How zero-cash brokerage accounts change where customer money is protected

Two SEC staff letters describe how a securities account can operate while keeping customers’ uninvested money with a separate bank or money-services business. Cash moves to the carrying broker for purchases and back to the external account after sales. The customer may use one investment application, but the securities and cash pass through different legal relationships. The 17 September 2026 letters address the duties of Alpaca Securities LLC and eToro USA Securities Inc. at different points in that process.[1][2]

The first letter concerns Alpaca Securities LLC, a carrying and clearing broker-dealer. It deals principally with the customer-protection rule governing transfers of customers' free credit balances. The second concerns eToro USA Securities Inc., an introducing broker-dealer that says it does not hold customer funds or securities. It addresses the introducing firm's net-capital treatment. They are complementary but not interchangeable. Neither letter is a blanket approval of every account arrangement using the technology, and neither establishes how many customers have been placed in such accounts.[1][2]

For customers, the practical question is which institution owes them the asset at any given moment. That determines which account terms and protection framework apply if a payment is delayed or a provider fails. The letters describe proposed arrangements and regulatory conditions; they do not report customer losses or establish the scale of any commercial rollout. Reading the cash movements alongside the two firms’ different broker roles explains what users need to establish from their own agreements.[1][2]

Two firms, two regulatory questions

Alpaca's proposed arrangement begins with a securities account carried at the firm. A customer must also designate an external cash account with a bank or with a state-licensed money-services business registered with the Financial Crimes Enforcement Network. The customer holds funds there until a securities purchase is placed. Funds then move to the brokerage account to settle the trade. When securities are sold, the resulting free credit balance moves back to the designated external account. Alpaca's traditional brokerage accounts would remain available as a separate offering.[1]

That is a carrying-broker issue because the broker receives cash for the purchase and carries the purchased securities. The applicable rule is Exchange Act Rule 15c3-3, including provisions restricting transfers of customer free-credit balances except on the customer's instruction or authorisation. Alpaca's lawyers asked staff whether it would recommend enforcement solely because the firm supported these outgoing transfers under standing authorisations and contemporaneous sale instructions. The request describes operational safeguards; it does not ask that all the ordinary obligations of a clearing firm disappear.[1]

The eToro USA Securities letter operates at a different link in the chain. That firm says it introduces accounts to another carrying broker-dealer on a fully disclosed basis and neither receives nor holds customer assets. A customer initiates the investment through the introducing relationship, but cash for an order goes to the carrying firm and securities remain carried there. The question for SEC staff was whether the specified low minimum net-capital calculation could continue to apply to that introducing firm when it offered the external-cash arrangement. This is a narrow legal question about one entity's financial-responsibility classification.[2]

The legal names matter. eToro USA Securities Inc. is not the same legal entity as Nasdaq-listed eToro Group Ltd. Alpaca is not an interchangeable name for the carrying broker in every eToro account. The letters should not be combined into a claim that a particular eToro customer is using Alpaca for clearing. They document separate staff positions sought by separate firms, and the public texts alone do not establish the complete commercial counterparties in any individual rollout.[1][2]

Follow one hundred dollars through the system

The Alpaca request offers a transaction illustration. A customer buys one share at $100, instructing the bank or money-services business to transfer $100 to the clearing firm. When the firm receives the money it allocates it to the brokerage account. The purchase settles on T+1, one business day after the trade, and the security is allocated to that account. A sell order reverses the sequence: on T+1, the $100 sale proceeds are credited to the brokerage account, after which Alpaca proposes to remit them to the external account promptly and no later than the close of the following business day.[1]

Trade settlement and external payment settlement are separate steps. There is a time when a securities order executes, a time when it settles at the carrying broker and a time when the external provider credits the customer’s cash balance. A displayed total may combine those states. The letters’ transaction illustration is not a service guarantee covering every bank holiday, rejected payment or customer-account restriction.[1]

For purchases, the system needs a reliable way to know funds have actually arrived. If an app displayed the customer's bank or money-services balance as available for trading before final transfer, the carrying firm would have to manage failed funding instructions or settle only after receipt. The letters describe the intended funding movement; they do not publish a complete policy on rejected payments, operating cut-offs, overdrafts or emergency liquidity. Those remain due-diligence questions rather than demonstrated defects.[1][2]

For sales, the operational challenge is different. Once a position is sold, the proceeds become a free credit balance at the carrying firm until remitted externally. Alpaca says balances not yet transferred at the time its customer-reserve calculation is required would still enter that calculation as a credit item. This is an important limit on any simplified claim that the customer-protection rule stops applying as soon as a sale order is entered. Protection and bookkeeping depend on the actual location of the money at the relevant time.[1]

The change in investor-protection perimeter

Both requests state that funds transferred out to an external cash account are no longer held in the brokerage account. They would therefore not constitute eligible customer claims under the Securities Investor Protection Act and would not be protected through the Securities Investor Protection Corporation in that capacity. The proposed customer agreements and platform disclosures are supposed to make that distinction prominent. This is one of the most consequential passages in the records, not an incidental legal qualification.[1][2]

SIPC works to restore missing customer securities and cash when a member brokerage fails, subject to the governing conditions and limits. It does not insure the market value of an investment. In the arrangements described here, the first question is whether the cash is still held at the carrying broker or has moved to the external account. The letters expressly identify the transfer as a change in the framework applicable to that cash.[1][2][3]

An external bank deposit may qualify for FDIC insurance if the bank and account meet the applicable conditions. A nonbank money-services business is not itself FDIC-insured. The FDIC explains that pass-through coverage can depend on funds actually reaching an insured bank and on ownership and recordkeeping requirements. It covers failure of the insured bank, not the nonbank provider’s own failure. FinCEN registration or a state licence does not by itself establish deposit insurance for a customer balance.[1][2][4]

The firms' proposals address safeguarding within that external-account perimeter in another way: they represent that external funds will not be commingled with the money-services business's proprietary funds and that appropriate licensing and registration will be checked. Those commitments deserve attention, but an undertaking to operate segregated accounts is not a public audit confirming how each provider has implemented them. A customer seeking assurance would need the provider's identity, legal account terms, recordkeeping arrangements and insolvency treatment.[1][2]

Different broker roles carry different capital requirements

Alpaca’s request says the carrying broker will maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit items under the relevant reserve formula. eToro USA Securities seeks the specified introducing-broker treatment while maintaining the greater of $5,000 or the amount otherwise required under the applicable part of Rule 15c3-1. These are different regulatory tests for different functions, and the stated floors are not the firms’ reported actual capital balances.[1][2]

A carrying broker performs settlement, possession-or-control and reserve-related duties. An introducing broker that does not receive or hold customer assets has a different role. The applicable capital requirement may exceed the dollar floor, and regulatory net capital is not the same as cash available to customers or a guaranteed recovery amount. The relevant comparison is the responsibility assigned to each entity in the arrangement.[1][2]

The eToro staff response is particularly explicit about its limits. On the facts represented, the Division would not recommend enforcement under the specified financial-responsibility provision. The response says it expresses no legal conclusions about the question presented and no view on other federal, state or foreign laws or self-regulatory rules. Different circumstances could require a different response, and the position may be modified or revoked. A no-action response is not the same instrument as a Commission rule, a court judgment or a permanent exemption covering all future products.[2]

The wording makes the word 'approval' potentially misleading if used without qualification. SEC staff expressed a conditional enforcement posture on the described facts. The firm still has to satisfy applicable customer disclosures, licensing, handling, broker registration and any laws not addressed by the letter. The same caveat applies to the Alpaca staff position on outbound customer credit transfers. An agreement between a platform and a payment operator cannot waive statutory protections or requirements elsewhere in the system.[1][2]

Daily reconciliation connects the two cash records

Alpaca's proposed model includes a daily exchange of reconciliation reports between the clearing broker and the money-services business, identifying funds that moved into brokerage accounts and free credit balances sent back. That requirement is practical rather than decorative. If one system regards a payment as complete and the other has it pending or rejected, a customer may see a number which neither ledger can presently support. Reconciliation is a way to detect and resolve those mismatches.[1]

Consider an illustrative $500 sale, not a transaction reported to have occurred. The carrying broker credits $500 on settlement, initiates a transfer and reduces its free credit balance. If the external provider later rejects the payment, the ledger has to identify whether a customer receivable has been restored, funds returned, or an exception remains outstanding. The public correspondence does not prescribe every exception-handling rule. That is exactly why it is premature to claim, on the strength of a no-action letter alone, that settlement and operational controls work seamlessly in practice.[1][2]

The required customer standing authorisation introduces another governance question. A customer can agree once to a recurring process, but the instruction still needs to be specific enough about destination and terms to satisfy the relevant rule. The model additionally envisages agreement or acknowledgement when securities are sold. A clear cancellation mechanism, handling of changes to designated accounts and authentication of instructions would be material customer-protection details. The correspondence outlines the authorisation premise but does not publish an independently tested user interface.[1]

The arrangement could let a financial-technology provider combine payments and investing while leaving idle money with an external provider. The commercial economics depend on contracts and fees that the letters do not supply. Neither document quantifies customer adoption, transaction charges or income earned on external balances. A legal route for the account model should therefore be distinguished from evidence that it is cheaper or commercially successful.[1][2]

What customers need from the account terms

The account terms should identify the external bank or money-services business, explain how cash is held and protected, and show when it leaves the brokerage account. They also need to explain the practical treatment of rejected transfers, account changes and freezes. Those are details of the actual customer relationship. The two letters do not identify a complete provider network or establish how every future implementation will operate.[1][2][4]

The securities account, settlement proceeds and external cash balance belong to a connected process with several regulated participants. Following the money through that process explains why one app can display assets with different protections. The staff letters set out conditions for particular broker arrangements; the customer’s provider identities and account terms complete the picture.[1][2]

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