Monday, November 27, 2023

Lawmakers implore banking regulators to clarify reach of staff accounting bulletin

By Kathleen Bianco, J.D.

On Oct. 31, 2023, the Government Accountability Office (GAO) issued a decision finding that the Securities and Exchange Commission’s Staff Accounting Bulletin 121 (SAB 121), published on April 11, 2022, is a “rule” for purposes of the Congressional Review Act. As a result of this determination, a bipartisan group of congressional members led by Rep. Patrick McHenry (R-NC), the Chairman of the House Financial Services Committee, and Senator Cynthia Lummis (R-Wyo) have now reached out to the prudential regulators asking them to take action to clarify that SAB 121 is not enforceable in light of the GAO decision.

SAB 121, as issued, requires banks holding crypto assets to recognize a liability and a corresponding offset on their balance sheets, measured at the fair value of the customer custodial digital assets. The lawmakers note in their November 15 letter that SAB 121 was issued without any consultation with any of the prudential regulators—the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board of Governors (Fed), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA). They further opine that “[t]his accounting approach, which deviates from established accounting standards, would not accurately reflect the underlying legal and economic obligations of the custodian, and places consumers at greater risk of loss.”

Because SAB 121 was deemed to have met the definition of a rule under the Administrative Procedure Act (APA), the SEC had an obligation to comply with the requirements of the Congressional Review Act by submitting SAB 121 to Congress or the GAO for review. As a result of the SEC’s failure to meet these obligations, SAB 121 “should have no legal effect and the Federal Banking agencies and National Credit Union Administration should not require banks, credit unions, and other financial institutions that provide custody services for digital assets to comply,” the letter indicated.

The letter goes on to state that, “[e]nforcing this noncompliant rule would set a concerning precedent that would facilitate regulatory gamesmanship to circumvent the APA, effectively allowing the SEC to have regulatory authority over institutions which Congress did not authorize.” It is for these reasons that the lawmakers’ who have signed the letter are encouraging the prudential regulators to act through guidance or other means to clarify that SAB 121 is not enforceable under the GAO findings.