JUST IN: Government Auditor Says SEC Broke The Law…

By Vince • October 31, 2023 5:31 pm • Comments

A new report from the Government Accountability Office (GAO) claims that the Securities and Exchange Commission broke the law.

The report centers around the mishandling of Staff Accounting Bulletin 121, which states that all banks acting as custodians for crypto assets must hold those assets on their balance sheets and keep cash assets against them.

Auditors with the Government Accountability Office concluded that Congress should have been allowed to review the bulletin before it was sent out to SEC staff. According to Consensys lawyer Bill Hughes:

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“The U.S. Government Accountability Office (GAO) says the SEC must submit Staff Accounting Bulletin No. 121 (SAB 121) (interpretive guidance regarding the accounting treatment of custodial crypto assets) in a report pursuant to the Congressional Review Act (CRA) to Congress as required.

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.

Tisk tisk Mr. Gensler. We will have to see whether he ignores the GAO’s finding like he did the CRA.”

CoinDesk provided more details:

It’s likely that the bulletin will now be submitted for congressional review, though the details on the mechanics of that aren’t yet clear.

Once a new federal rule arrives in their hands, lawmakers are granted a window of opportunity to reject it under the Congressional Review Act. A spokesman for the SEC declined to comment on the agency’s response.

Vice President of the Digital Chamber of Commerce Cody Carbone had this to say:

“Wow. The GAO has concluded that SAB 121 is not merely a bulletin, but an agency rule. Here is what it means:

1) SEC failed to comply with the law – Congressional Review Act (CRA)

2) The CRA states that all agency rules, unless an exception applies, must be submitted to both Houses of Congress and the Comptroller General.

3) CRA allows Congress to review and disapprove rules issued by federal agencies for a period of 60 days. If a resolution of disapproval is enacted, then the new rule has no force or effect.

4) Resolutions of disapproval will need to be passed by both Houses of Congress by a simple majority vote and then signed by the President.

5) If a joint resolution is successfully passed and signed into law, the regulation is nullified. The agency that issued the regulation is then prohibited from reissuing a similar regulation without congressional authorization.

The SEC did not comply with the law and tried to gaslight the GAO and the industry by saying it was merely an “agency statement” and non-binding.

This is a blow to the SEC and a win for clear, fair custody rules for digital assets. Time will now tell whether Congress moves to disapprove this rule-making.”

Gabor Gurbacs remarked: “The supreme audit institution of the U.S. federal government basically says that the SEC broke the law. Wow.”

Blockworks provided excerpts from the GAO report:

The SEC initially issued it to provide “interpretive guidance.” However, GAO argues, the bulletin is not an “agency action.”

“We conclude the Bulletin is a rule for purposes of CRA because it meets the APA definition of a rule, and no exceptions apply,’ GAO wrote Tuesday.

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