On October 31, 2023, the Government Accountability Office (GAO) issued a formal determination that the Securities and Exchange Commission (SEC) did not follow the Congressional Review Act (CRA) in enacting the 2022 Workforce Act. .Accounting Bulletin no. 121 (SAB 121).
As described in more detail in Fenwick's April 2022 Client Alert, SAB 121 requires companies that file or report to the SEC that secure crypto assets for their users to report a liability and a corresponding asset on their balance sheet to reflect the balance sheet value. assets The bulletin has been hotly debated, with some lawmakers arguing that SAB 121 violates the convention that custody assets are "off-balance sheet," thereby discouraging banks and other financial institutions from doing a good job. Due to the pressure of capital requirements caused by this unusual accounting method, companies that provide custody services for crypto-assets.
The CRA requires that before an agency rule becomes effective, the agency must submit a report on the rule to the House and Senate and the Comptroller General. The law allows Congress to review and reject rules recently adopted by federal agencies within 60 days using special procedures. If the decision is taken not to grant approval, the new regulations will not have any effect.
On August 2, 2022, Senator Cynthia M. Lummis asked the GAO to decide whether SAB 121 is a "rule" under the CRA, an independent, nonpartisan agency of the legislative branch of the federal government. The SEC argued that the bulletin was not subject to the CRA because it was issued by SEC staff and not by the SEC. However, the GAO disagreed and concluded that the statement was an “agency statement” within the meaning of the definition of applicable “rule” in the Administrative Procedure Act and was therefore subject to the requirements of the CRA.
The GAO reasoned that the role of the SEC's Division of Corporate Finance (the Division) is to monitor companies' compliance with accounting and disclosure requirements and that the division's practice is to refer companies that fail to comply with the SEC Division's enforcement requirements. reasonable grounds are that companies may change their conduct to be consistent with the employee interpretations set out in [SAB 121]."
Because of this decision, the status of SAB 121 remains uncertain. In previous cases, when GAO issued an opinion to Congress that the agency had not submitted a rule, Congress treated the opinion as the beginning of a limited period during which it could issue a special ruling disapproving the GAO rule in question. should think .
Key findings
- The GAO concluded that the SEC did not follow proper administrative procedure in issuing SAB 121, "Regarding Accounting for Covered Crypto Assets."
- SAB 121 has been criticized because it prevents regulated financial institutions subject to the guidelines from providing crypto-asset custody services.
- The legal status of SAB 121 is unclear. Congress has a deadline to pass a joint resolution rejecting the enactment of SAB 121. This decision may be unlikely; However, even without such an order, the GAO's decision is likely to strengthen the position of any potential plaintiffs seeking judicial review of SAB 121.
- Companies subject to SAB 121, such as banks and other financial services firms involved in the custody of crypto-assets, should note that while SAB 121 remains applicable today, some members of Congress have indicated their intention to file lawsuits in an effort to elect it. up. . The law is being voted on and can therefore remain in effect indefinitely.