SEC Staff Issues No-Action Relief for Zero-Cash-Balance Brokerage Models
New guidance provides a framework for broker-dealers and fintechs to separate securities and cash custody, keeping customer cash at a bank or licensed money services business.
The SEC's Division of Trading and Markets has issued two no-action letters providing a regulatory framework for “zero cash balance” brokerage models. The letters, issued to Alpaca Securities and eToro USA Securities, address how a broker-dealer can integrate with an external bank or money services business (MSB) to hold customer cash, transferring funds to the brokerage account only to settle transactions. This structure is a significant development for fintech platforms seeking to embed brokerage services, as it allows them to separate cash and securities custody.
The relief allows a carrying broker to transfer customer sale proceeds to a designated external account under a standing authorization, consistent with the Customer Protection Rule (Rule 15c3-3). It also permits a non-custodial introducing broker in this model to operate under a lower $5,000 minimum net capital requirement. Firms interested in this model must pay close attention to the letters' specific conditions, which include obtaining explicit customer consent, providing clear disclosures that cash held externally is not covered by SIPA, ensuring prompt fund transfers, and conducting diligence on the external cash custodian.