On October 26, 2020, the Wyoming Division of Banking issued “no-action” relief to Two Ocean Trust stating that i) Two Ocean is permitted to provide custodial services for both digital and traditional assets under Wyoming law, and (ii) that Two Ocean
can refer to itself as a “qualified custodian” as that term is defined under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Under Rule 206(4)-2 or the “custody rule”, an investment adviser is generally required to maintain cash or securities for which it is deemed to have custody with a “qualified custodian”. The custody rule defines “qualified custodian” to include, among others, “[a] bank as defined in section 202(a)(2) of the Advisers Act (15 U.S.C. 80b-2(a)(2)).”
Section 202(a)(2) of the Advisers Act defines “bank” as:
(A) a banking institution organized under the laws of the United States or a Federal savings association, as defined in section 1462(5) of title 12, (B) a member bank of the Federal Reserve System, (C) any other banking institution, savings association, as defined in section 1462(4) of title 12, or trust company, whether incorporated or not, doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency, and which is supervised and examined by State or Federal authority having supervision over banks or savings associations, and which is not operated for the purpose of evading the provisions of this subchapter, and (D) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (A), (B), or (C) of this paragraph.(emphasis added).
The Wyoming Division of Banking effectively concluded that Two Ocean is a trust company meeting all the requirements of prong (C).
Given this outcome, I believe that the SEC’s Division of Investment Management should offer guidance to the industry that reliance on these state-issued no-action letters is reasonable in concluding that an entity is a “qualified custodian” for purposes of the custody rule under the Advisers Act. This level of guidance will only further legitimize the crypto and digital asset movements and provide much needed clarity to the investment management industry.