SEC Proposes to Rewrite the Adviser Custody Rule: What Private Fund Managers Should Do

On 1 October 2026, the Securities and Exchange Commission proposed amendments to the custody rules for investment advisers and regulated funds, together with a framework for custody of crypto assets. The proposal is file number S7-2026-35 (release numbers IA-7023 and IC-36353) and was announced the same day. Comments are due 60 days after the proposal is published in the Federal Register. When we checked, the SEC's page had not given a calendar date for that deadline, and we could not confirm that Federal Register publication had happened, so managers should check the SEC's page before planning around a date.

What the SEC is proposing

The proposal would redesignate the Advisers Act custody rule, currently rule 206(4)-2, as rule 223-1, and update it in several ways. It would clarify when authorized discretionary trading falls within an exception to the rule. It would remove the requirement that independent accountants be registered with and inspected by the Public Company Accounting Oversight Board (PCAOB), which the SEC describes as part of updating audit requirements for advisers. It would require client account numbers in account opening notices. It would exempt advisers from the surprise examination requirement where custody arises only because of standing letters of authorization, and it would clarify that the exceptions available to registered investment companies also apply to business development companies. Conforming changes would be made to Forms ADV and ADV-E and to the recordkeeping rules.

The second part concerns crypto assets. The proposal would let an adviser self-custody crypto assets where it documents in writing that no permitted custodian can hold the asset, has the expertise to safeguard it and keeps protective systems. Conditions include joint authorization of transactions, segregated addresses for each client, quarterly account statements showing addresses and holdings, annual cybersecurity reviews and written agreements treating crypto as a financial asset under state law. It would also allow state trust companies to act as custodians if the adviser verifies, at the start and every year, that the company is authorized by its state for crypto custody, has written safeguarding policies, and provides audited financial statements and internal control reports, with client assets kept separate from its own. SEC Chairman Paul Atkins said the proposal would provide "a clear regulatory framework" and a compliant pathway for advisers and funds.

Why it matters for private fund managers

Most private fund advisers meet the existing custody rule by delivering audited financial statements for each fund within 120 days of year-end, instead of undergoing a surprise examination. That makes the audit requirement the part of the proposal most likely to touch a private fund manager's routine. The proposed removal of the PCAOB requirement is the change to read most closely, because it concerns who can sign the audit on which the process depends. The proposing release will say how the revised audit standard works for pooled vehicles, and managers should read that text and not rely on a press summary.

For a manager with no crypto assets and no standing letters of authorization, the proposal may change little in practice. For a manager holding digital assets for a fund, or planning to, the proposal is a clearer path than the current position.

What to do now

Start by reading the proposing release, which the SEC links from its rule page, and note the sections on audits, account statements and recordkeeping. Check with your auditor whether the PCAOB change would alter its role. Then map any digital asset holdings and ask your custodian how it would meet the proposed conditions, including whether it is a state trust company.

LPs ask about custody in diligence, so update your DDQ answers on custody and audit arrangements when the rule is final and not before. Consider whether to file a comment, since the SEC invites comments through an electronic form, by email or on paper, and a short letter on private fund audit mechanics from a practitioner can be useful.

This proposal sits within a busy run of SEC activity. We have covered the proposal to widen who can pay performance fees, the Form PF compliance date move to 1 July 2027 and the rewrite of the quorum rule. Together they suggest a rule book that is being revised on several fronts at once, which makes a regular compliance calendar more useful than ever. Managers that market to non-US investors should also see our AIFMD II and SEC marketing rules guide, and the marketing rule definition for a refresher.

What to watch next

Watch for Federal Register publication, which starts the 60-day comment clock, and for comment letters from industry groups, which will show where the proposal is likely to change. FundLinx members can see which LPs are asking about operational diligence.

This article is for information only and is not legal advice.

FundLinx Intelligence | FundLinx.ai