SEC Staff Requests Comments on the Custody Rule: Non-DVP Trading and Digital Assets

March 21, 2019

Through a March 12, 2019 letter (Letter), Paul Cellupica, Deputy Director and Chief Counsel of the SEC’s Division of Investment Management, on behalf of the Division’s staff invited industry engagement and sought information regarding products and transactions that do not settle on a delivery versus payment (Non-DVP) basis, distributed ledger technology (DLT) and digital assets, particularly in the context of Rule 206(4)-2 under the Investment Advisers Act of 1940 (Custody Rule). The staff cites questions raised in response to its February 2017 Guidance Update on inadvertent custody as one of the drivers for the Letter.

The Letter, addressed to Karen Barr, President and Chief Executive Officer of the Investment Adviser Association, seeks input from investment advisers and others on the Custody Rule, as well as potential amendments thereto, particularly regarding “the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment…basis” and “the application of the Custody Rule to digital assets.”

The staff notes that amendments to the Custody Rule are on the SEC’s long-term unified agenda. The staff further states its belief that there are Custody Rule issues in addition to non-DVP trading that the SEC should consider. As a result, industry participants may decide to comment more broadly on the Custody Rule in order to inform any future proposed amendments.

Non-DVP Trading

The Division of Investment Management’s Analytics Office has launched an initiative to gather information on non-DVP practices, as well as the expanding categories of securities and other instruments that settle on a non-DVP basis.

The Letter poses questions as to: types of instruments that trade on a non-DVP basis and the mechanics of such trading; role of custodians in the settlement process; ability to conduct surprise examinations of accounts that trade on a non-DVP basis; inclusion of non-DVP assets on account statements; and potential use of blockchain/DLT to enhance client protections in the context of non-DVP trading.

Digital Assets

The staff of the Division of Investment Management and the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) have engaged with the financial services industry to discuss compliance questions related to digital assets. Through this engagement, the staff considered how the unique characteristics of digital assets impact compliance with the Custody Rule – these characteristics include: the inability “to restore or recover” lost digital assets; “‘immutability’ of blockchain”; pairing of public and private digital keys to transfer assets; recording of ownership with DLT; anonymity of DLT transactions; and difficulty in auditing DLT and digital assets.

As part of this initiative, the Letter solicits public input on several issues, including: whether advisers face particular challenges in complying with the Custody Rule in regard to digital assets; what changes the SEC might consider in connection with possible amendments to the Custody Rule (e.g., whether to apply the Custody Rule’s account statement delivery requirements to digital assets); how advisers classify digital assets for compliance with the Custody Rule, as well as analysis of registration thresholds and investment adviser status; how to best address and remedy the risk of misappropriation of digital assets; what risks are involved with the settlement of DLT and digital asset transactions, both for peer-to-peer trades and transactions through intermediaries; how DLT might be used to evidence ownership of securities and other types of assets; and whether there are other issues concerning the use of DLT for custody and recordkeeping functions.

Comments can be submitted to a dedicated email address ( and will be made public. There is no deadline for comments.

Dechert intends to submit a comment letter in response to the staff’s request for information. Please contact us if you would like to share your views; however, industry participants are also encouraged to contact the staff directly and submit independent responses.


1) Engaging on Non-DVP Custodial Practices and Digital Assets: Investment Advisers Act of 1940: Rule 206(4)-2, Letter from Paul Cellupica, Deputy Director and Chief Counsel of the SEC’s Division of Investment Management, to Karen Barr, President and Chief Executive Officer of the Investment Adviser Association (Mar. 12, 2019).

2) Division of Investment Management Guidance Update 2017-01, Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority (Feb. 2017).

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