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US Securities and Exchange Commission

Gensler Defends SEC Staff Accounting Bulletin on Crypto After GAO Report Deems it a Rule

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Securities and Exchange Commission (SEC) Chair Gary Gensler once again defended the controversial Staff Accounting Bulletin (SAB) No. 121 on crypto custody accounting, this time following a report by the Government Accountability Office (GAO), which deemed it a rule subject to the Congressional Review Act (CRA).

“It’s just a staff accounting bulletin. And by its very number, it’s the 121st one in 50 plus years,” Gensler said in response to a question by Thomson Reuters following a fireside chat hosted by the American Bar Association in Washington on December 7, 2023.

While he did not directly address it, implicit in his remarks is that the 120 SABs that were issued were not called into question previously and were accepted as such. But banks are highly critical of SAB 121 because it would make its balance sheets look weak depending on cryptocurrency market conditions. And the digital asset market has proven to be highly volatile and rife with fraud.

“And it basically addresses whether liabilities should be on balance sheet, and what we have found actually in bankruptcy court, time and again, many times now, that in indeed, bankruptcy courts have said that crypto assets are not bankruptcy remote,” Gensler said. “So, the staff, as they have done over 50 years, did really good work.”

SAB 121, which was issued at the end of March 2022 to better protect investors, describes how companies should account for custodial services of crypto assets. Because of risks unique to crypto, the staff determined that companies should record a liability and corresponding asset on their balance sheets at fair value.

But upon issuance, SEC Commissioner Hester Peirce immediately criticized the agency for not having taken a deliberative step to issue the guidance. Or the accounting standard-setter FASB could have taken up the project, she said.

There was some initial pushback from the crypto industry. And banks have opposed SAB 121, heavily lobbying against it. Banking regulators have also been quietly critical of the SEC staff’s accounting guidance.

Chair Gensler and the staff have since been defending SAB 121 during public events.

For example, during a financial reporting conference in November 2022, SEC Chief Accountant Paul Munter, most likely chief architect of SAB 121, said it only represents the staff’s views.

“A SAB is not a commission rulemaking; it is not an official pronouncement of the commission. It is—as the S in SAB implies—the views of the of the staff. It is not standard setting. That’s what the FASB does. So, what a SAB is intended is to communicate the staff’s view about the application of current GAAP to an existing fact pattern” said Munter who was at the time acting chief accountant. He was promoted to be the agency’s top accountant in January this year.

Now the GAO report, issued on October 31, is giving ammunition to foes of SAB 121. When it is deemed a rule under the CRA, Congress can overturn it. And GOP lawmakers said they will seek to use it.

Moreover, a bipartisan group of House and Senate lawmakers urged the Federal Reserve and other prudential supervisors to clarify that SAB 121 is non-enforceable in light of the GAO opinion.

On the sidelines of an AICPA conference on December 4, when asked by Thomson Reuters about the GAO report, Munter now said: “I have no views on that.”

In the meantime, the “GAO opinion expresses its view that SAB 121 is a ‘rule’ for purposes of the CRA,” an SEC spokesperson previously said in a statement. “The opinion does not otherwise affect the status of SAB 121.”



This article originally appeared in the December 11, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.

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