DOL Proposes Changes to QPAM Exemption

On July 27, 2022, the US Department of Labor (DOL) released Proposed Amendment (Proposal) to PTCE 84-14 (QPAM Exemption), which is commonly utilized by financial institutions to conduct routine transactions involving private sector retirement plans and individual retirement accounts (Plans) that would otherwise be treated as a prohibited transaction under ERISA or the Internal Revenue Code. The proposed changes are significant and, if adopted, would impact banks, registered investment advisers, hedge funds, and other financial services firms and counterparties that provide products and services to, or transact with, Plans or plan asset vehicles.

Key changes in the Proposal are summarized below.

• Crimes and Prohibited Misconduct–Under the current QPAM Exemption, a qualified professional asset manager (QPAM) is not eligible to utilize the exemption for 10 years if the QPAM or any of its various affiliates is convicted of certain specified crimes. The Proposal expands this prohibition to a much broader (and less defined) range of conduct and events called “Prohibited Misconduct,” which includes “conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a crime.” Further, a QPAM becomes ineligible not only for actively participating in Prohibited Misconduct but also if it, or any affiliate, knowingly approved or had knowledge of misconduct and did not take any “appropriate and proactive steps to prevent such conduct from occurring.” The Proposal also generally includes a one-year winddown period in the event of disqualification.
• Foreign Crimes or Prohibited Misconduct–The Proposal provides that a QPAM would be ineligible to rely on the QPAM Exemption for foreign crimes or misconduct that are “substantially equivalent” to the exemption’s disqualifying domestic crimes or Prohibited Misconduct. This change would clarify, in the DOL’s favor, a longstanding question as to whether the QPAM’s existing disqualification provisions extend to foreign crimes.
• Mandatory Client Agreements–Presently, a QPAM must acknowledge in writing that it is serving as fiduciary to its Plan client. Under the Proposal, written management agreements will be required with Plan clients that include certain terms that apply in the event the QPAM is disqualified due to a crime or other Prohibited Misconduct, including that: (1) the QPAM generally will not limit the Plan client’s ability to exit the arrangement without fees or penalties; and (2) the QPAM will indemnify the Plan client against certain losses and costs resulting from the QPAM’s ineligibility.
• Restriction on Hiring Persons Involved in Crime or Misconduct–The Proposal contains restrictions on a QPAM hiring or retaining persons who were involved in certain crimes or Prohibited Misconduct.
• One-Time Notice–The Proposal would institute a requirement that a QPAM provide a one-time notice (via email) to the DOL that it is relying on the QPAM Exemption.
• Investment Decisions–The Proposal would expand the scope of responsibility over a transaction that a QPAM must have in order for the transaction to be covered by the exemption. Specifically, the terms, commitments, investment of plan assets, and any associated negotiations, must be the “sole responsibility of the QPAM.” This change, billed by the DOL as a “clarification,” would exclude from the QPAM Exemption certain types of transactions in which another fiduciary of the Plan has had any involvement.
• Recordkeeping–The Proposal would require QPAMs to maintain records demonstrating compliance with the QPAM Exemption for six years from the date of a covered transaction.
• Assets Under Management and Equity Thresholds–The Proposal would increase the assets under management requirement for registered investment advisers from $85 million to $135.87 million and the shareholders’ or partners’ equity requirement from $1 million to $2.04 million (adjusted annually for inflation), with the equity capital requirement for banks and insurance companies rising to $2.72 million. Except in the case of very small institutions, this change is not anticipated to have any impact in the marketplace.

Written comments and requests for a public hearing on the Proposal must be submitted to the DOL by September 26, 2022. The amendment, if granted, will become effective 60 days after the publication of the final amendment in the Federal Register. Financial institutions should assess the potential impact of the Proposal on their business and client relationships and track the progress of the proceedings relating to the Proposal at the DOL. Plans and Plan fiduciaries will also want to consider the impact of the Proposal on their investments and relationships. If the Proposal is adopted with the currently proposed effective date, financial institutions and Plans will have little time to update all of their client contracts to include the new mandatory QPAM provisions and otherwise adjust their operations to the conditions of the revised exemption.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.