PLANSPONSOR - May/June 2024 - 38

INSIDE ANGLE
DOL Finalizes QPAM
Exemption
Plan sponsors will need to monitor their managers
A
s those who read this column are aware, the U.S.
Department of Labor had proposed changes to
its long-standing Prohibited Transaction Class
Exemption 84-14, the QPAM [qualified professional asset manager]
exemption, portending major implications for retirement
plans and asset managers that service those plans. The agency
recently finalized certain changes to the exemption that will
affect investment managers and plan sponsors. These adjustments
largely involve instances where the QPAM is deemed
ineligible to rely on the QPAM exemption. Some of these key
adjustments are listed below.
Background
As background, the QPAM exemption is one of the most widely
used prohibited transaction class exemptions by those servicing
retirement plans. The QPAM exemption provides relief from
prohibited transaction restrictions of the Employee Retirement
Income Security Act when a qualified professional asset
manager engages in various investment transactions on behalf
of a plan. The exemption does not, however, relieve discretionary
managers from ERISA's conflict of interest prohibited
transaction provisions.
To be eligible for relief under the QPAM exemption, an
entity must qualify as a QPAM as the exemption defines it-i.e.,
as a bank, savings and loan association, insurance company
or registered investment adviser that meets certain asset and
equity ownership thresholds. The concept behind " QPAM " is
that the entity would be sufficiently large so as to not be influenced
by any particular plan client. The QPAM must also have
discretionary authority over asset management decisions.
Unlike other exemptions, this one maintains an ineligibility
provision that would prevent the QPAM from being able
to rely on the exemption for 10 years if that entity, any of its
affiliates or any owner of a 5% or more interest in the QPAM is
convicted of certain crimes.
Changes
As referred to above, here are some of the DOL's significant alterations
to the exemption.
* Notification to the DOL of reliance on the QPAM exemption.
Each business entity relying on the exemption will now need to
notify the DOL of that reliance. The DOL will maintain a list of
these entities on a publicly available website.
38 PLANSPONSOR.COM May - June 2024
Art by Joseph Ciardiello
* QPAM ineligibility. The QPAM exemption maintains the
domestic criminal conviction ineligibility provisions and also
clarifies that foreign criminal convictions will give rise to QPAM
ineligibility under certain circumstances.
In this regard, a
QPAM will be ineligible for relief under the exemption if it is
convicted by a foreign court of a crime substantially equivalent
to a crime that would cause a QPAM to be ineligible by reason of
a conviction in a U.S. court. Such crimes are generally crimes of
dishonesty, such as fraud, theft or similar criminal activity.
* Prohibited misconduct. The amendment provides that, if an
entity engages in " prohibited misconduct, " it will be ineligible
to qualify as a QPAM. The entity will be ineligible if it, its affiliate
or a 5% or more owner fails under one of two conditions.
In the first, it enters into certain deferred prosecution or nonprosecution
agreements that are based on allegations that would
constitute a disqualifying crime under the final exemption if the
entity were convicted. In the second, it is found by a U.S. court,
in a proceeding brought by certain federal or state regulators or
a state attorney general to have: engaged in a pattern or practice
of conduct that violates the QPAM exemption; intentionally
engaged in conduct violating the exemption; or provided materially
misleading information in connection with its conditions.
* Transition period. If a QPAM becomes ineligible, it must
notify its plan clients and the DOL of its ineligible status. It
must also: 1) not restrict a client plan from terminating or withdrawing
from its written management agreement with the
QPAM; 2) allow a withdrawal from or termination of the agreement
without penalty or fees; 3) indemnify, hold harmless and
restore any actual losses to client plans due to the misconduct,
notwithstanding any language to the contrary in the agreement;
and 4) not employ or engage with any individual who
participated in the misconduct that caused the ineligibility.
While the changes included within the QPAM exemption
will affect the plan sponsor, they will likely only become an
issue for it if its manager loses eligibility. Thus, plan sponsors
will want to monitor the status of their managers that rely on
the exemption and consider contingency plans in the event that
the ineligibility provisions are triggered.
George Sepsakos, a principal in Groom Law Group,
Chartered, in Washington, represents clients on a broad
range of Employee Retirement Income Security Act, federal
tax and securities law matters.
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