Trading and Custody: The Innovation Exemption and Broker-Dealer Safekeeping

On September 17, 2026, the SEC issued a temporary, conditional exemptive order (Release No. 34-106402) that lets Tokenized Securities Venues trade tokenized NMS stocks in permissioned automated-market-maker pools, subject to symbol and volume caps, public transaction data, and halts that track the primary listing exchange. For custody, SEC staff said in December 2025 that broker-dealers meeting specified conditions may treat themselves as having physical possession of crypto asset securities, and the SEC proposed separate crypto custody rules for advisers and funds in October 2026.

The Innovation Exemption for tokenized NMS stocks

On September 17, 2026, the Commission approved a temporary, conditional exemption, the "Innovation Exemption," to allow limited trading of tokenized NMS stocks on certain onchain venues called Tokenized Securities Venues, or TSVs ^[1]. The order, Release No. 34-106402, exempts TSVs from the definition of "exchange" and exempts certain liquidity providers that supply tokenized NMS stock to AMM liquidity pools from the definition of "dealer" ^[2]. It is an exemptive order, not a rule, and it is set to expire five years after publication ^[2].

A TSV brings together buyers and sellers of tokenized NMS stock by providing automated market maker (AMM) liquidity pools for permissioned participants and by setting standards for access ^[2]. Eligible tokenized NMS stock includes stock tokenized by or on behalf of the issuer and stock tokenized by an unaffiliated third party. It excludes synthetic instruments such as tokenized linked securities or tokenized security-based swaps ^[2]. A TSV must be a U.S. person, which brings it within OFAC sanctions requirements ^[2].

The main conditions

• Symbol and volume caps: Tier 1 tokenized NMS stocks are limited to 75 symbols and 0.25 percent of the prior month's average daily share volume in the underlying stock; Tier 2 stocks are limited to 250 symbols and 2.5 percent ^[2]. Tiers follow the Limit Up-Limit Down Plan, and volume is aggregated across affiliated TSVs ^[2].
• Transaction transparency: U.S. dollar-denominated data for all transactions in the past 30 days must be freely and publicly available in machine-readable form, updated within 10 minutes, including symbol, paired asset, price, size, time, and direction ^[2].
• Stoppage coordination: a TSV must stop trading a tokenized NMS stock whenever trading in the underlying stock is halted or suspended on the primary listing exchange, and must immediately notify participants ^[2].
• Other conditions: public notice, books and records, and technology safeguards ^[1].

Commissioner Mark Uyeda described the design as controlled, with symbol limits and volume caps calibrated by Limit Up-Limit Down tiers, and said the published data is meant to reduce information asymmetries and allow study of trading under the exemption ^[1]. He framed the order as a path to data-driven rulemaking, and the Commission is soliciting comment on its design ^[1]. The order asks, for example, whether the 75-symbol/0.25 percent and 250-symbol/2.5 percent limits are appropriate ^[2].

What investor advocates asked for

Six months earlier, on March 12, 2026, the SEC's Investor Advisory Committee approved a recommendation on tokenized equity ^[3]. It concluded that the SEC should not adopt a "blanket" innovation exemption. Instead, any reforms should be limited to what is necessary to facilitate tokenization without compromising fundamental investor protections, whether done through a limited exemption or rule-by-rule reform, and subject to public notice and comment ^[3]. The committee named three protections to preserve ^[3]:

• Mandatory disclosure giving investors a clear understanding of their ownership rights ^[3].
• SEC, state, or FINRA regulation and oversight of intermediaries ^[3].
• Trading protections that seek to ensure all investors receive the best terms for their orders ^[3].

The committee also warned that intermediary-free trading could weaken protections such as best execution and market-wide circuit breakers, and that trading should still meet know-your-customer requirements ^[3]. Readers can compare those principles with the order's caps, permissioned access, and halt-coordination conditions.

Custody: broker-dealers holding crypto asset securities

Rule 15c3-3(b)(1) requires a broker-dealer to promptly obtain and maintain physical possession or control of customers' fully paid and excess margin securities ^[4]. On December 17, 2025, the Division of Trading and Markets said it would not object if a broker-dealer deems itself to have "physical possession" of a crypto asset security when it takes specified measures ^[4]. Those measures include:

• Having access to the crypto asset security and the ability to transfer it on the associated ledger ^[4].
• Assessing the distributed ledger and its governance before taking custody and at reasonable intervals afterward ^[4].
• Not deeming itself in possession if it knows of material security or operational problems with the network ^[4].
• Protecting private keys with policies and controls consistent with industry best practices ^[4].
• Planning in advance for events such as blockchain malfunctions, 51% attacks, hard forks, and airdrops, for lawful freeze or seizure orders, and for transfer of assets in a liquidation ^[4].

Custody rules for other intermediaries are also moving. On October 1, 2026, the SEC proposed a tailored crypto custody framework for registered investment advisers and regulated funds that would, among other things, allow self-custody in certain circumstances and allow state trust companies to act as custodians ^[5]. That is a proposal, with a 60-day comment period running from Federal Register publication ^[5].

Market infrastructure is experimenting too

On December 11, 2025, Trading and Markets staff issued a no-action letter covering a pilot version of DTCC Tokenization Services ^[6]. Under the pilot, DTC participants could elect to have their security entitlements to DTC-held securities recorded on distributed ledger technology and transfer the resulting tokens directly to another participant's registered wallet ^[6]. Tokenization is therefore being tested inside existing regulated infrastructure as well as on new venues.

Key terms

Tokenized Securities Venue (TSV)

Under the 2026 order, an entity that brings together buyers and sellers of tokenized NMS stock through permissioned AMM liquidity pools.

NMS stock

An exchange-listed stock whose trades are reported under a national market system plan, excluding options.

Automated market maker (AMM)

A smart-contract pool that prices trades algorithmically based on the ratio of assets that liquidity providers have deposited.

Exemptive order

A Commission order granting conditional relief from statutory or rule requirements; narrower and more temporary than a rule.

Limit Up-Limit Down (LULD) tiers

The volatility-plan tiers for NMS stocks that the order uses to set separate symbol and volume caps.

Rule 15c3-3 (Customer Protection Rule)

The SEC rule requiring broker-dealers to keep possession or control of customers' fully paid and excess margin securities.

Staff statement

Views of SEC staff that are not rules or Commission statements and carry no legal force.

Check your understanding

Sources

1. [1]U.S. Securities and Exchange Commission (Commissioner Mark T. Uyeda), “Statement on the Innovation Exemption,” September 17, 2026.
2. [2]U.S. Securities and Exchange Commission, “Order Granting Temporary Conditional Exemptive Relief, Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934, from the Definition of "Exchange" in Section 3(a)(1) of the Exchange Act for the Use of Certain Distributed Ledger Trading Venues for Tokenized NMS Stocks and from the Definition of "Dealer" in Section 3(a)(5) of the Exchange Act for Certain Liquidity Providers for Tokenized NMS Stocks, and Request for Comment (Release No. 34-106402),” September 17, 2026.
3. [3]SEC Investor Advisory Committee, “Recommendation of the Investor Advisory Committee Regarding the Tokenization of Equity Securities,” March 12, 2026.
4. [4]U.S. Securities and Exchange Commission (Division of Trading and Markets), “Statement on the Custody of Crypto Asset Securities by Broker-Dealers,” December 17, 2025.
5. [5]U.S. Securities and Exchange Commission, “SEC Proposal Would Address How Investment Advisers and Funds Can Custody Crypto Assets Under the Federal Securities Laws,” October 1, 2026.
6. [6]U.S. Securities and Exchange Commission (Division of Trading and Markets), “No-Action Letter Request Related to The Depository Trust Company's Development of the DTCC Tokenization Services,” December 11, 2025.

Educational content only — not legal, tax, or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Rules and data are described as of November 2026 and may change. Securities offered through Umergence LLC, Member FINRA/SIPC.