1 year 6 months ago
Fasten your seat belts!
Claiming that “granting Defendants’ Motion would invite a brave new world of agency lawlessness,” the ForUsAll plaintiffs that have sued the Labor Department based on the impact of the latter’s position on cryptocurrency investments in retirement plans, have moved to dismiss their motion to dismiss.
In a motion to dismiss (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) the Labor Department’s motion to dismiss, the plaintiffs comment that if allowed, then “Agencies could publish official statements, endorsed by the agency head, disregarding the agency’s own regulations (and an executive order), advance biased positions, threaten to investigate any regulated entity that dares to reach a different conclusion than the one strongly suggested by the agency’s biased position, and publicly attack, by name, any entity that announces an intent to make available a service the agency disfavors. All of this with no judicial review, even where the agency admits it chose not to go through rulemaking because it would be politically inexpedient. No case law countenances such a lack of agency accountability and no decision should incentivize any federal agency to behave in this manner. The Motion should be denied.”
The History
Back in June recordkeeper ForUsAll filed suit against the Labor Department for its recent “arbitrary and capricious attempt to restrict the use of cryptocurrency in defined contribution retirement plans… .” ForUsAll has made its hay touting its retirement investment platform for small businesses as not only allowing employers to provide alternative investment options within 401(k) plans, nearly a year ago it announced a linkup with cryptocurrency platform Coinbase Institutional to offer cryptocurrency as the plan’s first alternative investment.
But in the wake of the Labor Department’s “compliance assistance release” this past March on cryptocurrency investments in defined contribution plans, the suit claimed that “approximately one-third of the plans ForUsAll has discussed the matter with have indicated that, despite their interest in including cryptocurrency, they do not intend to proceed at this time in light of Defendants’ enforcement threats.”
Then last month the Labor Department filed a motion to dismiss the suit, commenting that 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).”
The Motion to Dismiss (the Motion to Dismiss)
“Cryptocurrency is a widely accepted asset class,” which “[t]ens of millions of Americans have included…in their portfolios, as have some of the nation’s largest institutional investors, including Harvard University’s endowment,” the new motion begins. The ForUsAll plaintiffs proceed to reference President Biden’s executive order directing federal agencies to work together to “promote” the development and use of cryptocurrency, which they claim was “widely understood to supplant any hostility individual government officials may have previously expressed with respect to the existence of cryptocurrency and move the federal government towards a unified approach to the expanding use of cryptocurrency.” That was not, of course, how they described the response of the Labor Department which in their release “did not mention the Executive Order or any of the potential benefits of cryptocurrency, described cryptocurrency in exclusively negative terms, and stated 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.” They went on to note that “the Release’s biased description of cryptocurrency and list of purported risks included the preposterous assertion that other agencies might—in direct defiance of the Executive Order—simply “shut[] off” the ability to exchange cryptocurrency.”
The new motion goes on to comment that in addition to “describing the Department’s biased and inaccurate views on cryptocurrency, the Release makes at least two new and erroneous pronouncements regarding how the duty of prudence imposed by the Employee Retirement Income Security Act (“ERISA”) applies to cryptocurrency.” First, the motion states that, “the Release does not merely ‘remind fiduciaries’ of this duty ‘as expressed in the statute…,’” and that in fact “the Release never mentions the prudence standard of care described in the statute, and instead describes the applicable standard of care as ‘extreme care.’”
SDBA Scrutiny
The motion goes on to point to another controversial aspect of the Compliance Release, that dealing with self-directed brokerage account, noting that “the Department’s own longstanding regulations provide that the ‘duty to prudently select and monitor’ investments applies to ‘designated investment alternatives’ included on the plan’s menu of investment options, but does not extend to investments that are only available to participants if they opt in to the use of a brokerage window.” The motion then goes on to claim that in response to “industry-wide criticism,” the Labor Department sought to clarify that it was “not imposing a duty to monitor ‘all of the investments participants can access’ in brokerage windows, but only cryptocurrency in brokerage windows.”
The motion continues by noting that, “Neither the Release nor statements by DOL officials offer any coherent rationale for how there could be a duty to select and monitor investments in a brokerage window if those investments are cryptocurrency, but not if they are any other type of investment”—and that the Labor Department’s motion “offers no such rationale either. Instead, in addition to completely ignoring the Department’s regulations on this topic, the Motion misleadingly describes the above quotes as follows: Nowhere does the Release prohibit the offering of cryptocurrency investment options. And the Department has not stated anything different. Indeed, the complaint purports to quote a senior Department official as stating that the Department didn’t “impos[e] th[e] obligation” that the Release’s critics allege, but rather reminded fiduciaries that “[t]hey need to make sure they’re looking out for plan participants.”
Not ‘Mere Staff’
The ForUsAll plaintiffs note that “the Release was not issued by mere staff at the Department, but was approved by at least the Acting Assistant Secretary of Labor (the top official in the Department’s Employee Benefits Security Administration), who, in his own name, made an accompanying blog post purporting to explain the basis for the Release. Moreover, the Secretary of Labor himself has publicly described the Release as a ‘ruling[]’ of the Department of Labor.”
The motion goes on to note that “the Acting Assistant Secretary of Labor ‘publicly acknowledged that [the Department] considered using notice and comment rulemaking, but decided not to for reasons unrelated to the substantive nature of the rules prescribed in the Release, including what it deemed to be political expedience.’” They also noted that “the Acting Assistant Secretary of Labor also publicly attacked, by name, the two leading companies that announced their intention to help plans make cryptocurrency available to their participants: ForUsAll and Fidelity.”
Along those lines, the motion bluntly states that the plaintiff ForUsAll has been injured. “Of the ‘plans which had already agreed to add cryptocurrency through ForUsAll’s program prior to the Release and DOL officials’ public comments following the Release . . . approximately one-third of the plans that ForUsAll has discussed the matter with have indicated that, despite their interest in including cryptocurrency, they do not intend to proceed at this time in light of Defendants’ enforcement threats.’”
‘Threat’ Assessments
The plaintiffs pushed back on the Labor Department’s initial motion to dismiss commenting that “these are not ‘unspecified enforcement threats.’” Rather, they note that the threats “appear plainly on the face of the Release, which tells fiduciaries that they ‘should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of’ the Department’s biased and inaccurate views of cryptocurrency ‘described [in the Release],’ and which promises, beyond ‘conduct[ing] an investigative program aimed at plans that offer participant investments in cryptocurrencies . . . to take appropriate action to protect the interest of plan participants with respect to these investments’ under the auspices of brand new positions on the scope of the duty of prudence applicable only to cryptocurrency.”
Ultimately, the motion states that the Release “takes at least two definitive positions, each of which break new ground: (i) a new standard of care, ‘extreme care,’ applicable only to cryptocurrency; and (ii) an obligation to monitor investments in ‘brokerage windows’ also applicable only to cryptocurrency.”
The plaintiffs here argue that ForUsAll has adequately pleaded standing, since it has an injury caused by the predictable reactions of third parties to the Labor Department’s release—that the release represents the consummation of the department’s decision-making process, and has given rise to “direct and appreciable legal consequences,” that the release is, in fact, a “legislative rule requiring notice and comment rulemaking.”
More to come…
