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Congressman Mike Flood Accuses SEC of Cutting ‘Backroom Deals’ on SAB 121

Published September 25, 2024 1:29 PM
Prashant Jha
Published September 25, 2024 1:29 PM

  Key Takeaways

  • Congressman Mike Flood grilled SEC chief Gary Gensler on his reluctance to recall SAB 121.
  • SEC commissioner Hester Peirce said the agency allows certain players to bypass the SAB 121 and custody crypto.
  • Flood accused the agency of cutting backdoor deals with private firms anonymously.

Congressman Mike Flood levied severe accusations against the Gary Gensler-led Securities and Exchange Commission, claiming the agency is cutting backroom deals on controversial Staff Accounting Bulletin (SAB) 121 law.

Congressman Flood’s comments came during Tuesday’s Financial Service Committee meeting, during which Gensler was subjected to intensive gruelling by lawmakers nationwide.

SEC Dug Itself in Big Hole With SAB 121

The Congressman claimed that the SEC is conversing with market participants to tell them whether they must adhere to SAB 121 confidentially. He also accused the SEC of offering a non-objection to an unknown firm:

“It’s incredible how big of a hole the SEC has dug itself into. Yet, despite the backtracking and rebuke from both houses of Congress, earlier today, Chair Gensler indicated that he would not rescind SAB 121. Now that the office of the Chief Accountant is picking and choosing who needs to comply with SAB 121, why wouldn’t SEC simply rescind SAB 121 entirely?”

Flood questioned Gensler on why the agency would not recede the controversial rule if the agency, itself, was not sure about its application.

SEC Commissioner Hester Peirce said the agency allows certain regulated financial institutions to bypass SEC rules, enabling them to custody Bitcoin (BTC) and other cryptocurrencies.

SAB 121 was introduced by the SEC in March 2022, reportedly without consulting the banking sector. The U.S. House of Representatives passed a resolution opposing the bill. However, the Biden administration vetoed it into law.

Despite 184 votes against the resolution, the U.S. House couldn’t overturn the veto, as it requires two-thirds of the House votes to overturn it.

Under the controversial rule, traditional banking entities must report crypto assets held under custody as liabilities on their balance sheets and disclose the nature and amount of crypto assets in their financial statements. 

Crypto stakeholders believe the stringent requirements are meant to burden banks, forcing them to keep a safe distance from crypto assets.

Flood Says SAB 121 Fundamentally Flawed, Must Be Revoked

In his FSC address, Flood said the SAB 121 is one of the agency’s most controversial rulings and must be called back.

“There has been no accounting bulletin from the SEC that has ever been as fundamentally flawed as SAB 121, nor has there ever been one that has been considered to rule, according to GOA, and we certainly haven’t seen 60 U.S. Senators overturn any of the 120 previous accounting bulletins either.”

Flood questioned Gensler whether SAB 121 requirements added to the SEC’s anonymous deals with private firms could lead to concertation risks among custody firms. While Gensler didn’t directly answer the senator’s question, commissioner Pierce agreed that the current ruling could lead to concentration risks.

On Sept. 24, FSC chairman Patrick McHenry and Cynthia Lummis sent  a letter to the SEC chief signed by 42 Congress members. The letter demanded that the SEC repeal its controversial SAB 121 ruling. However, Gensler’s response suggests that the SEC chief is reluctant to recall the SAB 121.

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