In July 2026, the U.S. Securities and Exchange Commission (“SEC”) released its 2026 Regulatory Agenda (“Agenda”), reflecting its key priorities as to future rulemaking proposals. Many of the agenda items appear to focus on reducing compliance burdens, but one item caught our attention – a revival of proposed changes to the Custody Rule. It requires the attention of even those advisers who do not currently claim, or never have claimed, custody.
As many recall, in February 2023, the SEC proposed a new rule intended to replace the existing Custody Rule under the Investment Advisers Act of 1940 (the “Advisers Act”), known as the Safeguarding Advisory Client Assets rule (the “Safeguarding Rule”). The Safeguarding Rule was intended to modernize and expand the scope of investor protections and, following a robust comment process, would have presumably been implemented sometime in late 2024. The proposal was met with a roar of opposition from the industry. While many commenters agreed that the SEC was headed in the right direction, most felt the proposal was simply too broad in how the SEC sought to achieve its objectives. Ultimately, the SEC withdrew the Safeguarding Rule in June 2025.
Well, not so fast.
What’s old is new again as the Agenda resurrects the Custody Rule once again. The Agenda references “amendments to existing rules and/or… new rules under the Investment Advisers Act of 1940” intended to “improve and modernize the regulations around the custody of advisory client and fund assets, including to address in each case crypto assets.” Thus, what remains unclear, however, is exactly which path the SEC intends to take – amendments to the existing Custody Rule, a revival of the Safeguarding Rule, or something else entirely.
Chairman Atkins has explained that one goal is to “provide clarity as to how market participants can custody and facilitate trading of tokenized securities onchain.”[1] The reference to crypto assets and tokenized securities is hardly surprising given the emphasis placed on digital assets in the 2023 Safeguarding Rule proposal. Most would likely agree that some level of oversight regarding the custody of digital assets makes sense from an investor protection standpoint, particularly given the continued growth of the asset class.
But, it appears the proposed agenda may set its sights beyond just crypto from the preliminary comments of the SEC. Drawing from past commentary, the SEC's Fact Sheet for the 2023 Safeguarding Rule identified three headline objectives: (1) expanding the Custody Rule to cover a broader array of client assets and advisory activities; (2) enhancing custodial protections; and (3) updating related recordkeeping and reporting requirements.
In the Safeguarding Rule “expansion” to other advisory activities, one aspect of the proposal was viewed as particularly problematic. The SEC proposed treating discretionary authority as a sole requirement to bring assets within the scope of the safeguarding framework, even where the adviser lacked the ability to withdraw or misappropriate client assets. Since most advisers operate under a fee-based discretionary model, the practical effect would have been significant. Advisers with 10 clients and advisers with 10,000 clients alike would have become subject to additional regulatory obligations despite no change in the client relationship, no change in the adviser’s actual authority, and no change in the fact that a qualified custodian – not the adviser – maintained possession of the assets (while having its own obligations under the proposal). Whether the SEC ultimately revisits that aspect of the proposal will be worth watching closely.
What will also be interesting is what other changes the SEC believes are necessary to “make other modernizations needed to remove burdens from certain outdated provisions that are no longer needed to provide investor protection.”[2] While the SEC has provided little insight into what it means by “modernizing” the Custody Rule, advances in technology, coupled with developments such as Regulation S-P, should give regulators an opportunity to revisit certain longstanding requirements that may no longer meaningfully enhance investor protection.
For example, custody is defined as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” Yet, the application of that definition has produced some interesting results over the years. For example, under SEC guidance, an adviser that has authority under a standing letter of authorization/standing letter of instruction ("SLOA") to direct transfers to designated third parties may be deemed to have custody, even when the transfer arrangement was established by the client and the assets remain with a qualified custodian.[3] While relief may be available from certain requirements, such as the surprise examination requirement, the adviser nevertheless enters the custody framework.
Similarly, an adviser’s authority to automatically deduct advisory fees from a client account, even with the client’s consent and while assets remain with a qualified custodian, may also result in the adviser being deemed to have custody and subject to certain obligations.
Those interpretations may have made sense at a time when regulators were focused on identifying every possible avenue for asset misappropriation. But in a world of sophisticated custodial platforms, automated controls, real-time account access, sophisticated surveillance systems, and enhanced cybersecurity requirements, it is fair to ask whether some longstanding custody concepts continue to address meaningful investor protection concerns or whether they simply create additional compliance complexity when resources can be focused elsewhere. We have a thought.
The conversation becomes even more interesting when state custody rules enter the picture. Many states maintain their own custody frameworks, and those frameworks do not always evolve alongside SEC guidance. Some continue to impose requirements tied to fee deduction, invoicing procedures, net capital obligations, or other technical custody triggers that advisers often view as dated. In some cases, state interpretations have not fully tracked developments in federal guidance and interpretations, such as the SLOA interpretation mentioned above. For example, are separate fee invoices truly necessary in a world where custodial account statements clearly disclose advisory fees through statement disclosures and transaction detail? Some states still appear to think so, or, as we would suggest, the states should start to think about modernization alongside the SEC.
For now, the SEC has given the industry more questions than answers. But one thing seems clear: custody is back on the regulatory agenda, and advisers should be paying attention.
See you back here in October.
[1] https://www.sec.gov/newsroom/speeches-statements/atkins-statement-2026-regulatory-agenda-070726
[2] https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202510&RIN=3235-AN46
[3] https://www.sec.gov/divisions/investment/noaction/2017/investment-adviser-association-022117-206-4.htm