| Go-To Guide: |
|
On August 12, 2026, the SEC’s Division of Investment Management issued a No-Action Letter (the Letter) granting no-action relief to Franklin Templeton under Section 17(f) of the Investment Company Act of 1940 (the 1940 Act) and Rule 17f-2. The Letter provides that the SEC staff would not recommend enforcement action where Franklin Templeton’s affiliated transfer agent acts as custodian for certain Franklin Templeton funds’ investments in shares of a blockchain-recorded money market fund, notwithstanding noncompliance with Rule 17f-2(b), (e), and (f), which addresses the physical custody of certificated securities.
The relief was conditioned on 12 representations centered on the transfer agent’s control of the master securityholder file and the authoritative ownership record as a whole, with control of the private key being one of the many factors cited. The Letter provides useful insight into a transfer agent’s design of its control framework around blockchain-recorded money market fund shares and was issued against the backdrop of broader SEC attention to how existing transfer agency and custody frameworks should apply to digital asset and tokenized fund infrastructure.
Background
Franklin Templeton’s request arises against an industry backdrop in which sponsors of digital asset and tokenized funds grapple with adapting custody and recordkeeping requirements developed for intermediated book-entry or physical securities to blockchain-recorded ownership interests. In practice, some structures have sought to separate the legal record of ownership maintained by a registered transfer agent from the technological mechanics of wallets, private keys, smart contracts, and blockchain transaction records. Industry participants have increasingly focused on whether control over cryptographic keys alone should be treated as custody, or whether custody analysis should instead focus on control over the authoritative shareholder record and the administrative ability to correct, freeze, migrate, or restore ownership records.
The timing of this relief is also notable given that the Letter was issued days before the SEC again delayed its highly anticipated “innovation exemption,” designed to ease regulatory hurdles for firms seeking to issue and trade tokenized securities on blockchain rails under existing securities laws. Although the Letter is limited to its facts, it may serve as an interim indicator of how SEC staff is analyzing transfer agent control, digital asset recordkeeping, and custody concepts pending any more comprehensive SEC or staff action.
Franklin Templeton requested no-action relief from the SEC on behalf of its U.S. registered open-end and closed-end investment companies within the Franklin Templeton family of funds (the Funds). Franklin Templeton sought assurance that the SEC would not recommend enforcement action against the Funds under Section 17(f) of the 1940 Act and Rule 17f-2 with respect to the Funds’ custodial arrangements for its investments in shares of the Franklin OnChain U.S. Government Money Market Fund (the Blockchain-Recorded Fund).
The Blockchain-Recorded Fund’s transfer agent is Franklin Templeton Investor Services LLC (FTIS), an affiliated person of the Funds. FTIS maintains the master securityholder file for the Blockchain-Recorded Fund using a recordkeeping system that is integrated with blockchain/distributed ledger technology (the FTIS System). The FTIS System is comprised of an internal book-entry system that records private shareholder information, and one or more blockchains that record transactional information, such as purchases, redemptions, dividend rates and distributions, net asset values, trade dates and transaction memo information, as well as the complete transactional and operational history of the Blockchain-Recorded Fund.
FTIS controls the FTIS System, including permissioning, smart-contract administration, and referral linkage that incorporates the blockchain-recorded information into the master securityholder file. As part of the FTIS System, FTIS also maintains a separate administrative key-control environment (Administrative Controls). The Administrative Controls allow FTIS to submit instructions to the blockchain associated with an investor wallet, including to maintain, freeze, correct, migrate, or restore the official record of share ownership.
To effect a Fund’s investment in the Blockchain-Recorded Fund, FTIS creates and secures a wallet for each Fund, and maintains the associated private key using a layered security architecture that includes multi-signature and multi-party computation techniques, geographically and operationally distributed signers, and offline recovery capabilities.
Against that backdrop, Franklin Templeton sought no-action relief under Section 17(f) and Rule 17f-2.
Section 17(f) of the 1940 Act and Rule 17f-2
Section 17(f) of the 1940 Act requires every registered management company to place and maintain its securities in the custody of a qualified bank, a company that is a member of a national securities exchange, or with the registered investment company itself (self-custody). However, self-custody is permitted only in accordance with Rule 17f-2 and the rules promulgated thereunder. Rule 17f-2 provides that the securities and investments of a registered management investment company may be maintained in the custody of such company only in accordance with the provisions of Rule 17f-2. 17 C.F.R. § 270.17f-2(a). For purposes of the Letter, the SEC staff accepted that Section 17(f) of the 1940 Act and Rule 17f-2 are applicable because FTIS is an affiliated person of the Funds.
The difficulty here, however, is that Rule 17f-2’s operative conditions presuppose physical or certificated securities. Rule 17f-2(b) provides that all securities and similar investments “[s]hall be deposited in the safekeeping of, or in a vault or other depository maintained by, a bank or other company whose functions and physical facilities are supervised by Federal or State authority.” Rule 17f-2(b) further provides that the securities shall further be segregated at all times from those of any other person.
Similarly, Rule 17f-2(e) requires a signed, serially numbered notation each time securities are deposited, withdrawn, or ordered withdrawn, showing the date and time, the title and amount of the securities, the manner of acquisition, and the recipient. Rule 17f-2(f) then requires that the securities be verified by actual examination by an independent public accountant at least three times each fiscal year, with at least two of them on a surprise basis.
These provisions of Rule 17f-2 thus created an issue for Franklin Templeton, since the Funds’ investments in the Blockchain-Recorded Fund are not capable of being certificated nor deposited in a physical vault, and Franklin Templeton was not able to comply with Rule 17f-2(b), (e), and (f).
Result
The SEC staff stated that it would not recommend enforcement action under Section 17(f) and Rule 17f-2 if FTIS acts as custodian for the Funds with respect to the Funds’ investments in shares of the Blockchain-Recorded Fund without compliance with Rule 17f-2(b), (e) and (f). However, the no-action determination was conditioned on the Funds’ implementation of the following measures:
- Maintaining a system reasonably designed to prevent unauthorized instructions;
- Requiring FTIS to deliver and transition the Funds’ shares, related official books and records, and Administrative Controls to any successor transfer agent, custodian, or other safekeeper;
- Requiring FTIS to maintain the Administrative Controls for so long as FTIS acts as the transfer agent;
- Obtaining annual approval of the arrangement by the Funds’ boards;
- Requiring FTIS to maintain records in the FTIS System reflecting each Fund’s holdings in an account established for each Fund and segregated from the records of other shareholders, including the establishment of a separate wallet for each Fund;
- Requiring FTIS to provide the Funds with copies of all confirmations and transactions to or from the Funds’ account or wallet;
- Requiring FTIS to send the Funds reports concerning FTIS’ system of internal accounting control;
- Limiting the number of persons authorized to transmit instructions;
- Using passwords or other factors of authentication and cryptographic tools to ensure only authorized persons can transmit instructions;
- Requiring FTIS to send confirmations of each transaction to authorized persons of the Funds other than those who transmitted the instructions;
- Maintaining internal accounting controls that subject all confirmations to daily reconciliation; and
- Engaging each Fund’s independent public accountants to conduct examinations three times per year, at least two of which will be without prior notice.
These conditions closely track the investor-protection concerns embodied within Rule 17f-2.
Practical Takeaways
The most consequential feature of the Letter is the insight into what SEC staff focused on: control of the authoritative ownership record. SEC staff accepted the representation that FTIS’ maintenance of the wallets and private keys does not displace its transfer-agent authority or its master securityholder file. Rather, the private key is an instruction mechanism, while the authoritative record and the ability to control it remain with the transfer agent. The Letter effectively treats a transfer agent’s control of a blockchain integrated recordkeeping platform as functionally equivalent to traditional book-entry recordkeeping, without having to merely mirror traditional fund shares, provided the transfer agent maintains robust administrative controls. The Letter reinforces that the controlling question for Rule 17f-2 is the control of the official record, not the physical form of the asset.