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DOL Pushes Back on Cryptocurrency Suit

Government Affairs

Having been sued for issuing its Compliance Assistance Release on cryptocurrency by cryptocurrency recordkeeping platform provider ForUsAll, the Department of Labor (DOL) is pushing back.

In fairness, ForUsAll describes itself a little differently — as a “modern” 401(k) provider that also offers cryptocurrency services. But their interest in this litigation is — according to the suit they filed challenging the aforementioned Compliance Assistance Release back in June—for what it then labeled a “arbitrary and capricious attempt to restrict the use of cryptocurrency in defined contribution retirement plans….”   

That said, the DOL’s motion to dismiss the suit — filed in the U.S. District Court for the District of Columbia earlier this week — pushed back on the claims made by ForUsAll on a number of fronts. The DOL says the release itself “does not have the force of law nor does it make new law. It instead reminds fiduciaries of their duties under the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq., as expressed in the statute and the Supreme Court’s recent decision in Hughes v. Northwestern University, 142 S. Ct. 737 (2022).”

‘Informs’ Action

The motion (ForUsAll Inc. v. U.S. Department of Labor et al., case number 1:22-cv-01551, in the U.S. District Court for the District of Columbia) goes on to note that the Release “informs fiduciaries that the Department has concerns with retirement plans offering investments in cryptocurrency, a novel and volatile asset class, and provides advance notice that the Department expects that it will initiate an investigative program regarding unspecified plans’ offerings of cryptocurrency investment options to plan participants”—but “it does not preclude any plan from offering cryptocurrency investment options or interpret the duty of prudence to prohibit such actions.”

Not only does the DOL assert that the ForUsAll plaintiff have mischaracterized the nature of the Release, but that they have failed to assert an injury that would provide them with the standing/rationale to bring suit.

The response begins by noting the loss of business opportunities alleged by ForUsAll in response to the Release. Noting that the complaint “does not assert that the Release itself precludes ForUsAll from engaging in any business transactions or otherwise directly regulates the company,” but rather that the loss of business is a result of “third parties’ decisions,” which it claimed “are the result of unspecified “enforcement threats” on the part of Defendants — not even necessarily the Release.” Positioning that the DOL says is “too speculative and attenuated” to support a basis for standing. 

The DOL goes on to note that in such cases “a plaintiff must ‘adduce facts showing that those choices have been or will be made in such manner as to produce causation,’” — or, said another way, that you have to actually prove a connection between the action and the alleged reaction — with a proof burden higher for “uncertain” or “speculative” links. They fault the alleged “causal connection” here on two fronts; that ForUsAll acknowledges that “other plans” have, in fact, elected to use their platform following the Release, and that “ForUsAll has failed to allege any basis for concluding that the Release was a substantial motivating factor in the third-party plans’ actions giving rise to a causal connection sufficient to establish standing.” The DOL notes that the suit attributes a decision to forestall implementation due to alleged “enforcement threats,” rather than the role(s) “plan fiduciaries’ interpretation of the Release, their consideration of their duties following the Release, other Departmental statements identified in the complaint, the plans’ risk tolerance, or something else entirely—played in these plans’ change of course.”

ERISA Standards

The DOL further cautions that “the Release does not purport to have legal effect on its own or seek to change the duty of prudence enshrined in ERISA,” going on to note that “that the Release may have brought the concerns of the Department to plan fiduciaries’ attention, and that some plans as a result of their own internal fiduciary review or risk tolerance decided not to include ForUsAll’s cryptocurrency options on their plan menus, does not make the Release a substantial factor in ForUsAll’s claimed injury.” Indeed, it notes that the standards of care and prudence, as found in ERISA, were created by Congress, and that “nothing in a guidance document from the Department reminding fiduciaries of those standards changes them.”

And — if all that were not enough — the DOL notes that even if the court were to grant ForUsAll the relief it seeks, there has not been any alleged proof that it would remedy the problem(s) ForUsAll lays at its feet.  “…there is no suggestion, nor could there be a valid one, that somehow plan fiduciaries’ actions with respect to cryptocurrency are not covered by the duty of prudence or that the Department is barred from investigating or bring enforcement actions against fiduciaries who violate their duties in connection with cryptocurrency investment options. ERISA itself provides the Department with authority to take action, and if the Release were vacated, or never existed in the first place, that would remain unchanged — as would plan participants’ authority to bring civil actions based on violations of the duty of prudence.”

APA ‘Plectic?’

Standing aside, the ForUsAll plaintiffs have argued that the DOL’s action violated the terms of the Administrative Procedures Act (APA) — basically creating new law without the notice, review, and comment periods required by law. But here the DOL reiterations that “the Release does not constitute final agency action, because it does not represent the consummation of the Department’s decisionmaking process or create direct and immediate legal consequences for regulated entities” — and besides, “interpretative rules and general agency policy statements are exempt from such a requirement.”

Noting that “…the Release represents a first, provisional step in the Department’s actions concerning the offering of cryptocurrency investment options on 401(k) plans’ menu of investment options,” the DOL explained that, “By its own terms, the Release contemplates further action on the subject by the Department. For example, while the Release expresses that the “Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies,” it does not determine under which conditions the duty would be breached.” 

It goes on to note that “while the Release indicates that the Department ‘expects’ fiduciaries ‘to take appropriate actions to protect the interests of plan participants and beneficiaries,’ it states only that ‘EBSA expects to conduct an investigative program’ — not that it has determined fiduciaries must not offer cryptocurrency investment options in any or all circumstances or that any fiduciary that decides to offer cryptocurrency options under any circumstances will be investigated.” 

“Moreover, the Release bears few of the hallmarks of a final agency decision. It was not issued in the Secretary’s name nor published in the Federal Register. “While the Department has engaged with a variety of stakeholders following issuance of the Release, including ForUsAll, the Release was not issued after a formalized fact-finding process into any particular plan’s offerings. Indeed, the Release does not even purport to render a decision — on the breadth of the statute, on particular industry practices, or on disputes of fact. The Release merely expresses the Department’s concerns, which necessarily must be addressed in the context of specific facts and circumstances before there would be the consummation of the agency’s decisionmaking process.”

Stay tuned.