When I attempt to highlight an encrypted document, encrypted in Acrobat DC and opened with password in Acrobat Reader on my iPhone, I get an error stating "Restricted Document" and "This tool is not available due to the document's security settings". I have checked those settings and all editing and commenting is set as "Allowed". I can highlight in the Reader on my Mac. I can highlight unencrypted, non-password protected PDFs in iOS. Is this a bug in the iOS reader -- ignoring actual detailed permissions?
Your document is encrypted because of the document security and restriction settings.
Acrobat Reader mobile apps (for iOS, Android, Windows Phone) have the known limitation, where changes cannot be saved to encrypted PDF documents. Therefore, users are unable to make any changes (e.g. adding annotations or filling out forms) to encrypted PDF documents.
In contrast, there is no such limitation in the desktop version of Acrobat Reader, Pro, or Standard.
Sorry for the inconvenience.