A Wyoming Banking Division no-action letter (NAL) to the SEC’s Investment Management Division and FinHub Staff on Wyoming- and other state-chartered public trust companies’ custodial rights over their clients’ digital assets prompted the Commission to request public comments on the matter.
Wyoming NAL. The NAL basically stated that Wyoming law permits a Wyoming-chartered public trust company to provide custodial services for digital as well as traditional assets. The NAL additionally brought the Investment Advisers Act of 1940 and Rule 206(4)-2 (the "Custody Rule") into the discussion by proclaiming that a Wyoming state-chartered public trust company may serve as a Custody Rule-defined "qualified custodian" under the "bank" definition in the Advisers Act. The NAL has asked the SEC to weigh in on this scenario.
SEC response. The Commission began by reiterating the SEC-registered investment adviser’s fiduciary duty to exercise care over their clients’ assets, along with the critical role qualified custodians play in safeguarding those assets. The SEC acknowledged that since this is a complicated process based on individual facts and circumstances, only certain financial institutions possessing key characteristics can be qualified custodians. The SEC has now been asked by Wyoming’s Banking Division to consider whether under federal and state law, Wyoming- and other states’-chartered public trust companies can be included among the SEC-permitted financial intermediaries to act as qualified custodians over their clients’ assets, particularly their clients’ digital assets.
SEC comment request. To consider the issue, the Commission has asked the public to comment by email under a subject line headed "Custody Rule and Digital Assets." To generate the discussion, the SEC has asked commenters to consider the following questions:
- Do state chartered trust companies possess characteristics similar to those of the types of financial institutions the Commission identified as qualified custodians? If yes, to what extent?
- In what ways are custodial services that are provided by state-chartered trust companies equivalent to those provided by banks, broker-dealers, and futures commission merchants? In what ways do they differ?
- Would there be any gaps in—or enhancements to—protection of advisory client assets as a result of a state-chartered trust company serving as qualified custodian of digital assets or other types of client assets?
- How do advisers assess whether an entity offering custodial services satisfies the definition of qualified custodian in the Custody Rule?
- What qualities does an adviser seek when entrusting a client’s assets to a particular custodian? Do the qualities vary by asset class? That is, are there qualities that would be important for safeguarding digital assets that might not be important for safeguarding other types of assets? If so, what qualities and why? Should the rule prescribe different qualities based on asset class, or should the rule take a more principles-based approach and allow advisers to exercise care in selecting a custodian?
- Are there entities that currently satisfy the definition of qualified custodian under the Custody Rule that should not be included within that definition because they do not meet the policy goals of the rule? If so, which ones and why? Conversely, are there entities that currently do not satisfy the definition of qualified custodian but should? If so, which ones and why?