Senators join chorus of disapproval of ‘backdoor regulation’ in SEC staff accounting bulletin

United States Senator Bill Hagerty has sent a letter, cosigned by four other Republican senators, to Securities and Exchange (SEC) Commission chair Gary Gensler urging the withdrawal of a staff accounting bulletin, referred to as SAB 121, issued by the agency March 31. According to the senators, the bulletin amounts to “regulation disguised as staff guidance” and does not adhere to the Administrative Procedure Act.

SAB 121 provides guidance on accounting and disclosure for companies that safeguard clients’ crypto assets and allow them to perform transactions with them. The bulletin said those companies, which include platforms such as Coinbase and Robinhood, should list digital assets as liabilities on their balance sheets at fair value. The need for the new accounting procedure was chalked up to “increased risks” from crypto assets.

The senators’ letter pointed out that SEC staff provide guidance on existing regulations, but no regulations are cited in SAB 121, and the bulletin was worded as though compliance was an expectation, even though a staff bulletin is not intended to create enforceable obligations. The letter goes on to criticize SEC policy more broadly:

“The SEC's approach to the emerging crypto market has not promoted process, transparency or public engagement.”

In addition to Haggerty, the letter was signed by Senators Cynthia Lummis, M. Michael Rounds, Thom Tillis and Mike Crapo. SAB 121 elicited an immediate unfavorable response from SEC commissioner Hester Peirce, who also criticized “the way the change is being made.”

Coinbase caused a momentary stir in May when it included a statement that “In the event of a bankruptcy, the crypto assets we hold on behalf of our customers may be subject to bankruptcy proceedings” in its first-quarter report to the SEC. CEO Brian Armstrong took to Twitter to explain that the statement was included due to “an SEC requirement called SAB 121, which is a newly required disclosure,” and the company was in no danger of bankruptcy.

2/ We have no risk of bankruptcy, however we included a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties. https://t.co/lwmgb1kFtA

— Brian Armstrong - barmstrong.eth (@brian_armstrong) May 11, 2022

The banking industry also reacted to the bulletin with alarm. The American Bankers Association and Securities Industry and Financial Markets Association SIFMA sent a letter to the SEC on May 27 saying, “our member firms believe there are a number of questions regarding the scope and application of SAB 121 and, therefore, believe deferral of the effective date is necessary to ensure these matters are appropriately addressed.”