The SEC staff issued a no-action letter that will allow a broker-dealer to compute net capital by treating operating lease assets' value as a "good asset," to the extent of its associated operating lease liabilities, so that the two amounts effectively offset each other. The need to treat lesser assets differently arose due to an impending technical change in the way that accounting treats lease liabilities. The accounting change is purely technical, but the interaction between that change and the literal requirements of the SEC net capital rule would have forced broker-dealers to accept billions of dollars in capital charges on the lease liability side of their regulatory financial without receiving any regularly credit on the asset side.

Commentary

The unintended consequence of the accounting change would have been devastating for small broker-dealers, likely driving many of them out of business by forcing them to recognize large liabilities (i.e., the future expenditures under their leases) while affording them no credit for the related assets (the ability to use their leased properties). The no-action letter undoes that unintended consequence. However, a number of related technical matters still need to be resolved, such as how broker-dealers should report their lease assets and liabilities to regulators under the new regime.

Note: Mary Kay Scucci of SIFMA led the industry effort to coordinate the change in the accounting rules with a corresponding change in the SEC's net capital interpretations. James McDonnell and I assisted in the drafting of SIFMA's request letter.

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