Loading article...
On August 29, 2023, the United States District Court for the District of Columbia, in ForUsAll v. Department of Labor, dismissed claims by the plaintiff, a 401(k) service provider, that DOL violated the Administrative Procedure Act (APA) in publishing, in March of 2022, “Compliance Assistance Release No. 2022-01 401(k) ‘Plan Investments in ‘Cryptocurrencies.’”
In this note we briefly review that decision.
Background
The CAR raised several issues with respect to crypto investments, especially where they are made available in participant directed defined contribution plans, including: their speculative and volatile nature; the lack of participant expertise with respect to them; difficulties with respect to custody and recordkeeping; issues with respect to valuation; and the lack of a regulatory framework.
The CAR was controversial, especially for its concluding statement that “plan fiduciaries … allowing [crypto] investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described [in the CAR].”
In its complaint challenging the CAR, ForUsAll claimed that (1) DOL should have gone through a notice-and-comment process before it published the CAR and (2) that the CAR itself in targeting crypto currency for special treatment and in implying that a 401(k) plan fiduciary might have fiduciary obligations with respect to investment options in a brokerage window was arbitrary and capricious.
The District Court’s decision
The court summed up its view of the CAR as follows:
No legal consequences flow from the Release here. The Release “does not tell regulated parties what they must do or may not do in order to avoid liability.” … It does not “command[],” “require[],” “order[],” or “dictate[]” that plan fiduciaries refrain from offering cryptocurrency investment options or take any other action. … Nor does the Release withdraw discretion from the Department going forward by compelling certain enforcement actions. … It simply reminds plans of their duties under ERISA, describes the various risks associated with cryptocurrency investments, and communicates the Department’s position in a manner that does not bind regulated entities or the agency.
Based on this view of the CAR and its effect, the court found that the plaintiff (1) had not suffered an injury that would give it standing to sue and (2) even if it had standing, had not stated a claim under federal law.
Standing
First, it found that ForUsAll did not have standing to sue. As explained by the court, to bring a lawsuit “a plaintiff must plausibly allege that it has ‘(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.’”
While the court found that plaintiff has satisfied items (1) and (2) — it had plausibly alleged that it had lost business as a result of the issuance of the CAR — it had not satisfied item (3), “redressability.” Put simply, the CAR, the court found, did nothing more than express DOL’s views on these issues. If, e.g., injunctive relief was granted requiring DOL to withdraw the CAR, those views (already publicly expressed) would not change, and there is no reason to believe that the negative effect of those views on plaintiff’s business would be “cured.”
Quoting the court: “Whether the Release stands or falls, retirement plans are unlikely to jump back into business with ForUsAll, at least on this score, because they will remain bound by fiduciary duties that will be enforced by a Department that is skeptical of cryptocurrency and likely to bring enforcement actions in this area.”
Failure to state a claim
The court also found that, even if ForUsAll did have standing, its claim that DOL should have gone through a notice-and-comment process before issuing the CAR failed because the CAR was not a final rule; it was, in effect, simply an expression of views.
Brokerage windows
On the specific issue of brokerage windows (probably the most controversial element of the CAR), the court, citing Moitoso v. FMR, described the law as “unsettled.” We discuss Moitoso, and fiduciary issues with respect to brokerage windows more broadly, in our article Fiduciary obligations with respect to a brokerage window.
* * *
The CAR called into question two fundamental issues under ERISA’s fiduciary rules that we thought were settled: (1) that, even in a participant directed individual account plan, ERISA did not prohibit any specific legal investment not explicitly prohibited by law; and (2) that plan fiduciaries had no prudence responsibility with respect to otherwise legal investment options in a brokerage window.
We’ve known for some time that DOL was uncomfortable with the “no holds barred” element of brokerage windows, but their attempts to do something about it have been consistently blocked. From one point of view, the CAR can be seen as an expression by DOL of frustration with that situation, in the context of a particularly controversial asset class, crypto investments, and of its intention to continue look for ways to do something about it.
And the effect of the CAR can be understood as the result of the informal power an agency has to change policy simply by expressing displeasure. A similar dynamic is at work in ongoing litigation over DOL’s fiduciary advice project – with respect to which (again) DOL attempt to change a rule it believes is out of date has been consistently frustrated by the courts but has nevertheless had an effect on the industry.
We will continue to follow this issue.