SEC Rule 17a-4, Regulation T 220.8, and the Letter of Free Funds: A 2026 Guide

Updated October 2026 for T+1 settlement and the 2022 amendments to SEC Rule 17a-4. First published April 2024.

Your institutional client buys 40,000 shares through your desk in a cash account and settles delivery versus payment (DVP) at its custodian. On settlement date, you deliver the shares and the custodian pays on receipt. To Regulation T, that is delivering a security to another firm before the customer paid for it in full. Unless you hold a written statement that the receiving account had the funds, the account goes into a 90-day freeze.

The written statement is the Letter of Free Funds (LOFF). Regulation T sets when you need it. SEC Rule 17a-4 covers how long you keep it and how. This guide reviews both rules as they stand in 2026, shows where the process tends to break, and gives you a checklist to test your workflow.

The Short Version

• The freeze: Under 12 CFR 220.8(c)(1), selling a security, or delivering it to another broker or dealer, before the customer pays in full triggers a 90-day freeze on the cash account.
• The exception: No freeze applies under 220.8(c)(2)(ii) if that delivery went for deposit into a cash account holding enough funds to pay for it. Your firm may rely on the other firm's written statement, accepted in good faith.
• The clock: The payment period is the standard settlement cycle plus two business days. Under T+1, you have until the third business day after trade date.
• The record: Both the LOFF request and response count as business communications. Rule 17a-4(b)(4) requires keeping them for at least three years, with the first two in an easily accessible place.
• The storage: Rule 17a-4(f) mandates that electronic records live in WORM storage or a system maintaining a complete, time-stamped audit trail.

Part 2 of our video series, Moving to Self-Clearing, looks at the letter from the side of a firm that has just started clearing its own trades: who sends it now, which trades need one, and what to do when other brokers' letters start arriving. The series page has all four parts, with transcripts.

Regulation T 220.8: When You Need the Letter

Regulation T (12 CFR Part 220) is the Federal Reserve Board's rule on credit extended by brokers and dealers. Section 220.8 covers the cash account, where your firm extends no credit and the customer pays in full for every purchase. Four parts of it shape the LOFF process.

• The payment period. Section 220.2 defines it as the number of business days in the standard settlement cycle plus two. The U.S. moved to T+1 on May 28, 2024, so a cash-account purchase must now be paid for by the third business day after trade date (T+3). If payment does not arrive in time, 220.8(b) requires the firm to cancel or liquidate the unpaid trade promptly.
• The DVP allowance. Under 220.8(b)(2), when a DVP trade is held up by delivery mechanics rather than customer willingness or ability to pay, the firm has up to 35 calendar days to obtain payment.
• The freeze. Under 220.8(c)(1), selling a security, or delivering it to another broker or dealer, before full payment removes the privilege of paying after trade date for 90 calendar days. In practice, customers need cash in the account before every purchase.
• The exception. Under 220.8(c)(2)(ii), no freeze applies if delivery to another broker or dealer is for deposit into a cash account holding enough funds to pay. The firm may rely on that other firm's written statement, accepted in good faith, confirming the funds are there. That statement is the LOFF.

On DVP accounts, the exception makes ordinary settlement work. Every delivery to the custodian happens before the customer has paid, so each one needs a letter behind it. Documented prime brokerage is different: with an SIA-150 and F1SA on file for the account, you don't need letters.

Good faith has a definition. Under 220.2, your firm must be alert to the circumstances when it accepts a statement. If you have information that would make a prudent person ask questions first, investigate and satisfy yourself that the statement is correct. A letter for an account that was never funded at the custodian is a reason to ask.

When a payment is late for a reason outside the DVP allowance, 220.8(d) lets the firm's examining authority, usually FINRA, extend a payment period or waive the freeze. That relief comes only on application, and only where exceptional circumstances warrant it.

SEC Rule 17a-4: How You Keep the Letter

SEC Rule 17a-4 sets how long a broker-dealer keeps its records and how it stores them. Three parts of the rule matter for LOFFs.

• Retention. A LOFF request and the other firm's response are business communications. Paragraph (b)(4) requires at least three years, with the first two in an easily accessible place. Your written retention schedule can set a longer period to match the six years paragraph (a) sets for blotters and ledgers. That is a policy choice; the rule's floor for the letters is three years.
• Storage. The SEC amended Rule 17a-4(f) in October 2022, effective January 3, 2023, with compliance required by May 3, 2023. An electronic recordkeeping system now has two options. It can keep a complete, time-stamped audit trail of every modification and deletion, including who made it, with the ability to re-create the original record. Or it can preserve records in a non-rewriteable, non-erasable format (WORM). Either way, your firm files an undertaking signed by a designated executive officer or a designated third party.
• Production. Paragraph (j) requires your firm to furnish promptly a legible, true, complete, and current copy of a record when the SEC asks. An examiner sampling DVP trades will ask for the letter behind each one, so the record has to tie the statement to the trade and the account.

If your written procedures still describe the rule before 2023, with WORM as the only electronic option and a mandatory third-party undertaking, they are due for an update.

Where the Process Breaks

Both rules are short. The failures show up in the records. These are the patterns we see most often:

• The letter lives in an inbox. Email and fax responses sit apart from the trade they cover. When an examiner samples DVP trades, the firm runs a search instead of producing a record.
• Only half the exchange is kept. Firms file the custodian's response and lose the outgoing request. Both are communications under Rule 17a-4(b)(4).
• The trail stops at the PDF. A scan in a shared drive shows what arrived. It does not show who reviewed it, whether it matched the trade, or when the trade was released.
• The clock moved and the process did not. Under T+2, a letter that took a day to come back by fax still arrived before settlement. Under T+1, it arrives after.
• Volume hides a paperwork problem. When one account generates dozens of LOFFs a day, it is often an undocumented prime brokerage relationship. One executing broker was on track for 2,500 letters a month on a single account with no F1SA on file.

A Checklist for Your LOFF Process

1. Send every LOFF request from a controlled workflow, tied to the trade and the account.
2. Keep the request and the response together, each with its timestamp.
3. Record who reviewed the response, whether it matched the trade, and when the trade was released.
4. Store electronic copies in WORM storage or a system with the full audit trail Rule 17a-4(f) describes. Confirm your undertaking is on file.
5. Keep the letters at least three years, the first two easily accessible, or longer if your written policy says so.
6. Count LOFFs per counterparty account every day. A high count on one account points to missing prime brokerage documentation.
7. Test production before an examiner does: pull 10 recent DVP trades and time how long it takes to produce the letter behind each one.

Where FVD and PBIN Fit

Freefunds Verified Direct (FVD) manages both sides of the letter. On the executing broker's side, FVD-S generates each LOFF request from the trade and sends it to the custodian. On the custodian's side, FVD-R receives inbound requests, including those that arrive by email and fax, and returns the response. FVD stores the request, the response, and every action in between in WORM storage with a time-stamped audit trail. It keeps them for eight years, three of them in the application, and firms that keep their own copies can ask for a shorter period.

Prime Broker Integrated Network (PBIN) holds the SIA-150, SIA-151, and F1SA for every prime brokerage relationship. The systems are linked: once an F1SA lands in PBIN for an account, FVD stops generating outgoing requests and declines incoming ones automatically.

A point to be precise about: In 2003, the staff of the SEC's Division of Market Regulation reviewed how Loffa's LOFF network works. They issued a no-action letter on broker-dealer registration. In that letter, Loffa represented that it would not keep the books and records Rules 17a-3 and 17a-4 require on behalf of broker-dealers. That position still holds. Loffa keeps the records it processes as evidence for your obligations, but the Rule 17a-4 obligations stay with your firm.

If LOFFs still travel by fax and email, or if your record stops at a scanned PDF, contact Loffa Interactive Group. We can walk your team through FVD against the checklist above.

This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.

Related reading: our summaries of SEC Rule 17a-4 and Regulation T, Friday Afternoon and the LOFFs Come Due, T+1 Broke Your Cash Verification, and Moving to Self-Clearing: The Regulatory Work Your Clearing Firm Used to Do.