The SEC and CFTC granted no-action relief to broker-dealers (SEC) and to futures commission merchants and introducing brokers (CFTC) regarding the net capital implications resulting from changes in accounting principles adopted under the Financial Accounting Standards Board ("FASB") (FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers).
The FASB changes provide that certain expenses relating to obtaining customer business should be capitalized and written off over time, rather than immediately expensed. While the effect of this accounting change is generally to increase the equity of firms that calculate their assets in accordance with GAAP, it actually has the wholly unintended effect of decreasing the regulatory "net capital" of regulated entities because they treat capitalized expenses as having no value for regulatory capital purposes, but they are required to deduct future tax liabilities relating to these capitalized expenses as deductions from net capital. The SEC letter and the CFTC letter will essentially undo the effect of the FASB changes in the calculation of firms' net capital; in effect, firms will continue to write off all expenses of obtaining customer business immediately as they are incurred.
The CFTC no-action letter also effectively accepted a number of further adjustments relating to the interaction between the computation of GAAP accounting and the determination of net equity that had been dealt with in SEC no-action letters over the years. This has the very sensible effect of keeping the methods by which the two regulators calculate regulatory capital consistent with each other.
Cadwalader assisted Mary Kay Scucci of SIFMA in obtaining the no-action letters.
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