[Congressional Record Volume 169, Number 180 (Wednesday, November 1, 2023)]
[Senate]
[Pages S5310-S5312]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     GAO LEGAL DECISION REGARDING SEC STAFF ACCOUNTING BULLETIN 121

  Ms. LUMMIS. Mr. President, on March 31, 2022, the Securities and 
Exchange Commission--SEC--issued Staff Accounting Bulletin 121--SAB 
121--which purported to address the accounting treatment of crypto 
assets. The bulletin was not issued as a rule under the Administrative 
Procedure Act--APA--and was not submitted to Congress as required by 
the Congressional Review Act.
  On August 2, 2022, I sent a letter to the Comptroller General 
requesting a GAO legal decision regarding the applicability of the 
Congressional Review Act to SAB 121. On October 31, 2023, GAO issued a 
legal decision finding that SAB 121 was a rule under both the 
Administrative Procedure Act and the Congressional Review Act and that 
no exception applied.
  Mr. President, I ask unanimous consent that the GAO legal decision 
regarding SAB 121 be printed in the Congressional Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                Decision

     Matter of: Securities and Exchange Commission--Applicability 
         of the Congressional Review Act to Staff Accounting 
         Bulletin No. 121.
     File: B-334540.
     Date: October 31, 2023.


                                 DIGEST

       On March 31, 2022, the United States Securities and 
     Exchange Commission (SEC) issued Staff Accounting Bulletin 
     No. 121 (Bulletin). The Bulletin provides interpretive 
     guidance regarding how covered entities should account for 
     and disclose their custodial obligations to safeguard crypto-
     assets held for their platform users. SEC did not submit a 
     report pursuant to the Congressional Review Act (CRA) to 
     Congress or the Comptroller General on the Bulletin.
       CRA requires that before a rule can take effect, an agency 
     must submit a report on the rule to both the House of 
     Representatives and the Senate as well as the Comptroller 
     General, and provides procedures for congressional review 
     where Congress may disapprove of rules. CRA adopts the 
     definition of rule under the Administrative Procedure Act 
     (APA) but excludes certain categories of rules from coverage. 
     We conclude the Bulletin is a rule for purposes of CRA 
     because it meets the APA definition of a rule, and no 
     exceptions apply. Therefore, the Bulletin is subject to the 
     requirement that it be submitted to Congress.


                                decision

       On March 31, 2022, the United States Securities and 
     Exchange Commission (SEC or the Commission) issued Staff 
     Accounting Bulletin No. 121 (Bulletin) and published it on 
     the Commission's website. SEC, Staff Accounting Bulletin No. 
     121, available at https://www.sec.gov/oca/staff-accounting-
bulletin-121 (last visited Oct. 25, 2023). The Bulletin 
     became effective on April 11, 2022, and was published in the 
     Federal Register on that same date. 87 Fed. Reg. 21015. We 
     received a congressional request for a decision regarding 
     whether the Bulletin is subject to the Congressional Review 
     Act (CRA). Letter from Senator Cynthia M. Lummis to 
     Comptroller General (Aug. 2, 2022). For the reasons described 
     below, we conclude that the Bulletin is a rule under CRA and 
     thus subject to CRA's submission requirement.
       Our practice when rendering decisions is to contact the 
     relevant agencies to obtain their legal views on the subject 
     of the request. GAO, Procedures and Practices for Legal 
     Decisions and Opinions, GA0-06-1064SP (Washington, D.C.: 
     Sept. 2006), available at https://www.gao.gov/products/gao-
06-1064sp. Accordingly, we reached out to SEC to obtain the 
     agency's legal views. Letter from Assistant General Counsel, 
     GAO, to General Counsel, SEC (Oct. 24, 2022). We received 
     SEC's response on November 21, 2022. Letter from General 
     Counsel, SEC, to Assistant General Counsel, GAO (Response 
     Letter).

[[Page S5311]]

  



                               BACKGROUND

     SEC's Staff Accounting Bulletin No. 121
       SEC was established in the Securities Exchange Act of 1934 
     (the Exchange Act). 15 U.S.C. 78a-78rr. The Commission is 
     composed of five commissioners who are appointed by the 
     President by and with the advice and consent of the Senate. 
     Id. The Exchange Act grants SEC broad authority over the 
     securities industry. Id. The Act delegates to SEC the power 
     to oversee certain organizations dealing with securities, to 
     exercise disciplinary authority over covered parties that 
     participate in prohibited conduct, and to require the 
     periodic reporting of information by companies with publicly 
     traded securities. Id. In exercising these powers, SEC 
     publishes some its interpretations relating to financial 
     reporting matters in the Code of Federal Regulations. See 17 
     C.F.R. Part 211. These interpretations include Financial 
     Reporting Releases (Subpart A), Staff Accounting Bulletins 
     (SABs) (Subpart B), and Accounting and Audit Enforcement 
     Releases (Subpart C). Id. SEC also publishes these 
     interpretations on its official website in order to ``provide 
     guidance to those who must comply with the federal securities 
     laws.'' SEC, Staff Interpretations, available at https://
www.sec.gov/regulation/staff-interpretations (last visited 
     Oct. 25, 2023).
       SABs in particular are used by SEC to publicize its staffs 
     ``views regarding accounting-related disclosure practices'' 
     under federal securities laws. SEC, Selected Staff Accounting 
     Bulletins, available at https://www.sec.gov/regulation/
staffinterpretations/accounting-bulletins (last visited Oct. 
     25, 2023). According to SEC, SABs specifically represent the 
     interpretations and policies followed by the Commission's 
     Division of Corporation Finance (Division) and Office of the 
     Chief Accountant (OCA), two internal organizational units of 
     SEC. Id. The Division is tasked with ensuring that investors 
     are provided with material information to make informed 
     investment decisions. SEC, About the Division of Corporation 
     Finance, available at https://www.sec.gov/divisions/corpfin/
 cfabout (last visited Oct. 25, 2023). In furtherance of this 
     goal, the Division selectively reviews filings made under the 
     Exchange Act in order to both monitor and enhance compliance 
     with disclosure and accounting requirements. Id. Division 
     staff ``may issue comments to a company to elicit better 
     compliance with applicable disclosure requirements,'' and, in 
     response, a company has the opportunity to amend its 
     disclosure or revise its financial statements and other 
     disclosures. Id. Additionally, the Division may ``refer[ ] 
     matters to the Division of Enforcement'' when appropriate. 
     Id. OCA, headed by the Chief Accountant, provides advice to 
     the Commission on accounting and auditing matters, including 
     accounting policy determinations. SEC, Office of the Chief 
     Accountant, available at https://www.sec.gov/page/oca-landing 
     (last visited Oct. 25, 2023).
       Starting in 1975, the Division and OCA instituted the 
     practice of releasing SABs to more widely publicize staff 
     interpretations regarding the disclosure requirements of 
     federal securities laws. 40 Fed. Reg. 53557 (Nov. 19, 1975). 
     SABs were created to level the competition among accounting 
     firms; the Commission noted that large accounting firms 
     generally had multiple opportunities to exchange information 
     and views with SEC staff, but that small accounting firms 
     might have been disadvantaged by a lack of similar 
     opportunities. 40 Fed. Reg. 53557. To rectify this imbalance, 
     the SAB was thus instituted as a tool for the Division and 
     OCA to use to ``quickly and easily communicate[ ]'' their 
     staff's new and revised practices and interpretations to the 
     public. 40 Fed. Reg. 53557.
       On March 31, 2022, SEC published the Bulletin to express 
     its staff's views regarding the accounting obligations for 
     covered entities that provide custodial services of crypto-
     assets. SEC, Bulletin, available at https://www.sec.gov/oca/
staff-accounting-bulletin-121 (last visited Oct. 25, 2023). 
     The Bulletin was issued in response to SEC staff's 
     observation of an increase in the number of entities 
     providing platform users with the ability to transact in 
     crypto-assets. Id. In the Bulletin, SEC staff state their 
     belief ``that the recognition, measurement, and disclosure 
     guidance[ ] will enhance the information received by 
     investors and other users of financial statements . . . 
     thereby assisting them in making investment and other capital 
     allocation decisions.'' Id. The Bulletin presents a 
     hypothetical situation regarding Entity A, an example entity 
     engaging in crypto-asset services, and then provides 
     interpretive responses to three questions concerning how SEC 
     staff would expect Entity A to account for and disclose its 
     custodial obligations. Id. For example, according to the 
     Bulletin, covered entities that are responsible for 
     safeguarding platform users' crypto-assets may be required to 
     present a liability on their balance sheets to reflect this 
     obligation. Id. Additionally, the Bulletin states staff would 
     expect such entities to include clear disclosures of the 
     nature and amount of cryptoassets they are responsible for 
     holding for their platform users in the notes to their 
     financial statements, with separate disclosure for each 
     significant crypto-asset, and the vulnerabilities they have 
     due to any concentration in such activities. Id.
       Also on March 31, 2022, one of the commissioners released a 
     public statement questioning SEC's use of a SAB to make and 
     publicize the Bulletin's change in accounting practices. SEC, 
     Statement of Commissioner Hester M. Peirce, Response to Staff 
     Accounting Bulletin No. 121, available at https://www
.sec.gov/news/statement/peirce-response-sab-121-033122 (last 
     visited Oct. 25, 2023) (criticizing the use of an SAB to 
     provide the ``definitive interpretive guidance'' conveyed in 
     the Bulletin).
     The Congressional Review Act
       CRA, enacted in 1996 to strengthen congressional oversight 
     of agency rulemaking, requires all federal agencies to submit 
     a report on each new rule to both Houses of Congress and to 
     the Comptroller General before it can take effect. 5 U.S.C. 
     Sec. 801 (a)(1 )(A). The report must contain a copy of the 
     rule, ``a concise general statement relating to the rule,'' 
     and the rule's proposed effective date. Id. CRA allows 
     Congress to review and disapprove rules issued by federal 
     agencies for a period of 60 days using special procedures. 5 
     U.S.C. Sec. 802. If a resolution of disapproval is enacted, 
     then the new rule has no force or effect. Id. CRA makes clear 
     that its provisions ``shall apply notwithstanding any other 
     provision of law.'' 5 U.S.C. Sec. 806(a).
       CRA adopts the definition of rule under the Administrative 
     Procedure Act (APA), 5 U.S.C. Sec. 551 (4), which states that 
     a rule is ``the whole or a part of an agency statement of 
     general or particular applicability and future effect 
     designed to implement, interpret, or prescribe law or policy 
     or describing the organization, procedure, or practice 
     requirements of an agency.'' 5 U.S.C. Sec. 804(3). CRA 
     excludes three categories of rules from coverage: (1) rules 
     of particular applicability; (2) rules relating to agency 
     management or personnel; and (3) rules of agency 
     organization, procedure, or practice that do not 
     substantially affect the rights or obligations of non-agency 
     parties. Id.
       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.


                               DISCUSSION

       At issue here is whether the Bulletin is a rule for 
     purposes of CRA. First, we must consider whether it meets the 
     definition of a rule under APA. We conclude it does. We next 
     must examine whether any exception applies. We find that none 
     apply. Therefore, we conclude the Bulletin is a rule for 
     purposes of CRA.
     The Bulletin is a Rule Under APA
       The Bulletin meets the APA definition of a rule. First, the 
     Bulletin is an agency statement because it was published on 
     SEC's official, public-facing website as a representation of 
     the views held by its own employees. Second, the Bulletin is 
     of future effect because it explicitly states that it applies 
     to certain entities and contains ``guidance for [these] 
     entities to consider when they have obligations to safeguard 
     crypto-assets held for their platform users.'' Bulletin. From 
     this, we ascertain that SEC intended the Bulletin's guidance 
     to apply prospectively to covered entities' future accounting 
     and disclosure practices. Lastly, the Bulletin interprets and 
     prescribes policy because it announces a preference for how 
     covered entities should account for and disclose crypto-
     asset-related custodial obligations. Id.
       SEC contends that the Bulletin is not a rule under APA 
     because it is not an agency action. Response Letter, at 2. In 
     its response to us, SEC stated that the Bulletin is not an 
     agency statement because it is not binding on the agency and 
     ``at most'' indicates ``how the Office of the Chief 
     Accountant and the Division of Corporation Finance would 
     recommend that the agency act.'' Response Letter, at 3. 
     Additionally, SEC asserts that the Bulletin is not an agency 
     statement because the Exchange Act and SEC's organizational 
     rules prohibit the Commission from delegating general 
     rulemaking authority to an individual Commissioner or to 
     staff. Response Letter, at 2-3 (citing 17 C.F.R. 200.43).
       We recognized in an earlier opinion that ``in order [for an 
     agency action] to be a rule [under APA], the statement must 
     be made by an agency.'' B-238859, Oct. 23, 2017. The Bulletin 
     is a statement made by SEC. While it is true that the 
     Bulletin was not held out by SEC as a statement representing 
     the full Commission, a statement issued by a subset of the 
     agency may still constitute an agency statement for CRA 
     purposes.
       In particular, our prior opinions have recognized that 
     agency actions published by less than the full agency can 
     still constitute agency statements for the purposes of APA, 
     and thus CRA. In three of our previous opinions, we examined 
     whether various Supervision and Regulation Letters (SR 
     Letters) issued by the Board of Governors of the Federal 
     Reserve System (FRB or Board) were rules for purposes of CRA. 
     B-330843, Oct. 22, 2019 (finding that SR 12-7 and SR 14-8 are 
     rules under CRA, but that SR 15-7 is not a rule under CRA 
     because it fell within an exception to the Act), B-331324, 
     Oct. 22, 2019 (finding that SR 11-7 is a rule under CRA), and 
     B-331560, Apr. 16, 2020 (finding that SR 15-18 is a rule 
     under CRA). In those opinions, we noted that FRB has the 
     authority to inspect the financial condition of financial 
     institutions under its jurisdiction. B-330843, B-331324, and 
     B-331560. We explained that FRB examiners tasked with 
     inspecting and monitoring these

[[Page S5312]]

     institutions can issue SR Letters when they believe guidance 
     on a particular issue is necessary and clarified that such 
     guidance is not binding on any institution. B-330843, B-
     331324, and B-331560. In all three of our opinions involving 
     FRB SR Letters, we concluded that the SR Letters at issue 
     were agency statements within the APA definition of rule. B-
     330843, B-331324, and B-331560. We explained that the SR 
     Letters were agency statements ``as [they were] issued by 
     FRB.'' B-330843, B-331324, and B-331560. The fact that such 
     SR Letters were issued by examiner employees of FRB rather 
     than the Board as a whole did not diminish the fact that the 
     SR letters constituted the FRB speaking as an agency.
       While we recognize that the Exchange Act and SEC's 
     organizational rules limit the Commission's authority to 
     delegate its general rulemaking function to its staff, these 
     sources speak only to how the Bulletin does not stem from the 
     Commission's general rulemaking authority. On this point, we 
     find it helpful to draw a parallel between the organizational 
     structure and practices of both the SEC and FRB. Both are 
     multi-member, independent government agencies that are 
     statutorily restricted from delegating rulemaking authority. 
     The Federal Reserve Act expressly does not authorize FRB to 
     delegate its rulemaking function ``to . . . members or 
     employees of the Board.'' 12 U.S.C. Sec. 248(k). FRB adopted 
     this language from the Federal Reserve Act as an 
     organizational rule. Similar to how SEC's Division and OCA 
     publish SABs to announce how staff intends to administer 
     certain accounting-related disclosure practices, FRB's 
     Division of Supervision and Regulation publish SR Letters to 
     ``address significant policy and procedural matters related 
     to [FRB's] supervisory responsibilities.'' As these SR 
     Letters are published by a division FRB, we can presume that 
     the letters are published outside of FRB's rulemaking 
     authority since FRB is not authorized to delegate its 
     rulemaking function to its employees. Our determination that 
     the Bulletin is an agency statement is consistent with our 
     previous recognition of FRB's SR Letters as agency statements 
     in B-330843, B-331324, and B-331560.
       Additionally, we have consistently concluded that CRA also 
     covers agency actions outside the APA rulemaking process. For 
     example, in B-331171, Dec. 17, 2020, we recognized that 
     ``[t]he sponsors of CRA intended the definition of rule to be 
     as broad as possible to ensure congressional review of agency 
     action.'' In B-331324, Oct. 22, 2019, we cited to a CRA 
     sponsor's statement that ``[a]lthough agency interpretive 
     rules, general statements of policy, guideline documents, and 
     agency policy and procedure manuals may not be subject to the 
     notice and comment provisions of [APA], these types of 
     documents are covered under the congressional review 
     provisions of [CRA].'' Id. (quoting 142 Cong. Rec. H3005 
     (daily ed. Mar. 28, 1996)). Moreover, SEC acknowledged that 
     ``CRA can apply to agency actions that do not require notice 
     and the opportunity for public comment [under 
     APA].'' Response Letter, at 4. Although the Bulletin was 
     published by staff who lack the Commission's general 
     rulemaking authority, our prior precedent and CRA's 
     legislative history demonstrate that the Bulletin is still 
     covered by CRA.
       The Bulletin was issued by SEC staff as a representation of 
     how the Division and OCA interpret accounting-related 
     disclosure requirements. Since one of the Division's roles is 
     to monitor companies' compliance with accounting and 
     disclosure requirements, and, since the Division's practice 
     is to refer noncompliant companies to SEC's Division of 
     Enforcement when appropriate, it is reasonable to believe 
     that companies may change their behavior to comply with the 
     staff interpretations found in the Bulletin. SEC published 
     the Bulletin on its public-facing website to ``add[ ] 
     interpretive guidance for entities to consider when they have 
     obligations to safeguard crypto-assets held for their 
     platform users.'' Bulletin. Like the SR Letters issued by 
     FRB's examiners, the Bulletin was issued by agency employees 
     to provide non-binding guidance that covered entities were 
     nevertheless expected to follow. We therefore find that the 
     Bulletin is an agency statement within the meaning of APA.
       As stated previously, the Bulletin is also of future effect 
     and was designed to interpret and prescribe policy. 
     Accordingly, we conclude that the Bulletin meets the 
     definition of rule under APA.
     No CRA Exceptions Apply to the Bulletin
       Having concluded that the Bulletin meets the APA definition 
     of a rule, we next consider whether any of the three CRA 
     exceptions apply. We conclude that none apply. First, the 
     Bulletin is a rule of general applicability because it 
     neither identifies specific entities by name nor does it 
     address specific actions for a named entity to take.'' 
     Second, the Bulletin concerns actions that covered entities 
     should take, rather than actions that SEC management or 
     personnel should take, and is, therefore, not a rule of 
     agency management or personnel. This leaves the third 
     exception, the exception for rules of ``agency organization, 
     procedure, or practice that do[ ] not substantially affect 
     the rights or obligations of non-agency parties.'' 5 U.S.C. 
     Sec. 804(3)(C). The Bulletin does not qualify for this last 
     exception because it has a substantial impact on its 
     regulated community.
       In analyzing the third CRA exception, we have previously 
     held that agency rules that encourage the regulated community 
     to change internal operations or policies have a substantial 
     impact on non-agency parties and thus do not qualify for the 
     exception. B-334032, Dec. 15, 2022. See B-330843, B-331324, 
     and B-331560. Additionally, we more specifically determined 
     that agency rules that recommend specific actions, such as 
     best practices the regulated community should take, do not 
     qualify for the exception. B-334032.
       We examined a similar issue in B-330843, Oct. 22, 2019, 
     where we found that FRB's SR 12-17 did not meet the third CRA 
     exception because it had a substantial impact on the 
     regulated community. SR 12-17 put forth actions institutions 
     should take to ensure their resiliency if they enter a period 
     of financial distress and to prevent harm to the financial 
     system in case of the institution's failure. Id. We noted 
     that the actions from SR 12-17 could change covered entities' 
     expectations of FRB and could lead to and encourage changes 
     in the covered entities' internal operations and policies. 
     Id. For those reasons, we determined that SR 12-17 had a 
     substantial impact on the regulated community and thus did 
     not qualify for the third CRA exception. Id.
       Here, the Bulletin recommends best practices for how 
     covered entities should account for their obligations to 
     safeguard the crypto-assets they hold for their platform 
     users. Bulletin. Similar to the FRB guidance in B-330843, the 
     Bulletin advises these covered entities on how they can 
     fulfill certain financial disclosure obligations to ensure 
     compliance with SEC staff's interpretations of these 
     obligations. By advising the covered entities in this manner, 
     the Bulletin is encouraging the regulated community to change 
     its internal operations or policies to comply with the 
     Bulletin's guidance.
       Additionally, since the Bulletin was published on SEC's 
     official website, it is reasonable for covered entities to 
     believe they are expected to, at minimum, consider the 
     Bulletin's guidance when preparing their own financial 
     disclosures to the agency. SEC states that the Bulletin 
     reflects policies followed by the Division and OCA. Response 
     Letter, at 3. According to SEC, the Division uses its filing 
     review process to monitor and to enhance compliance with 
     disclosure and accounting requirements. Since SEC monitors 
     the covered entities' compliance with certain financial 
     disclosure requirements, it is reasonable to believe that 
     these entities might change their internal operations and 
     policies to align with the accounting practices suggested by 
     the Bulletin.
       Furthermore, in a public statement about the Bulletin, an 
     SEC Commissioner recognized 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.' '' We 
     agree with this characterization. Because the Bulletin 
     changes covered entities' expectations of how SEC will 
     evaluate their compliance, and because it encourages these 
     entities to change their internal operations and policies, we 
     conclude that the Bulletin has a substantial effect on the 
     financial disclosure obligations of non-agency parties. Thus, 
     the Bulletin does not fall within CRA's exception for rules 
     of agency organization, procedure, or practice that do not 
     substantially affect the rights or obligations of non-agency 
     parties.


                               CONCLUSION

       The Bulletin is a rule for purposes of CRA because it meets 
     the APA definition of a rule and none of the three CRA 
     exceptions apply. Accordingly, the Bulletin is subject to the 
     CRA's submission requirement.
                                            Edda Emmanuelli Perez,
     General Counsel.

                          ____________________