GAO finds controversial SEC guidance is subject to congressional oversight

United States Senator Cynthia Lummis has scored another one for crypto with a Government Accountability Office (GAO) decision issued on Oct. 31. The GAO found that Securities and Exchange Commission (SEC) Staff Accounting Bulletin 121 should be subject to congressional review. That bulletin, issued in March 2022, has been a source of ire for many pro-crypto lawmakers.

The GAO was acting on a letter sent by Lummis to the U.S. Comptroller General in August 2022. It considered whether the bulletin was a rule subject to the Congressional Review Act (CRA). Under the CRA, a report on an agency rule must be submitted to the comptroller general and both chambers of Congress, with a procedure for Congress to disapprove the rule. Using the definition of a rule found in the Administrative Procedures Act (APA), the GAO found the SEC bulletin to be subject to the CRA. The GAO said:

“It is reasonable to believe that companies may change their behavior to comply with the staff interpretations found in the Bulletin […] The Bulletin is also of future effect and was designed to interpret and prescribe policy. Accordingly, we conclude that the Bulletin meets the definition of rule under APA.”

The bulletin “expresses the views of the staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for platform users,” according to the SEC. It said, “The statements in staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval. They represent staff interpretations and practices.”

This is huge.

The GAO reviewed SAB 121, an illogical anti-crypto accounting bulletin issued by the SEC last March, and found that it’s a “rule” under the CRA and APA.

The SEC didn’t comply with either.

This is a clear statement from a federal agency that the SEC broke the law. https://t.co/brglK3sm8S

— Jake Chervinsky (@jchervinsky) October 31, 2023

The bulletin used hypothetical situations to describe what the SEC considered best practices to safeguard crypto-assets held by platforms for their users. Coinbase and PayPal are examples of such platforms. It advises platforms to list their users’ assets on their books as liabilities and assets at their fair value at initial recognition. This represented a sharp turn in accounting practice as custodied assets were not previously recorded on balance sheets.

Related: US House Financial Services Committee tells SEC it doesn’t like custody proposal

The bulletin was quickly met with objections from several sides. SEC commissioner Hester Peirce released a critical response within days. Peirce stated that the accounting procedure described in the bulletin was a response to risk that the SEC itself was partially the source of.

Five Republican senators, including Lummis, wrote to SEC chairman Gary Gensler in June 2022 to express their disapproval of the bulletin’s “backdoor regulation.” Gensler was further lectured on the bulletin by Representative Mike Flood when he appeared before the House Financial Services Committee this September.

GAO findings are recommendations only. However, the agency notes, “Clearly, agencies are taking our recommendations.”

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