The Department of Labor stirred up a hornet’s nest in March when it issued Compliance Assistance Release 2022-01 (the “CAR”). The CAR strongly discouraged defined contribution plans from allowing participants to invest in cryptocurrency, and even announced that the DOL expected to open up an investigative program requiring fiduciaries of plans that permitted cryptocurrency investments, including through self-directed brokerage accounts, to justify those decisions as consistent with ERISA’s fiduciary duties of prudence and loyalty.
ForUsAll’s Program
401(k) provider ForUsAll had already permitted its plans to elect to permit participants to invest up to 5% of their accounts in cryptocurrency through self-directed brokerage accounts. This was in response to already existing demand. Millennials would like to invest in cryptocurrency through their plans, and other participants would like to be able to shelter their capital gains in tax exempt trusts. Forusall claims to have consulted with the DOL in setting up its program, and also that it tested participants to make sure they understood enough about cryptocurrency to be making informed decisions.
Fidelity’s Announced Program
Shortly after the CAR, Fidelity joined the pushback by announcing that it expected to implement a Bitcoin investment option that plan sponsors could select to permit participants to invest up to 20% of their accounts. Fidelity also sent a letter to the DOL disagreeing with the positions taken in the CAR. The DOL annouced that it had grave concerns about Fidelity’s program.
Industry Groups Weigh In
Other industry groups and the U.S. Chamber of Commerce sent their own letters that, while not endorsing cryptocurrency investments, questioned whether issuing such inflexible guidance in a form that didn’t subject it to public comment and then proceeding to regulate through investigations was appropriate rulemaking.
The ForUsAll Lawsuit
ForUsAll continues to maintain that cryptocurrency could be an appropriate plan investment to provide account diversification and considers its business targeted by the DOL guidance. On June 2, ForUsAll filed suit in the District of Columbia to invalidate the CAR on the grounds that it was issued in violation of the Administrative Procedure Act. This is the same statute that was used by the Fifth Circuit Court of Appeals to invalidate the DOL’s Fiduciary Rule. The lawsuit also asks the court to enjoin the DOL from taking any enforcement action based on the CAR. The complaint highlights inconsistencies between previous positions of the DOL and language in the CAR, particularly with respect to self-directed brokerage accounts.
The specific arguments raised by ForUsAll are that:
The CAR exceeded DOL’s statutory authority and is contrary to the statute, in singling out one class of investments to be subject to a standard of “extreme care” (which is not a term used in ERISA)
The position taken by the DOL is “arbitrary and capricious”
The DOL should have subjected its guidance to notice and public comment
The DOL singled out ForUsAll as a target and has adversely affected ForUsAll’s business.
Procedural issues that may become significant for this lawsuit are whether the CAR is a “final agency action” eligible to be challenged under the Administrative Procedure Act, since it is not a ruling or regulation, and whether it is ripe for adjudication, as the DOL has not implemented its investigation program.
Unclear Reach of the CAR
While the ForUsAll complaint does not address the vagueness of the CAR’s statements that it applies to cryptocurrency-related investments, derivatives, and investments whose value is determined by reference to cryptocurrency, that could also be a basis for challenging the CAR. Critics have questioned whether it could even apply to investment in stock of a single company with significant cryptocurrency holdings, and the CAR does not distinguish at all between direct investment by participants and investment through funds managed by investment professionals and even traded on the New York Stock Exchange or NASDAQ. It remains unclear which investments could subject fiduciaries to the announced DOL investigation program. The DOL appears in the CAR to have approached these investments with a hammer rather than a scalpel.
What Does the Future Hold?
It will be interesting to see how the DOL responds to this lawsuit and whether similar suits or supporting briefs will be filed by other vendors. If Acting Assistant Secretary for EBSA Ali Khawar is replaced by a permanent appointment, there is also a possibility of more flexibility in the DOL’s position. And legislative change can’t be ruled out. Tommy Tuberville recently introduced legislation to provide that fiduciaries were not responsible for cryptocurrency investments through self-directed brokerage accounts.
On the broader front, President Biden has issued an Executive Order calling for regulation of cryptocurrency, and Kirsten Gillibrand and Republican Cynthia Loomis recently introduced bi-partisan legislation called the Responsible Financial Innovation Act in order to create a complete regulatory framework for cryptocurrency. The Act would classify cryptocurrencies as commodities and empower the CFTC to regulate the market. The cryptocurrency landscape could be changing in ways that affect the debate about the appropriateness of cryptocurrency as a retirement plan investment and the DOL’s position as expressed in the CAR.