SEC Division of Investment Management staff letter: Franklin Templeton

“OnChain Fund”), a series of Franklin Templeton Trust, without compliance with paragraphs (b), (e) and (f) of Rule 17f-2. This no-action request is informed and supported by the Staff’s September 24, 1992 no￾action letter to Franklin Investors Securities Trust (the “Trust”) (the “1992 NAL”), 3 which provided a no-action position with respect to the same paragraphs (b), (e) and (f) of Rule 17f-2 in connection with an affiliated master-feeder fund arrangement. 4 The Funds are, however, requesting that the Staff provide new assurances because certain relevant facts differ from those addressed in the 1992 NAL. In particular, for the OnChain Fund, Franklin Templeton Investor Services LLC (“FTIS”), a registered transfer agent under the Securities Exchange Act of 1934 (the “1934 Act”), maintains the official record of share ownership (i.e., the master securityholder file) using a proprietary recordkeeping system that is integrated with blockchain/distributed ledger technology (the “Integrated System”), rather than solely through the traditional book-entry system described in the 1992 NAL. In addition, FTIS will maintain and secure the private keys associated with the blockchain wallets holding the investing Funds’ shares of the OnChain Fund. Notwithstanding the changed factual circumstances, we believe that safeguards similar to those described in the 1992 NAL would satisfy relevant investor-protection objectives served by Rule 17f-2. Further, we believe that compliance with paragraphs (b), (e) and (f) of Rule 17f-2 would be burdensome and impractical with respect to the custody of shares of the OnChain Fund without corresponding benefits to the Funds shareholders. The 1992 NAL The 1992 NAL involved the Trust, its Franklin Adjustable Rate Securities Fund series (the “Feeder Fund”), and Adjustable Rate Securities Portfolio (the “Master Fund”), another registered open-end management investment company in which the Feeder Fund invested. Franklin Administrative Services, Inc. (“FAS”), now known as FTIS, served as transfer agent for both the Feeder Fund and the Master Fund, and the Trust proposed to maintain the Feeder Fund’s shares of the Master Fund in FAS’s book-entry system. Because FAS was an affiliated person of the Feeder Fund, Rule 17f-2 applied. The Trust therefore requested no-action assurances if it acted as custodian for the Feeder Fund’s Master Fund shares without complying with Rule 17f￾2(b), (e) and (f), subject to representations derived principally from then-current Rule 17f-4. Because the Master Fund shares were uncertificated and the Feeder Fund would not have physical possession of them, the Trust explained in the 1992 NAL that compliance with Rule 17f-2(b) would be difficult and, perhaps, impossible. In lieu of compliance with Rule 17f-2(b), the Feeder Fund proposed to treat FAS, as transfer agent to the Master Fund, as a securities 3 Franklin Investors Securities Trust, SEC Staff No-Action Letter (pub. avail. Sept. 24, 1992). 4 The
Commission subsequently recognized the continuing relevance of staff no-action letters like the 1992 NAL that address fund of fund custody arrangements in footnote 15 to the 2003 release adopting amendments to Rule 17f-4, stating that “funds should continue to rely on the staff no-action letters that address arrangements in which funds invest in shares of other funds.” Custody of Investment Company Assets with a Securities Depository, Investment Company Act Rel. No. IC-25934 (Feb. 20, 2003), n.15.

depository for this limited purpose. Although FAS was not a registered clearing agency, the Trust asserted that FAS was functionally equivalent to one in its role as transfer agent because the Master Fund’s uncertificated shares were maintained directly on FAS’s books in book-entry form and transferred by book-entry without physical delivery. The Feeder Fund therefore represented that it would adopt procedures modeled on then￾current Rule 17f-4, including: (i) maintaining a system that is reasonably designed to prevent unauthorized officers’ instructions and which will provide, at least, for the form, content and means of giving, recording and reviewing the instructions;5 (ii) requiring FAS, upon ceasing to act as transfer agent for the Master Fund, to deliver the Feeder Fund’s shares to the successor clearing agency, custodian or safekeeper;6 and (iii) causing the Feeder Fund’s Board of Trustees to approve the arrangements with FAS and review such arrangements at least annually. 7 In addition, the Feeder Fund represented that it would implement procedures based on then-current Rule 17f-4(d)(2), (3) and (4) by requiring FAS to: (a) maintain a segregated account representing only assets held for the Feeder Fund;8 (b) send to the Feeder Fund copies of all confirmations of any transfers to or from the Feeder Fund’s account;9 and (c) send to the Feeder Fund reports regarding FAS’s system of internal accounting control as the Feeder Fund may reasonably request from time to time. 10 With respect to Rule 17f-2(e), the Feeder Fund explained that compliance with the notation requirements was not practical because the Feeder Fund would not deposit or withdraw securities from FAS in the manner contemplated by the rule. In lieu of this requirement, the Feeder Fund represented that it would: (a) limit the number of persons authorized to transmit instructions to FAS as transfer agent; (b) use passwords to ensure that only properly authorized persons could transmit instructions; (c) require FAS to transmit transaction confirmations to persons authorized by the Feeder Fund other than the persons who transmitted investment instructions; and (d) maintain internal accounting controls that subject all confirmations from FAS to daily proof against the Feeder Fund’s transaction authorizations. 5 This provision of Rule 17f-4(c)(1) was updated by amendments to Rule 17f-4 adopted by the Commission in Custody of Investment Company Assets with a Securities Depository, Rel. No. IC-25934 (Feb. 20, 2003) (“Amended Rule 17f-4”) and has been replaced by Amended Rule 17f-4(b)(2). 6 This requirement was removed in Amended Rule 17f-4 and replaced with an overall duty of care; however, we note that it is customary to provide such undertaking in open-end funds’ transfer agency agreements. 7 This requirement was removed in Amended Rule 17f-4. 8 This requirement was removed in Amended Rule 17f-4 and replaced with the reasonable commercial standards as the minimum standard of care. 9
This requirement was removed in Amended Rule 17f-4 although we note that confirmations are still required to be sent by Rule 10b-10 under the 1934 Act. 10 This requirement is now included in Amended Rule 17f-4(b)(1)(ii) and now includes reports on the securities depository’s financial strength and a requirement that such reports be delivered promptly.

With respect to Rule 17f-2(f), the Feeder Fund explained that physical examination of the Master Fund shares by the Trust’s independent public accountants would be impossible because the shares were uncertificated. In lieu of physical examination, the independent public accountants would conduct their examinations by comparing FAS’s transfer agent account records with the book records of the Feeder Fund and the Master Fund and reconciling any differences. The independent public accountants also would perform at least three verifications of the Feeder Fund’s investments each fiscal year, at least two of which would be performed without prior notice to the Feeder Fund. Based on these representations, the Staff stated that it would not recommend enforcement action to the Commission if the Trust maintained the Feeder Fund’s shares of the Master Fund in FAS’s book-entry system, as described in the incoming letter, without complying with Rule 17f￾2(b), (e) and (f). Background of the OnChain Fund and the Integrated System The OnChain Fund is an open-end management investment company and a money market fund relying on Rule 2a-7 under the 1940 Act. The OnChain Fund invests at least 99.5% of its total assets in Government Securities, cash and repurchase agreements collateralized fully by Government Securities or cash, and operates as a “government money market fund,” as such term is defined in or interpreted under Rule 2a-7 under the 1940 Act. 11 The OnChain Fund does not invest in cryptocurrencies or other digital assets. The OnChain Fund operates in the same manner as other money market funds registered under the 1940 Act, except with respect to the method FTIS uses to record the OnChain Fund’s share ownership. Beginning February 8, 2022, and after extensive discussions with the Staff, as well as the staff of the Division of Trading and Markets and the Division of Corporation Finance, FTIS began maintaining the official share ownership records of the OnChain Fund on the Integrated System. The Integrated System uses features of traditional book-entry form and one or more public blockchain networks. The Integrated System is composed of: (i) an internal book-entry system that records private shareholder information; and (ii) one or more blockchains that record transactional and other anonymous shareholder information, such as purchases, redemptions, dividend rates, dividend distributions, net asset values, trade dates and transaction memo information, as well as complete transactional and operational history of the OnChain Fund. These records are automatically joined by FTIS on a real-time basis by referential data linkage to establish the master securityholder file. Although information recorded on a blockchain can be viewed by the public through a blockchain explorer, public viewers have only view access to that blockchain-recorded information. FTIS controls the Integrated System, including the permissioning, smart-contract administrative functions and
referential linkage that make blockchain-recorded information part 11 For purposes of this policy, “Government Securities” means any securities issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States, or any certificate of deposit for any of the foregoing.

of the master securityholder file. Similar to traditional fund recordkeeping systems, all fund and shareholder records in the Integrated System are under the full control of FTIS as transfer agent. FTIS maintains controls to correct errors or unauthorized transactions on any blockchain used by the Integrated System. The Integrated System was designed to allow a migration from one blockchain to another and, if necessary, to revert to the traditional book-entry form of recordkeeping to mitigate risks arising from the blockchain technology. The Funds believe that the Integrated System provides operational efficiencies, including faster transaction processing and the potential for reduced costs, as well as enhanced data security, each of which benefits the Funds and investors. The Funds represent that the Integrated System is different from other distributed ledger or blockchain technologies on which permissionless tokens, such as cryptocurrencies, are issued and transferred without comparable access controls. Importantly, FTIS has unilateral control over the Integrated System and can correct errors or unauthorized transactions as well as limit the transferability of OnChain Fund shares. The Funds believe that the technology underlying the Integrated System enables FTIS to mitigate risks that arise from the use of permissionless blockchain technology and that the OnChain Fund remains subject to the same shareholder protection provisions as any other registered investment company with respect to its transfer agent function. In order for a Fund to invest in the OnChain Fund, FTIS will create a blockchain wallet for the Fund on the Stellar blockchain network upon creation of the Fund’s account through Franklin Templeton’s Benji Institutional Web Portal (the “Institutional Web Portal”). 12 FTIS will maintain and secure the private key associated with each Fund’s blockchain wallet. 13 FTIS uses a layered wallet security architecture, including multi-signature and multi-party computation techniques, geographically and operationally distributed signers, and offline recovery capabilities, designed to protect against theft, loss and unauthorized use of private keys. 14 FTIS also maintains a separate administrative key-control environment (the “Administrative Controls”). This environment uses Multi-Party Computation (“MPC”) and multi-signature (“MultiSig”) techniques across both “hot” (online) and “cold” (offline) signing implementations. MPC and MultiSig combine to require multiple sets of valid signatures for a given transaction to be valid. By distributing signing authority across always-online compute environments, such as datacenters, and offline configurations secured in multiple geographic 12 The OnChain Fund currently uses the Stellar blockchain network as the primary public blockchain but may use other blockchain networks for certain accounts upon request and subject to eligibility. 13 A “private key” is one of two numbers in a cryptographic “key
pair.” A key pair consists of a public key and its corresponding private key, both of which are lengthy alphanumeric codes, derived together and possessing a unique relationship. The private keywill be used to send (i.e., digitally sign and authenticate) instructions to the blockchain to update the ownership records of the OnChain Fund’s shares. 14 Franklin Templeton addresses risks related to artificial intelligence (“AI”) through established enterprise processes for AI governance, technology risk management, cybersecurity, data privacy, and vendor risk management. These processes apply to the review, approval, use, and monitoring of AI-enabled tools and services for all computing systems, including the Integrated System. Franklin Templeton continues to assess AI￾related risks as technologies, use cases, threats, and regulatory expectations evolve.

locations, the Administrative Controls achieve highly diversified and redundant cryptographic signing. These Administrative Controls allow FTIS, in its capacity as transfer agent and administrator of the Integrated System, to sign and submit administrative instructions affecting the blockchain records associated with an investor wallet. Controls of this kind generally do not exist for permissionless tokens, such as cryptocurrencies. In practical terms, the private key associated with an investor wallet permits transactions to be digitally signed and performed for that wallet, while FTIS’s Administrative Controls permit FTIS to maintain, correct, freeze, migrate, or restore the official record of share ownership in the Integrated System. For example, if the private key for a Fund’s wallet were compromised, FTIS would be able to freeze the assets associated with that wallet, investigate the facts, and, if deemed appropriate, create a new wallet for the Fund with a new private key and transfer the holdings from the compromised wallet to the new wallet. The Administrative Controls apply (and have such capabilities) regardless of whether the shareholder uses FTIS’s wallet implementation, their own wallet, or a third-party wallet implementation. The Funds seek the flexibility to invest in the OnChain Fund for cash management purposes, including the investment of cash balances and securities lending collateral. The Funds believe that investments in the OnChain Fund would benefit the Funds and their shareholders because the OnChain Fund provides certain operational features that are not available through the Funds’ current cash management vehicle, including, for example, hourly net asset value calculations, intraday trading, faster transaction processing and the potential for reduced costs, as well as enhanced data security. Discussion The Funds believe the requested no-action position is appropriate because the proposed custody arrangements for the Funds’ investments in shares of the OnChain Fund present the same core custody issues addressed in the 1992 NAL and include safeguards designed to satisfy the same investor-protection objectives. The starting point for the analysis is the same practical concern that motivated the 1992 NAL. Specifically, the Funds would be unable to comply with paragraphs (b), (e) and (f) of Rule 17f-215 because application of those provisions to fund shares maintained by the underlying fund’s affiliated transfer agent would impose operational requirements designed for physical or certificated securities. 15 The Commission and the staff have taken the position that arrangements where a registered investment company custodies its assets with a custodian that is affiliated with its investment adviser may be subject to rule 17f-2. See Custody of Investment Company Assets with a Securities Depository, Investment Company Act Release No. 25266 (Nov. 15, 2001) at n. 65; Maxim Series Fund, Inc., SEC Staff No-Action Letter (Jan. 15,
2004) at n.5 and accompanying text. Because FTIS is an affiliated person of the Funds, the Funds’ proposed
custody of shares of the OnChain Fund with FTIS are self-custody arrangements subject to Rule 17f-2. FTIS and the primary investment managers and most of the subadvisers to the Funds are indirect wholly-owned subsidiaries of Franklin Resources, Inc. and therefore are affiliated persons of each other and of the Funds, including the OnChain Fund.

As a result, the Funds’ proposed investments in the OnChain Fund present the same functional problem that was addressed in the 1992 NAL, notwithstanding the use of blockchain technology in the Integrated System. The investing Funds’ OnChain Fund shares will be recorded in the Integrated System maintained by FTIS rather than held by the Funds in certificated form deposited in a physical vault. FTIS, as registered transfer agent, will maintain the official record of the Funds’ ownership of the OnChain Fund through the Integrated System. The blockchain component of that system does not change the nature of the asset held by the Funds and does not place the custody arrangement outside FTIS’s transfer-agent control. Rather, it is one component of the recordkeeping architecture by which FTIS maintains the master securityholder file, together with its internal book-entry records and referential data linkage. Accordingly, for purposes of Rule 17f-2, the Funds’ position with respect to OnChain Fund shares is substantially the same as the Feeder Fund’s position with respect to Master Fund shares in the 1992 NAL—the ownership position is evidenced and administered through the affiliated transfer agent’s records rather than through physical possession of certificates. Further, FTIS may be viewed as the functional analogue of a securities-depository, as FAS was in the 1992 NAL. In the current request, FTIS performs the same custodial function (similar to a registered clearing agency in its role as a transfer agent) for shares of the OnChain Fund that FAS performed for shares of the Master Fund, as described in the 1992 NAL. FTIS allocates OnChain Fund shares to shareholder accounts and effects purchases, redemptions, transfers and related record changes through entries in records that FTIS controls. The additional use of blockchain records does not substantially alter that functional similarity because FTIS remains the party charged with and empowered to maintain the official record of share ownership as part of its custodial function. FTIS’s maintenance of the private keys associated with the investing Funds’ blockchain wallets does not require a substantially different result. Those private keys permit transactions associated with a Fund’s wallet to be digitally signed. They do not displace FTIS’s transfer-agent authority, FTIS’s master securityholder file, or FTIS’s administrative controls over the Integrated System. Because FTIS controls the permissioning, smart-contract administrative functions and referential linkage that make blockchain-recorded information part of the official record, and because FTIS can correct errors or unauthorized transactions, freeze or migrate wallet records, create a new wallet and restore the official record if necessary, a compromise or misuse of a wallet private key would not, by itself, establish a different official ownership record or prevent FTIS from maintaining the correct record of share ownership. The relevant
custody analysis therefore continues to turn on FTIS’s controlled transfer-agent recordkeeping environment, and the representations described in this request, rather than on the mere fact that FTIS also maintains the wallet private keys used to sign blockchain transactions. In that respect, FTIS’s private-key custody and administrative authority make the proposed custody solution closely analogous to the 1992 NAL, because the entity serving as transfer agent is the entity that maintains and controls the records through which the OnChain Fund shares are held and transferred. Accordingly, the Funds believe that the proposed custody arrangements, under the circumstances described below, support the Staff granting a no-action position with respect to

Rule 17f-2(b), (e) and (f), just as the arrangements described in the 1992 NAL were sufficient in the context of affiliated fund shares maintained by an affiliated transfer agent in book-entry form. FTIS’s controlled transfer-agent records, segregated accounts, successor-transition obligations and board oversight satisfy the concerns addressed by the physical vault custody requirement in Rule 17f-2(b) for fund shares recorded in the Integrated System. Similarly, controls over authorized instructions, passwords or other authentication factors, confirmations sent to persons other than those transmitting instructions, and daily reconciliation against transaction authorizations satisfy the concerns addressed by the deposit and withdrawal notation requirement in Rule 17f-2(e). Finally, the concerns addressed by Rule 17f-2(f) are satisfied by three annual independent public accountant verifications that compare FTIS’s transfer-agent account records with the book records of the investing Fund and the OnChain Fund, together with reconciliation of any differences. The use of blockchain technology in the Integrated System does not change the core custody analysis and the continuing relevance of the safeguards described in the 1992 NAL, as adjusted to reflect the operational features of the Integrated System, because FTIS remains responsible for, and has administrative authority over, the official share ownership record and because the proposed representations carry forward the same investor-protection safeguards that the Staff considered in 1992. For these reasons and the other reasons outlined above, we respectfully request assurance that the Staff will not recommend enforcement action to the Commission 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 OnChain Fund, a series of Franklin Templeton Trust, without compliance with paragraphs (b), (e) and (f) of Rule 17f-2, provided that the investing Funds will:

1. maintain a system that is reasonably designed to prevent unauthorized officers’
   instructions and that will provide, at least, for the form, content and means of giving, recording and reviewing instructions.

2. require FTIS, upon ceasing to act as transfer agent for the OnChain Fund (including upon
   any assignment of the transfer agent function to another entity), to deliver and transition each investing Fund’s shares and the related official books and records to the successor transfer agent, custodian or other safekeeper. In connection with any such transition, FTIS will also transfer to the successor transfer agent the Administrative Controls necessary to maintain and update the official record of share ownership in the Integrated System, including administrative control over any smart contracts and any other functionality that provides unilateral ability to effect or correct entries on the official record.

3. require FTIS to maintain the Administrative Controls described in this request for so long
   as FTIS acts as transfer agent for the OnChain Fund, including the controls necessary for FTIS to correct errors or unauthorized transactions, freeze or migrate wallet records if necessary, and maintain or restore the official record of share ownership in the Integrated System.

4. cause each Fund’s Board of Trustees to approve the arrangements with FTIS and review
   such arrangements at least annually.

5. require FTIS to maintain records in the Integrated System that reflect each investing
   Fund’s holdings in an account established for that Fund and segregated from the records of other shareholders. In addition, for purposes of recording holdings on the blockchain, FTIS will establish and maintain a separate blockchain wallet for each investing Fund.

6. require FTIS to send to each investing Fund copies of all confirmations of any
   transactions to or from the Fund’s account or blockchain wallet.

7. require FTIS to send to each investing Fund reports regarding FTIS’s system of internal
   accounting control as the Fund may reasonably request from time to time.

8. limit the number of persons authorized to transmit instructions to FTIS as transfer agent.

9. use passwords or other factors of authentication and cryptographic tools to ensure that
   only properly authorized persons can transmit instructions.

10. require FTIS to transmit confirmations of each transaction to persons authorized by the
    investing Fund other than those who transmit investment instructions on behalf of the investing Fund.

11. maintain internal accounting controls that subject all confirmations from FTIS to daily
    reconciliation against the investing Fund’s transaction authorizations.

12. engage each investing Fund’s independent public accountants to conduct their
    examinations by comparing FTIS’s transfer agent account records with the book records of the investing Fund and the OnChain Fund and reconciling any differences. The independent public accountants will perform at least three verifications of the investing Fund’s investments each fiscal year, at least two of which will be performed without prior notice to the investing Fund.

---

We thank the Staff in advance for considering this request. If you have any questions or would like to discuss these matters, please contact me at (650) 312-3492. Sincerely, Navid J. Tofigh Senior Associate General Counsel Franklin Templeton