H. Rept. 118-480 - PROVIDING FOR CONGRESSIONAL DISAPPROVAL UNDER CHAPTER 8 OF TITLE 5, UNITED STATES CODE, OF THE RULE SUBMITTED BY THE SECURITIES AND EXCHANGE COMMISSION RELATING TO "STAFF ACCOUNTING BULLETIN NO. 121"118th Congress (2023-2024)
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118th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 118-480
======================================================================
PROVIDING FOR CONGRESSIONAL DISAPPROVAL UNDER CHAPTER 8 OF TITLE 5,
UNITED STATES CODE, OF THE RULE SUBMITTED BY THE SECURITIES AND
EXCHANGE COMMISSION RELATING TO ``STAFF ACCOUNTING BULLETIN NO. 121''
_______
May 1, 2024.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. McHenry, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.J. Res. 109]
The Committee on Financial Services, to whom was referred
the joint resolution (H.J. Res. 109) providing for
congressional disapproval under chapter 8 of title 5, United
States Code, of the rule submitted by the Securities and
Exchange Commission relating to ``Staff Accounting Bulletin No.
121'', having considered the same, reports favorably thereon
without amendment and recommends that the joint resolution do
pass.
CONTENTS
Page
Purpose and Summary.............................................. 2
Background and Need for Legislation.............................. 2
Related Hearings................................................. 3
Committee Consideration.......................................... 4
Committee Votes.................................................. 4
Committee Oversight Findings..................................... 6
Performance Goals and Objectives................................. 6
Congressional Budget Office Estimates............................ 6
New Budget Authority, Entitlement Authority, and Tax Expenditures 6
Federal Mandates Statement....................................... 6
Advisory Committee Statement..................................... 6
Applicability to Legislative Branch.............................. 6
Earmark Identification........................................... 6
Duplication of Federal Programs.................................. 7
Section-by-Section Analysis of the Legislation................... 7
Minority Views................................................... 8
PURPOSE AND SUMMARY
Introduced on February 1, 2024, by Representative Mike
Flood, H.J. Res 109, Providing for congressional disapproval
under chapter 8 of title 5, United States Code, of the rule
submitted by the Securities and Exchange Commission relating to
``Staff Accounting Bulletin No. 121, would rescind the
Securities and Exchange Commission's (SEC) Staff Accounting
Bulletin (SAB) 121, which expresses the view of SEC staff
regarding how certain entities should account for and disclose
their custodial obligations when safeguarding digital assets
held for their platform users. H.J. Res 109 is cosponsored by
Reps. Nickel, Emmer, Soto, and Hill. Senator Cynthia Lummis (R-
WY) introduced a companion Resolution in the Senate.
On August 2, 2022, Senator Cynthia Lummis (R-WY) sent a
congressional request to the Government Accountability Office
(GAO) for a decision regarding whether the Bulletin is subject
to the Congressional Review Act (CRA). On October 31, 2023, the
GAO issued its decision concluding that the Bulletin is a rule
for purposes of CRA because it meets the APA definition of a
rule, and no exceptions apply.
BACKGROUND AND NEED FOR LEGISLATION
Effective on April 11, 2022, SAB 121 requires entities that
are safeguarding digital assets for users to record on their
balance sheets a liability and a corresponding asset at the
fair value of the digital assets. SAB 121 also specifies
certain disclosure requirements. This is a sea change from the
existing accounting treatment for custodial assets, as these
are traditionally recorded off-balance sheet. Indeed, numerous
commenters have highlighted that SAB 121 ``deviates from
existing accounting treatment of safeguarded assets held in a
custodial capacity, which does not result in assets or
liabilities reported on the custodian's balance sheet.'' Even
Federal Reserve Board Chair Powell remarked in testimony before
the Senate Committee on Banking, Housing, and Urban Affairs
that SAB 121 marks a shift away from traditional custodial
practices.
While SAB 121 was intended to clarify the accounting
treatment of digital assets safeguarded by custodians, digital
asset trading platforms, and other digital asset firms, SAB 121
creates confusion and injects new risks and costs for digital
asset custodians. By placing custodial assets onto the balance
sheet, it puts customer assets at greater risk of loss if the
custodian becomes insolvent or enters receivership. Likewise,
SAB 121 will increase capital, liquidity, and other burdens on
digital asset custodians under the existing prudential
regulatory framework by requiring on-balance sheet treatment of
digital assets. As a result, it will be far more expensive for
a firm to custody digital assets compared to traditional
assets. This in turn is likely to discourage banking
organizations from providing custodial services for digital
assets. As emphasized in comment letters, ``U.S. banking
organizations'' experience over the past two years has
confirmed that SAB 121 has curbed the ability of [financial
institutions] to develop and bring to market at scale certain
digital asset products and services.''
The impact of SAB 121 was especially apparent when the SEC
recently approved spot bitcoin exchange-traded products (ETPs).
These ETPs allow investors to gain exposure to Bitcoin through
a regulated product. As part of the ETP structure, an entity
must provide custody services to each ETP issuer. Typically,
this role would be filled by banking organizations, such as
Coinbase and Fidelity Digital Asset Services, that have ample
experience providing such services. Because of the regulatory
burdens created by SAB 121, the banking organizations that
specialize in custodial services are unable to custody digital
assets.
In contrast to the SEC's approach, the Federal banking
agencies have concluded that digital asset custody is a
permissible activity for banks. Indeed, financial institutions
have already engaged with their regulators who have set out
guidelines for the safe and secure custody of digital assets.
As Jones Day Partner, Jonathan Gould, explained on March 9,
2023, ``OCC Interpretive Letter 1179 required banks to address
[safety and soundness concerns] to the OCC's satisfaction
before the bank could engage in digital asset activities . . .
Following in the footsteps of the OCC, the FDIC and Federal
Reserve each issued similar guidance documents in 2022.''
It is therefore not surprising that the SEC issued SAB 121
without consulting the Federal banking agencies, in
contravention of Commission norms. According to a former Chief
Accountant of the SEC, ``[g]enerally, before a SAB is issued,
the general content and staff views to be expressed in the SAB
are discussed with registrants, accounting firms, standard
setting bodies, trade groups, and other agencies.'' On March 2,
2023, House Financial Services Committee Chairman Patrick
McHenry and Senator Cynthia Lummis sent a letter to the Federal
banking agencies asking if they had been consulted on SAB 121.
Each agency confirmed there had been no coordination between
them and the SEC regarding SAB 121, prior to its issuance. SEC
Chair Gary Gensler also confirmed this during the Committee's
SEC oversight hearing on April 18, 2023.
SEC Commissioner Hester Peirce emphasized her concerns that
``the staff accounting bulletin may not be the appropriate
vehicle through which to make this accounting change.''
Importantly, Commissioner Peirce also highlighted that the
Bulletin ``provides definitive interpretive guidance'' for
public companies and contains a ``detailed description of
disclosure the staff expects to see, including a full paragraph
describing relevant disclosures that may also be required
outside the financial statements under existing Commission
rules.''
RELATED HEARINGS
118th Congress
Pursuant to clause 3(c)(6) of rule XIII, the following
hearings were used to develop H.J. Res 109: The Committee on
Financial Services held a hearing on February 6, 2024, titled
``The Annual Report of the Financial Stability Oversight
Council.''
The Committee on Financial Services held a hearing on
November 15, 2023, titled ``Oversight of the Prudential
Regulators.''
The Committee on Financial Services held a hearing on
September 27, 2023, titled ``Oversight of the Securities and
Exchange Commission.''
The Committee on Financial Services held a hearing on June
21, 2023, titled ``The Federal Reserve's Semi-Annual Monetary
Policy Report.''
The Committee on Financial Services held a hearing on June
13, 2023, titled ``The Future of Digital Assets: Providing
Clarity for the Digital Asset Ecosystem.''
The Subcommittee on Digital Assets, Financial Technology
and Inclusion held a hearing on April 27, 2023, titled ``The
Future of Digital Assets: Identifying the Regulatory Gaps in
Digital Asset Market Structure.''
The Committee on Financial Services held a hearing on April
18, 2023, titled ``Oversight of the Securities and Exchange
Commission.''
The Subcommittee on Digital Assets, Financial Technology
and Inclusion held a hearing on March 9, 2023, titled
``Coincidence or Coordinated? The Administration's Attack on
the Digital Asset Ecosystem.''
The Committee on Financial Services held a hearing on March
8, 2023, titled ``The Federal Reserve's Semi-Annual Monetary
Policy Report.''
117th Congress
Pursuant to clause 3(c)(6) of rule XIII, the following
hearings were used to develop H.J. Res 109:
The Committee on Financial Services held a hearing on
November 16, 2022, titled ``Oversight of Prudential Regulators:
Ensuring the Safety, Soundness, Diversity, and Accountability
of Depository Institutions.''
The Subcommittee on Investor Protection, Entrepreneurship,
and Capital Markets held a hearing on July 19, 2022, titled
``Oversight of the SEC's Division of Enforcement.''
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
February 29, 2024, and ordered H.J. Res 109 to be reported
favorably to the House as amended by a recorded vote of 31 ayes
to 19 nays (Record vote no. FC-119), a quorum being present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the order to report legislation and amendments thereto. H.J.
Res 109 was ordered reported favorably to the House as amended
by a recorded vote of 31 ayes to 19 nays (Record vote no. FC-
119), a quorum being present.
COMMITTEE OVERISGHT FINDINGS
Pursuant to clause 3(c) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee, based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the goal of H.J. Res 109 is to
rescind the SEC's SAB 121, which expresses the view of the SEC
staff regarding how certain entities should account for and
disclose their custodial obligations when safeguarding digital
assets held for their platform users.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
The Committee has requested but not received a cost
estimate from the Director of the Congressional Budget Office.
However, pursuant to clause 3(d)(1) of House rule XIII, the
Committee will adopt as its own the cost estimate by the
Director of the Congressional Budget Office once it has been
prepared.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
The Committee has requested but not received an estimate
from the Director of the Congressional Budget Office. However,
pursuant to clause 3(c)(2) of rule XIII of the Rules of the
House of Representatives, once an estimate has been prepared by
the Director of the Congressional Budget Office, as required by
section 402 of the Congressional Budget Act of 1973, the
Committee will adopt as its own the estimate of new budget
authority, entitlement authority, or tax expenditures or
revenues.
FEDERAL MANDATES STATEMENT
The Committee has requested but not received from the
Director of the Congressional Budget Office an estimate of the
Federal mandates pursuant to section 423 of the Unfunded
Mandates Reform Act. The Committee will adopt the estimate once
it has been prepared by the Director.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
Pursuant to clause 3(c)(5) of rule XIII of the Rules of the
House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes a program of
the Federal Government known to be duplicative of another
Federal program, including any program that was included in a
report to Congress pursuant to section 21 of the Public Law
111-139 or the most recent Catalog of Federal Domestic
Assistance.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
This Joint Resolution disapproves the rule submitted by the
Securities and Exchange Commission relating to ``Staff
Accounting Bulletin No. 121''and asserts that such rule shall
have no force or effect.
MINORITY VIEWS
H.J. Res.109 is a Congressional Review Act (``CRA'')
resolution that would nullify U.S. Securities and Exchange
Commission's (``SEC'') Staff Accounting Bulletin (``SAB'') No.
121, which provides non-binding, staff-level accounting
guidance for companies registered with the SEC that custody
crypto assets on behalf of customers. This resolution is a
knee-jerk reaction in response to some banks, who are concerned
that SAB 121 will indirectly requires them to hold more capital
if they want to provide custodial services to a crypto firm.
Nullifying this non-binding guidance using a CRA resolution, as
H.J. Res.109 would do, would not only make it difficult for the
SEC to revise their guidance on this matter, it would likely
result in a chilling effect on the SEC's willingness to provide
any further guidance via SABs, which could ultimately have
broad, negative consequences for all investors, particularly
retail investors, and U.S. businesses.
SAB 121 provides guidance in two regards. First, it advises
custodians to record on their balance sheets a liability for
each corresponding crypto asset they custody on behalf of
customers. For some banks, this may indirectly require them to
hold more capital. Second, SAB 121 advises custodians to
clearly disclose the nature and amount of crypto assets that
the entity is responsible for holding for its platform users,
with separate disclosure for the vulnerabilities the entity may
face due to such holdings. The SEC explained that the guidance
in SAB 121 was prudent because of the ``unique risks and
uncertainties'' associated with the custody of crypto assets,
including technological, legal, and regulatory risks and
uncertainties.\1\ SAB 121 is designed to provide transparency
to investors and the public regarding custody of crypto assets
in light of the unique risks and uncertainties associated with
crypto assets as compared to non-crypto assets, that could have
significant impact on the entity's operations and financial
condition.\2\ Such transparency can also help protect consumers
by preventing mishandling of crypto assets that can ultimately
result in substantial losses for consumers.
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\1\See SEC, SAB 121, effective April 11, 2022.
\2\Id.
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By nullifying SAB 121, H.J. Res.109 would not only
eliminate the aforementioned benefits for investors and
consumers, it would also lead to a chilling effect on the SEC's
ability to issue staff-level accounting and legal guidance
across the board. The SEC has a long history of providing its
registrants, often at their request, with input on how complex
legal and accounting principles should be applied to the myriad
of unique and fact-specific situations that they face. One way
this is accomplished is through SABs, which the SEC started
issuing nearly five decades ago to provide uniform guidance in
response to the numerous accounting inquiries it receives from
both registrants and federal regulators. Due to the CRA's
prohibition on an agency adopting ``substantially similar''
rules to the one nullified, passing H.J. Res. 109 would impair
the SEC staff's efforts to provide guidance on this particular
issue in the future and it could also significantly
disincentivize the SEC from providing any other staff level
guidance in this manner. The crypto industry has long
complained about the lack of clarity from the SEC when it comes
to crypto matters and accused the SEC of regulating by
enforcement. The irony is that this resolution could impair the
SEC's ability to provide clarifying guidance, leaving the SEC
to lean more heavily on its enforcement arm.
The following individuals and groups oppose H.J. Res. 109:
Americans for Financial Reform (AFR); Better Markets; Public
Citizen; Consumer Federation of America (CFA), United States
Public Interest Research Group (US PIRG); NJ Citizen Action;
Demand Progress; Institute for Agriculture and Trade Policy;
Texas Appleseed; 20/20 Vision; Hilary J. Allen, Professor of
Law at American University; Lee Reiners, Lecturing Fellow at
Duke University.
For these reasons, we oppose H.J. Res. 109.
Sincerely,
Maxine Waters,
Ranking Member, Committee on
Financial Services.
Nydia M. Velazquez,
Brad Sherman,
Stephen F. Lynch,
Al Green,
Emanual Cleaver, II,
Joyce Beatty,
Sean Casten,
Rashida Tlaib,
Nikema Williams,
Bill Foster,
Juan Vargas,
Ayanna Pressley,
Sylvia R. Garcia,
Members of Congress.
