The GAO found that the controversial SEC directive was under Congressional oversight

United States Senator Cynthia Lummis scored another hit for crypto in the Government Accountability Office (GAO) decision released on October 31. GAO found that the Securities and Exchange Commission's (SEC) Staff Report 121 is subject to congressional review. In the year That announcement, which came out in March 2022, was a source of outrage for many crypto-legislators.

The GAO is working on Lummis' August 2022 letter to the US Comptroller General. He notes that the notice is a rule administered under the Congressional Review Act (CRA). Under the CRA, an agency's rulemaking report must be submitted to the Comptroller General and both houses of Congress, the process by which Congress can veto the regulation. Using the definition of the rule found in the Administrative Procedures Act (APA), GAO found that the SEC notice was subject to the CRA. The GAO said:

“It is reasonable to believe that companies can change their behavior to comply with the definitions of employees found in the bulletin […] The notice is retroactive and intended to interpret and dictate policy. Accordingly, we conclude that the Bulletin meets the definition of a regime under the APA.

The notice “states the staff's opinion regarding accounting for an entity's obligations to protect crypto-assets it holds for platform users,” the SEC said. “The statements contained in the staff financial statements are not the rules or interpretations of the Commission, nor are they published with the official approval of the Commission. They represent the interpretation and practice of workers.

This is huge.

The GAO reviewed SAB 121, an illogical anti-crypto accounting notice issued by the SEC last March, and found it to be a “rule” under the CRA and APA.

The SEC did not comply with either.

This is a clear statement from a federal agency that the SEC violated the law. https://t.co/brglK3sm8S

— Jake Chervinsky (@jchervinsky) October 31, 2023

The announcement used hypothetical scenarios where the SEC considered best practices for protecting crypto-assets held by platforms for their users. Coinbase and PayPal are examples of such platforms. It recommends that platforms list their users' assets on their books as liabilities and assets at the time of initial recognition. This represents a significant change in accounting because retained assets were not previously recorded on the balance sheet.

Related: U.S. House Financial Services Committee tells SEC it doesn't like protection request.

The announcement quickly met with opposition from various quarters. SEC Commissioner Hester Pearce issued a critical response within days. Perce said in the announcement that the accounting process the SEC itself is partly a source of risk.

Five Republican senators, including Lummis, wrote to SEC Chairman Gary Gensler in June 2022 that they would not accept the “backyard rule” of advertising. Gensler was further briefed on the announcement by Representative Mike Flood during an appearance before the House Financial Services Committee in September.

GAO's findings are recommendations only. However, the agency said, “Clearly, agencies are taking our recommendations.”

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