SEC’s Crypto Accounting Bulletin Determined Procedurally Deficient

By: Ryan J. Straus , Ran Ben-Tzur , Jennifer J. Hitchcock , Kevin Kirby , Hector Velez

On October 31, 2023, the U.S. Government Accountability Office (GAO) published a formal decision concluding that the Securities and Exchange Commission (SEC) failed to follow prescribed Congressional Review Act (CRA) procedures in its 2022 issuance of Staff Accounting Bulletin No. 121 (SAB 121).

As described in more detail in Fenwick’s client alert from April 2022, SAB 121 provides that a company subject to SEC filing or reporting obligations that safeguards crypto assets for its users should record a liability and corresponding asset on its balance sheet, reflecting the value of the assets. The bulletin has been the subject of significant controversy, with some lawmakers arguing SAB 121 upsets the long-standing convention of treating property held in custody as “off-balance sheet,” and in doing so discourages well-regulated banks and other financial institutions from providing crypto asset custodial services because of the strain on their capital requirements created by this unusual accounting treatment.

The CRA requires that, before an agency rule can take effect, the agency must submit a report on the rule to both the House of Representatives and the Senate as well as to the Comptroller General. The law allows Congress to review and disapprove any rule newly issued by federal agencies for a period of 60 days using special procedures. If a resolution of disapproval is enacted, then the new rule has no force or effect.

On August 2, 2022, Senator Cynthia M. Lummis requested the GAO—which is an independent, non-partisan agency within the legislative branch of the federal government—to determine whether SAB 121 was a “rule” subject to the CRA. The SEC maintained that the bulletin was not subject to the CRA because it was published by the SEC’s staff, rather than through the SEC. The GAO disagreed, however, finding that the statement was an “agency statement” within the applicable definition of a “rule” under the Administrative Procedures Act, and thus, was subject to the CRA’s requirements.

The GAO reasoned that, since the role of the SEC’s Division of Corporation Finance (Division) is to monitor companies’ compliance with accounting and disclosure requirements, and since the Division’s practice is to refer noncompliant companies to the SEC’s Division of Enforcement, it was “reasonable to believe that companies may change their behavior to comply with the staff interpretations found in [SAB 121].”

With this decision, the status of SAB 121 is uncertain. In past instances in which the GAO has issued an opinion that an agency failed to submit a rule to Congressional review, Congress has treated the opinion as the start of a limited window of time in which to take up consideration for a special resolution for disapproval of the rule in question.

Key Takeaways

  • The GAO concluded that the SEC failed to follow appropriate administrative procedure with its publication of SAB 121, relating to the accounting of safeguarded crypto assets.
  • SAB 121 has been criticized as deterring regulated financial institutions subject to the guidance from offering crypto asset custodial services.
  • The legal status of SAB 121 is now uncertain. Congress has a window of time during which it can pass a joint resolution to disapprove of the issuance of SAB 121. Such a resolution may be unlikely; however, even without such resolution, the GAO’s decision likely strengthens the hand of any would-be litigants appealing for judicial review of SAB 121.
  • Entities covered by SAB 121, such as banks and other financial services companies in the business of providing cryptoasset custody, should take note that, while SAB 121 currently remains applicable, certain members of Congress have indicated that they plan to initiate proceedings in hopes of overturning the bulletin, and thus, it may be on uncertain footing.


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