In a significant victory for its clients eToro USA Securities Inc. (eToro) and Alpaca Securities LLC (Alpaca), Lowenstein Sandler secured two SEC no-action letters that provide significant relief and regulatory clarity for broker-dealers and their affiliated fintech platforms.

  • Two separate no-action letters issued by SEC staff provide relief to fintech brokerage platforms operating in conjunction with affiliated and third-party money services businesses.
  • Zero cash balance brokerage accounts allow innovative fintech platforms to better serve retail brokerage customers, facilitate U.S. market access to foreign customers, reduce traditional foreign exchange conversion constraints, and better support multi-asset and multiproduct financial services offerings.
  • Each of the no-action letters issued today provides necessary regulatory clarity for SEC-registered broker-dealers operating in this space with respect to their net capital, customer disclosure, and flow of funds mechanisms.

The “Zero Cash Balance” SEC no-action letters (eToro; Alpaca) allow broker-dealers and clearing firms to offer brokerage accounts where purchases of stocks are funded on an as-needed basis by drawing funds from customer bank accounts, crypto accounts, or remittance payment accounts held with affiliated or third-party money transmitter or financial institutions. Similarly, clearing firms can automatically transfer proceeds from customer brokerage accounts into associated accounts when customers sell their stocks rather than maintaining idle cash balances in customer brokerage accounts.   

The combined result of the regulatory clarity afforded by each of the SEC no-action letters is that fintech platforms and their custodians can provide comprehensive, seamless, cross-platform services to their customers – providing customers with the opportunity to efficiently access the U.S. securities markets while simultaneously obtaining the benefits of products and services offered by associated financial services providers, including remittance offerings, currency conversion, cryptocurrency trading, global debit card products, and more.

On a more technical level, the “Zero Cash Balance” SEC no-action letters (1) allow custodians to transfer free credit balances from the proceeds of securities transactions into a customer’s designated external bank account or money services business account in reliance on a properly obtained standing customer authorization, pursuant to Exchange Act Rule 15c3-3(j)(2)(i), and (2) allow introducing broker-dealers to operate with a minimum net capital requirement of $5,000 pursuant to Exchange Act Rule 15c3-1(a)(2)(vi), even when the customer’s designated external cash account is held at an affiliated institution.

The zero cash balance brokerage model requires careful compliance with a variety of conditions and requirements as outlined in the SEC no-action letters.

For further details on this model and its requirements, including how it applies to fintech platforms considering whether to add U.S. brokerage services to their product offerings, contact Ethan L. Silver, William Brannan, Sean Miller, or another member of your Lowenstein team.