DOL Issues Proposed Amendments to the QPAM Exemption

Practical Law Legal Update w-036-4241 (Approx. 6 pages)

DOL Issues Proposed Amendments to the QPAM Exemption

by Practical Law Employee Benefits & Executive Compensation

Background on the QPAM Exemption

In the context of certain employee benefit plans, a QPAM currently is one of the following:

A bank, savings and loan, or insurance company with equity capital or net worth in excess of $1 million.
A registered investment advisor that has as of the last day of its most recent fiscal year total client assets under its management and control in excess of $85 million and either:
- shareholders' or partners' equity greater than $1 million; or
- payment of all of its liabilities, including any liabilities that may arise by reason of a breach of ERISA fiduciary duties, guaranteed by certain related parties such as an affiliate of the QPAM, a bank, savings and loan association, insurance company, or a broker-dealer registered under the Securities Exchange Act of 1934 meeting certain requirements.

Absent an exemption, ERISA and the Code generally prohibit transactions between a plan and a disqualified person. The qualifications for the QPAM Exemption are found in PTCE 84-14 and amendments. If a plan's investment manager qualifies as a QPAM and meets several strict conditions under the QPAM Exemption, a broad range of prohibited transactions will be permitted, including:

Sales.
Exchanges.
Leases.
Extensions of credit.
Provisions of goods and services.

For more information on the QPAM Exemption and the rules governing prohibited transactions under ERISA and the Code, see Practice Notes:

For a sample QPAM Agreement, see Standard Document, Qualified Professional Asset Manager (QPAM) Agreement.

The Proposed Amendments to the QPAM Exemption

The preamble to the Proposed Amendments states that Section I(g) of the Exemption has effectively required QPAMs that have become ineligible but wish to continue to rely on the QPAM Exemption to seek an individual exemption from the DOL. Since 2013, the DOL has received an increasing number of individual exemption requests involving Section I(g) ineligibility as a result of criminal convictions occurring within the corporate family of large financial institutions. The DOL decided to issue the Proposed Amendments to the QPAM Exemption to address the substantial changes that have occurred in the financial services industry since 1984, when the Exemption was issued.

Foreign Convictions

The proposed amendments include several changes to the QPAM Exemption. One of the most important changes is the explicit naming of foreign convictions as a reason for disqualifying plan asset managers from using the exemption.

Currently, as provided in Section I(g)(3) of the QPAM Exemption, the Exemption is not available if the QPAM, its affiliate or any owner, direct or indirect, of a 5% or more interest in the QPAM has, within the ten years immediately preceding the transaction, been convicted or released from imprisonment as a result of certain felonies, income tax evasion, and other crimes, as defined in Section VI(r) of the Exemption (see Practice Note, Guide to the Qualified Professional Asset Manager (QPAM) Exemption: Criminal History Acknowledgment).

Under the Proposed Amendments, Section I(g)(3)(A) of the Exemption covers the same US federal and state crimes as the current QPAM Exemption. However, the Proposed Amendments expand the definition of Criminal Conviction in Section VI(r) to expressly cover foreign convictions.

The Proposed Amendments state that this change is consistent with the DOL's longstanding view and is intended to remove all doubt about foreign convictions; questions regarding the applicability of foreign convictions have been raised in advisory opinion requests and in connection with individual exemption requests. The DOL is proposing this change because transactions involving plan assets are increasingly likely to involve entities that reside and operate in foreign jurisdictions, due to the increasingly global nature of financial services. The DOL believes that the crimes identified in the QPAM Exemption are relevant to a QPAM's ability to manage plan assets with integrity, care, and undivided loyalty, regardless of whether the crime occurs in a domestic or foreign jurisdiction.

Prohibited Misconduct

The Proposed Amendments also expand the types of prohibited misconduct that disqualify QPAMs from using the QPAM Exemption under Section I(g). The DOL is proposing to add the following new categories of misconduct that may lead to ineligibility:

Any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a crime described in Section VI(r) of the QPAM Exemption.
Any conduct that forms the basis for an agreement, however denominated by the laws of the relevant foreign government, that is substantially equivalent to a non-prosecution agreement or deferred prosecution agreement.
Engaging in a systematic pattern or practice of violating the conditions of the QPAM Exemption in connection with otherwise non-exempt prohibited transactions.
Intentionally violating the conditions of the QPAM Exemption in connection with otherwise non-exempt prohibited transactions.
Providing materially misleading information to the DOL in connection with the conditions of the QPAM Exemption.

Under the Proposed Amendments, asset managers will be ineligible to use the QPAM Exemption if they either proactively participate in these types of prohibited misconduct, or if they knowingly approve of the misconduct or have knowledge of the misconduct without taking appropriate and proactive steps to prevent it from occurring.

According to the preamble, for the last three types of misconduct listed above, ineligibility will occur only in limited circumstances, and even in these circumstances, only after:

An investigation by the appropriate DOL field office.
The QPAM thereafter receives a written warning that the DOL is considering issuing a written Ineligibility Notice.

Additional Changes to the QPAM Exemption

In addition to the forms of prohibited conduct, the Proposed Amendments also add the following to the QPAM Exemption:

A requirement that a QPAM provide a one-time notice by email to the DOL stating that the QPAM is relying upon the Exemption and reporting the legal name of each business entity relying upon the Exemption and the operating names of the QPAM.
A requirement that a QPAM include certain standards of integrity that are required under the Exemption in a written management agreement with its client plans. The written management agreement would have to provide that in the event the QPAM, its affiliates, and five percent or more of the owners engage in conduct resulting in a criminal conviction or receipt of a written ineligibility notice from the DOL, the QPAM would not restrict its client plan's ability to terminate or withdraw from its arrangement with the QPAM, free of any fees, penalties, or charges.
A mandatory one-year winding-down period to help plans avoid or minimize the possible negative impacts of changing QPAMs or adjusting their asset management arrangements when a QPAM becomes ineligible for the Exemption.

The Proposed Amendments add a new section to the Exemption, Section I(k), which instructs an applicant for the Exemption to review the DOL's most recently granted individual exemptions involving Section I(g) ineligibility with the expectation that similar conditions will be required if an exemption is proposed and granted.

The Proposed Amendments also make a clarifying revision to Section I(c) that specifies that the terms of the transaction, commitments, investment of fund assets, and any corresponding negotiations are the sole responsibility of the QPAM, to make clear that a QPAM must not permit other parties in interest to make decisions regarding plan investments under the QPAM's control.

The Proposed Amendments increase the asset management and equity thresholds in the QPAM definition in Section VI(a) to adjust for changes in the Consumer Price Index since 1984.

Finally, the Proposed Amendments add, in new Section VI(t), a standard recordkeeping requirement that the Exemption currently lacks.

Comments Requested

The DOL is requesting comments on the Proposed Amendments, including whether there are certain types or aspects of criminal behavior that deserve additional focus in the Exemption. Comments are due within 60 days of the date of publication of the Proposed Amendments in the Federal Register (September 26, 2022).

Practical Implications

Retirement plans and entities that currently use the QPAM Exemption should read and review the DOL's Proposed Amendments to PTE 84-14. The Proposed Amendments makes numerous changes to the QPAM Exemption that plans and QPAMs should be mindful of, particularly in regard to foreign convictions and prohibited misconduct. As the DOL discussed in the preamble to the Proposed Amendments, QPAMs should be careful when entering into joint ventures or other passive investment ventures when another entity's ownership interest could jeopardize the QPAM's ability to rely upon the QPAM Exemption; QPAMs in those situations should also be aware that another entity with an ownership interest in the QPAM could be using the QPAM, knowingly or not, to further its own criminal conduct or prohibited misconduct.

The Proposed Amendments, if granted, will be effective 60 days after the date of publication of the final amendments in the Federal Register.

DOL Issues Proposed Amendments to the QPAM Exemption | Practical Law