The action followed only two days after the Digital Asset Market Clarity Act (the “Clarity Act”) failed to advance in the Senate on September 15, 2026. That timing underscores the SEC’s willingness to use existing statutory authority while Congress continues to debate a durable market-structure framework.

This alert summarizes the Order’s advance-notice requirements, eligibility boundaries, principal operating conditions, and practical implications for broker-dealers, including custody³, trading, supervision, technology, and strategic considerations.

II. The Order: Exemption, Scope, and Core Conditions

2.1 Effective Date and Lead Time

The Order’s exemptions are effective as of September 17, 2026, and expire on September 17, 2031. That effective date does not eliminate the TSV’s separate lead-time obligations: before operating under the TSV Exemption, the TSV must publish its public notice (the “Notice”) at least 30 calendar days in advance, and within one business day after publishing that Notice must notify the Commission by email. The 30-day period is therefore a condition to commencing TSV operations, not a delay in the effectiveness of the Order.

A TSV that meets the Order’s definition and conditions may rely on the TSV Exemption without individualized SEC approval, but it remains subject to the Order’s notice, disclosure, operational, and oversight requirements. The Covered Firm Exemption is separately conditioned and applies only to qualifying liquidity providers in the limited context described below.

2.2 Scope and Eligibility Boundaries

A TSV is an organization, association, or group of persons that brings together buyers and sellers of Tokenized NMS Stock by (1) providing one or more AMM Liquidity Pools for permissioned participants to interact and agree to trade terms and (2) setting standards for access to those pools. “Tokenized NMS Stock” means an NMS stock—an NMS security other than an option—that is tokenized by or on behalf of the issuer of the underlying NMS stock or by an unaffiliated third party. It excludes a crypto asset representing the third party’s own security that provides synthetic exposure to an underlying security, including a tokenized linked security or tokenized security-based swap, and it excludes rights and warrants. The Order does not provide relief under the Investment Company Act of 1940.

• Permitted pairs and participants. A Tokenized NMS Stock may be paired only with another Tokenized NMS Stock, a non-security crypto asset (including a payment stablecoin issued by a permitted payment stablecoin issuer), or a tokenized money market fund; a pair may have two or more legs, each satisfying one of those categories. Any non-security crypto asset or tokenized money market fund must be directly paired and traded alongside a Tokenized NMS Stock. Participants must be verified or credentialed, and the Order does not itself determine the registration status of participants.
• U.S. person and OFAC condition. The TSV must be a U.S. person and must comply with economic and trade sanctions programs administered and enforced by the Office of Foreign Assets Control (“OFAC”), including restrictions involving Specially Designated Nationals and Blocked Persons and blocked property.
• No primary offerings; Securities Act compliance. The TSV may not conduct primary issuances or initial offerings of securities.⁴ All offers and sales of Tokenized NMS Stock must be registered under the Securities Act of 1933 (the “Securities Act”) or conducted pursuant to an available exemption; the Order does not relieve any person of applicable Securities Act registration requirements.
• Equivalent rights. The TSV must verify that each Tokenized NMS Stock provides holders the same interest in the company, dividend and voting rights, and right to receive the same share of residual assets upon liquidation as traditional NMS stock of an equivalent class. For third-party tokenization, related proxy materials and issuer communications must be made available to token holders at no cost to the issuer or shareholders.
• Issuer notice and objection. Before making available a Tokenized NMS Stock tokenized by an unaffiliated third party, the TSV must give written notice to the issuer and wait at least 30 calendar days after receipt. A timely written objection prevents the TSV from making that affected Tokenized NMS Stock available for trading; it does not bar other Tokenized NMS Stock from trading. The TSV must revise its public Notice within five business days to disclose the objection.

Reliance on the TSV Exemption does not create a presumption that a TSV is an exchange. The Order does not exempt activity outside the TSV or provide relief from other applicable federal securities laws, including antifraud and anti-manipulation provisions, registration requirements, or applicable self-regulatory organization (“SRO”), anti-money laundering (“AML”), and countering the financing of terrorism (“CFT”) obligations; participants remain responsible for their own regulatory status.

2.3 Core Conditions for TSVs

Transaction transparency. A TSV must make U.S.-dollar-denominated transaction data freely and publicly available in a machine-readable format for all transactions during the preceding 30 days, update the data within 10 minutes after each transaction, and provide it to all market participants at the same time and on the same terms. At a minimum, the data must include the symbols for the Tokenized NMS Stock and paired asset, transaction price, size, time at the AMM Liquidity Pool, direction, the pool and smart-contract addresses, daily asset-pair share volume, and end-of-day pool size per asset pair.⁵

Symbol and volume limits. Tier 1 Tokenized NMS Stock, which are NMS stocks in the S&P 500 and Russell 1000 indexes, as well as specific exchange-traded products, is limited to 75 symbols and 0.25% of the relevant NMS stock’s average daily share volume during the prior month as reported by an effective transaction reporting plan; Tier 2, which includes all other eligible NMS securities except rights and warrants, is limited to 250 symbols and 2.5% of that average daily share volume. The percentage is calculated using the average daily share volume of the Tokenized NMS Stock traded on the TSV as the numerator and the average daily share volume of the relevant NMS stock as the denominator. Tiering follows the Limit Up-Limit Down Plan. A TSV must aggregate symbol counts and trading volume with its affiliated TSVs. The first volume breach in a given Tokenized NMS Stock requires no action other than avoiding further breaches; each subsequent breach requires an immediate three-month pause for that stock, with participant notice and a public notice revision within five business days. Exceeding a symbol limit does not receive this stepped treatment.

2.4 Covered Firm Exemption

The Covered Firm Exemption applies only to a liquidity provider that supplies Tokenized NMS Stock using proprietary capital to an AMM Liquidity Pool operated pursuant to the TSV Exemption, conducts the related trading solely for its own account, and does not hold or custody customer assets. It permits the Covered Firm to engage in additional indicia-of-dealing activities, such as quoting prices to customers or entering into committed-capital arrangements, only within that limited TSV context. The Covered Firm’s securities activities must remain limited to Tokenized NMS Stock trading in qualifying AMM Liquidity Pools; it may trade on more than one qualifying TSV, and the exemption does not limit non-securities activities.

Covered Firms must maintain records supporting liquidity and loss capacity, supplied liquidity, liquidity or market-making arrangements, and incentives, fees, rebates, or other compensation; make specified public disclosures, including that they are not SEC-registered broker-dealers and may receive compensation; and notify the Commission in writing of their role, business model and risk controls, regulatory contact, arrangements, compensation, lack of statutory disqualification, consent to information requests, and acknowledgment of SEC oversight. No presumption that a Covered Firm is a dealer arises solely from reliance on the Covered Firm Exemption.

III. Operating Requirements Under the Order

3.1 Public Notice Process

A TSV must publish a plain-English, clear, concise, and understandable Notice prominently on its publicly available website at least 30 calendar days before operating, then notify the Commission by email within one business day after publication, identifying its contact information and the Notice’s URL. The TSV must revise the Notice in the same form and location: within five business days after commencing or ceasing to make a Tokenized NMS Stock available, pausing or resuming trading under the volume limits, or receiving a timely issuer objection; 20 calendar days before a material operational or disclosure change; within 30 calendar days after each quarter for non-material changes; and within five business days after discovering materially inaccurate or incomplete information. Each revision must state the change category and, if prospective, its effective date. The TSV must notify the Commission within one business day after publishing each revised Notice and maintain all Notice versions.⁶

3.2 Smart Contracts, Trading Halts, and Operational Events

Relevant distributed ledger applications, including smart contracts, must be auditable and public and deployed on a public, permissionless distributed ledger. A TSV must stop trading a Tokenized NMS Stock concurrently with any halt or suspension of the underlying NMS stock on its primary listing exchange and immediately notify participants. The TSV must also immediately notify participants and promptly notify the Commission in writing of any significant operational event, remedy known events as soon as reasonably practicable, and notify participants of the remediation.⁷

3.3 No Leverage, No Endorsement, and Records

A TSV may not borrow securities or non-security crypto assets on the TSV, hypothecate or permit their hypothecation, or extend credit to a participant to purchase Tokenized NMS Stock. It also may not state or imply that it is SEC-registered or that the Commission approved or endorsed its activities; the Notice must state that the TSV is not registered with the Commission.

• Records. The TSV must make and keep current records of trading interest and transactions, participant and wallet screening, fees and compensation, stoppages, volume, operational events, and notices to the public, Commission, issuers, and participants.
• Retention and examination. The TSV must preserve those records while the exemption is effective and for three years afterward, maintain them in the United States, provide them promptly to SEC staff in human-readable and reasonably usable electronic formats, and consent to Commission examinations.
• Trading stops. When the TSV pauses or stops trading, it must communicate promptly to participants and keep the required operational record; its Notice must describe stoppage triggers, risk controls, and resumption procedures.
• Public notice disclosures. The Notice must concisely cover the TSV’s registration disclaimer and use of the exemption; structure, governance, affiliates, products, participants, access and screening; tokenization, rights, issuer objections, and paired assets; trading, pool, on-chain/off-chain functionality, hours, market data, fees, complaints, confidentiality, maximal extractable value, systems, clearing and settlement, risks, service providers, surveillance, and stoppage procedures.
• Significant operational events. The TSV must describe the event, affected systems, and participant impact in its required communications and records, and promptly address intrusions or disruptions affecting trading, pool operations, access, assets, or participant information.
• Participant and market-conduct boundaries. The TSV Exemption does not provide relief for the regulatory status of participants, impose fair-access obligations applicable to registered exchanges or alternative trading systems, or make a TSV subject to Regulation NMS.

These conditions are binding conditions of the temporary relief, not merely disclosures. They are designed to support transparency and oversight while the Commission evaluates whether and how Tokenized NMS Stock trading should be integrated into the national market system.

3.4 SEC Modification Authority and Comment Request

The exemptions run from September 17, 2026 through September 17, 2031, but the Commission may modify their length or other aspects under Section 36 of the Exchange Act if necessary or appropriate in the public interest and consistent with investor protection. The SEC requests comment on the exemptions’ permanence and duration, effects on liquidity, pricing, trading, market quality, overnight trading and 10-minute reporting, the scope of eligible securities and paired assets, Tier 1 and Tier 2 limits, compliance challenges for regulated entities, possible Regulation NMS relief for broker-dealer participants, and the Covered Firm Exemption’s scope, duration, and conditions.⁸

3.5 Potential Benefits Versus Practical Recommendations

The SEC describes potential benefits—including investor self-custody, around-the-clock trading, fractional ownership, near-instantaneous settlement, improved auditability, and lower costs—but those are stated potential benefits, not guaranteed outcomes or independent permissions. Broker-dealers should treat the Order’s enumerated conditions as binding and separately assess whether participation is appropriate under their own best-execution, custody, capital, surveillance, operational-resilience, and customer-protection obligations.

IV. Broker-Dealer Implications

4.1 Custody and Possession/Control Obligations

Broker-dealers that receive, hold, or facilitate transfers of Tokenized NMS Stock should assess how the framework of the December 2025 SEC staff’s Statement on the Custody of Crypto Asset Securities by Broker-Dealers applies in a TSV environment. Tokenized NMS Stock remains stock; the Order’s market structure relief does not itself displace a broker-dealer’s customer-protection obligations.⁹

A practical review should map the SEC staff’s five-part framework to each supported token and network: access and transfer capability; initial and periodic distributed ledger technology assessment; escalation and stop-custody triggers; private-key protection; and contingency procedures. Firms should assess Rule 15c3-3 policies, wallet governance, vendor oversight, recovery arrangements, and books and records.

4.2 Trading, Execution, and Settlement Considerations

TSV participation may offer near-instantaneous settlement, in contrast to the conventional one-business-day (“T+1”) cycle. That potential benefit also raises questions regarding funding, fails, reversibility, error correction, and the sequencing of cash and securities legs. Broker-dealers should document when settlement becomes final and how on-chain records reconcile to customer and general-ledger books.

Best-execution reviews should account for tokenized and traditional versions of the same class, including price, size, access, fees, speed, and settlement attributes. Firms should also evaluate whether their order-handling, disclosure, and surveillance frameworks address differences between AMM execution and traditional market execution.

4.3 Compliance Program Updates

Before participating, broker-dealers should consider targeted updates to their written supervisory procedures, risk assessments, testing plans, and training. Key workstreams include:

• AML and KYC. AML and know-your-customer (“KYC”) controls for permissioned TSV access, including wallet screening and allocation of responsibilities among the TSV, broker-dealer, custodian, and liquidity provider;
• Supervision and reporting. Supervisory procedures for recommendations, order handling, principal trading, customer disclosures, conflicts, and tokenized-stock transaction reporting, including applicable Financial Industry Regulatory Authority (“FINRA”) requirements;
• Trading controls. Pre-trade and post-trade monitoring of symbol restrictions, volume caps, issuer objections, trading halts, and significant operational events;
• Books and records. Controls that reconcile public transaction data, pool activity, wallet records, and traditional broker-dealer ledgers, while preserving required notices and examination materials; and
• Technology and resilience. Technology-risk assessment covering smart contract audits, public and permissionless distributed ledger dependencies, key management, cybersecurity, business continuity, incident response, upgrades, forks, and network congestion.

V. Opportunities and Conclusion

The Innovation Exemption is a potential landmark development in U.S. securities regulation, creating the first federal pathway for on-chain trading of tokenized publicly traded shares. The framework may allow broker-dealers to broaden product offerings, connect customers to new liquidity sources, test programmable settlement, and build experience with tokenized public equities within a defined federal framework. Early participation may also position firms to contribute practical evidence during the comment process.

Broker-dealers and other market participants should begin assessing operational and compliance readiness, including custody and control frameworks, trading and settlement models, and supervisory procedures. This relief is temporary, subject to the Order’s conditions and possible modification, and likely to evolve as the SEC gathers data and input.

For any questions regarding the Innovation Exemption, or for assistance in preparing a comment letter, please contact any member of the King & Spalding team.