By Mark S. Nelson, J.D.
The House Financial Services Committee, during an abruptly abbreviated markup last week, succeeded in advancing a Congressional Review Act (CRA) resolution that, if enacted, would disapprove the SEC’s Staff Accounting Bulletin (SAB) No. 121 on custody of crypto assets. The action comes just weeks after a bipartisan and bicameral group of lawmakers announced their intention to overturn the SEC’s guidance. The House FSC vote on H. J. Res. 109 was 31-19 to approve the resolution, with three Democrats joining Republicans in support of the resolution and with one Democrat and one Republican not voting. The Senate version of the resolution has not been acted on since being introduced.
The contents of SAB No. 121 are three Q&A-style sets of guidance, although it is the first question regarding how to account for the safeguarding of crypto assets that has drawn the most attention. The SEC stated that a crypto firm should enter a liability and asset on its balance sheet for any custodied crypto and that the value of the safeguarding liability and the asset should be the fair market value of the crypto assets held for platform users. The remaining Q&As deal with disclosure and the time frame for applying the guidance to financial statements.
“After Chair Gensler tried to tuck a major policy change into so-called staff guidance, the GAO ruled SAB 121 constitutes a rule,” said House FSC Chair Patrick McHenry (R-NC) in his opening remarks at the markup. “So now, our Committee is taking action to rescind this misguided rule and ensure Americans can custody digital assets in one of the safest ways possible—through highly regulated banks.”
According to an opening statement form House FSC Ranking Member Maxine Waters (D-Calif), Republicans on the committee risked stripping away clarity on crypto accounting rules by pursuing the CRA resolution. Said Waters: “This bulletin is non-binding SEC staff guidance intended to help clarify how a company should account for its customers’ cryptocurrencies. We often hear Republicans and the crypto industry complain about a lack of clarity from the SEC, but ironically, the resolution before us effectively blocks the SEC staff from providing that clarity around crypto.”
The GAO ruling mentioned by McHenry in his opening remarks was supposed to provide clarity on the status of a document the SEC typically considers to be guidance. Although the Administrative Procedure Act and the CRA may not provide a clear answer on this topic, the GAO and other sources suggest that the definition was intended to have a broader meaning that just notice and comment rulemaking.
Stephen Hall, Legal Director and Securities Specialist at Better Markets, issued a statement in advance of the markup questioning the wisdom of Congress overturning financial accounting guidance.
“It is therefore critical to consider whether Congress has the expertise to second-guess the judgment that the SEC has made in the bulletin regarding some highly technical accounting issues,” said Hall. “And wouldn’t the CRA resolution set a dangerous precedent of nullifying accounting requirements that are designed and intended to protect investors, customers, markets, and financial stability—especially given the extraordinary and demonstrated risks that the crypto markets pose?”
The Chamber of Digital Commerce also issued a blog post in early February when the CRA resolution was first announced. “Today’s bipartisan resolution represents a decisive action to ensure the SEC operates within its designated rulemaking authority,” said the Chamber of Digital Commerce. “By failing to issue SAB 121 in adherence with the rulemaking process, the SEC bypassed established procedures, compromising the integrity of the regulatory framework, and violating principles of transparent and inclusive governance.”