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SEC Issues No-Action Letter Clarifying Net Capital Treatment of Leases Under New Accounting Standards


Plan Designs Reflect Market, Regulatory Forces

In a no-action letter dated November 8, 2016, the SEC provided clarification pursuant to their position on lease treatment resulting from the Financial Accounting Standards Board’s (FASB) Accounting Standards Update No. 2016-02, Leases (issued in February 2016). This accounting standard includes significant changes to how operating lease assets and liabilities are recognized. These changes sent shockwaves through the financial industry as the new standard inadvertently changes the way broker-dealers calculate their net capital and, absent regulatory relief, would reduce many firms’ net capital and, consequently, their reported excess net capital.

SIFMA Outlines Impacts to Broker-Dealer Industry

In an effort to get the SEC to address the concerns of broker-dealers, SIFMA outlined the key issues and likely impacts to the broker-dealer industry in a letter dated May 2016, which explained the significant impact the new lease standards would have on broker-dealers, prior to provided relief, including:

  • Right-of-use assets would not be considered allowable assets under the net capital rules, therefore they can’t be used to offset a lease liability for purposes of calculating net capital, thus diminishing excess net capital.
  • Broker-dealers that use the aggregate indebtedness method in calculating their net capital requirement would have to include lease liabilities in their calculation of capital requirements, in effect, increasing the capital requirements for these firms.

SIFMA also conducted a preliminary survey of 22 broker-dealers to gauge their thoughts on the estimated impact of the new standards. Collectively, these broker-dealers estimated that the impact to their regulatory capital would be $9.8 billion, with regional, smaller and introducing broker-dealers being affected disproportionately.

SEC Responds to SIFMA Concerns

Within the SEC’s November 2016 no-action letter, the SEC responded to SIFMA and indicated that they would not recommend  enforcement action under SEC Rule 15c3-1 if:

  • A broker-dealer computing net capital adds back an operating lease asset equivalent to the associated operating lease liability.
  • A broker-dealer determining its minimum net capital requirement using the aggregate indebtedness standard does not include in its aggregate indebtedness an operating lease liability to the extent of the associated operating lease asset.

While the SEC has agreed not to enforce these provisions from a regulatory perspective, they did not express views with respect to the legal ramifications a broker-dealer may face from state and federal governments or self-regulatory organization rules.

Taking Action

In light of this update, what action should broker-dealers take? Firms should analyze their leases and the impact on operations under the new standards.

Gray_LincolnFor assistance, contact Lincoln Gray, Partner in Charge, Broker-Dealer and Investment Advisory Services, at 314.983.1235 or


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