SEC Rebuked for Breaking Law With Crypto Disclosure Policy

The US Government Accountability Office (GAO) said the US Securities and Exchange Commission (SEC) illegally directed banks to include customers’ crypto holdings on their balance sheets. The GAO ruled that the Staff Accounting Bulletin 121 (bulletin) should have followed due process for new rules as outlined in the Congressional Review Act (CRA).

The GAO overruled the SEC’s assertion that the bulletin provided “interpretive guidance” rather than a new rule. The SEC had previously argued that the rule was not subject to the Congressional Review Act because it was not an “agency statement” of “future effect.”

GAO Disputes SEC Mitigation

The CRA requires that a government agency submit a report on a proposed rule to the House of Representatives and the Senate, as well as the Comptroller General. It also offers a way forward if Congress disagrees with the new rule.

The GAO contests that the SEC bulletin was an agency statement because it was published on the SEC’s public-facing website. This meant it reflected the views of SEC employees. Moreover, the bulletin was “of future effect” because it guides certain entities on how to protect crypto assets they may need to hold on behalf of clients at some point in the future.

“From this, we ascertain that the SEC intended the Bulletin’s guidance to apply prospectively to covered entities’ future accounting and disclosure practices.”

The GAO also said that the bulletin contained policy because it revealed the SEC’s preferences with respect to crypto disclosure and custody. Given the SEC’s mandate to police disclosure requirements, GAO says it is reasonable to assume that affected entities would have taken action to comply.

In conclusion, the GAO said the bulletin is now subject to the CRA’s submission requirements.

SEC Crypto Enforcement Blitz Hits Roadblocks

Several commentators said the GAO’s ruling proved the SEC broke the law as it sought to crack down on the crypto industry last year. The SEC issued the bulletin on March 31, 2022, around five months after the crypto bull market peaked.

Pro-crypto SEC Commissioner Hester Peirce criticized the bulletin as a “scattershot and inefficient” approach to crypto. Ripple Labs’ legal head, Stuart Alderoty, commented that the ruling was poetic because it revealed that the SEC had become a “Wild West,” a term the agency’s chairman Gary Gensler used to describe crypto.

Earlier this year, Coinbase, a US-based exchange, recently argued that Congress is unlikely to allow agencies like the SEC to unanimously make new rules on matters of political or economic importance. The SEC sued Coinbase for offering securities not registered under the Securities Act of 1933.

Traditional investment managers also criticized the SEC for its new product naming rules. They question the additional compliance overhead required to refine traditional definitions of bonds and equities.

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