The House Financial Services Committee on February 29, 2024, advanced a bipartisan measure to eliminate a 2022 SEC staff accounting bulletin (SAB) on accounting for custodied crypto assets, over the objection of some Democrats who warned the Congressional Review Act (CRA) resolution would tie the hands of commission staff on future guidance.
H.J. Res. 109 cleared the committee on a 31 to 20 vote. The resolution would wield the CRA, which allows Congress to overturn a regulation through a simple majority vote in both the House and Senate (subject to presidential veto), to do away with (SAB) No. 121. It is sponsored by Representative Mike Flood (R-NE), with Representative Wiley Nickel (D-NC) joining as cosponsor. Senator Cynthia Lummis (R-WY) is sponsoring the Senate version of the resolution.
Under the accounting guidance, issued in March 2022, SEC-registered entities and certain other companies responsible for safeguarding crypto assets for platform users must present a liability on their balance sheet at fair value to reflect that obligation, as well as a corresponding asset.
The guidance has drawn criticism from Republican lawmakers and some Democrats – as well as crypto and banking industry groups – who frame it as a departure from the standard accounting treatment of custodied assets.
“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,” Flood said prior to the vote. “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. That’s not much of a choice at all.”
The vote comes months after a Government Accountability Office (GAO) report deeming the bulletin a rule for the purposes of the CRA.
If a regulation is invalidated under the CRA, an agency is barred from issuing a subsequent one that is “substantially the same.” Democratic critics of using the CRA to scrub SAB No. 121 warned it could have broader implications.
“If this Congressional Review Act resolution is signed into law, it will have a chilling effect on the SEC’s ability to issue staff-level accounting and legal guidance on any other issue in the future,” said Representative Maxine Waters (D-CA), the committee’s ranking member. “That’s because this resolution not only repeals the bulletin, but it prohibits the SEC from ever issuing a substantially similar bulletin again. Moreover, the SEC staff would likely think long and hard before ever offering guidance to public companies in the future, even on completely unrelated accounting topics.”
This article originally appeared in the March 1, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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