The Department of Labor (DOL) recently issued a final amendment (“Final Amendment”) to Prohibited Transaction Exemption (PTE) 84-14, which is otherwise known as the “QPAM Exemption.”  The QPAM Exemption is a prohibited transaction exemption providing broad relief for transactions with employer-sponsored retirement plans (“Plans”) or individual retirement accounts (IRAs) that otherwise would be prohibited by the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (“Code”), as long as the transactions involve a “qualified professional asset manager” (i.e., QPAM). Certain entities, including banks, savings and loan associations, insurance companies, and registered investment advisors may qualify as a QPAM if they meet certain asset and equity ownership thresholds.

Since the QPAM Exemption was adopted in 1984, many investment advisers and other financial institutions have relied on the exemption when providing services to, and transacting with Plans, IRAs, and certain commingled investment vehicles that have Plan investors.  However, there have been significant changes in the financial services industry since the QPAM Exemption was first adopted, including the increased global expansion of financial institutions and asset managers. Given this new global financial landscape, the DOL believed that certain amendments were deemed necessary to ensure that the exemption still adequately protected the rights of Plans, IRAs, and their respective participants or beneficiaries. In particular, the Final Amendment clarifies and expands the disqualifying conduct that would make an entity ineligible to rely on the QPAM Exemption and adds new administrative and compliance requirements to the exemption as described below. The Final Amendment became effective on June 17, 2024.

Overview of Final Amendment

1. QPAM Ineligibility. The Final Amendment prohibits an entity from relying on the QPAM Exemption for 10 years if the QPAM, its Affiliates, or any of its 5% or more owners have a “criminal conviction” or engage in “prohibited misconduct.” These occurrences are not retroactive and will only apply to conduct that occurs on or after June 17, 2024.

• Criminal Conviction. Although the concept of an entity becoming ineligible because of a criminal conviction was previously contemplated in the exemption, there was some ambiguity as to whether that would be limited to domestic crimes or if it would extend to foreign crimes as well. The Final Amendment clarifies that “criminal conviction” will also include convictions by a foreign court of competent jurisdiction or imprisonment for foreign crimes that are substantially equivalent to certain serious domestic crimes in the list of crimes that cause an entity to be ineligible to be a QPAM, unless the conviction or imprisonment occurs in a country that is listed by Department of Commerce as a “foreign adversary” (i.e., China, Cuba, Iran, North Korea, Russia, or the Maduro Regime in Venezuela).
• Prohibited Misconduct. The Final Amendment also expands the circumstances that may lead to ineligibility under a new Prohibited Misconduct category, which triggers ineligibility if a QPAM, any of its Affiliates, or any of its 5% or more owners: (i) enters into a domestic non-prosecution or deferred prosecution agreement (NPA or DPA) or (ii) is found in a court’s final judgment or court approved settlement to have participated in conduct that intentionally violated the QPAM Exemption’s conditions or provided misleading information in connection with the QPAM Exemption’s conditions.

2. Notification of Ineligibility. The Final Amendment also requires a QPAM to notify the DOL within 30 days if the QPAM, any of its Affiliates, or any of its 5% or more owners: (i) participates in Prohibited Misconduct; or (ii) enters into an NPA or DPA with a foreign government that is substantially equivalent to a domestic NPA or DPA.

3.Transition Period. If a QPAM becomes ineligible as a result of a criminal conviction or Prohibited Misconduct, the Final Amendment provides an automatic, mandatory one-year transition period to help Plans and IRAs avoid or minimize possible costs and disruptions when changing QPAMs or adjusting their asset management arrangements based on ineligibility. During the transition period, the ineligible QPAM may continue to rely on the QPAM Exemption for its existing Plan and IRA clients so long as the QPAM continues to comply with the other conditions of the exemption. The ineligible QPAM must also provide written notice to its Plan and IRA clients of its ineligible status and agree that it (i) will not restrict its Plan and IRA clients’ ability to terminate or withdraw from its arrangement with the ineligible QPAM, (ii) will provide indemnification and restoration of any losses incurred by its Plan and IRA clients resulting from a violation of applicable laws, a breach of contract, or any claim arising out of the failure of the QPAM to remain eligible for relief under the QPAM Exemption, and (iii) will not employ or engage with any individual who participated in the misconduct that led to ineligibility for the QPAM.

4. Administrative and Compliance Amendments

• Reporting QPAM Status. Any investment advisor or other financial institution that intends to rely on the QPAM Exemption will be required to submit a one-time notice to the DOL acknowledging that the entity is relying on the exemption.  This requirement will ensure that the DOL is aware of those entities that are relying on the exemption and a list of registered QPAMs will be made publicly available on the DOL website.  If an entity changes its name or if a QPAM no longer wishes to rely on the QPAM Exemption, it needs to update its notice within 90 days of such change.  Any entity relying on the QPAM Exemption prior to the effective date of the Final Amendment will have until September 15, 2024 to notify the DOL of its intent to rely on the exemption.
• Independence and Authority. QPAMs will be required to act independently with respect to investment decisions and retain sole authority with respect to planning, negotiating, and initiating the transactions covered by the QPAM Exemption.  A QPAM may delegate certain responsibilities so long as it acts with prudence and clearly retains sole responsibility for the related transactions.
• Recordkeeping Requirement. QPAMs will be required to maintain records necessary to determine whether the conditions of the QPAM Exemption have been met for a period of six years from the date of a covered transaction. This is similar to the standard recordkeeping provision that the DOL has included in recently granted prohibited transaction exemptions.
• Increased Financial Thresholds. The Final Amendment substantially raises the amount of assets under management (AUM) and equity thresholds an entity must meet in order to qualify as a QPAM, which will continue to increase over a seven-year period as set forth in the chart below. Such increases are designed to ensure the assets of a QPAM continue to be of a sufficient size to protect against improper influence from parties in interest or disqualified persons. However, this may impact smaller asset managers, who may no longer qualify based on the increased thresholds.

Key Takeaways from the Final Amendment

In light of the changes being implemented by the Final Amendment, entities that intend to rely on the QPAM Exemption should take certain steps to ensure compliance with all of the requirements, including:

• Registering as a QPAM with the DOL promptly;
• Ensuring that each transaction has been negotiated with sufficient authority for the entity acting as the QPAM;
• Confirming that the updated AUM and equity thresholds are, and continue to be, satisfied; and
• Keeping accurate records relating to compliance with the conditions necessary to qualify for the QPAM Exemption.

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