Custody and AML: where the investor's money is, and who is watching it

Two compliance areas govern how a sponsor handles the actual money, and they are worth separating because they are at very different stages. Custody, the rules about where investor funds sit and who holds them, is long-settled law. Anti-money-laundering and know-your-customer obligations for investment advisers are a newer regime that has been adopted but delayed, and whose final shape is still uncertain. A sponsor and an investor should understand both, and understand that one is a present obligation and the other is a scheduled one that keeps moving.

Where the money sits is settled law. Who the sponsor has to vet is a rule that was written, postponed, and may be rewritten before it ever takes effect.

Custody: keeping the money separate

The core custody principle is simple and old: investor money is not the sponsor’s money, and it must not be handled as if it were. For advisers subject to the custody rule, that means client assets are held by a qualified custodian, investors receive account statements, and pooled vehicles are subject to audit or verification protections designed to prevent a sponsor from quietly misusing the funds. Even for sponsors not formally covered, the principle carries the force of fiduciary duty and anti-fraud law: commingling investor money with the sponsor’s own operating accounts, or spending it before it is properly the deal’s to spend, is both a custody problem and, as the trouble section noted, a fraud and fiduciary problem.

This connects directly to the escrow discipline covered in the offering-documents section. Routing investor money through escrow at the raise, so it is held separately until closing conditions are met, is the front end of good custody practice, and keeping the deal’s funds in the deal’s own accounts rather than the sponsor’s is the ongoing version. An investor evaluating a sponsor can reasonably ask where their money will be held, and a sponsor who commingles is showing a red flag that sits at the intersection of custody, fiduciary duty, and fraud.

One note on the current state of the rules: the SEC proposed an expanded safeguarding rule in 2023 that would broaden the existing custody requirements, but as of 2026 that proposal has not been finalized, so the existing custody rule still governs. This is an area to watch, because the scope of what must be safeguarded and how may change if the proposal is adopted.

AML and KYC: adopted, delayed, still shifting

The anti-money-laundering picture is the one to state carefully, because it is a moving target. In 2024, FinCEN finalized a rule that would treat many investment advisers, including some exempt reporting advisers, as financial institutions under the Bank Secrecy Act, requiring them to build anti-money-laundering programs, file suspicious-activity reports, and keep related records. Its original effective date was January 1, 2026.

That date has moved. FinCEN delayed the rule’s effective date to January 1, 2028, and signaled that it intends to revisit and possibly tailor the substance of the rule before it takes effect, while the companion customer-identification-program requirement remains only a proposal. So as of 2026, the accurate statement is this: adviser anti-money-laundering obligations have been adopted but are not yet in force, are scheduled for 2028, and may still change in scope before then. A sponsor should be aware the regime is coming and building toward basic readiness, but should not treat the 2024 rule’s specifics as settled current law, because the government has explicitly said it may revise them.

The structuring consequence

For the sponsor, custody is a present discipline and AML is a coming one: keep investor money properly segregated and, where applicable, with a qualified custodian now, because commingling is a live custody, fiduciary, and fraud exposure today, and separately track the AML rule toward its 2028 effective date while understanding its details may shift. For the investor, custody is a fair question to ask any sponsor, where is my money held and is it kept separate from your operating funds, because the answer distinguishes a disciplined operation from a risky one, while the AML regime is mostly the sponsor’s forthcoming compliance burden rather than an investor concern. The money’s safekeeping is settled law worth confirming; the anti-money-laundering rules are real but still being written, and both are worth watching, because one governs the sponsor today and the other will govern them soon.

Last verified August 2026.