SEC Rule 206(4)-2, commonly known as the “Custody Rule,” is a regulation under the Investment Advisers Act of 1940 that mandates specific requirements for investment advisers who have custody of client funds or securities. Its core purpose is to safeguard client assets from theft or misuse by advisers, ensuring robust internal controls and external oversight, which is increasingly relevant for advisers dealing with digital assets.
Mechanism
The rule requires advisers with custody to maintain client funds and securities with a qualified custodian, notify clients of the custodian’s identity, and arrange for an independent public accountant to conduct an annual surprise examination of client assets. Additionally, advisers must obtain a written internal control report from the accountant if they maintain client assets themselves or with an affiliate.
Methodology
The strategic compliance approach focuses on implementing stringent custody arrangements and oversight procedures to protect client interests and maintain regulatory standing. Principles include transparent client communication regarding asset location, rigorous internal record-keeping, and proactive engagement with independent auditors to verify asset existence and proper segregation, establishing a framework for investor protection in both traditional and digital asset advisory services.
A qualified crypto custodian secures the cryptographic key representing the asset itself; a traditional custodian safeguards the legal claim to an asset.
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