A group of investors wants the SEC not to be deterred by strong pushback from the crypto industry against the commission’s recent staff guidance that would require trading platforms to record their customers’ crypto assets on their balance sheets.
Crypto companies have been lobbying Congress to try to undo the commission staff guidance, according to a source close to the matter. And SEC Commissioner Hester Peirce— also known as Crypto Mom—who has been a darling of the crypto industry because of her laissez-faire views, has also issued a critique of the staff’s move—in Staff Accounting Bulletin (SAB) No. 121 issued on March 31, 2022.
Her stance largely reflects the views of the industry, which has been arguing that the SEC is trying to stifle innovation by bringing unjustified enforcement actions without providing clear rules of the crypto road. The SEC has repeatedly said it would regulate digital assets if they are deemed to be a security.
The guidance represents a significant regulatory decision for the $2 trillion crypto market with platforms transacting crypto trades worth more than $100 billion a day.
In the view of the SEC staff, safeguarding customers’ crypto assets has unique risks unlike other types of assets, including technological, legal, and regulatory risks. The actions undertaken by the platforms to protect users’ assets is a liability, the staff believes. Thus, platforms should record a liability and corresponding asset on their balance sheets at fair value.
The Alliance of Concerned Investors (ACI) agreed and applauded the staff’s decision in an April 8 letter to SEC commissioners, including Chair Gary Gensler, who has been emphasizing investor protection during his tenure.
“We believe that compliance with the guidance in SAB 121 will provide useful, transparent, and timely information to investors. In addition to providing investors with the information they need to evaluate risks, compliance with SAB 121 should afford regulators information to oversee and assure orderly and efficient markets,” wrote ACI, which has been active in the past couple of years in asking the SEC to reform what they see is a broken financial reporting system.
They believe that investors are vulnerable because, among other issues, the Financial Accounting Standards Board (FASB), which the SEC oversees, had been too preoccupied with accounting rule simplification projects that respond to companies’ demands while ignoring the views of investors who are the main users of company financial statements.
Peirce’s Objection
Peirce said that her concern is not with the accounting determination itself, but with the way the change was made. “If we are trying to encourage companies to enter our public markets, we ought to embrace a more deliberate approach to changing rules—one that involves consulting with affected parties,” she wrote.
She said the commission could do rulemaking with public notice and comment. Or the FASB could take up an accounting rule project. The board has said that it may address a narrow area of crypto financial reporting—accounting for exchange-traded digital assets and commodities. “Or even engaging affected public companies through the Division of Corporation Finance’s filing review program in consultation with the Office of Chief Accountant would all be preferable methods to the SAB to address an issue such as this one,” she wrote.
ACI: SAB 121 Protects Investors
But members of ACI, who have worked in the capital markets for multiple decades as buy- and sell-side research analysts, accounting standard-setters and regulators, or accounting academics, said that SAB 121 is important to investors “that until legal questions surrounding how the rights and obligations arising from such crypto currency arrangements would be treated in a court proceeding should an adverse event occur, a company’s exposure to its crypto currency contracts should be recognized on the balance sheet and disclosed.”
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.”
FASB’s Slow Walk on Crypto Accounting Project?
Further, SAB No. 121 “fills a reporting void which the FASB has failed to address,” ACI wrote. “We had urged the FASB to take on a project on accounting for digital assets immediately in our September 22, 2021 response to the FASB Invitation to Comment on its agenda. Even though the FASB has the ability through its Emerging Issues Task Force [EITF] to provide accounting and disclosure guidance for emerging issues on a nearly real-time basis and noting that crypto currencies have been in existence for over a dozen years, the FASB remains on the sidelines instead of leading.”
The FASB declined to comment as the letter was not addressed to the board.
“That said, I just want to point out that the FASB is currently working on a research project related to exchange-traded crypto that will be discussed by the board in the next several weeks,” FASB Spokesperson Christine Klimek said.
Individuals who signed the letter include a member of the FASB’s EITF: Jack Ciesielski, president of investment research firm R. G. Associates. Other members of ACI are Jane Adams, a former deputy chief accountant at the SEC and a former FASB staff member; Rebecca McEnally, former director of Capital Markets Policy for the CFA Institute Centre for Financial Market Integrity; Janet Pegg, an analyst at Zion Research Group who is an IAC member; and Lynn Turner, a former SEC Chief Accountant.
“As we recall the causes of Lehman’s and MF Global’s financial collapse, we add this to the list of issues that FASB has been slow to address,” the group wrote.
They were referring to the FASB’s 2014 requirement that all repurchase agreements be accounted for as secured loans. The changes were sparked by the October 2011 failure of commodities broker MF Global Inc., which prompted calls to the SEC to amend the financial reporting requirements for securities and commodities firms that rely on repurchase agreements, also called repos, to fund their daily trading. The SEC responded by delegating the job to the FASB.
MF Global masked the extent of its indebtedness by interpreting a FASB standard at the time to treat the trades as sales. Similarly, Lehman Brothers Holdings Inc. used a questionable interpretation of the rule in the months leading up to its September 2008 bankruptcy.
“As we noted in our letters of October 20, 2020 and April 19, 2021, high-quality financial reporting is an essential element for achieving the SEC’s mission and maintaining a robust and efficient capital market,” ACI wrote. “We praise the Commission for its proactive initiative and ongoing efforts in protecting investors.”
This article originally appeared in the April 11, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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