Franklin Templeton Met SEC Crypto Task Force on 1940 Act Issues Under Innovation Exemption

Franklin Templeton met with the Crypto Task Force of the US Securities and Exchange Commission (SEC). The $1.8 trillion AUM financial services giant seeks clarity over how the agency’s innovation exemption applies to tokenized money market funds, tokenized National Market System (NMS) ETFs, and tokenized funds on liquidity pools.

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Franklin Templeton Seeks SEC Clarity on Potential 1940 Act Issues Under Innovation Exemption

According to an SEC memo, Franklin Templeton representatives Mike Muir, Navid Tofigh, and Sarah Bessin met with the Crypto Task Force regarding the innovation exemption.

The proposed agenda covered background on the firm’s digital assets business, its FOBXX government money market fund, and the SEC’s Innovation Exemption and its potential issues with the 1940 Act.

Franklin Templeton asked the SEC Crypto Task Force whether relief from Section 22(d) and Rule 22c-1 is necessary for a tokenized money market fund share to trade on a tokenized securities venue (TSV) and for a liquidity provider to charge a fee for its services.

It also asked whether a share of a tokenized NMS ETF needs similar relief to trade on a TSV, in a pair with another tokenized NMS stock, a permitted payment stablecoin, or a tokenized money market fund. The agenda also asked whether additional relief is required because a TSV is not a national securities exchange.

Discussions covered the mechanics of depositing assets and receiving liquidity pool (LP) interests. It also included whether relief is needed so that the liquidity pool is not treated as an investment company and the LP interests are not treated as securities, which may require relief under the 1933 and 1934 Acts.

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Why Regulatory Clarity Is Needed?

In August, the SEC’s Division of Investment Management issued a no-action letter and allowed certain Franklin Templeton-affiliated funds to invest in the OnChain Fund via blockchain wallets controlled by the transfer agent, subject to conditions designed to protect ownership records and assets.

In September, the SEC issued the Innovation Exemption under the 1934 Securities Exchange Act. It offered tokenized securities venues (TSVs) relief from the “exchange” definition and allowed them to operate automated market maker (AMM) liquidity pools for trading tokenized National Market System (NMS) stocks.

In addition, it gave certain liquidity providers relief from “dealer” registration. However, this does not automatically clear 1940 Act requirements that apply to mutual funds, ETFs, and money market funds.

Franklin Templeton needs clarity on whether additional relief is needed for its tokenized funds and ETFs to participate in the TSV trading environment created by the Innovation Exemption, without violating the 1940 Act.

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