Oct. 28, 2023
Unfair Burdens on State-Chartered Trust Companies Custodying Crypto - The SEC's proposed amendments to the custody rule under the Investment Advisers Act would impose unfair burdens on state-chartered trust companies seeking to provide crypto custody services. While the proposal's goals of investor protection are valid, the rule would make it extremely difficult, if not impossible, for these companies to qualify as "qualified custodians", despite meeting the definition of a "bank" under the Advisers Act. This unfairly discriminates against and disrupts a growing field of specialty financial institutions regulated under state banking laws. The proposed rule conflicts with Section 202(a)(2) of the Advisers Act, which defines "bank" to include any "State bank, banking association, or trust company" that operates under state laws and "exercises fiduciary powers similar to those permitted to national banks." State-chartered trust companies meet this definition and should qualify as banks and therefore qualified custodians, regardless of the assets they custody. There is no basis under the Advisers Act to exclude only state-chartered trusts custodying crypto from the bank definition. Additionally, the proposed rule is in tension with the basic aim of the National Bank Act, to establish competitive equality between national and state-chartered banks. As applied to crypto custody, the rule would upset this equal playing field by imposing requirements on state institutions that federally chartered institutions escape. This discriminatory treatment of state-chartered custodians has no statutory basis under the custody rule.