As Congress works to avoid another potential partial government shutdown to fund the rest of the federal government for fiscal 2024 by March 22, a legislative report accompanying an appropriations bill could have a significant effect on the fate of the Securities and Exchange Commission’s (SEC) staff interpretive guidance on accounting for crypto assets in custody.
The accompanying report for the GOP-led House Appropriations Committee’s Financial Services and General Government (FSGG) Appropriations Bill for fiscal 2024, which runs until September 30, 2024, includes language that would “direct” the SEC “to consult with the prudential regulators to determine how SAB 121 [Staff Accounting Bulletin] affects insured depository institutions and revise SAB 121 to conform with existing prudential standards on insured depository institutions for the custody of digital assets.”
Democrats have control of the Senate, but GOP senators want similar language used in the House version of the appropriations bill to be included for the SEC budget for fiscal 2024 in yet another effort to try to kill SAB 121. And senators behind the scenes are negotiating whether that language should be in the Senate appropriations bill for FSGG, according to two sources familiar with the matter, with some Democrats who may be willing to sacrifice SAB 121 in return for concessions from Republicans on other legislative efforts.
This comes as SAB 121 has been criticized by financial firms immediately after it was published late March 2022 to better protect investors. 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, and investor advocates applauded the staff guidance.
In an April 2022 letter to the SEC, the Alliance of Concerned Investors (ACI) wrote that SAB 121 will not only provide investors with the information they need to evaluate risks, it should also “afford regulators information to oversee and assure orderly and efficient markets.”
The group said that investors are attracted to cryptos because of their ability to transport large amounts of cash outside of the normal financial and reporting channels. And SAB 121 is a “bold first step” toward improving cryptocurrency information.
“Investors in public companies engaging in the facilitation of such transactions deserve to understand the degree of risk exposure they are undertaking,” the investors wrote. “The accounting and disclosure requirements of SAB 121 will provide these investors with more transparency than ever.”
Strong Opposition
But SEC Commissioner Hester Peirce, a well-known advocate for free enterprise, 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 pushback from the crypto industry. Banks have strongly opposed SAB 121, heavily lobbying against it 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. Banking regulators have also been quietly critical of the SEC staff’s accounting guidance.
The GOP scored a victory when the Government Accountability Office (GAO) at the end of October 2023 issued a report, saying that SAB 121 is a rule subject to the Congressional Review Act (CRA), thereby giving ammunition to foes of SAB 121. When it is deemed a rule under the CRA, Congress can overturn it with a simple majority vote. And the House Financial Services Committee at the end of February advanced a resolution to eliminate SAB 121. Some Democrats supported the measure. There is also a Senate version of the resolution, which has not advanced yet.
Before the vote, Representative Mike Flood (R-NE) who sponsored the resolution, said: “If a bank were to custody digital assets according to the parameters of SAB 121, the on balance-sheet treatment would affect their other regulatory obligations like their capital and liquidity requirements.”
“The end result is that banks must choose to either custody digital assets, thus inflating their balance sheet and severely affecting every other line of business, or stay entirely out of the market,” Flood added. “That’s not much of a choice at all.”
Moreover, some 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.
In Defense of SAB 121: Remember Enron?
However, former SEC Chief Accountant Lynn Turner, who is a member of the investor alliance ACI, said “SAB 121 requires disclosures of off-balance sheet debt that contributed to the downfall of Enron and cost investors hundreds of billions in losses, and thousands of jobs.”
At the time Enron collapsed two decades ago, its bankruptcy was the biggest in US history.
“After Enron failed, Congress required disclosure of off-balance sheet debt, but now in an election year, are turning a blind eye to this danger while holding out their hands for campaign contributions,” Turner added.
In the meantime, SEC Chair Gary Gensler as well as the staff have been defending SAB 121.
“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 at the sidelines of a conference in December 2023. While he did not directly address it, implicit in his remarks was that the 120 SABs that were issued were not called into question previously and were accepted as such.
“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.”
The Senate Appropriations Committee did not immediately respond to a query.
Budget for Fiscal 2024 and 2025
Congress on March 8 passed a $459 billion funding bill for departments of Agriculture, Commerce, Energy, Housing and Urban Development, Interior, Justice, Transportation, and Veterans Affairs, as well as the Environmental Protection Agency and Food and Drug Administration, for the rest of the fiscal year.
The two chambers of Congress have to also negotiate how much the SEC should be funded.
For fiscal 2024, the SEC wants almost $2.44 billion. The House FFSG subcommittee, however, is only willing to fund it $2 billion, a cut from about $2.15 billion for fiscal 2023.
The Senate appropriations, on the other hand, wants to provide the SEC about $2.36 billion for fiscal 2024.
Separately, the SEC is requesting about $2.59 billion for fiscal 2025, which starts October 1.
Additional reporting by Bill Flook
This article originally appeared in the March 19, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
