[House Report 118-480]
[From the U.S. Government Publishing Office]


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.
---------------------------------------------------------------------------
    \1\See SEC, SAB 121, effective April 11, 2022.
    \2\Id.
---------------------------------------------------------------------------
    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.