The Department of Labor (the “Department”) issued its final amendment (the “Amendment”) to Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”) on April 3, 2024. The QPAM Exemption is relied on by “qualified plan asset managers” (“QPAM”) managing assets of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and other plans described in Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) (collectively “plans”). The QPAM Exemption, subject to what the Department views as protective conditions, permits qualified plan asset managers of investment funds holding plan assets to engage in transactions with parties in interest to the plans and IRAs invested in the fund. The Amendment introduces new requirements for entities seeking to rely on the QPAM Exemption and expands the categories of crimes and misconduct that could result in loss of the exemption. The Amendment takes effect on June 17, 2024.
What is the QPAM Exemption?
Under both ERISA and the Code, plan fiduciaries have a fiduciary duty to manage plan assets in the best interest of participants and beneficiaries. They are required to avoid prohibited transactions, which happen when a plan fiduciary causes the plan to engage in a sale or exchange, leasing of property, loan or extension of credit, or furnishing of goods, services, or facilities between the plan and a “party in interest”, unless there is an individual or class exemption covering the transaction.
Many large fiduciary investment managers rely on the QPAM Exemption to perform investment functions for their client plans. This exemption provides relief for many transactions between the QPAM (registered investment advisers, banks, savings and loan associations, and insurance companies) and parties in interest to a plan or a plan fiduciary.
Key Changes introduced by the final QPAM Amendment
Some of the most significant items in the Amendment are:
Notification Requirement. Effective June 24, 2024, the Amendment requires QPAMs to provide an email notification to inform the Department of the QPAM’s legal name and any other name under which it operates within 90 days of the QPAM’s reliance on the exemption. There is also a 90-day correction period for inadvertent failures to provide the initial notice (or any update due to a name change). The Department will maintain a list of these entities on its publicly available website. Those managers relying on the QPAM Exemption will have until September 15, 2024, to notify the Department.
Ineligibility Due To Prohibited Misconduct and Criminal Convictions. The Amendment clarifies and expands the types of misconduct that could result in a QPAM being ineligible to rely on the QPAM Exemption. The Amendment does not change the current list of crimes that result in QPAM ineligibility, but clarifies that foreign convictions that are “substantially equivalent to the listed disqualifying U.S. federal and state crimes” are also disqualifying crimes. However, certain misconduct in a country included on the U.S. Department of Commerce’s list of “foreign adversaries,” as updated from time to time, is not treated as a disqualifying crime.
The Amendment also provides that a QPAM will become ineligible to rely on the exemption if it engages in “prohibited misconduct.” This includes: (i) if the conduct of the QPAM (or its affiliates or owners of 5% or more of the QPAM) is subject to a non-prosecution agreement (“NPA”), deferred prosecution agreement (“DPA”)” with a U.S. federal or state prosecutor or regulatory agency, or other criminal or civil settlements if the allegations describe one of the QPAM Exemption’s disqualifying crimes; (ii) intentional violations or a systematic pattern of violations of the QPAM Exemption’s conditions; and (iii) providing materially misleading information to the Department and certain other regulators in connection with the conditions of the Exemption.
The Department removed the foreign equivalent of NPAs or DPAs as an ineligibility trigger but added a requirement that a QPAM notify the Department within 30 days after a QPAM, any affiliate, or any owner, direct or indirect, of a 5% or more interest in the QPAM (i) enters into a foreign equivalent of a DPA or NPA or (ii) participates in prohibited misconduct.
Transition Period. The Amendment provides a QPAM that becomes ineligible due to criminal conviction or prohibited misconduct with a one-year transition period. During this time, the QPAM may continue to rely on the QPAM Exemption with respect to plan clients for which it was already relying on the exemption as of the ineligibility date, so long as the QPAM provides appropriate written notice to the Department and each of its plan clients and meets certain other requirements in the Amendment. During this period, the QPAM may apply for an individual exemption from the Department to continue to operate as a QPAM after the transition period ends. The Amendment contains provisions regarding the process for requesting an individual prohibited transaction exemption if ineligibility under the QPAM Exemption occurs.
Increased Assets Under Management and Shareholder Equity Ownership Thresholds. The Amendment increases the assets under management and shareholder capital requirements for QPAM eligibility to ensure that the exemption is only available to institutions large enough to withstand being unduly influenced by parties in interest. The thresholds will be adjusted annually, no later than January 31, to account for inflation.
Recordkeeping Requirement. A QPAM will be required to maintain records for six years from the date of a transaction to ensure the QPAM will be able to demonstrate, and the Department will be able to verify, compliance with the exemption conditions. QPAMs are also required, to the extent permitted by law, to provide the records “to any authorized employee of the Department or the Internal Revenue Service or another federal or state regulator; any fiduciary of a plan invested in an Investment Fund managed by the QPAM; any contributing employer and any employee organization whose members are covered by a plan invested in an Investment Fund managed by the QPAM; and any participant or beneficiary of a plan and an IRA Owner invested in an Investment Fund managed by the QPAM.”
Exclusive Authority Requirement. A QPAM may not act as a rubber stamp or mere independent approver of a fully negotiated transaction. However, it may delegate certain responsibilities to a sub-adviser so long as it retains sole authority with respect to planning, negotiating, and initiating the transaction.
Key Considerations
The Amendment includes clarifying guidance and introduces stricter qualification and compliance obligations for asset managers relying on the QPAM Exemption. It is essential for existing QPAMs and asset managers to familiarize themselves with the Amendment and the requirements and conditions of the QPAM Exemption, including considering the following:
- Preparing their one-time notice to the Department of Labor, confirming their status at [email protected] within 90 days of June 17, 2024. QPAMs should also establish a process for future updates or changes in a business entity’s legal or operating names relying on the exemption.
- Reviewing and updating their policies and procedures to ensure they align with the new requirements set by the Amendment, explicitly addressing concerns regarding the maintenance of the QPAM’s independent authority.
- Evaluating their current financial status by December 31, 2024, to confirm the satisfaction of the increased equity and AUM thresholds. If applicable, they should also develop a strategy to meet the updated criteria for future increases.
- Reviewing record-keeping practices to ensure they maintain the required records for six years and that they are accessible for examination.
- Developing an internal process for monitoring events that could trigger ineligibility, such as foreign convictions or agreements with prosecutors.
For ERISA clients, QPAMs should review any investment management agreements and other related agreements for any applicable provisions that may require amendment.