SEC staff lets Franklin funds hold on-chain money-fund shares with their affiliated transfer agent as custodian

What changed

On August 12, 2026 the Investment Management staff said it would not recommend enforcement action under Investment Company Act Section 17(f) and Rule 17f-2 if Franklin-family registered funds hold shares of the Franklin OnChain U.S. Government Money Fund with Franklin Templeton Investor Services (FTIS), the affiliated transfer agent, as custodian, without meeting Rule 17f-2's vault, notation, and physical-examination requirements in paragraphs (b), (e) and (f). FTIS keeps the fund's official ownership record by joining an internal book-entry system to blockchain records on Stellar. It holds each investing fund's wallet key and keeps separate administrative keys that let it correct errors, freeze or migrate wallet records, and rebuild the official record. Franklin argued that the custody analysis turns on FTIS's control of that record, not on who holds the wallet key; the staff restated the argument but made no legal finding. The position carries twelve conditions, including a separate wallet and segregated account for each fund, transfer of the administrative keys and smart-contract controls to any successor agent, annual board review, daily reconciliation, and three accountant verifications a year, two unannounced. It extends a 1992 staff letter on book-entry master-feeder shares and has no legal force.

Who it affects

• Franklin-family registered open-end and closed-end funds using the OnChain Fund for cash and securities-lending collateral
• Fund boards, chief compliance officers, and auditors reviewing self-custody of fund shares recorded on a blockchain
• Other fund complexes and transfer agents weighing similar arrangements

What is still open

• Whether staff would take the same position for a fund complex whose transfer agent lacks equal power to freeze, correct, and restore on-chain records
• How the position applies if the OnChain Fund moves holdings from Stellar to another chain, which the fund says it may do
• Whether the transfer-agent proposal's 'exclusive control' standard, if adopted, would change the analysis

What it means for an advisor

• When a tokenized fund is offered, ask who can freeze, correct, or reissue a holder's position and whether that power passes to a successor transfer agent
• Treat the letter as relief for Franklin funds only; it does not cover advisory client accounts or the Advisers Act custody rule
• Separate who holds the wallet key from who keeps the official ownership record when documenting custody for a tokenized fund position