On April 3, 2024, the Department of Labor (the “DOL”) issued its final amendment (“Final Amendment”) to Prohibited Transaction Class Exemption 84-14, commonly referred to as the “QPAM Exemption”.
Generally, the QPAM Exemption offers relief from the prohibitions of Section 406(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) (“Prohibited Transactions”) for transactions involving retirement plans and other entities that are subject to the prohibited transaction provisions of ERISA or the Code (collectively “Plans”) with “parties in interest” (or “disqualified persons” within the meaning of the Code), where the Plan is managed by an entity that meets the definition of a “qualified professional asset manager” (a “QPAM”) and the other requirements of the QPAM Exemption are met.
Given its breadth and relative regulatory certainty, the QPAM Exemption is considered the “industry standard” prohibited transaction exemption and, thus, widely utilized by discretionary investment managers of Plan separate accounts and ERISA governed “plan asset” investment funds. It is also accepted by financial firm counterparties and service providers to such accounts and funds. One of the conditions of the QPAM Exemption has always been that neither the QPAM nor certain of its affiliates be convicted of certain crimes.
The Final Amendment imposes a variety of new requirements with potential impacts on both investment managers currently relying on (or those considering relying on) the QPAM Exemption and financial firms which we have summarized briefly below.
That said, we would expect that for most market participants – whether most large well-established investment managers managing Plan assets or financial counterparties and service providers with whom they trade – Plan related business should not be substantially impacted. To be sure, if a given QPAM manager entity becomes disqualified, then business with respect to Plan assets under its authority becomes compromised under the QPAM Exemption. And while the Final Amendment does broaden the scope of the universe that may trigger those disqualification events, for those that do not experience them, we would not expect there to be significant changes to most institutions’ standard ways of approaching Plan related business, apart from some enhanced notification and vigilance on the part of QPAMs.
The Final Amendment is effective June 17, 2024.
Brief Summary of Final Amendment
No Immediate Updating of Client Documents Required. In contrast to the proposed amendments to the QPAM Exemption (the “Proposed Amendment”), managers relying on the QPAM Exemption will not be required to update written management agreements (including investment management agreements). The Proposed Amendment would have required that the QPAM provide for, and where necessary, amend all client written management agreements to, among other things, indemnify Plans for the costs arising out of any future failure of the QPAM Exemption due to an ineligibility event and to agree not to restrict a Plan’s ability to withdraw from a “plan assets” investment fund. Those undertakings will now only be necessary via a notice upon a “Covered Conviction” or “Prohibited Misconduct” event during the "One-Year Transition Period” (as described below).
New Notification Requirement to the DOL. Managers currently relying on the QPAM Exemption (or expected to be relying on the QPAM Exemption) in respect of Plan assets will now be required to provide notice to the DOL via email providing the legal name of each QPAM entity within 90 days of its reliance.
- This requirement is effective June 17, 2024 so managers currently relying on the QPAM Exemption have until September 14, 2024 to provide the notice.
- There is also a 90-day correction period for inadvertent failures to provide the initial notice (or any update due to name change).
- The DOL indicated it will publish a list of notifying QPAMs on its publicly available website.
New Eligibility Requirements -- Increase Assets Under Management and Shareholder Equity Requirements. The Final Amendment increases the assets under management and shareholder capital requirements for QPAM eligibility.
- For example, for a QPAM that is a registered investment adviser under the Investment Advisers Act of 1940 the current assets under management requirement of $85,000,000 is increased to $101,956,000 and $1,000,000 shareholder capital requirement is increased to $1,346,000 as of the last day of the fiscal year ending no later than December 31, 2024 (with additional increases of each of these requirements in 2027 and 2030).1
New Ineligibility Events and Notice Requirements. One of the conditions of the QPAM Exemption is that the QPAM, its affiliates and any 5% or more owner of the QPAM cannot be convicted of certain crimes (“Criminal Convictions”). Upon a Criminal Conviction, the QPAM is disqualified from using the QPAM Exemption for a period of ten years.
- The Final Amendment confirms that foreign convictions are “in scope” for Criminal Convictions and, in addition, adds that entering into a U.S. non-prosecution agreement (“NPA”) or U.S. deferred prosecution agreements (“DPA”) with respect to covered U.S. crimes and being found by a U.S. court of participation in certain proscribed conduct in a proceeding brought by certain U.S. regulators (or Federal or State attorneys general) are also covered prohibited misconduct events (“Prohibited Misconduct”).2
- In addition, the QPAM must provide notice to the DOL if the QPAM or any affiliate or 5% or more owner of the QPAM participates in any “Prohibited Misconduct” or enters into an agreement with a foreign government that is substantially equivalent to a NPA or DPA.
New Recordkeeping Requirements. QPAMs will be required to maintain records to show evidence of compliance with the QPAM Exemption, and permit access to those records to both regulators and Plan fiduciaries, Plan contributing employers and Plan participants and beneficiaries. It is uncertain what the DOL means by “show evidence of compliance,” but the DOL indicated in the cost study accompanying the release of the Final Amendment that it “recognizes that some QPAMs may not be maintaining records that satisfy the requirements of the [Final Amendment] . . . but expects that most QPAMs are already fully compliant.” Firms should be aware, however, that these records would be available not only to the DOL, and not only other Federal and State regulators, but also, potentially, contributing sponsors, and Plan participants and beneficiaries.3
New One Year Transition Period Due to Ineligibility. If a QPAM becomes ineligible as described above, the QPAM must provide a one-year transition period (“One-Year Transition Period”) to its Plan clients. During the One-Year Transition Period, the QPAM would be expected to seek individual relief under newly revised individual prohibited transaction exemption procedures. The QPAM can continue to rely on the QPAM Exemption during that period but the QPAM will be required to provide notice to Plans concerning the nature of the Criminal Conviction or Prohibited Misconduct event and agree to indemnify Plans broadly for costs, not impose fees for withdrawing from the fund and not restrict a Plan’s ability to withdraw from a fund. Notice would need to be given to all Plan clients. The QPAM must also not employ or knowingly engage any individual that “Participated In” the conduct that is the subject of a Covered Conviction or Prohibited Misconduct, regardless of whether the individual is separately convicted in connection with the criminal conduct.4
- The DOL helpfully changed its approach from the Proposed Amendment which would have disallowed reliance on the QPAM Exemption for new transactions entered into during the One-Year Transition Period. The Final Amendment makes clear that such transactions will be covered in reliance on the QPAM Exemption, assuming that the QPAM complies with all the protocols associated with the One-Year Transition Period.
QPAM as Decision-Maker. Section I(c) of the QPAM Exemption has always contemplated that the QPAM be the party with authority to negotiate and approve the given transaction on behalf of Plan assets. As has been historically and widely understood, the QPAM Exemption is not available for those who would seek to utilize a manager on a so-called “rent-a-QPAM” or “QPAM-for-a-day” basis (i.e., where, in general terms, the QPAM is hired in the context of a specific transaction). In both Proposed Amendment and the Final Amendment, the DOL offered some guidance concerning its views on this requirement. The Final Amendment modifies Section I(c) of the QPAM Exemption making it clear that the QPAM must “not be appointed or relied upon to uncritically approve transactions, commitments, or investments negotiated, proposed, or approved by the plan sponsor or other parties in interest” but rather the QPAM should have the “sole responsibility with respect to the transaction.” Investment managers and advisors to Plan assets, as well as market participants that trade with, or provide services to those assets, will want to read these pronouncements to ensure that their current practices reflect this theme.
Broad Based Action Items
Managers will want to review their existing protocols to assure that they meet and will continue to meet the QPAM Exemption’s new notice, eligibility, and recordkeeping requirements. They will also want to revisit (and where appropriate adjust) their internal practices that are designed to identify acts of Criminal Convictions or potential Prohibited Misconduct—as now redefined—and potential affiliates that are “in scope.” They should consider these items on an entity-by-entity approach, and on a current and dynamic basis, being mindful of events that could impact a given entity’s status (for example, corporate acquisitions, divestitures, combinations, investments etc.)
With respect to financial institution counterparties transacting with, or providing services to, Plan assets in reliance on the manager’s compliance with the QPAM Exemption, assuming that the given QPAM does not experience any disqualification event (whether under the current exemption or the Final Amendment) such financial institutions should not generally expect any immediate action items.
Conclusions
The QPAM Exemption is a widely utilized exemption from ERISA’s “party in interest” prohibited transactions under Section 406(a) of ERISA and the analogous provisions of the Code. The DOL’s Final Amendment includes changes that will require managers to focus on its notice, eligibility, and recordkeeping requirements. For the overwhelming majority of managers that do not experience a Criminal Conviction or Prohibited Misconduct event, aside from these action items, we would expect much to remain as “business as usual” for them, their Plan clients, and their trading counterparties. As has been the case since its enactment in 1984, those institutions that have the misfortune of experiencing a disqualifying event—a universe broadened by the Final Amendment -- will need to take immediate action.
REDLINES. For your convenience, a redlined version of the QPAM Exemption in its Final Amendment form is provided, marked to show changes from the current version. An additional redlined version is provided, marked to show changes from the text of the Proposed Amendment.
- The QPAM Exemption has an alternate way of satisfying the equity capital requirement through certain unconditional guarantees by specified parties.
- Prohibited Misconduct will occur if a QPAM or covered affiliates is found or determined in a final judgment, or court-approved settlement by a Federal or State criminal or civil court in a proceeding brought by the Department, the Department of Treasury, the Internal Revenue Service, the Securities and Exchange Commission, the Department of Justice, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Depository Insurance Corporation, the Commodities Futures Trading Commission, a state regulator, or state attorney general to have “participated in”:
- Engaging in a systematic pattern or practice of conduct that violates the conditions of this exemption in connection with otherwise non-exempt prohibited transactions;
- Intentionally engaging in conduct that violates the conditions of this exemption in connection with otherwise non-exempt prohibited transactions; or
- Providing materially misleading information to the Department, the Department of Treasury, the Internal Revenue Service, the Securities and Exchange Commission, the Department of Justice, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Depository Insurance Corporation, the Commodities Futures Trading Commission, a state regulator or a state attorney general in connection with the conditions of the exemption.
“Participating in” refers not only to active participation in Prohibited Misconduct, but also to knowing approval of the conduct, or knowledge of such conduct without taking active steps to prohibit such conduct, including reporting the conduct to the appropriate compliance personnel.
3. For example, many firms in our experience periodically review each QPAM entity’s conformity with QPAM’s eligibility tests. Where applicable, many also have the practice of maintaining (and updating) lists of affiliated financial intermediaries of the QPAM with whom trading on behalf of Plan assets would be proscribed under Part I(d) of the exemption, and procedures in place to assure that the 20 percent client limitation associated with Part I(e) of the QPAM Exemption is satisfied. Most managers in our experience also ask Plans to identify those persons who may have the authority described in Section I(a) of the QPAM Exemption so that the managers code their systems appropriately.
4. For “participated in” see the preceding footnote 2.
