Key Takeaways
- • 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 without complying with Rule 17f-2's physical vaulting, segregation, and examination requirements.
- • This represents the first SEC staff application of Rule 17f-2's self-custody framework to digital assets, establishing a precedent for how tokenized fund shares can be held by affiliated registered funds under a principles-based rather than technology-specific regulatory approach.
- • The relief exempts Franklin Templeton funds from three specific Rule 17f-2 provisions: paragraph (b) requiring physical vault placement and segregation, paragraph (e) mandating deposit-and-withdrawal notation, and paragraph (f) requiring independent accountant physical examination and verification.
- • The no-action letter provides regulatory clarity on digital asset custody for registered investment companies and establishes a pathway for other fund families seeking similar relief, though the letter's scope is limited to the specific tokenized shares of the affiliated Franklin OnChain fund.
Summary
The SEC's Division of Investment Management granted historic no-action relief on August 12, 2026, to Franklin Templeton, addressing a longstanding ambiguity in how U.S. registered funds may custody digital assets. The letter permits Franklin Templeton's registered open-end and closed-end funds to hold tokenized shares of the Franklin OnChain U.S. Government Money Market Fund through an affiliated transfer agent without meeting three core physical custody requirements established under Rule 17f-2 of the Investment Company Act.
Rule 17f-2, adopted in 1947 and last amended in 1989, was designed for certificated securities held in physical form. The rule mandates that securities be placed in vaults with physical segregation, that deposit and withdrawal transactions be formally noted, and that independent public accountants conduct periodic physical examinations and verification. These requirements proved incompatible with blockchain-based digital assets, which exist only in tokenized form and cannot be physically vaulted or examined in the traditional sense.
Franklin Resources sought relief to enable its funds to invest in tokenized shares of an affiliated blockchain-integrated government money market fund while maintaining custody through an affiliated transfer agent. The SEC staff's approval grants this relief while maintaining investor protection through alternative safeguarding mechanisms suited to digital asset characteristics. This represents the first formal SEC staff position applying Rule 17f-2's self-custody framework specifically to digital assets, signaling regulatory acceptance of a principles-based approach to digital asset custody rather than technology-specific requirements.
The letter is narrowly tailored to Franklin Templeton's specific fund structure and the tokenized shares of the Franklin OnChain fund, limiting its immediate practical application. However, it establishes a regulatory foundation that other fund families may reference in seeking similar relief, potentially catalyzing broader institutional adoption of tokenized investment vehicles within registered fund structures.
Rule 17f-2, adopted in 1947 and last amended in 1989, was designed for certificated securities held in physical form. The rule mandates that securities be placed in vaults with physical segregation, that deposit and withdrawal transactions be formally noted, and that independent public accountants conduct periodic physical examinations and verification. These requirements proved incompatible with blockchain-based digital assets, which exist only in tokenized form and cannot be physically vaulted or examined in the traditional sense.
Franklin Resources sought relief to enable its funds to invest in tokenized shares of an affiliated blockchain-integrated government money market fund while maintaining custody through an affiliated transfer agent. The SEC staff's approval grants this relief while maintaining investor protection through alternative safeguarding mechanisms suited to digital asset characteristics. This represents the first formal SEC staff position applying Rule 17f-2's self-custody framework specifically to digital assets, signaling regulatory acceptance of a principles-based approach to digital asset custody rather than technology-specific requirements.
The letter is narrowly tailored to Franklin Templeton's specific fund structure and the tokenized shares of the Franklin OnChain fund, limiting its immediate practical application. However, it establishes a regulatory foundation that other fund families may reference in seeking similar relief, potentially catalyzing broader institutional adoption of tokenized investment vehicles within registered fund structures.
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