useful opening for private credit managers that run BDCs or registered funds, and the K&L Gates procedures are the likeliest template for any final rule.

The SEC proposes that compliance with the modernization amendments be required on the effective date and asks whether advisers need six months, a year or more. On adoption, the Commission's views would supersede the staff letters and guidance the release lists on these topics, including the 2017 standing letter of authorization no-action letter, the 2017 inadvertent custody guidance and the escrow portion of the 2014 private fund guidance.

These changes remain proposals, and current requirements continue to apply. Comments are due 60 days after publication in the Federal Register.

AIMA will shortly schedule a member working group call to discuss the proposals and gather views to inform its response. Members interested in contributing should contact James Delaney or Joe Engelhard.

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  James Delaney

  Managing Director, Asset Management Regulation, AIMA

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  Joe Engelhard

  Head of US Private Credit and Asset Management Policy & Regulation, AIMA