SEC No-Action Letter 2003 — Issued to Loffa

Overview

In 2003, the staff of the SEC's Division of Market Regulation reviewed how Loffa's letter of free funds network actually works and confirmed it would not recommend enforcement action if Loffa operated that network without registering as a broker-dealer. The relief is specific to Loffa and remains published on the SEC's own website, where anyone can read it in full.

For a firm evaluating Loffa as a vendor, the significance is straightforward: the structure of this system was described to the SEC in detail — how requests move between executing brokers and custodians, what Loffa does and does not touch, and how Loffa is paid — and the staff responded in writing. That record is more than twenty years old, permanent, and independently verifiable.

Official citation: Loffa Interactive Corp., Inc., SEC No-Action Letter (September 12, 2003), Division of Market Regulation. Incoming request dated September 9, 2003 from Robert J. Hackett of Fennemore Craig, Phoenix, Arizona. Response signed by Joshua Kans, Special Counsel.

The letter was issued to Loffa Interactive Corp., Inc., the predecessor name of Loffa Interactive Group, Inc. It concerns the same free funds letter communication system that operates today as Freefunds Verified Direct (FVD).

The Regulation T Problem It Addresses

Section 220.8(c) of Regulation T generally requires a broker-dealer that delivers a security in a cash account to another broker-dealer — before the underlying customer has paid — to freeze that customer's ability to delay payment beyond the trade date for the following 90 days.

Regulation T provides an escape: no freeze is required if the security is delivered into a cash account already holding sufficient funds. The delivering broker-dealer "may rely on a written statement accepted in good faith from the other broker-dealer that sufficient funds are held in the cash account." That written statement is the letter of free funds.

At the time of the letter, the SEC noted that broker-dealers exchanged this information by "facsimile, U.S. mail, e-mail or the systems of the Depository Trust and Clearing Corp." Loffa built a dedicated communications network for it.

What the SEC Staff Actually Said

"On the basis of the facts presented and your representations, the Division would not recommend enforcement action to the Commission under Section 15(a) of the Exchange Act if Loffa operates a system to communicate information related to letter of free funds requests, as described above, without registering as a broker-dealer in accordance with Section 15(b) of the Exchange Act."

The staff set out the specific reasons it took that position:

Communication happens after the trade terms are set. By the time Loffa transmits anything, the identity, amount, and price of the security are already fixed. Loffa plays no role in determining any of them.
Loffa does not accept or route orders, and plays no role in opening accounts with any broker-dealer.
Fees are not tied to transaction value. Loffa charges a flat fee per transmission, unrelated — directly or indirectly — to the size or value of any transaction.
Loffa does not negotiate, solicit, recommend, or handle funds or securities related to a transaction.

Scope and Limits — Read This Part

A no-action letter is not an endorsement, a certification, or an approval of a product. It is a statement of the staff's enforcement posture on one narrow question, on one set of stated facts. The letter says so directly, and we quote it here rather than paraphrase it:

"Any future enhancements or modifications to Loffa's system, such as modifications of the system related to prime brokerage arrangements, are outside the scope of this letter."
"The positions expressed above are based solely on the facts presented and the representations you have made to the Division, and any different facts or conditions may require a different response."
"[T]his response only expresses the Division's position on enforcement action and does not purport to express any legal conclusions on the questions presented."

The letter also records Loffa's representation that it would not keep or maintain the books and records required under Exchange Act Rules 17a-3 and 17a-4 on behalf of broker-dealers, and that it would inform broker-dealers of that fact.

Why It Matters in Vendor Due Diligence

Federal banking regulators and FINRA both direct firms to document diligence on the vendors supporting regulated activity. Most of what a vendor offers in response is self-produced: a brochure, a security questionnaire, a reference. This letter is none of those. It is a primary-source document, hosted by the regulator, that describes the operating model of the system your firm would be adopting — and it has been sitting on sec.gov, unchanged, since 2003.

It should be read alongside Loffa's SOC 1 and SOC 2 Type II reports, which cover the control environment as it operates today.

Official Sources