Brokerage Insights - January 2017

January 2017


SEC Issues No-Action Letter for Broker-Dealers Under New Lease Accounting Standards

Download PDF Version

On November 8, 2016, the U.S. Securities and Exchange Commission’s (SEC) Division of Trading and Markets issued a no-action letter providing relief to broker-dealers from the effects of the Financial Accounting Standards Board’s (FASB) recently issued new accounting standard for operating lease assets and liabilities, known as ASU 2016-02, Leases, or “Lease Accounting Update” (Topic 842).


What is Topic 842?

Issued in February, 2016, Topic 842 was developed to provide improved transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard was viewed as problematic for broker-dealers, despite there being a similar accounting requirement for capital leases.


What was the concern for broker-dealers?

Topic 842 would have had a significant impact on broker-dealers’ calculation of net capital requirements under Exchange Act Rule 15c3-1, which requires broker-dealers to deduct from net worth any asset that is not readily convertible into cash (a non-allowable asset). Capitalized leased assets would have been a non-allowable asset while increasing aggregate indebtedness. That could have required an immediate capital injection to remain in compliance with regulatory net capital requirements.


What does the no-action letter provide?

The SEC’s no-action letter will allow broker-dealers to treat capitalized operating lease assets as allowable to the extent of the related operating lease liability. This must be done on an individual basis and cannot be done in the aggregate. The no-action letter will also allow lease liability to be excluded in the determination of the aggregate indebtedness (AI) to net capital ratio. This ultimately eases concerns that the new standard will increase broker-dealer net capital requirement obligations.

You can find a complete version of the SEC’s no-action letter by clicking on the below link.

For more information, please contact one of the following industry leaders:
John Iacobellis
New York
   Bharath Ramachandran

Nathan Dick
Los Angeles
  James Kochanski

Mark Ellenbogen
Greater Washington, D.C.
  Gary McCormick
San Diego

Jim Dannemiller