[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.
____________________