PLANSPONSOR - August - September 2022 - 39

INSIDE ANGLE
Stricter Requirements
The DOL proposes amendments to QPAM exemptions
T
he Department of Labor recently proposed an amendment
to Prohibited Transaction Class Exemption 84-14
that would have a major impact on benefit plan investors
and asset managers that service Employee Retirement Income
Security Act plans.
The proposed amendment would place significant new
limitations on the availability of the qualified professional
asset manager, or QPAM, exemption and would raise the risks
imposed on those who operate as QPAMs.
A QPAM is defined as a bank, insurance company, broker/
dealer or registered investment adviser that satisfies certain
net worth,
capitalization and/or assets under management
requirements and acknowledges its fiduciary status in a written
management agreement.
The exemption is investment managers' principal source of
relief from the prohibited transaction restrictions under ERISA
and permits QPAMs to engage in a variety of otherwise prohibited
transactions on behalf of a plan client. There are many transactions
for which the exemption may be necessary, and it is customary
for plan investment managers to represent their QPAM status to
plan sponsors when engaging in institutional transactions. The
changes could cause asset managers to consider other prohibited
transaction relief or other conflict avoidance strategies.
What the DOL Wants
Among other proposed changes-including how a QPAM would
be wound down in the event it is disqualified from performing
that role-are the following, which are key.
1) Necessity to report to the DOL. Every QPAM would need
to report its reliance on the QPAM exemption to the DOL. This
would be a new requirement. The DOL intends to post a publicly
available list of all QPAMs on its website, and we expect the
agency may use the information to develop a targeted program
to investigate compliance with the QPAM exemption.
2) New conditions regarding the ineligibility of a QPAM.
The proposed amendment clarifies and expands the circumstances
under which a QPAM may become ineligible to rely
on the exemption and requires every QPAM to make certain
changes to its currently existing agreements with plan clients.
First, institutions relying on the QPAM exemption would
need to explicitly provide for a penalty-free termination or withdrawal
from a management agreement or QPAM-managed
investment fund if the institution, its affiliates, or a 5% or more
owner engages in conduct resulting in a criminal conviction or
receipt of an ineligibility notice from the DOL.
Second, a QPAM would also need to contractually indemnify,
hold harmless and restore actual losses to client plans for damages
directly resulting from a violation of applicable law, a breach of
contract or any claim arising out of the organization's ineligibility.
3) Foreign convictions and other prohibited misconduct.
The amendment would codify the DOL's view that a conviction
handed down by a " foreign court of competent jurisdiction "
would disqualify a QPAM, provided that the conviction is
for a crime " substantially equivalent " to a U.S. federal or state
crime described in the QPAM exemption's current definition of
criminal conviction. Recognizing that there may be situations
where a foreign criminal conviction raises unique issues when
compared with U.S. criminal convictions, the DOL would also
grant the QPAM a hearing regarding the substantial equivalence
of a foreign crime or misconduct.
Besides the convictions described above, the exemption
further provides that participating in " prohibited misconduct "
such as the following would form the basis of disqualifying
a QPAM: entering into a domestic non-prosecution or deferred
prosecution agreement, or the foreign equivalent, for any act that
would disqualify the QPAM if convicted; intentionally violating
or engaging in a systematic pattern or practice of violating the
conditions of the QPAM exemption; and providing materially
misleading information to the DOL in connection with the
conditions of the exemption.
The DOL explained that such findings would come from an
investigation. The agency would provide advance notice and an
opportunity for the QPAM to explain why it did not violate the
categories of prohibited misconduct listed above. If, after this
process, the DOL continued to believe the QPAM had participated
in prohibited misconduct, the DOL could issue an ineligibility
notice saying the manager could no longer rely on the exemption.
Whether and how the exemption is modified after all comments
are reviewed will have an impact on its usefulness going forward.
Steve Saxon is a partner in Groom Law Group, Chartered,
and George Sepsakos is a principal in Groom. Offices for
Groom are in Washington, D.C.
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