Gary Gensler, Chairman of the United States Securities and Exchange Commission (SEC), recently testified before the House Financial Services Committee for over four hours. During the hearing, much of the criticism directed towards Gensler focused on the SEC’s policies and actions, including the issuance of the Staff Accounting Bulletin (SAB) 121 in March 2022.
One of the committee members, Representative Mike Flood, questioned Gensler about the SEC’s consultation process before publishing SAB 121. Flood highlighted that the SEC did not confer with prudential regulators or the Financial Accounting Standards Board (FASB) before issuing the bulletin. The FASB, which is responsible for issuing accounting standards under Generally Accepted Accounting Principles (GAAP), only added digital asset accounting standards to its agenda in May 2022, well after the publication of SAB 121.
Gensler acknowledged Flood’s concerns and clarified that SAB 121 provides guidance on applying existing requirements under SEC rules. He mentioned a rule from 2009 that addresses the custody of digital assets by investment advisers, as well as a rule made in April 2021 regarding special purpose broker-dealers. However, Flood argued that there were no SEC rules specifically addressing the custody of digital assets at the time SAB 121 was issued. He emphasized that a proposed rulemaking on custody, including digital asset custody, had not been finalized as of February 2023.
Representative Flood suggested that either the SEC knew there was no strong justification for issuing the guidance in SAB 121 and did so anyway, or it made an error in issuing the bulletin. This raised doubts about the SEC’s decision-making process and the rationale behind the bulletin.
SAB 121 requires public companies, such as banks and platforms like Robinhood and Coinbase, to disclose technological, legal, and regulatory risks associated with custodying digital assets. Since its issuance, SAB 121 has faced opposition from various parties. SEC Commissioner Hester Peirce criticized the bulletin on the day it was issued, calling it regulation disguised as staff guidance. Five senators, including crypto advocate Cynthia Lummis, sent a letter to Gensler in June expressing similar concerns. They argued that the SAB places the interests of crypto holders at greater risk compared to the situation before its issuance.
In addition to the discussion on SAB 121, other topics were briefly mentioned during the hearing. Four committee members sent a letter to Gensler urging him to approve spot Bitcoin exchange-traded funds (ETFs). However, this topic was not explored in depth during the hearing. Gensler also addressed concerns about the SEC’s handling of the Grayscale case, stating that it was still under advisement.
During the hearing, there were also allegations that Gensler was not impartial within the financial industry, and a discussion over the interpretation of the Howey test, a test used to determine whether a transaction qualifies as an investment contract.
Overall, the hearing provided a platform for lawmakers to question Gensler on various issues surrounding the SEC’s policies and actions. The criticism of the SEC’s decision-making process regarding SAB 121 and concerns about the approval of spot Bitcoin ETFs were among the key points raised during the event.
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