When trying to encrypt the passwords using the datamover script encrypt.dms or just using the ENCRYPT_PASSWORD *; command I got an error that was showing that there was an error with msgver.cpp trying to UPDATE the PSLOCK table for CLM. Interestingly enough I could not find any cases that seem to make any sense, but putting a couple of things together, I decided to check the database version levels.

It turned out that for SQL Server 2012 running on PeopleTools 8.53.02, you need to be at a minimum of CU3. So after apply the cumulative update #3 patch to my new SQL Server 2012 64-bit install, the problem went away without a problem.