What the 2026 Custody Rule Proposal Means for Private Fund Advisers

On October 1, 2026, the U.S. Securities and Exchange Commission (SEC) proposed amendments to the custody rule for investment advisers. Most of the attention to date has gone to provisions on crypto assets, but the proposal would also change how private funds get audited. Nothing is final yet. Comments are due December 7, 2026, and Rule 206(4)-2 applies as written until the SEC adopts a final rule.

What did the SEC propose?

A set of updates to the existing rule. It isn’t a rewrite. The proposal (Release IA-7023) would move Rule 206(4)-2 under Section 223 of the Advisers Act and renumber it as Rule 223-1. The SEC fact sheet groups the changes into three areas.

1. A framework for crypto assets, including self-custody by advisers in limited cases and custody by state trust companies.
2. Updates to the adviser custody rule, mostly around audits and a few narrow exceptions.
3. Updates to the custody rules for registered funds and business development companies.

This follows the SEC’s 2023 safeguarding proposal, which was withdrawn on June 12, 2025.

What changes for funds on the audit path?

Six things, if the proposal is adopted as written.

1. No PCAOB requirement. Today the auditor of a fund relying on the audit provision has to be registered with and inspected by the Public Company Accounting Oversight Board (PCAOB). The proposal drops that. It would also drop the PCAOB requirement for the surprise exam and internal control report that apply when the adviser or an affiliate acts as the custodian. The auditor would still have to qualify as an independent public accountant under the independence standards in Rule 2-01(b) and (c) of Regulation S-X.
2. GAAP becomes part of the rule. Audited financials would have to follow U.S. Generally Accepted Accounting Principles (GAAP), with an exception for foreign pooled vehicles.
3. Longer deadlines for funds of funds. The 120-day delivery deadline would become 180 days for funds of funds and 260 days for funds of funds of funds.
4. Room for unforeseeable delays. If you reasonably expected to deliver on time and something you couldn’t foresee got in the way, a late delivery generally wouldn’t count as a violation, as long as you deliver promptly once it’s resolved.
5. A shorter first year for new funds. A fund formed in the last 90 days of its fiscal year could send investors financial statements for that first short year within 90 days after it ends, and those statements could be unaudited. The audit would then cover the first and second fiscal years together and go out after the second year ends.
6. Delivery to an investor’s representative. Audited financials could go to an independent representative that an investor designates, instead of to the investor directly.

The PCAOB change could have the biggest consequences of anything in the proposal. Relatively few audit firms are PCAOB-registered, which limits who sponsors can hire and pushes up what they pay. If the requirement goes away, more firms could audit private funds, and the audit path could get cheaper relative to the custodian path.

It is also likely to draw the most opposition. The PCAOB requirement was added in the SEC’s 2009 amendments after the Madoff fraud, which was audited by a tiny firm that no regulator had inspected. Investor advocates may push to keep the requirement in some form.

What stays the same on the custodian path?

The core requirements. An adviser that doesn’t use the audit provision would still need to:

• Keep each fund’s cash and securities with a qualified custodian.
• Have a reasonable basis to believe the custodian sends quarterly statements to every investor in the fund.
• Get a surprise exam from an independent accountant once each calendar year.

The privately offered securities exception would also stay tied to the audit. An unaudited fund would still need a custodian to hold its private interests.

What else is in the proposal?

A few narrower changes that could affect some advisers.

• Standing letters of authorization. An adviser with custody only because of a qualifying standing letter of authorization would be excepted from the surprise exam. A standing letter of authorization is a client’s written instruction letting the adviser send money to specific third parties.
• Inadvertent custody. A new exception would cover advisers that end up with custody inadvertently in specified circumstances.
• Discretionary trading. The rule would spell out when discretionary trading authority alone doesn’t count as custody.
• Client notice. The notice sent when an account is opened with a qualified custodian would have to include the client’s account number.

What does it say about crypto and state trust companies?

Most of the proposal’s length goes to crypto assets. An adviser could hold a client’s crypto assets itself only if no permitted custodian is available for that asset, and it would have to recheck that every quarter. It would also need documented safeguarding expertise, separate addresses for each client, and an annual internal control report from an independent accountant.

State trust companies could hold client crypto assets if the adviser does diligence before hiring the trust company and every year after. That diligence covers four things.

1. The trust company is authorized by its state banking regulator to provide crypto custody.
2. It has written policies and procedures to safeguard the assets.
3. Its most recent audited financial statements, reviewed by the adviser.
4. Its most recent internal control report, reviewed by the adviser.

Client crypto assets would also have to be kept separate from the trust company’s own assets.

These provisions only cover crypto. Whether a state trust company counts as a “bank,” and so as a qualified custodian for other assets, still depends on the statutory definition in Section 202(a)(2) of the Advisers Act. The SEC’s fact sheet notes that this is a fact-specific question. American Estate & Trust (AET) is a Nevada-chartered trust company examined by the Nevada Financial Institutions Division, and it serves as qualified custodian for private funds today. If you want to talk through how that applies to your funds, book a call with our team.

What should private fund advisers do now?

Keep complying with Rule 206(4)-2 as it stands. A final rule may look different from the proposal, and it would come with its own compliance date.

A few steps make sense in the meantime.

• If you’re choosing between the audit and the custodian path, ask your accountant how the PCAOB change would affect pricing. Don’t switch on the assumption that it will be adopted.
• If you run funds of funds, note the proposed 180-day and 260-day deadlines, but keep meeting 120 days for now.
• If you form a new limited liability company (LLC) for each deal, watch the first-year rule. A deal that closes in the last 90 days of the fiscal year would no longer need its own audit of that short first year. Until the rule is final, confirm with your auditor how first-year audits work for your funds today.
• If you want to weigh in, comments are due December 7, 2026. The proposing release explains how to submit them.

Frequently asked questions

Is the SEC custody rule changing in 2026? The SEC proposed amendments on October 1, 2026. A final rule is unlikely before 2027, and it would take effect later still. Until then, Rule 206(4)-2 applies.

What is Rule 223-1? The proposed new number for the custody rule. The proposal would move Rule 206(4)-2 under Section 223 of the Advisers Act.

Would private fund audits still need a PCAOB-registered firm? Not under the proposal. The auditor would still have to be an independent public accountant.

Does the proposal change account statements for private fund investors? No. Unaudited funds would still need a qualified custodian to send quarterly statements to every investor.

When is the comment deadline? December 7, 2026.

Talk to us about your funds

If you’re weighing the audit and custodian paths, or want to see how AET would hold your funds’ positions and send investor statements, book a call with our team. You can also read our comparison of the audit and surprise exam paths.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax, or investment advice. The proposal described here may change before adoption. Advisers should confirm how the custody rule applies to their funds with compliance counsel and their independent accountant.