Congressman Flood Applauds Committee Vote to Advance SAB 121 Repeal

WASHINGTON, D.C. – Today, U.S. Congressman Mike Flood (R-NE) issued a statement following a vote by the House Financial Services Committee to advance a bipartisan resolution he introduced under the Congressional Review Act (CRA) with Congressman Wiley Nickel (D-NC). H.J. Res. 109 repeals the U.S. Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) 121. U.S. Senator Cynthia Lummis (R-WY) has introduced a companion measure in the Senate. SAB 121 prevents banks from providing custodial services to digital assets investors by requiring them to keep those assets on-balance sheet. 

“Thank you to my colleagues on the committee for advancing the repeal of SAB 121 on a bipartisan basis,” said Rep. Flood. “The SEC issued SAB 121 without conferring with prudential regulators despite the accounting standard’s effects on financial institutions’ treatment of custodial assets, and the SEC issued SAB 121 without going through the notice-and-comment process. In the face of overreach by a regulator, it is the role of Congress to serve as a check. Today’s vote was a key step in rolling back SAB 121, and I look forward to a vote by the full House so we can end SAB 121.”

Rep. Flood is a member of the House Financial Services Committee where he serves as a member of the Housing and Insurance Subcommittee and the Digital Assets, Financial Technology and Inclusion Subcommittee

Ahead of the vote to advance the resolution, Rep. Flood delivered remarks. The remarks as prepared for delivery are below. Video of the remarks are here. 

Thank you, Chairman. 

House Joint Resolution 109 is a Congressional Review Act resolution that would rescind the SEC’s Staff Accounting Bulletin 121. I want to thank my colleague on other side of the aisle, Congressman Nickel from North Carolina for his leadership on this issue as well as Senator Lummis who is leading this effort in the Senate.

For those who are not familiar, Staff Accounting Bulletin 121 was guidance released by the SEC in March of 2022. Staff accounting bulletins are technical accounting guidance, not something we’d usually spend a lot of time debating during a Committee markup. 

However, Staff Accounting Bulletin 121 or “SAB 121” is different. It directs covered entities that custody digital assets to do so on-balance sheet. The problem is that for banks, custodial assets are always considered off-balance sheet for any other asset, like securities.

The ramifications of requiring banks to hold these assets on-balance sheet are pretty significant. If a bank were to custody digital assets according to the parameters of SAB 121, the on-balance sheet treatment would affect their other regulatory obligations like their capital and liquidity requirements. 

The end-result is that banks must choose to either custody digital assets—thus inflating their balance sheet and severely affecting every other line of business or stay out of the market. 

That’s not much of a choice at all, really. In effect, SAB 121 precludes banks from taking custody of digital assets altogether. 

Now, I’m sure there are a number of banks that don’t have interest in taking custody of digital assets right now anyway. But SAB 121 prevents banks from effectively ever playing a custodial role for these assets. You’re locking out the most-regulated institutions from a market that they know well: custody. 

There are some serious ramifications that stem from that. In January, the SEC approved eleven spot Bitcoin ETFs. These ETFs are giving a lot more retail investors the ability to invest in Bitcoin. Because of SAB 121, banks aren’t able to serve as custodians for the Bitcoin within those ETFs. 

The lack of bank custodians for Bitcoin ETFs is particularly important because holding private keys to Bitcoin is akin to carrying physical cash. Both are bearer instruments, which means the holder of the asset is presumed to be in full control. 

That’s a situation where you might want more bank custodians, who are well-regulated experts on custody, on the job. As it is, there are only four total custodians for those eleven Bitcoin ETFs, and they are all non-banks. 

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So how did we get to this point? Unfortunately, there were some serious problems with the process around how SAB 121 was issued:

1. The SEC issued SAB 121 without conferring with the prudential regulators who are the experts on regulating bank custody. That’s a pretty significant oversight. Federal Reserve Chair Jerome Powell once said in front of the Senate Banking Committee that “Bank custody assets are off-balance sheet, always have been." Had the SEC discussed this issue with the prudential regulators before issuing the Bulletin, we might have avoided the situation we’re in today.

2. The Government Accountability Office determined last year that SAB 121 actually meets the definition of a rule for the purposes of the Congressional Review Act. This means that according to the independent and nonpartisan GAO, SAB 121 is not really non-binding guidance at all, and in fact is effectively a rule instructing regulated entities how to custody assets.

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In other words, the SEC issued guidance affecting banks without talking to the experts on bank custody—the bank regulators, and an independent body found that SAB 121 wasn’t guidance at all but a rule under the APA and CRA. Those are two big process fouls.

If SAB 121 were truly the non-binding guidance that the SEC claims, we would not be able to consider a CRA on the issue at all. The fact that we’re even having this conversation today illustrates the scale of the SEC’s mistake here. 

Now let’s move on to the proposed solution here: a Congressional Review Act resolution. Believe it or not, I would prefer it if a CRA were not necessary. 

The easiest way to fix this problem is for the SEC to simply rescind the Bulletin themselves and work with the prudential regulators on an alternate solution. Unfortunately, the SEC has made it clear that they’re going to double-down on SAB 121 instead. 

Despite the obvious evidence that this Bulletin was issued through a faulty process, and despite the negative ramifications of keeping banks from taking custody of retail investor assets, they have been unwilling to have a conversation about making changes.

As a result, I think it’s our responsibility to take this issue up in Congress. The SEC shouldn’t arbitrarily prevent well-regulated banks from taking custody of investors’ digital assets. Instead, it should find a different path forward with the prudential regulators.

The message I want to send today is simple: This is a real problem and unless the SEC changes course, Congress is going to have to be the one to fix it.

I urge my colleagues to support this resolution and I yield back the balance of my time.