SEC Staff Issues No-Action Letter Addressing the Ability of State Trust Companies to Custody Crypto Assets

October 20, 2025

Background

Rule 206(4)-2 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) requires investment advisers registered under the Advisers Act (“Registered Advisers”) with custody of client “funds or securities” to maintain such assets with a “qualified custodian”, which includes a “bank” as defined in Section 202(a)(2) of the Advisers Act.1 Similarly, Sections 17(f) and 26(a) of the Investment Company Act of 1940, as amended (the “1940 Act”) require Regulated Funds2 to place and maintain securities and similar investments with certain specified custodians, including “banks” as defined in Section 2(a)(5) of the 1940 Act.

No-Action Letter

On September 30, 2025, the SEC’s Division of Investment Management (the “Staff”) issued a no-action letter (the “No Action Letter”) stating that it would not recommend an enforcement action to the SEC under Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, or Sections 17(f) and 26(a) of the 1940 Act, and the rules thereunder (collectively, the “Custody Provisions”) against Registered Advisers or Regulated Funds, respectively, for treating a State Trust Company3 as a “bank,” as defined in the Advisers Act and the 1940 Act (and, therefore, an institution permitted to custody assets), with respect to the placement and maintenance of Crypto Assets4 and cash and/or cash equivalents reasonably necessary to effect transactions in Crypto Assets (“Related Cash and/or Cash Equivalents”) provided that the conditions outlined in the No-Action Letter, which are described below, are met.

  1. Due Diligence and Oversight. Prior to engaging a State Trust Company, and annually thereafter, a Registered Adviser or Regulated Fund must have a reasonable basis, after due inquiry, for believing that the State Trust Company is authorized by the relevant state banking authority to provide custody services for Crypto Assets and Related Cash and/or Cash Equivalents.
    1. Internal Policies and Procedures: The Registered Adviser or Regulated Fund must also have a reasonable basis, after due inquiry, for believing that:
      1. The State Trust Company maintains and implements written internal policies and procedures reasonably designed to safeguard Crypto Assets and Related Cash and/or Cash Equivalents from the risk of theft, loss, misuse, and appropriation. 
      2. To make such a determination, the Registered Adviser or Regulated Fund must receive and review the State Trust Company’s most recent annual audited financial statements, confirm that such financial statements have been subject to an audit by an independent public accountant and prepared in accordance with Generally Accepted Accounting Principles (“GAAP”).5
        The Registered Adviser or Regulated Fund must also receive and review the State Trust Company’s most recent written internal control report prepared by an independent public accountant during the current or prior calendar year (e.g. SOC-1 or SOC-2 reports, or an equivalent internal control report). The Registered Adviser or Regulated Fund must confirm that the report includes an opinion of the independent public accountant, stating that, as of a specified date, controls are operational and such controls are suitably designed and operating effectively to meet control objectives relating to custodial services, including safeguarding of Crypto Assets and Related Cash and/or Cash Equivalents throughout the year.
  2. Written Custodial Agreements. The Registered Adviser or Regulated Fund must enter into, or cause an RIA Client6 to enter into, a written custodial services agreement with the State Trust Company, which provides that:
    1. The State Trust Company will not, directly or indirectly, lend, pledge, hypothecate, or rehypothecate any Crypto Assets and Related Cash and/or Cash Equivalents held in custody for a RIA client or Regulated Fund, without prior written consent of the RIA client or Regulated Fund, and then only for the account of such RIA client or Regulated Fund; and
    2. All Crypto Assets and Related Cash and/or Cash Equivalents held in custody for a RIA client or Regulated Fund will be segregated from the State Trust Company’s assets.
  3. Risk Disclosure. The Registered Adviser must disclose to its RIA clients, or the Regulated Fund must disclose to members of its board of directors or trustees any material risks associated with using the State Trust Company as a custodian of Crypto Assets and Related Cash and/or Cash Equivalents.
  4. Best Interests Determination. The Registered Adviser (with respect to RIA clients) or the Regulated Fund (with respect to its board of directors or trustees), must reasonably determine that the use of the State Trust Company’s custody services is in the best interest of RIA clients or Regulated Fund shareholders, as applicable.

It is important to note that this No-Action Letter relief is limited to Crypto Assets and Related Cash and/or Cash Equivalents. The Staff also clarified in the No-Action Letter that (i) all requirements of the respective Custody Provisions continue to apply and (ii) a Regulated Fund or Registered Adviser may custody Crypto Assets (or Related Cash and/or Cash Equivalents) with other entities that qualify under the definition of a “bank” under the Advisers Act and the 1940 Act, as applicable (including, for example, member banks of the Federal Reserve System such as a member national trust bank).

As part of its Spring 2025 Unified Agenda of Regulatory and Deregulatory Actions, the SEC is also considering proposing amendments to existing rules and/or proposing new rules under the Advisers Act and the 1940 Act to improve and modernize the regulations around the custody of advisory client and fund assets, including to address in each case Crypto Assets.

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Seward & Kissel LLP will continue to provide insight on any related developments. If you have any questions regarding the foregoing, please contact your primary Seward & Kissel partner or a member of the Investment Management Group at Seward & Kissel LLP.

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1 Rule 206(4)-2 requires qualified custodians to hold client funds or securities in an account either under the client’s name or under the Registered Adviser’s name as agent or trustee for its clients.

2 This definition includes issuers registered as investment companies under the 1940 Act and issuers that have elected to be regulated as business development companies under the 1940 Act.

3 As used in the No Action 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.

4 The Staff defined “Crypto Assets” as assets that are digital representations of value that are recorded on a cryptographically secured distributed ledger.

5 The Staff provided an alternative option in the event that the State Trust Company’s financial statements are presented on a consolidated basis with its parent and other affiliates that have substantive activities. In such cases, the Registered Adviser or Regulated Fund can obtain a written certification or representation from the State Trust Company that the most recent annual financial statements of its parent or other affiliate have been subject to an audit by an independent public accountant and have been prepared in accordance with GAAP. Additionally, the Staff noted that the written certification or representation should contain information regarding results of the audit.

6 In a footnote to the No Action Letter, the Staff defined RIA clients to include: issuers registered as investment companies under the 1940 Act, or that have elected to be regulated as business development companies under the 1940 Act, natural persons, pooled investment vehicles that are private funds (as defined in Section 202(a)(29) of the Advisers Act), or are otherwise not required to register as investment companies under the 1940 Act, corporations, foundations, trusts, and other types of individual and institutional accounts.

 

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