On September 30, the SEC Division of Investment Management issued a no-action letter, in response to a law firm’s request, stating it would not recommend any enforcement action against registered investment advisers or regulated funds for treating a state trust company as a “bank” custodian for cryptoassets and related cash under custody provisions of the Investment Advisers Act and Investment Company Act, provided it comports with the conditions outlined in the letter.

Specifically, the no-action letter stated that the SEC staff’s position was conditioned on the adviser or fund, before and during the relationship, having a “reasonable basis, after due inquiry” for believing the state trust company is authorized by state banking regulators to provide custody services for cryptoassets and maintains appropriate safeguarding policies; and that the adviser or fund: (i) enters into a written custodial agreement with the state trust company that includes segregation and use restrictions for client assets; (ii) discloses material risks associated with using a state trust company as custodian to clients or boards; and (iii) reasonably determines that using the state trust company’s custody services is in the best interest of clients or shareholders.

The SEC elaborated on the “due inquiry” requirement, explaining that the adviser or fund must review the state trust company’s most recent audited financial statements and independent audit reports (e.g., SOC-1 or SOC-2 reports) to confirm that the company’s controls are suitably designed and operating effectively to safeguard cryptoassets and related cash.