Key Takeaways:

• The U.S. Department of Labor (“DOL”) has amended the qualified professional asset manager (“QPAM”) class prohibited transaction exemption 84-14 (“QPAM Exemption”), effective as of June 17, 2024.
• As a result of this amendment, any investment manager currently relying upon the QPAM Exemption must make a one-time filing with the DOL by no later than September 15, 2024.
• The assets under management and equity thresholds have increased, which means that some small investment managers may no longer qualify for the QPAM Exemption.
• The DOL has also expanded the types of actions that can result in QPAM ineligibility, including foreign convictions for certain crimes and entering into non-prosecution agreements for certain misconduct.

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The U.S. Department of Labor (“DOL”) has amended the qualified professional asset manager (“QPAM”) class prohibited transaction exemption 84-14 (“QPAM Exemption”), effective as of June 17, 2024 (“QPAM Amendment”).

The QPAM Exemption permits an investment fund that holds ERISA plan assets and is managed by a QPAM to engage in certain otherwise ERISA prohibited transactions with a “party in interest” to a qualified benefit plan (“Plan”) invested in the fund.

Following is a brief overview of the main effects of the QPAM Amendment. Any investment manager relying on the QPAM Exemption should carefully consider the following and note in particular that a one-time filing with DOL is required in order to retain eligibility to rely upon the QPAM Exemption. Small investment managers should also confirm that they meet the increased assets under management and equity thresholds now required for the QPAM Exemption.

Filing with the DOL is required by no later than September 15, 2024

Any investment manager relying upon the QPAM Exemption must notify the DOL by email at QPAM@dol.gov. The notice must include the legal name of each business entity relying on the QPAM Exemption and any other name the QPAM may be operating under.

For any investment manager currently relying upon the QPAM Exemption, this notice must be provided within 90 days of the effective date of the QPAM Amendment, which means by no later than September 15, 2024. Failure to provide the required notice can result in loss of use of the QPAM Exemption.

The DOL notice only has to be provided once unless there is a change in the QPAM’s legal or operating name(s), in which case notice of such change must be provided within 90 days of the change. The DOL intends to make a list of entities relying on the QPAM Exemption publicly available on the DOL’s website. Any investment manager who is no longer relying on the exemption can notify the DOL and have its name removed from the list of QPAMs on the DOL website (but there is no requirement to do so).

QPAM asset management and equity thresholds have increased.

The QPAM Amendment has increased the assets under management and equity thresholds for QPAM Exemption eligibility for investment managers as follows:

These thresholds will increase again in 2027 ($118,912,000 assets under management and $1,694,000 equity required), and then again in 2030 ($135,868,000 assets under management and $2,040,000 equity required), with potential further increases after that based on inflation. There is no grandfathering of existing QPAMs, so any investment manager who intends to rely on the QPAM exemption will need to meet the requirements in effect at the time.

Certain recordkeeping is now required of all QPAMs.

The QPAM Exemption does not currently require maintenance of records demonstrating compliance. As a result of the QPAM Amendment, however, an investment manager will need to maintain records for six years, beginning as of the date of the applicable transaction, showing such compliance. The recordkeeping requirement is focused on records showing general compliance, such as meeting the asset and equity thresholds and other requirements of the exemption, but the extent to which transaction specific records are necessary will be based on facts and circumstances. Records must be available for examination by the DOL, Plan fiduciaries, and Plan participants, among others, but for any Plan parties, the examination right is specific to the fund or transaction that the Plan is invested in and is subject to certain limits (based on protection of privileged commercial or financial information of the QPAM and confidentiality of other individuals).

The discretion and authority required by the QPAM has been clarified.

The QPAM Amendment clarifies that in order for the QPAM Exemption to apply, the QPAM must exercise its own discretion over the terms of the transaction and the decision whether to enter into the transaction. This is intended to avoid situations where a transaction is negotiated and a QPAM is then appointed to approve the transaction. The DOL’s intent is that the QPAM (or an entity under its authority and direction) be the ultimate decisionmaker in order for the QPAM Exemption to apply. An investment manager who uses subadvisors should ensure that the terms of any agreement with the subadvisor provide that the manager retains such ultimate authority in order to ensure that the QPAM Exemption will be available to the manager.

Provisions for QPAM ineligibility have been significantly expanded.

The QPAM Exemption currently provides that an entity will lose its QPAM status for a 10-year period if the QPAM (or any of its affiliates or owners of 5% or more interest in the QPAM) are convicted in a U.S. court of certain financial crimes such as fraud, theft, misappropriation of funds or securities, extortion or similar criminal activity, or any conspiracy or attempt to commit any such crimes. The QPAM Amendment now expands this provision to cover any conviction by a foreign court of a substantially equivalent offense to those already covered (with an exception to this for any conviction by a country that is included in the U.S. Department of Commerce’s list of foreign adversaries.)

In addition to convictions, however, the QPAM Amendment now expands the 10-year ineligibility provisions to include certain “prohibited misconduct,” including entering into a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA) where the alleged activity, if successfully prosecuted, would have constituted a covered financial crime described above. The DOL had previously proposed that the execution of the foreign equivalent of an NPA or DPA also be treated as such prohibited misconduct, but this was not included in the QPAM Amendment. Instead, a QPAM is required to notify the DOL of any such foreign agreement, and describe the conduct at issue, within 30 days of execution of such agreement, which may result in disqualification. An investment manager that is considering entering into an NPA, DPA or a similar foreign agreement should consider whether such agreement would result in QPAM disqualification.

In addition to the above, other actions that can result in a 10-year QPAM ineligibility period include being found to have engaged in a systematic practice of conduct that violates the QPAM exemption, intentionally engaging in conduct that violates the QPAM Exemption, or providing materially misleading information to a federal or state regulator in connection with the conditions of the QPAM Exemption, provided in each case that there is a final court judgment or court approved settlement. Note that the issue here is the conduct itself and there is no requirement that the court expressly consider the QPAM Exemption in its decision.

A QPAM is required to take certain action within 30 days of QPAM disqualification in order to qualify for a one-year transition period.

The QPAM Amendment provides for a one-year transition period following QPAM ineligibility during which an investment manager may continue to rely upon the QPAM Exemption with respect to existing clients, provided that the manager complies with certain additional conditions. Within 30 days of disqualification the investment manager is required to provide written notice to the DOL and to current Plan clients, including a detailed description of the criminal conviction or prohibited misconduct that resulted in QPAM ineligibility and notifying them of the start of the one-year transition period after which the manager will not be able to rely on the QPAM Exemption. The notice must also state that during the transition period the manager will not restrict the Plan’s ability to withdraw from its arrangement with the manager, will not impose any fees or penalties on the Plan in connection with such withdrawal (other than certain reasonable withdrawal fees that were disclosed in advance), and will indemnify the Plan for any losses suffered by the Plan directly resulting from the failure of the manager to remain eligible for the QPAM Exemption (including costs associated with the transition to a new QPAM). In addition, the manager cannot employ any individual who participated in the conduct that resulted in the QPAM ineligibility.

An investment manager who complies with these conditions will be eligible to rely upon the QPAM Exemption with respect to ongoing and new transactions for any current Plan clients but cannot rely upon the QPAM Exemption for any new Plan clients. Following termination of the one-year transition period, the manager cannot rely on the QPAM Exemption at all until the expiration of the 10-year ineligibility period unless it applies for and receives an individual exemption from the DOL.

Any investment manager who is concerned about conduct that may result in QPAM ineligibility is advised to contact legal counsel as soon as possible.

The above is a very broad overview of the main points of the QPAM Amendment. Any investment manager who currently relies on the QPAM Exemption or intends to do so in the future should consult legal counsel to ensure they are compliant with the QPAM Exemption as amended.