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Proposed QPAM Amendment Would Expand Criminal Disqualification Rules And Add Contractual Protections For Plans – Employee Benefits & Compensation

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Key takeaways:

  • In addition to the current list of offenses that disqualify a
    manager from acting as a QPAM, the amendment would codify the
    DOL’s interpretation that foreign crimes substantially
    equivalent to the enumerated U.S. offenses result in
    disqualification. The amendment would also add categories, short of
    actual crimes, permitting the DOL to strip a manager of QPAM

  • The Amendment would require QPAM management agreements to
    indemnify plan clients against losses resulting from the QPAM’s
    disqualification, and impose a mandatory one-year winding down
    period following disqualification to help plans mitigate
    disruptions from changing advisors.

  • The Amendment would also make a number of administrative
    updates, including adding recordkeeping and public notice
    requirements, clarifying that the QPAM must have sole
    responsibility over transactions in order for the exemption to
    apply, and updating the exemption’s capitalization and AUM

On July 27, 2022, the U.S. Department of Labor (the
“DOL”) published a proposed amendment (the
“Amendment”) to prohibited transaction class exemption
84-14 (the “Exemption”) that would expand the categories
of disqualifying criminal conduct for “qualified professional
asset managers” (“QPAMs”) and add important new
compliance requirements for the Exemption.

The QPAM Exemption has been in place since the early 1980s and
has been widely used by asset managers to conduct their trading
activities on behalf of employee benefit plans (“Plans”)
free of the risk of violating certain of the prohibited transaction
provisions of the Employee Retirement Income Security Act of 1974,
as amended (“ERISA”). While the existing Exemption
imposes a number of technical compliance requirements, the
Exemption nevertheless has been a useful tool for asset managers to
engage in transactions involving Plan assets that could otherwise
be barred by ERISA. The Amendment would expand these technical
requirements, especially in circumstances where an asset manager or
one of its affiliates has engaged in certain criminal (or
potentially criminal) activity. Because of the potential economic
and reputational cost to engaging in prohibited transactions, any
expansion of the Exemption’s requirements, however technical,
should be viewed as a serious regulatory change.

In recent years, there have been a substantial number of
requests to the DOL for relief from the provision of the Exemption
that disqualifies a QPAM because it or an affiliate engages in
specified criminal activity. The proposed Amendment appears
primarily focused on enhancing this condition, including by: (1)
codifying a Biden administration interpretation to expressly
include foreign crimes; (2) expanding the conduct that can be
deemed disqualifying; and (3) affording the DOL greater leverage in
addressing the circumstances where this condition is not satisfied.
The Amendment would also incorporate directly into the Exemption
remedies and protections for Plan clients harmed by wrongdoing;
these remedies and protections are largely based on conditions the
DOL has previously imposed for granting individual relief from
disqualification. Part of the expressed rationale for the Amendment
is the growth in the footprint of many large asset managers, for
example in foreign jurisdictions and in connection with joint
ventures, and there is a recognition in the explanation of the
Amendment that large asset managers that use the Exemption need to
diligently monitor the compliance of unrelated business units in
control relationships with the QPAM.

  • Foreign Crimes and Additional “Prohibited
    While the DOL already interprets the
    criminal eligibility provisions of the Exemption to include foreign
    convictions “substantially equivalent” to the offenses
    enumerated in the Exemption, the Amendment would expressly add
    these offenses to the list of disqualifying crimes. In addition,
    the Amendment would establish a procedure that would allow the DOL,
    after due process, to disqualify QPAMs for “Prohibited
    Misconduct,” such as: (i) conduct subject to a non-prosecution
    or deferred prosecution agreement (or foreign equivalent) that, if
    successfully prosecuted, would have constituted a disqualifying
    crime; (ii) intentional violations or systematic patterns of
    violations of the Exemption’s conditions; and (iii) providing
    materially misleading information to the DOL in connection with the
    conditions of the Exemption. The addition of the Prohibited
    Misconduct provision could have a significant impact on asset
    managers with compliance shortcomings that permit rank-and-file
    traders to engage in criminal activity, as a common strategy in
    that situation has been to fire the traders and negotiate civil
    penalties for the institution that would not result in
    disqualification under the Exemption’s current terms.

  • Required Changes to Management Agreements: The
    Amendment would require a management agreement between the QPAM and
    each client Plan to expressly provide that the QPAM: (i) will not
    restrict the Plan’s ability to terminate or withdraw from its
    arrangement with the QPAM if the manager were to lose its QPAM
    qualification and (ii) will indemnify the Plan against losses
    resulting from the QPAM’s failure to remain eligible for the
    Exemption, including losses resulting from unwinding ineligible
    transactions and transitioning the Plan’s assets to another
    manager. The proposed Amendment does not appear to make this
    condition prospective only, potentially requiring all QPAMs to
    amend all existing agreements. QPAMs must also agree not to employ
    individuals involved in such disqualifying criminal activity for a
    minimum of 10 years following the subject conduct.

  • One-Year Winding Down Period: To mitigate
    disruption to Plans, the Amendment would permit a one-year
    “winding down” period for disqualified QPAMs, during
    which the manager could continue to rely on the Exemption, but only
    for existing Plan clients and only for pre-disqualification
    transactions, and subject to continued compliance with the other
    conditions of the Exemption and provision of notice to all Plan
    clients of the circumstances surrounding the disqualification.
    Thus, the relief of the winding-down period appears to be quite
    limited. In addition, while this change may appear to be a
    “give” by the DOL, the DOL intends to employ this portion
    of the Amendment to foreclose arguments by QPAMs that immediate
    disqualification would be detrimental to their Plan clients,
    bolstering the argument for the need to provide individual
    exemptive relief from this condition to the affected manager. With
    the wind-down period built into the Exemption, the DOL argues that
    Plan clients will have adequate time to migrate their assets to
    other managers.

  • Recordkeeping: The Amendment would add a new
    recordkeeping provision, requiring QPAMs to maintain records of
    compliance with the Exemption’s requirements for six years and
    make these records available for inspection by Plan fiduciaries,
    contributing employers and sponsoring organizations; Plan
    participants and beneficiaries; and the DOL, the IRS and other
    federal and state regulators. These inspection requirements would
    be subject to limitations to protect the QPAM’s trade secrets
    and, in the case of Plan parties, limited to records pertaining
    only to the relevant Plan and not to other clients of the QPAM.
    Compliance with the recordkeeping requirement with respect to a
    transaction would be a condition to the relief provided by the
    Exemption for such transaction.

  • Clarification of QPAM’s Independent Authority over
    The Amendment would add, as an express
    condition to the Exemption, that the investment of assets managed
    by the QPAM is the sole responsibility of the QPAM (i.e., that
    parties in interest must not be permitted to make decisions
    regarding Plan investments under the QPAM’s control). The scope
    of this clarification is not very clear, although it does appear to
    be intended to codify the DOL’s prior statement as to the
    ineffectiveness of using a so-called “QPAM for a day” to
    perfunctorily bless transactions negotiated by parties in

  • Public Notice: Entities intending to rely on
    the Exemption would be required to send a one-time email notifying
    the DOL of their reliance on the Exemption. The DOL has stated that
    it intends to use these submissions to create a public database of

  • Capitalization and AUM Updates: For QPAMs that
    are registered investment advisers, the Amendment would also
    increase: (i) assets under management requirements from greater
    than $85,000,000 to greater than $137,870,000 and (ii) equity
    capitalization requirements from greater than $1,000,000 to greater
    than $2,040,000. Capitalization requirements would also be
    increased for any bank, savings and loan association or insurance
    company seeking to qualify as a QPAM. Under the Amendment, these
    thresholds would also be subject to annual cost-of-living

Written comments on the proposed Amendment must be submitted to
the DOL by September 26, 2022. If adopted, the Amendment would be
effective 60 days after its final publication.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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