SEC staff grants no-action relief for custody of digital assets (limited to specific fund shares) under the Investment Company Act

aaaThe letter allows the Franklin Templeton registered funds to do so without complying with Rule 17f-2’s requirements for physical vaulting and segregation, deposit and withdrawal notation, and physical examination (i.e., paragraphs (b), (e), and (f) of the rule) under the Investment Company Act of the 1940, as amended (the “Investment Company Act”).

The letter is the first SEC staff position applying Rule 17f-2’s self-custody framework to digital assets, albeit to specific registered funds’ ability to self-custody the tokenized shares of a specific affiliated registered fund.²

Regulatory background

Section 17(f) of the Investment Company Act governs where a registered fund’s securities and similar investments must be maintained. Rule 17f-2 sets the conditions under which a fund or an affiliated person may custody fund assets, often referred to as “self-custody.” The rule—adopted in 1947 and amended in 1989—assumes physical possession of fund securities in certificated form: paragraph (b) requires securities to be placed in a vault and physically segregated; paragraph (e) imposes deposit-and-withdrawal notation requirements; and paragraph (f) requires physical examination and verification by independent public accountants.³

The request

In its request, Franklin Resources, Inc. (“Franklin Templeton”) sought flexibility for its U.S. registered open-end and closed-end funds to invest in the tokenized shares of the Franklin OnChain U.S. Government Money Market Fund (the “OnChain Fund”), an open-end government money market fund relying on Rule 2a-7 of the Investment Company Act.

According to the request, the funds’ affiliated transfer agent, a registered transfer agent under the Securities Exchange Act of 1934, maintains the official record of OnChain Fund share ownership using a proprietary recordkeeping system with two components:

Internal book-entry system: records private shareholder information (name, DOB/SSN).

Public blockchain(s): records transactional and anonymous information (purchases, redemptions, dividend rates, NAVs, trade dates, complete transactional history). 

As described, the transfer agent joins the two components in real time by referential data linkage to form the master securityholder file. 

Franklin Templeton represented that the transfer agent maintains “Administrative Controls,” a key-control environment using multi-party computation (MPC) and multi-signature (MultiSig) protocols across geographically and operationally distributed hot (online) and cold (offline) signers. These controls allow the transfer agent to correct errors and unauthorized transactions, limit transferability, freeze or migrate wallet records, and revert to traditional book-entry recordkeeping if necessary, regardless of whether the shareholder uses the transfer agent’s wallet, its own wallet, or a third-party wallet.

The relief

Based on the facts presented and subject to twelve conditions, the SEC staff stated that it would not recommend enforcement under Section 17(f) and Rule 17f-2 if the U.S. registered funds in the Franklin Templeton fund family hold the tokenized shares of the OnChain Fund in custody with their affiliated transfer agent.

The takeaways

This relief is significant because it represents the first SEC staff position permitting custody of digital assets under the self-custody framework of Investment Company Act Rule 17f-2, notwithstanding the limited scope of the relief. We expect the SEC to build upon this relief in the investment company custody rule proposal that we expect the SEC to publish later this year.⁴

Footnotes

1. Franklin Templeton, SEC No-Action Letter (Aug. 12, 2026), available at SEC.gov | Franklin Templeton.

2. The current letter builds on a 1992 staff position also involving Franklin Templeton registered funds. See Franklin Investors Securities Trust, SEC No-Action Letter (Sept. 24, 1992).

3. 17 CFR § 270.17f-2.

4. See Amendments to the Custody Rules, SEC 2026 Regulatory Agenda, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202510&RIN=3235-AN46.