On October 23, 2020, the Wyoming Division of Banking issued a no-action letter to Two Ocean Trust, a Wyoming-chartered public trust company located in Jackson, Wyoming. The no-action letter was noteworthy not so much for its content but, at least with regards to the federal regulatory issues it discusses, that it was written at all.
The Wyoming Division of Banking is the primary regulator of Two Ocean, and as such it oversees not just Two Ocean’s compliance with Wyoming laws but other laws as well. The no-action letter contains the Wyoming Division of Banking’s analysis that (1) Two Ocean is permitted to provide custodial services for digital assets, including virtual currency and digital (tokenized) securities under Wyoming law and (2) that the Wyoming Division of Banking would not bring an enforcement action if Two Ocean held itself out to the public as a “qualified custodian” based on satisfying the definition of “bank” under the Investment Advisers Act of 1940 for purposes of the Securities and Exchange Commission’s Custody Rule. The first item involved interpreting Wyoming law and is of real importance mostly to Two Ocean and its customers.
The second point involved interpreting a federal statute and rules promulgated under that statute, which generally falls under the purview of federal regulators, not state regulators. In the case of the Custody Rule, that federal regulator is the SEC. While the Wyoming Division of Banking does address this jurisdictional point in its no-action letter 1, it was unusual for it to issue a formal letter discussing its view of what constitutes a bank for purposes of the Custody Rule. After all, whether or not a state chartered trust company can act as a qualified custodian under the Custody Rule hinges on whether its business consists of exercising fiduciary powers similar to those permitted to national banks as required by the definition of “bank,” and the regulator tasked with interpreting this rule is the SEC.
On November 9, 2020, the Division of Investment Management of the SEC, in consultation with the SEC’s FinHub staff, issued a statement in response to the no-action letter by the Wyoming Division of Banking. In footnote four to its response, it pointed out that neither the SEC nor its staff, are “bound by statements or views expressed by state regulators. This includes statements or interpretations regarding custody of digital assets as well as more traditional securities and whether any entity is a ‘qualified custodian.’” It highlighted that the Wyoming no-action letter “should not be construed to represent the views of the SEC or any other regulatory agency” and that with respect to “whether any entity’s business consists of exercising fiduciary powers similar to those permitted to national banks as required by the definition of ‘bank’ [the staff] expects that it would consult with the staff of the Office of the Comptroller of the Currency.”
1 The no-action letter makes it clear that it represents the view of the Wyoming Division of Banking and "should not be construed to represent the views of the SEC or any other regulatory agency."
The SEC statement makes it clear that the no-action letter issued by the Wyoming Division of Banking does not establish conclusively that Wyoming trust companies are “qualified custodians” under the Custody Rule, even though a number of commentators have interpreted it to mean just that. For investment advisers, custody of digital assets remains an important issue, and for now whether or not a state chartered trust company can act as a qualified custodian will continue to be a fact-based, case-by-case examination. Though the SEC staff is currently considering changes to the Custody Rule, qualified custodians will remain a key element of the rule.