CryptoSlate
An SEC proposal approved on Oct. 1 would let investment advisers hold certain client crypto assets when no qualified custodian will maintain them. The agency models $433,833 in annual adviser costs for the fallback: $376,000 for an independent control report and $57,833 for recurring internal compliance work. That subtotal excludes some potentially significant technology costs.
The SEC says smaller advisers may decline to use the option, while larger firms may be better able to spread its costs across clients, assets or affiliated businesses. For clients, access to an asset could therefore depend on which adviser they use. The estimate is not a minimum firm size or a complete operating budget.
An adviser would need to establish, before taking custody and at least quarterly afterward, that no qualified custodian will maintain each asset. Custodian fees alone would not justify using the fallback. If a qualified custodian became available, the adviser would have to transfer the asset as soon as reasonably practicable. Proposed safeguards include key-management controls, client reporting and independent review.
Frequently asked questions
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When could an adviser use the proposed custody fallback?
An adviser could use it for covered client crypto assets when, after due inquiry, it has a written reasonable basis to conclude that no qualified custodian will maintain the asset.
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What makes up the SEC's $433,833 annual cost estimate?
The modeled subtotal combines a $376,000 independent internal control report with $57,833 in recurring internal compliance work. It excludes some potentially significant technology costs.
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Why might the proposal affect smaller advisers differently?
The SEC says smaller advisers may decline to use the fallback. Larger firms may be better able to spread its costs across clients, assets or affiliated businesses.
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Can an adviser use the fallback because a qualified custodian is expensive?
No. Custodian costs could not form the basis for determining that no qualified custodian will maintain an asset.
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What happens if a qualified custodian becomes available?
The adviser would have to place the asset with that custodian as soon as reasonably practicable. The obligation could arise between the required quarterly reviews.
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