SEC weighs changes to crypto custody rule for investment advisors

The US Securities and Exchange Commission (SEC) is reconsidering a proposed rule imposing stricter custody requirements on investment advisers holding crypto and other assets. 

Acting SEC Chair Mark Uyeda stated during the “Investment Management Conference” in San Diego that the agency is evaluating whether to amend or rescind the rule introduced under the prior administration.

Custody rule reassessment

Initially backed by former SEC chair Gary Gensler, the proposed rule sought to enhance investor protection by ensuring that investment advisers properly safeguard client assets. 

One of its proposals was to limit qualified custodians to federally chartered entities. At the time, Gensler emphasized the need to prevent asset misuse or loss. 

However, Uyeda highlighted public comments critiquing the rule’s broad scope, prompting the agency to reconsider its approach. 

Former Chair of the House Financial Services Committee Patrick McHenry sent a comment letter on May 2023 stating that the rule was “highly concerning” for crypto firms. 

The reasoning was that regulators discouraged federally chartered banks from custody of assets from crypto-related companies. McHenry said the rule’s proposed limiting would leave crypto industry players without proper custody solutions.

Shift in regulatory priorities

Uyeda said that the SEC is now focused on developing regulatory measures that align with statutory authority while maintaining cost efficiency and effectiveness.

He also addressed another regulatory change requiring mutual and exchange-traded funds (ETFs) to report monthly rather than quarterly portfolio holdings. The rule, adopted in August under Gensler, was designed to enhance market transparency. 

However, Uyeda noted concerns over compliance costs and potential risks linked to artificial intelligence-driven data analysis have emerged. He added that the SEC is exploring possible adjustments to the rule, including extending the compliance deadline.

Uyeda also highlighted the importance of revising small-entity definitions to appropriately calibrate regulatory burdens. 

The regulator is refining its procedures for assessing economic impacts, legal and compliance costs, and other professional expenses associated with its rulemaking. 

Uyeda emphasized that safeguarding client assets, fund disclosures, and digital engagement practices—such as predictive data analytics—remain areas of regulatory scrutiny.

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