FINRA Issues FOCUS Report Guidance – Operating Lease Reporting

consultingOn March 19, 2019 the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 19-08, providing guidance on reporting operating lease assets and liabilities on their Focus reports.

Background

On October 23, 2018, the SEC issued a no action relief letter (the Letter) stating that, absent relief, the right-to-use asset would be a non-allowable asset in determining net worth under Rule 15c3-1, and the lease liability would be included in the aggregate indebtedness calculation for firms using the aggregate indebtedness (AI) standard under Rule 15c3-1.  The Letter also stated that the Division would not recommend enforcement action in the following circumstances:

  1. If a broker-dealer computing net capital adds back an operating lease asset to the extent of the associated operating lease liability. A broker-dealer cannot add back an operating lease asset to offset an operating lease liability unless the asset and liability arise from the same operating lease; and the amount of the asset as to each lease may not exceed the liability on the balance sheet arising from that lease.
  2. 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.

FOCUS Reports and the Latest Guidance – What You Need to Know:

  • On FOCUS Report Part II, Part IIA and Part II CSE, members should report the operating lease asset on the line “Property, furniture, equipment, leasehold improvements and rights under lease assets”. The portion to be added back should be included in box 490, under the allowable column.  The non-allowable portion should be included in box 680.
  • On FOCUS Part II, members should report the operating lease liability on the line “Accounts payable and accrued liabilities and expenses – F. Other”. Include the portion that is not an aggregate indebtedness liability in Box 1380 (under the “Non-A.I. Liabilities” column); report the portion that is an aggregate indebtedness liability in Box 1200 (under the “A.I. Liabilities” column).
  • On FOCUS Report Part IIA, members should report the operating lease liability on the line “Accounts payable, accrued liabilities, expenses and other”. Report the portion that is not an aggregate indebtedness liability in Box 1385 (under the “Non-A.I. Liabilities” column); report the portion that is an aggregate indebtedness liability in Box 1205 (under the “A.I. Liabilities” column).
  • On FOCUS Report Part II CSE, Members should report the operating lease liability on the line “Accounts payable and accrued liabilities and expenses – F. Other” in Box 1680.

 

For more information on the latest Guidance, or how Oyster can support your Financial and Operations Principals, complete our contact form or call (804) 965-5400.

About the Author: 

Jeff Harpel is a seasoned industry professional with over 30 years of expertise in accounting, finance, and auditing in the securities brokerage industry. Jeff’s experience includes a comprehensive understanding of securities operations and regulations, experience in dealing with regulatory bodies, examiners and auditors and a thorough command of internal controls, financial systems, and merger conversion activities. Prior to joining Oyster, Jeff was Director of Regulatory Accounting and Financial Compliance for the retail broker-dealers of Wachovia Securities (now Wells Fargo Advisors) ensuring compliance with net capital, customer protection, FOCUS, and other financial rules and reporting requirements. At Oyster, Jeff’s experience has been utilized as the FinOp for a number of brokerage firm clients as well as on numerous regulatory reporting engagements.

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