SEC Staff Responds to Alpaca Request on Free Credit Balances in Zero Cash Balance Brokerage Accounts

Key Takeaways

• The SEC Division of Trading and Markets received a no-action request from Alpaca Securities LLC.
• The request concerns a "zero cash balance" brokerage model in which customer cash is held in external MSB or bank accounts, and it seeks relief under Exchange Act Section 15(c)(3) and Rule 15c3-3(j)(2).
• The document provided contains the Division's letter header and recital of the request, but the operative staff position is not visible.
• Compliance teams should treat the conditions described as a likely template, and should not rely on them as confirmed relief until the full response is reviewed.

Deep Dive

The SEC Division of Trading and Markets received a no-action request from Alpaca Securities LLC. The request concerns a "zero cash balance" brokerage model in which customer cash is held in external MSB or bank accounts, and it seeks relief under Exchange Act Section 15(c)(3) and Rule 15c3-3(j)(2). The document provided contains the Division's letter header and recital of the request, but the operative staff position is not visible. Compliance teams should treat the conditions described as a likely template, and should not rely on them as confirmed relief until the full response is reviewed.

Customers must open an External Cash Account at a state-licensed, FinCEN-registered MSB or at a bank. Funds move to the carrying broker-dealer only to satisfy buy orders. Sale proceeds, which are free credit balances, are returned to the External Cash Account under a standing customer authorization. The request relies on Rule 15c3-3(j)(2)(i), which permits transfers of free credit balances only upon the customer's specific order, authorization, or draft. It cites prior Commission and staff guidance that a single standing instruction can cover ongoing transfers. The proposed conditions include:
- Remittance promptly, and no later than close of business on the next business day.
- Inclusion of any unremitted balances as credits in the Rule 15c3-3a reserve formula at the computation date.
- Daily reconciliation reports between the Firm and the MSB.
- No commingling of External Cash Account funds with the MSB's or bank's proprietary funds.
- Periodic checks of the provider's licensure and registration.
- Full compliance with Rules 15c3-1, 15c3-3, 17a-3 and 17a-4.
- Net capital of the greater of USD $250,000 or 2 percent of aggregate debit items.
- Prominent disclosure of the model's operation.

Funds in External Cash Accounts fall outside SIPA protection, and the request commits to clear customer disclosure of this. Key risks include misclassification of free credit balances, reserve computation errors, and the reconciliation and timing gaps between the broker-dealer and the MSB. There is also counterparty and safeguarding risk at the MSB, which is generally subject to less prudential oversight than a bank. Introducing broker-dealer arrangements add disclosure, suitability, and Reg BI-related complexity. AML and sanctions responsibilities must be allocated clearly across the introducing firm, the carrying firm, and the MSB.

Compliance teams should:
- Obtain and review the complete staff response and any conditions.
- Assess whether similar products are planned or offered, and map them to Rule 15c3-3(j)(2).
- Confirm that standing authorization language, disclosures, and SIPA notices are adequate.
- Validate reserve formula treatment and the next-business-day remittance controls.
- Establish MSB due diligence and daily reconciliation procedures.
- Note that no-action relief is staff-level, applies to the requesting firm and its facts, and may be modified or withdrawn.

Source: Securities and Exchange Commission