On November 8, 2016, in response to a request by the Securities Industry and Financial Markets Association (“SIFMA”) the Securities and Exchange Commission (“SEC” or “Commission”) released its interpretation of the net capital rule and how FASB’s Accounting Standards Update No. 2016‐02 (Leases (Topic 842)
will be applied. The new lease accounting standard is effective for fiscal years beginning after December 15, 2018 for entities such as registered broker dealers, which are deemed to be “public business entities.”
Under the new standard, for leases with a term greater than twelve months, lessees will be required to recognize (i) their obligations to make lease payments as a liability (the “lease liability”), initially measured at the present value of the lease payments, and (ii) their ability to use the leased property as a corresponding asset (a “right‐of‐use asset”). SIFMA expressed concern that this change in the treatment of operating leases is purely a matter of accounting and that the new standard does not alter the economic or legal characteristics of leases. Without regulatory relief, SIFMA commented, the new accounting standard would reduce firms’ net capital and excess net capital, potentially by material amounts.
In its “No Action Letter” the Division of Trading and Markets of the SEC stated that its interpretation should be applied on a lease-by-lease basis, and that the Division: “…will not recommend enforcement action to the Commission under Exchange Act Rule 15c3‐1 if a broker‐dealer computing net capital adds back an operating lease asset to the extent of the associated operating lease liability. If the value of the operating lease liability exceeds the value of the associated operating lease asset, the amount by which the liability's value exceeds the associated lease asset must be deducted for net capital purposes. Further,…the Division will not recommend enforcement action to the Commission under Exchange Act Rule 15c3‐1 if a broker‐dealer determining its minimum net capital requirement using the AI standard does not include in its aggregate indebtedness an operating lease liability to the extent of the associated operating lease asset. If the value of the operating lease liability exceeds the associated operating lease asset, the amount by which the lease liability exceeds the lease asset must be included in the broker‐ dealer's aggregate indebtedness
It should be noted that the above relief is provided with respect to operating leases only and not to financing leases. For more information contact Dave Grumer
or David Sunshine
at (212) 697-1000.