Asset manager Franklin Templeton is preparing to integrate tokenized assets into its conventional mutual funds and exchange-traded funds, following a regulatory clearance from Securities and Exchange Commission staff to hold its $721 million blockchain-based money market fund within those portfolios.
The SEC's Division of Investment Management issued a relief letter on August 12, setting aside specific vault custody provisions under Rule 17f-2 of the Investment Company Act of 1940. The division noted that the staff position is not a rule, regulation, or statement of the Commission, and carries no legal force or effect.
The underlying product, the Franklin OnChain U.S. Government Money Fund (FOBXX), reported net assets of $720,928,224 on July 31 alongside a 3.50% seven-day net yield. Under the arrangement, Franklin Templeton Investor Services will open a separate wallet on the Stellar blockchain for each participating investment fund.
The staff approval is subject to twelve conditions. Each fund’s board of trustees must approve the arrangement and review it at least annually. Additionally, Franklin Templeton Investor Services must retain the ability to correct errors, freeze or migrate wallet records, and restore official ownership records. If the firm ceases to act as transfer agent, administrative control over the smart contracts must be transferred to a successor.
Furthermore, independent public accountants are required to verify each fund’s holdings at least three times per fiscal year, with two of those inspections conducted without prior notice. The funds are permitted to use the shares for cash balances and securities lending collateral.
The relief was granted by analogy to a 1992 letter concerning a master-feeder arrangement with an affiliated transfer agent, with Franklin arguing that a Stellar wallet presents a similar scenario because the official ownership record remains under unilateral control.
