SEC Staff Issues No-Action Letter Permitting Franklin Templeton Funds' "Self-Custody" of Shares in Affiliated Money Market Fund with Blockchain-Integrated Recordkeeping

At a Glance

• Franklin Templeton Funds may now invest in the Franklin OnChain U.S. Government Money Fund, which uses a blockchain-integrated shareholder recordkeeping system maintained by an affiliated transfer agent, without full compliance with the "self-custody" rule.
• The OnChain Fund is a government money market fund whose affiliated transfer agent uses a proprietary recordkeeping system integrating an internal book-entry system with one or more public blockchains to maintain the official record of share ownership.
• The SEC Staff will not recommend enforcement action under Section 17(f) of the 1940 Act, and Rule 17f-2 thereunder, if Franklin Templeton Funds invest in the OnChain Fund and the OnChain Fund's affiliated transfer agent acts as custodian for such investments.
• The no-action relief is conditioned upon Franklin Templeton Funds satisfying 12 specific operational safeguards.

On August 12, 2026, the Staff of the SEC's Division of Investment Management issued a no-action letter in response to a request from the Franklin Templeton family of funds (Franklin Templeton Funds) regarding custodial arrangements for their investments in shares of the Franklin OnChain U.S. Government Money Fund (OnChain Fund). The OnChain Fund uses a blockchain-integrated system to maintain the official record of share ownership, with the recordkeeping function performed by an affiliated transfer agent. The Staff stated that it would not recommend enforcement action under Section 17(f) of the Investment Company Act of 1940 (1940 Act) and paragraphs (b), (e), and (f) of Rule 17f-2 thereunder, provided that the Franklin Templeton Funds maintain 12 specified operational safeguards in connection with the proposed "self-custody" arrangement.

Background

The Regulatory Framework: Section 17(f) and Rule 17f-2 

Section 17(f) of the 1940 Act governs the custody of investment company assets. Rule 17f-2 (also known as the "self-custody" rule) applies when a registered investment company custodies its own assets, including through custodial arrangements with an affiliated custodian. Rule 17f-2 imposes operational requirements that substitute for the protections ordinarily provided by an independent, external custodian, including: (i) requiring that securities be placed in a vault and physically segregated (paragraph (b)); (ii) requiring the notation of deposits and withdrawals (paragraph (e)); and (iii) requiring the physical examination of securities by the fund's independent public accountants (paragraph (f)). These requirements present compliance challenges when fund shares are held in uncertificated, book-entry, or digital form.

The 1992 NAL Precedent 

The current relief builds on a September 24, 1992, no-action letter issued to Franklin Investors Securities Trust (1992 NAL), which provided relief with respect to paragraphs (b), (e), and (f) of Rule 17f-2, in connection with an affiliated master-feeder fund arrangement where the feeder fund's investments in the master fund were maintained by the master fund's affiliated transfer agent in book-entry form. The Staff granted relief in the 1992 NAL subject to various safeguards, including board approval, segregated accounts, successor-transition undertakings, transaction confirmations, and independent accountant verifications. 

The OnChain Fund 

The OnChain Fund, a government money market fund, does not invest in cryptocurrencies or other digital assets and operates in the same manner as other money market funds, except that its affiliated transfer agent, Franklin Templeton Investor Services LLC (FTIS), maintains the official record of share ownership on a blockchain-integrated system (Integrated System). The Integrated System combines an internal book-entry system recording private shareholder information with one or more public blockchains recording transactional and other anonymous shareholder information. FTIS reconciles those records through real-time referential data linkage to establish the master securityholder file.

Relief Sought and SEC Response

Because FTIS and the Franklin Templeton Funds are affiliates, the Franklin Templeton Funds' proposed custody of their investments in the OnChain Fund with FTIS constitutes a "self-custody" arrangement subject to Rule 17f-2. Franklin Templeton Funds argued that the proposed arrangements present the same functional issue addressed in the 1992 NAL — fund shares maintained by an affiliated transfer agent not held in certificated form — and that the blockchain component does not alter the core custody analysis because FTIS retains unilateral control over the official ownership record. FTIS maintains "administrative controls" employing multiparty computation and multisignature techniques that allow it to correct errors, freeze or migrate records on the blockchain, and restore the official record of share ownership.

The Staff agreed, confirming it will not recommend enforcement action under Section 17(f) and Rule 17f-2, provided that Franklin Templeton Funds satisfy 12 specific operational safeguards, requiring:

1. Maintenance of a system reasonably designed to prevent unauthorized instructions
2. FTIS's successor transition of shares, records, and administrative controls
3. Ongoing maintenance by FTIS of administrative controls
4. Annual board approval and review of arrangements with FTIS
5. Segregated accounts and separate blockchain wallets per investing Fund
6. Transaction confirmations of Fund account or blockchain wallet activities
7. Internal accounting control reports from FTIS upon reasonable request
8. Limiting authorized instruction personnel
9. Using password/cryptographic authentication for transmitting instructions
10. Transaction confirmations sent to non-instructing personnel
11. Daily reconciliation of FTIS confirmations against investing Funds' transaction authorizations
12. Three annual independent accountant verifications (two unannounced)

Practical Implications

Potential Accelerated Adoption of Blockchain-Integrated Shareholder Recordkeeping 

The OnChain Fund offers hourly net asset value calculations, intraday trading, faster transaction processing, potential cost reductions, and enhanced data security. As funds seek greater efficiency in cash management and in securities-lending collateral investments, the Staff's no-action relief for Franklin Templeton Funds may accelerate broader industry adoption of blockchain-integrated shareholder recordkeeping. Moreover, the Staff's analytical framework — treating a blockchain-integrated recordkeeping system as functionally equivalent to a traditional book-entry system for Rule 17f-2 purposes — may serve as a model that other fund sponsors and service providers seek to invoke in analogous contexts.

Limitations and Open Questions 

As with all no-action letters, the Staff's response reflects only its enforcement views based on the specific facts represented by the Franklin Templeton Funds in connection with the proposed "self-custody" arrangement for their investments in the OnChain Fund. The broader regulatory framework governing the adoption of blockchain-based technology in regulated fund operations remains to be developed.

For More Information

For further information, please contact the authors or another member of the firm's investment management team.