GAO Concludes SEC's SAB 121 Is Subject to Congressional Review Act
Interesting! But not sure this actually matters
The SEC’s staff accounting bulletin 121 says that when an entity has an obligation to safeguard crypto for its users, that entity ought to reflect a liability on its balance sheet to reflect its obligation to safeguard that crypto at the fair value of the crypto. SAB 121 also says that the entity should, in turn, recognize a corresponding asset on its balance sheet measured at the fair value of the crypto.
Among other things (and while not the only factor) this has made it less attractive for U.S. publicly listed banks to engage in crypto custody activities, because doing so would thus have “a wide range of knock-on effects in most areas of the prudential regulatory framework that would give rise to significant capital, liquidity and other costs.” (The prudential regulatory framework generally, though not always, starts by looking at the accounting treatment of a given asset or liability.)
SEC Chair Gensler has said he is “actually quite proud” of SAB 121, and has suggested that any unintended consequences it has had for banking organizations can be addressed by the federal banking regulators.
The U.S. banking regulators, for their part, have said they are “still reviewing the implications of SAB 121.” They said this most recently in the call report supplemental instructions they published in September 2023 , and they also previously said it in June 2023, March 2023, December 2022, September 2022 and June 2022.
While this (apparently thorough!) review of SAB 121 is ongoing, the banking regulators advise that “an institution that determines that it is appropriate for it to apply SAB 121 for SEC or other financial reporting purposes should complete its Call Report consistent with the classification determination made for SEC or other financial reporting purposes.”
Today the Government Accountability Office released an opinion about SAB 121 that — based on my first impression — I don’t think will change anything, but may still be interesting nonetheless.
The Congressional Review Act
The Congressional Review Act is a Clinton Administration-era law that makes it procedurally easier for Congress to overturn certain actions taken by regulatory agencies. The specific details are not necessarily relevant to this post, but the basic idea is that when an agency makes a rule, it has to submit that rule to Congress and then Congress has a window of time in which it can vote to overturn the rule using a mechanism known as a resolution of disapproval.
Congress of course can always vote to overturn or change regulations, but the key feature of the Congressional Review Act that makes it a powerful tool is that a resolution of disapproval under the Act is not subject to a filibuster or various other procedural maneuvers that can delay or even prevent the consideration of a bill.
The most notable feature of the CRA is its special set of parliamentary procedures for considering a joint resolution disapproving an agency’s final rule. These procedures make it easier for Congress to pass a joint resolution of disapproval, particularly in the Senate. Perhaps most significantly, when a joint resolution of disapproval meets certain criteria, it cannot be filibustered in the Senate. In addition, when 20 calendar days have elapsed after the receipt and publication of a rule, a petition, signed by 30 Senators, can be presented on the floor to discharge a Senate committee of the further consideration of a disapproval resolution. Once the committee is discharged, any Senator can make a nondebatable motion to proceed to consider the disapproval resolution. Should a majority of the Senate vote to consider the disapproval resolution, debate on it is limited, and a final vote would be all but guaranteed
So, bottom line, if a something is a “rule” for purposes of the CRA, Congress has to be given a chance to review and reject that rule under fast-track procedures.
The GAO Says SAB 121 Is a Rule
In August 2022, Senator Cynthia Lummis asked the Government Accountability Office to determine whether SAB 121 is a “rule” for purposes of the Congressional Review Act.1
Today the GAO released an opinion concluding (over the objections of the SEC) that, yes, SAB 121 is a “rule” for Congressional Review Act purposes.
SEC did not submit a CRA report to Congress or to the Comptroller General in regard to the Bulletin. In its response to us, SEC maintained that the Bulletin is not subject to CRA because it does not meet the APA definition of a rule as it is not an “agency statement” of “future effect.” Response Letter, at 2–4. For the reasons explained below, we disagree. We find that the Bulletin does meet the definition of a rule under APA and that no exception applies. Thus, the Bulletin is subject to CRA’s submission requirement.
Implications
As noted above, my first reaction to all this is that, though interesting and perhaps important for other financial regulatory actions that, like SAB 121, are purportedly from an agency’s staff, the practical implications of today’s GAO opinion for SAB 121 itself are likely to be minimal.
Here is how I am thinking about it, but the Congressional Review Act is tricky and I would as always appreciate hearing from readers who believe I am not looking at this in the right way.
Overturning SAB 121 - Still Unlikely
After a period of dormancy, the Congressional Review Act was used in the early stages of the Trump Administration to overturn certain President Obama-era regulations. Then, after President Biden took office, it was used to overturn the OCC’s Trump-era true lender rule.
So a crypto-optimist’s mind might immediately go to the possibility that SAB 121 too would be overturned by Congress.
It is true that the fact that SAB 121 is a “rule” for Congressional Review Act purposes will, for a window of time,2 make this easier. As noted above, a resolution of disapproval brought under the Congressional Review Act cannot be filibustered, so Senator Lummis or another pro-crypto Senator could force a vote on it if they so choose. But legislatively overturning SAB 121 would still require a majority vote in the Senate and in the House, and then the President signing the resolution into law. That seems unlikely here, for obvious reasons.
The way the Congressional Review Act shot clock works is pretty weird, so at least in theory the window for a resolution of disapproval could stretch into 2025, and maybe at that point there could be a Congress and White House more favorably disposed to crypto. But in a world where that scenario comes to pass, isn’t it likely that crypto-favorable people would also be put in charge of the SEC itself? If so, it’s not clear that a Congressional Review Act disapproval would be necessary to get rid of SAB 121 — at that point, the new-look SEC could just do so on its own.3
SAB 121 Is (For Now) Ineffective…But So What?
More interesting to me than the possibility of disapproval is the provision of the Congressional Review Act saying that, before a “rule” under the Act may take effect, it must be submitted to Congress and to the GAO. The SEC did not do that here, so SAB 121 is not currently effective.
When will SAB 121 become effective? I think the answer is basically as soon as the SEC submits it to Congress and the GAO, but I am not sure the answer is perfectly clear.
The uncertainty stems from the fact that, for “major” rules, the Congressional Review Act says that an agency has to submit the rule and then (subject to certain exceptions) wait at least 60 days before the rule can take effect.4 On the other hand, if a rule is not a “major” rule, then the rule takes effect “as otherwise provided by law after submission to Congress.” Given the criteria,5 my assumption is SAB 121 is not a major rule, but again, not crystal clear.
The bigger question though is, regardless of when SAB 121 becomes “effective,” what exactly does that mean? And, equally, what does it mean for SAB 121 to have been ineffective from the time it was issued until the time (presumably in the near future) that the SEC submits SAB 121 to Congress?
Here again, I am not sure. The SEC’s position, according to today’s GAO opinion, is that SAB 121 “at most” indicates “how the Office of the Chief Accountant and the Division of Corporation Finance would recommend that the agency act.” So, taking the SEC at face value, SAB 121 should not, on its own, and whether “effective” or otherwise, have been the basis for any action by the Commission.
Say you are a company involved in custodying crypto and you are getting ready to file your 10-Q this week — do you do anything different in light of the fact that SAB 121 is, for the moment, ineffective? I kind of doubt it.6
Thanks for reading! Thoughts are welcome at bankregblog@gmail.com
The GAO has, to this point, been considered the arbiter of these questions. Note, however, that like a lot of stuff with the Congressional Review Act, this has never been fully examined by a court. Of course, also an open question is whether a court could examine this question even if it wanted to: see 5 USC 805.
From the CRS report linked to earlier:
In order to be eligible for the “fast track” procedures for Senate consideration, that body has to act on a properly introduced disapproval resolution during a period of 60 days of Senate session that begins when the rule is received by Congress and published in the Federal Register(if it is required to be published). After this “action” period has expired, the joint resolution could still be considered, but would have to be called up and debated under normal Senate procedures.
You might prefer using the CRA in a situation where rescinding a rule through the agency process will require a proposal, a comment period, etc., but that is not the case (I wouldn’t think) with SAB 121.
Another feature (or drawback) to using the CRA: if a rule is disapproved under the CRA, the agency cannot (except under certain circumstances) at a later point enact a rule that is substantially the same as the one that was disapproved.
See page 14 of the CRS report.
A rule is considered “major” if it: has (A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets.
This is not the first time a scenario like this has come up with a CRA “rule” issued by a financial regulator. For example, in April 2020, the GAO concluded that the Federal Reserve Board’s Supervision and Regulation Letter 15-18, which sets out supervisory expectations with respect to capital planning for very large banking organizations, was a rule for purposes of the Congressional Review Act. The Board had never submitted SR 15-18 to Congress, and so in the GAO’s view under the Congressional Review Act SR 15-18 would not be effective until the Board did so. Other (but not all) Federal Reserve Board SR Letters have also been held to be “rules” under the CRA — see appendix B here.
To my knowledge, none of this resulted in meaningful or lasting changes to how banks conducted their activities in light of apparently (but temporarily) ineffective Federal Reserve Board guidance.