SEC Staff Provides Important Custody-Related Regulatory Relief for Registered Investment Advisers and Regulated Funds

On September 30, 2025, the SEC Staff of the Division of Investment Management (the “Staff”) issued a no-action letter (the “Letter”)[1] that clarifies how SEC-registered investment advisers (“RIAs”), registered investment companies, and business development companies (collectively, “Regulated Funds”) can custody crypto assets[2] in compliance with the custody provisions (the “Custody Provisions”) of both the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (the “1940 Act”).[3]

The Letter resolves a significant regulatory ambiguity for RIAs seeking to provide investment advice for crypto assets and for Regulated Funds seeking to invest directly in crypto assets, and represents another step by the Staff to clarify the application of federal securities laws to crypto assets.[4] Specifically, the Letter confirms that the Staff will not recommend enforcement action against RIAs or Regulated Funds that treat certain State Trust Companies[5] as “banks”—and thus qualified custodians eligible to custody crypto assets—for purposes of the Custody Provisions.[6] 

Background

In relevant part, Rule 206(4)-2 under the Advisers Act requires RIAs with custody of “client funds or securities” to maintain such funds or securities with a “qualified custodian,” including a “bank” as defined in Section 202(a)(2) of the Advisers Act. Sections 17(f) and 26(a) of the 1940 Act and the rules thereunder generally provide that Regulated Funds must place and maintain securities and similar investments with certain specified custodians, including most “banks” as defined in Section 2(a)(5) of the 1940 Act. 

Because most State Trust Companies are chartered under state law to provide fiduciary services but do not operate as traditional deposit-taking banks, it has not been clear that such entities could meet the definition of “bank” under the Advisers Act or the 1940 Act.  This effectively precluded RIAs or Regulated Funds from using such entities to custody crypto assets, although many State Trust Companies offer this service. While other types of entities are eligible to serve as qualified custodians under the Custody Provisions—such as broker-dealers and national banks—such entities traditionally have not offered crypto asset custody services. National banks, for example, historically have been reluctant to engage in crypto asset custody due to perceived regulatory risk and reputational concerns. Meanwhile, certain states, such as Wyoming and New York, have developed charters for specific institutions to provide custodial and other services for digital assets. Several firms have obtained these charters to offer crypto asset custodial services.  Until recently SEC and FINRA Staff guidance prohibited registered broker-dealers from having custody of crypto assets, except through a special purpose broker-dealer.[7]

Conditions of the Letter

To rely on the Letter, an RIA or a Regulated Fund must meet several conditions, which are summarized below.

1. Due Diligence and Ongoing Review:  
1. Conduct an initial and annual review to confirm that the State Trust Company: (i) is authorized by the relevant state banking authority to provide custody services for crypto assets; and (ii) maintains certain internal policies and procedures; and
2. In connection with the due diligence noted above, review the State Trust Company’s most recent audited GAAP financial statements and written internal control report prepared by an independent public accountant (e.g., an SOC-1 or SOC-2 report) that includes certain opinions.
2. Custodial Agreements: Enter into (or cause the RIA client to enter into) a custodial agreement with the State Trust Company that includes certain specified terms.
3. Disclosure: Disclose the material risks of using State Trust Companies as custodians to advisory clients or the Regulated Fund’s board of directors/trustees, as applicable. 
4. Best Interests Determination: Determine that the use of the State Trust Company’s custody services is in the best interests of the RIA’s client or Regulated Fund and its shareholders, as applicable. With respect to a Regulated Fund, the fund’s board of directors/trustees must also make this determination.

The Letter only represents Staff guidance, and thus is not binding on the SEC. In theory, the SEC under different leadership could reverse this guidance in the future.[8] However, the Staff notes in the Letter that the SEC is considering a proposed rulemaking regarding the custodial requirements applicable to RIAs and Regulated Funds relating to crypto assets, and it is possible that the conditions of the Letter inform that rulemaking.[9] Before any RIA or Regulated Fund relies on the guidance in the Letter, however, it should consider whether other regulatory and compliance obligations under the federal securities laws apply to providing advice on, or investing in, crypto assets.

Please contact us if you have any questions concerning this alert or compliance with the conditions of the Letter.

[1] See Simpson Thacher & Bartlett LLP, SEC Staff No-Action Letter (Sept. 30, 2025).

[2] The guidance in the Letter is limited to “crypto assets,” which the Letter defines as assets that are digital representations of value that are recorded on a cryptographically secured distributed ledger. 

[3] These include: (i) Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder and (ii) Sections 17(f) and 26(a) of the 1940 Act, and the rules thereunder.

[4] See, e.g., SEC Staff Offers Guidance on Disclosure Requirements for Crypto Asset Exchange-Traded Products, MoFo Client Alert (July 30, 2025).

[5] As used in the Letter, “State Trust Company” refers to a legal entity organized under state law that is:

(i) supervised and examined by a state authority having supervision over banks and (ii) permitted to exercise fiduciary powers under applicable state law.

[6] For additional information about crypto-asset safekeeping more generally, please see Crypto-Asset Safekeeping: What’s Involved If You’re a Bank (or if You Want to Be One), MoFo Client Alert (July 24, 2025).

[7] See Withdrawal of Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities, Statement by SEC Staff in the Division of Trading and Markets and FINRA’s Office of General Counsel (May 15, 2025); see Letter from SEC Staff in the Division of Trading and Markets to FINRA re. ATS Role in the Settlement of Digital Asset Security Trades (Sept. 25, 2025). 

[8] Commissioner Crenshaw published a statement that is critical of the guidance in the Letter. See Poking Holes: Statement in Response to No-Action Relief for State Trust Companies Acting as Crypto Asset Custodians, SEC Commissioner Caroline A. Crenshaw (Sept. 30, 2025).

[9] Amendments to the Advisers Act and 1940 Act custody rules, in addition to other crypto-related rule proposals, are currently listed on the SEC’s Regulatory Flex Agenda.  See Spring 2025 Unified Agenda of Regulatory and Deregulatory Actions.