When LOFF and 17a-13 Processes Get Fixed: CCO, Exam, Merger

When Creand Securities converted to self-clearing in October 2019, it had no written supervisory procedures for coding accounts as customer or non-customer. Some customer accounts went into its reserve formula as non-customer, which left customer credit balances of $3.6 million to $42.5 million out of the computation. By February 2020 that had produced four hindsight deficiencies totaling about $27.8 million and five inaccurate FOCUS reports. A FINRA examination found it. In May 2024, Creand accepted a censure and a $115,000 fine, without admitting or denying the findings, and agreed that a senior principal would certify within 90 days that the problem was fixed.

A conversion opened Creand's gap, and an exam found it. We see the same sequence in the two processes we work on every day, Letters of Free Funds and the quarterly 17a-13 count. Hardly anyone calls us about either one because they went shopping. The call comes after one of three things: a new chief compliance officer arrives, a FINRA exam finding or a 15c3-3 deficiency lands, or a merger or conversion leaves two sets of settlement paperwork running side by side.

Why These Two Processes Wait

Both processes produce paper that nobody outside the firm asks for until something goes wrong. Under Regulation T, an executing broker that delivers a purchased security to another broker-dealer before the customer pays can avoid the 90-day freeze if the security went into a cash account holding enough funds to pay for it, and it can rely on the other firm's written statement that the funds are there (12 CFR 220.8(c)(2)(ii)). That statement is the Letter of Free Funds. Rule 17a-13 asks for a quarterly count, verification of anything held elsewhere for more than 30 days, and every unresolved difference on the books within 7 business days of the count.

A desk can send letters by fax and email for years, and a stock record team can run the count from a spreadsheet, without a single complaint. The gap shows only when someone asks to see the letter behind a trade, or the verification behind a 31-day fail.

A New Chief Compliance Officer

FINRA Rule 3130 makes every member name its chief compliance officer on Schedule A of Form BD. Once a year the CEO certifies that the firm "has in place processes to establish, maintain, review, test and modify" its written compliance policies and supervisory procedures, and that the CEO met with the CCO in the preceding 12 months. A CCO who arrived this year is in that meeting before the next certification and has to explain procedures someone else wrote.

Cantor Fitzgerald's 2019 settlement with FINRA is about a different process, but the timeline looks familiar. Cantor ran its Regulation SHO close-outs on a mostly manual system and failed to close out fails to deliver on time at least 4,879 times. Firm staff had flagged one trading desk as a frequent violator from 2013 into 2015. Among the firm's efforts to improve supervision, the AWC lists a new chief compliance officer hired in April 2015 and a Regulation SHO working group formed that fall. The automated systems arrived in early 2016. Cantor paid a $2 million fine and agreed to retain an independent consultant, without admitting or denying the findings.

Skip the binder for now and start with the evidence, because that's where an inherited procedure and the desk's actual practice drift apart.

Pull the last four 17a-13 count dates. No count may fall within 2 months of the prior one or more than 4 months after it.
Find out who ran or supervised each count. The rule requires people whose regular duties don't give them direct responsibility for the securities or the records.
Ask for the verification file for one item that was more than 30 days old at the last count, and the entry that put any unresolved difference on the books.
Pick five recent DVP trades and ask for the Letter of Free Funds behind each. Note how long each took to find, and where it was.
Confirm who is supposed to send the letters. When the executing broker doesn't clear its own trades, the SEC staff's 2003 letter to Loffa describes the clearing firm making the request (our summary).

An Exam Finding or a 15c3-3 Deficiency

FINRA's January 2026 settlement with Wells Fargo Clearing Services came out of a routine cycle exam. From November 2016 to November 2023, the firm didn't take prompt steps to get possession or control of 178 municipal securities positions, worth about $4.1 million, that it had failed to receive for more than 30 calendar days. It "relied primarily on repeated buy-in attempts until a position was covered," even when it knew the attempts weren't working. In December 2023 it updated its system and processes for municipal fails and revised its procedures to match. Wells Fargo accepted a censure and a $1,250,000 fine, $937,500 of it for the MSRB rule violations, without admitting or denying the findings.

The two rules share a boundary. Rule 15c3-3(d)(2) says that when securities have been failed to receive for more than 30 calendar days, the firm has until the next business day to "take prompt steps" to get them back into its possession or control, "through a buy-in procedure or otherwise." Rule 17a-13(b)(3) requires verification of securities that have been in transfer, on loan, or failed for longer than 30 days. Both rules draw the line at 30 days, so if your customer protection finding cites aged fails, it's pointing at the same items your quarterly verification should have been working.

We'd fix them together. Clear the aged fails without touching the count procedure, and the next exam can find the same thing. Rebuild the count around the 30-day population, and the examiner can see why the aged fails won't come back.

A Merger or a Conversion

When two broker-dealers combine, each brings its own way of doing both jobs. Say one desk sends Letters of Free Funds through a network and the other faxes them. One stock record team verifies 30-day items with mailed confirmations, and the other uses a vendor. The deal closes on a date, and the rules keep their own calendar: the surviving firm's next quarterly count still has to land within 2 to 4 months of its last one, conversion weekend or not.

Creand's trouble came from a conversion, and a merger opens the same kind of gap: a new setup with no procedure for a decision the old arrangement used to make. Watch the quarter after a conversion closely. Positions moved between systems, and some of them moved between clearing arrangements. If the combined firm now clears its own trades, the Letters of Free Funds a clearing firm used to request are its job too, as we covered in Moving to Self-Clearing.

If you're on either side of a deal, settle three questions before closing:

Which firm's LOFF process survives, and how do the other's open requests get finished?
When is the first combined 17a-13 count, and does its date fit the surviving firm's last count?
Where do each firm's existing letters and count records live once the systems they sit in are switched off? The retention periods in Rule 17a-4 keep running after the deal closes.

Where FVD and QBS Fit

Freefunds Verified Direct (FVD) sends Letter of Free Funds requests, tracks each response, and keeps every request, response, and status change in write-once storage for eight years. Quarterly Broker Statement (QBS) aggregates borrows, loans, repos, and fails for the count, sends and tracks the 17a-13(b)(3) confirmations, records unresolved differences inside the 7-business-day window, and enforces the 2-to-4-month spacing between counts. It also handles more than one clearing entity in one platform, for the quarters when a merged firm still has two.

With both in place, a CCO who asks for the letter behind a trade, or the verification behind a 31-day item, gets it on demand.

If you're in one of these three moments now, contact Loffa Interactive Group. We can walk through your last count and a sample of your letters with you.

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.