Key Takeaways
- • The SEC Division of Investment Management issued a no-action letter on August 12, 2026, permitting Franklin Templeton registered funds to hold tokenized shares of the Franklin OnChain U.S. government money market fund in custody with an affiliated transfer agent, marking the first SEC staff position applying Rule 17f-2's self-custody framework to digital assets.
- • Franklin Templeton funds received relief from compliance with Rule 17f-2 paragraphs (b), (e), and (f)—which traditionally require physical vaulting and segregation, deposit-and-withdrawal notation, and physical examination by independent accountants—enabling custody of digital assets without these physical-possession requirements.
- • The no-action relief signals regulatory flexibility for self-custody of digital assets within registered fund families, focusing on transfer-agent control over authoritative ownership records rather than exclusive private-key control, establishing a potential framework for broader institutional digital asset custody arrangements.
- • This guidance addresses a regulatory gap: Rule 17f-2, adopted in 1947 and last amended in 1989, was designed for certificated securities and did not contemplate blockchain-based or tokenized assets, creating uncertainty around custodial arrangements for digital holdings in registered investment companies.
Summary
The SEC's Division of Investment Management granted no-action relief to Franklin Templeton on August 12, 2026, permitting its U.S. registered open-end and closed-end funds to maintain custody of tokenized shares of an affiliated blockchain-integrated government money market fund through an affiliated transfer agent. This represents the first SEC staff application of Rule 17f-2's self-custody framework specifically to digital assets held by registered investment funds.
The relief exempts Franklin Templeton funds from three core requirements of Rule 17f-2: the mandate to place securities in a vault with physical segregation (paragraph b), deposit-and-withdrawal notation protocols (paragraph e), and physical examination and verification by independent accountants (paragraph f). Instead of traditional physical-possession requirements, the framework emphasizes transfer-agent control over the authoritative ownership record of digital assets, diverging from conventional private-key custody models.
Rule 17f-2, originally adopted in 1947 and amended in 1989, governs where registered fund securities must be maintained under Section 17(f) of the Investment Company Act. The rule's architecture assumes physical custody of certificated securities—an assumption that does not align with tokenized or blockchain-based assets. By granting this no-action relief, the SEC acknowledged this regulatory gap and provided interim guidance allowing institutional asset managers to implement digital asset custody arrangements pending potential formal rulemaking. The relief is narrowly tailored to Franklin Templeton's specific use case of intra-fund family custody of tokenized fund shares, but establishes a regulatory position that may inform custodial arrangements for other registered funds seeking to hold digital assets with affiliated or qualified custodians.
The relief exempts Franklin Templeton funds from three core requirements of Rule 17f-2: the mandate to place securities in a vault with physical segregation (paragraph b), deposit-and-withdrawal notation protocols (paragraph e), and physical examination and verification by independent accountants (paragraph f). Instead of traditional physical-possession requirements, the framework emphasizes transfer-agent control over the authoritative ownership record of digital assets, diverging from conventional private-key custody models.
Rule 17f-2, originally adopted in 1947 and amended in 1989, governs where registered fund securities must be maintained under Section 17(f) of the Investment Company Act. The rule's architecture assumes physical custody of certificated securities—an assumption that does not align with tokenized or blockchain-based assets. By granting this no-action relief, the SEC acknowledged this regulatory gap and provided interim guidance allowing institutional asset managers to implement digital asset custody arrangements pending potential formal rulemaking. The relief is narrowly tailored to Franklin Templeton's specific use case of intra-fund family custody of tokenized fund shares, but establishes a regulatory position that may inform custodial arrangements for other registered funds seeking to hold digital assets with affiliated or qualified custodians.
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