The 40 Act Framework Applied to Tokenized Fund Products
The Investment Company Act of 1940 (the “40 Act”) remains the foundational statute governing pooled investment vehicles in the United States. Enacted in the aftermath of the 1929 market crash and refined through 23 major amendments over 84 years, the Act regulates approximately 16,000 registered investment companies holding aggregate assets exceeding $31.3 trillion as of December 2025. Its application to tokenized ETF structures presents one of the most consequential regulatory interpretation challenges in modern securities law.
Section 3(a)(1) of the Act defines an “investment company” as any issuer that “is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.” Tokenized ETFs — which invest in securities but distribute fund shares as blockchain tokens — fall squarely within this definition. The critical questions concern not whether the Act applies, but how its specific provisions interact with distributed ledger technology.
Section 17(f): Custody Requirements for Digital Assets
Section 17(f) of the 40 Act imposes strict custody requirements on registered investment companies. Fund assets must be maintained by qualified custodians — a category that has traditionally included banks, broker-dealers, and futures commission merchants. The section was designed to prevent the type of self-custody arrangements that enabled the fraudulent schemes investigated by the SEC in the 1930s.
For tokenized fund shares, Section 17(f) creates a dual custody challenge. The underlying portfolio assets — whether traditional securities, digital assets, or hybrid baskets — must be held by qualified custodians. Simultaneously, the fund shares themselves, if tokenized on a blockchain, require custody solutions that satisfy the Act’s requirements while leveraging distributed ledger technology’s native security properties.
The SEC’s custody rule interpretation has evolved through a series of staff letters. The November 2023 Staff Accounting Bulletin No. 121 (SAB 121), which required entities custodying crypto assets to record corresponding liabilities on their balance sheets, created significant obstacles for banks seeking to provide digital asset custody services. The early 2025 rescission of SAB 121 under Chair Paul Atkins’s administration removed this barrier, enabling traditional qualified custodians to hold tokenized fund shares without punitive accounting treatment — a development that coincided with the tokenized treasury market reaching $11.70 billion across 73 products and 55,520 holders by March 2026.
State-chartered trust companies with fiduciary powers — including Anchorage Digital Bank (OCC-chartered), BitGo Trust Company, and Coinbase Custody Trust Company — have established qualified custodian status for digital assets. These institutions now custody over $180 billion in digital assets collectively, providing the infrastructure necessary for 40 Act fund custody of tokenized shares. BlackRock’s BUIDL fund ($2.01 billion AUM) uses five custodian providers — Anchorage Digital, BitGo, Coinbase, Copper, and Fireblocks — with BNY Mellon as fund-level custodian.
Section 22: Share Pricing and NAV Calculation
Section 22 of the 40 Act, together with Rule 22c-1, establishes the forward pricing requirement for mutual fund and ETF shares. Fund shares must be sold and redeemed at prices based on the current net asset value next computed after receipt of the order. This “forward pricing” rule was adopted in 1968 to prevent dilution and late trading.
In a tokenized environment, the forward pricing requirement intersects with blockchain’s capacity for continuous settlement. If tokenized ETF shares trade on decentralized exchanges or through smart contract-based order books, the question arises whether each trade must reference a forward-computed NAV or whether on-chain pricing mechanisms satisfy the anti-dilution objectives underlying Section 22.
The SEC has addressed this question indirectly through its treatment of ETF market pricing. Rule 6c-11 exempts ETFs from the forward pricing requirement for secondary market transactions, recognizing that ETF market prices are kept in line with NAV through the creation and redemption mechanism. Tokenized ETFs could extend this logic, with smart contract-based arbitrage mechanisms replacing traditional authorized participant activity.
NAV calculation methodology for tokenized funds raises additional Section 22 questions. Current NAV calculations rely on pricing vendors (Bloomberg, Refinitiv, ICE) that provide end-of-day valuations. On-chain NAV calculation using oracle networks could provide continuous NAV updates, potentially exceeding the accuracy and timeliness requirements of the existing framework.
Section 2(a)(41): Valuation of Fund Assets
The 40 Act’s valuation provisions, primarily Section 2(a)(41) and Rule 2a-5 (adopted December 2022), require fund boards to determine fair value for portfolio securities for which market quotations are not readily available. Rule 2a-5 codified decades of SEC staff guidance on fair value determination, establishing a framework that tokenized funds must navigate.
For funds holding tokenized real-world assets, blockchain-native tokens, or hybrid portfolios, fair value determination requires pricing methodologies that account for the unique characteristics of digital assets. Liquidity assessments, oracle reliability, and cross-chain price discovery all factor into valuation decisions that fund boards must oversee.
The rule’s requirement for “fair value policies and procedures” provides flexibility for tokenized fund valuation approaches, but the absence of specific digital asset guidance creates compliance uncertainty. The ESMA’s approach to valuation of tokenized fund assets offers a useful comparison point for how regulators might address these questions.
Section 18: Capital Structure Restrictions
Section 18 limits the capital structure of registered investment companies, restricting the issuance of senior securities. For open-end funds (including ETFs), Section 18(f) effectively prohibits leverage except through specific carve-outs for bank borrowings and derivative positions covered by segregated assets.
Tokenized fund structures that incorporate DeFi elements — such as staking, lending, or liquidity provision — could implicate Section 18’s leverage restrictions. A tokenized ETF that deploys fund assets in DeFi protocols to generate yield might create implicit leverage that triggers Section 18 scrutiny, even if the fund’s explicit investment strategy does not contemplate leveraged positions.
The SEC’s derivatives rule (Rule 18f-4, effective August 2022) addressed leverage from derivatives but did not contemplate DeFi-specific risks. The interaction between Section 18 and on-chain yield strategies represents an unresolved compliance question for tokenized fund operations.
Section 10: Board Composition and Governance
The 40 Act’s governance requirements — particularly Section 10’s mandates regarding board composition and independent director oversight — apply fully to tokenized fund structures. At least 40% of a registered investment company’s board must consist of persons who are not “interested persons” of the fund, as defined in Section 2(a)(19).
Tokenized fund governance could integrate on-chain voting mechanisms for certain board actions, though the Act’s requirements for in-person meetings (modified post-COVID to permit virtual attendance) and specific board approvals would still require traditional governance processes. The potential for DAO-like governance structures for registered funds remains theoretically interesting but practically constrained by the 40 Act’s prescriptive governance framework.
Exemptive Relief and No-Action Pathways
Historically, the SEC has used exemptive relief under Section 6(c) of the 40 Act to accommodate financial innovation. The first ETF — the SPDR S&P 500 ETF Trust — launched in 1993 under exemptive relief that took years to obtain. Tokenized fund structures may require similar exemptive relief for provisions that cannot be satisfied through existing rule frameworks.
The SEC’s Division of Investment Management has the authority to issue no-action letters providing informal guidance on 40 Act compliance questions. Several fund sponsors have submitted no-action requests related to blockchain-based fund operations, though the Division has not yet published formal responses specific to tokenized ETF structures.
The comparison between regulatory approaches to tokenized fund authorization across major jurisdictions reveals that the US 40 Act framework, while comprehensive, lacks the specific digital asset provisions that newer regulatory regimes — particularly MiCA — have incorporated.
Practical Implications for Fund Sponsors
Fund sponsors planning tokenized ETF launches under the 40 Act face a compliance landscape characterized by regulatory silence rather than prohibition. The Act’s broad statutory language accommodates blockchain technology in principle, but the absence of specific guidance on custody, valuation, settlement, and governance creates legal risk that only formal SEC action can resolve.
The most viable near-term strategy involves operating within existing 40 Act frameworks while introducing tokenization at the operational layer — maintaining traditional fund structures for regulatory compliance while using blockchain for settlement efficiency, NAV transparency, and investor access.
Section 17: Affiliated Transaction Restrictions
Section 17 of the 40 Act restricts transactions between a registered investment company and its affiliated persons — including the fund’s investment adviser, principal underwriter, and any entity controlled by these parties. For tokenized fund structures, Section 17 creates specific compliance considerations:
DeFi protocol interactions: If a fund’s investment adviser or its affiliates hold governance tokens, provide liquidity, or participate in development of DeFi protocols where the fund deploys assets, these interactions could constitute affiliated transactions under Section 17(a). A tokenized ETF that deposits assets in an Aave or Compound pool where the adviser’s affiliated entity also has positions may trigger Section 17 scrutiny.
Cross-fund transactions: Section 17(a) prohibits affiliated funds from transacting with each other except under specific conditions. For fund families operating multiple tokenized products, on-chain interactions between fund smart contracts — such as one fund purchasing another fund’s tokens or participating in the same liquidity pool — must be structured to avoid Section 17(a) violations. Rule 17a-7 provides limited relief for cross-fund securities transactions at market prices, but its application to on-chain transactions has not been formally tested.
Transfer agent relationships: Securitize, which serves as transfer agent for both BlackRock’s BUIDL and Franklin Templeton’s BENJI, raises Section 17 questions for any fund where Securitize or its affiliates hold economic interests. The transfer agent’s central role in tokenized fund operations — controlling smart contract administration, processing subscriptions and redemptions, and maintaining the shareholder register — creates extensive business relationships that Section 17 must accommodate.
Section 30: Reporting and Disclosure Obligations
Section 30 of the 40 Act requires registered investment companies to file periodic reports with the SEC — including Form N-PORT (monthly portfolio holdings), Form N-CEN (annual census), and annual and semi-annual shareholder reports. Tokenized fund operations enhance the data available for these filings while introducing new reporting considerations:
On-chain data for N-PORT: Form N-PORT requires detailed portfolio holdings data, including security-level valuations, risk metrics, and liquidity classifications. For tokenized funds, on-chain portfolio data can populate N-PORT filings with greater accuracy and timeliness than traditional data aggregation processes. However, the SEC’s EDGAR filing system does not currently accept blockchain-sourced data directly, requiring extraction and formatting through on-chain fund administration systems.
Blockchain-specific disclosures: The SEC’s Division of Investment Management has informally indicated that tokenized fund prospectuses should include disclosure of: the blockchain networks used for fund share issuance; smart contract addresses and audit status; oracle network dependencies for NAV calculation; and technology-specific risks including private key compromise, network outages, and smart contract vulnerabilities. The regulatory filing guide covers these disclosure requirements in detail.
Shareholder report modernization: The SEC’s October 2022 rule on tailored shareholder reports (effective July 2024) requires funds to produce concise, visually accessible annual and semi-annual reports. For tokenized funds, these reports could include links to on-chain data dashboards, real-time portfolio composition, and verifiable NAV history — providing transparency that exceeds the rule’s requirements.
Comparison with International Fund Regulation Frameworks
The 40 Act’s framework for tokenized funds can be compared with international equivalents to assess relative regulatory capability:
UCITS Directive: The EU’s UCITS framework, while also lacking explicit DLT provisions, benefits from proactive interpretive guidance from national regulators — particularly the CSSF and Central Bank of Ireland. The UCITS depositary model (requiring a regulated depositary to oversee fund operations) provides a natural integration point for DLT oversight that the 40 Act’s more distributed governance model lacks.
MiCA: While MiCA excludes financial instruments (including fund shares) from its scope, it establishes a comprehensive framework for the service providers that support tokenized fund operations. The 40 Act has no equivalent framework for regulating tokenization platforms, blockchain custodians, or oracle providers — leaving these critical infrastructure components subject to general securities law rather than tailored regulation.
Hong Kong SFC framework: The SFC’s circular on tokenized fund authorization (issued 2023) provides explicit guidance on DLT fund operations — including smart contract standards, custody requirements, and technology governance — that the SEC has not matched. Hong Kong’s approach demonstrates the regulatory clarity achievable when a single regulator addresses tokenized fund operations comprehensively.
Singapore MAS approach: MAS’s technology-neutral regulatory framework enables tokenized fund products within existing fund regulations, supplemented by specific technology risk management guidelines. MAS’s Project Guardian experiments with institutional tokenized fund products have produced practical regulatory insights that the SEC’s enforcement-focused approach has not.
The SEC vs. ESMA comparison positions the 40 Act within the broader transatlantic regulatory landscape. The CFTC-SEC jurisdiction analysis examines how dual-agency oversight compounds the 40 Act’s interpretive challenges. The FINRA broker-dealer requirements cover how 40 Act fund distribution requirements translate to broker-dealer obligations for tokenized products. The SEC publishes Investment Company Act guidance at sec.gov.
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