DOL Publishes Proposed Amendment to QPAM Exemption | Foley Hoag LLP

The DOL is proposing an amendment to the QPAM exemption that (among other things):

  • expand the types of misconduct that may result in a QPAM being ineligible to claim the QPAM exemption;
  • significantly raise the QPAM asset and capital management thresholds;
  • impose new reporting and record keeping requirements on QPAMs; and
  • require changes to existing QPAM investment management agreements.

The Department of Labor (“DOL”) recently released a proposed amendment to the 84-14 Prohibited Transaction Class Exemption (the “QPAM Exemption”). The QPAM exemption allows an investment fund managed by a qualified professional asset manager (“QPAM”) to engage in certain transactions otherwise prohibited by ERISA with an “interested party” to a benefits plan qualified social (“Plan”) invested in the fund. Currently, there are no reporting or record-keeping requirements to claim the QPAM exemption. The proposed amendment, which is intended to protect Plans from the effects of consolidation and globalization in the financial services industry, would expand the types of misconduct for which a QPAM may become ineligible for the QPAM exemption (in part by including crimes committed abroad and misconduct by affiliates). However, the proposed amendment would affect all managers who take advantage of the QPAM exemption because (as described in more detail below) it would require all QPAMs to review existing management agreements with plan clients, meet new record keeping and reporting requirements and meet increased asset management needs. and capital thresholds.

The comment period on the proposed amendment ends on September 26, 2022. If finalized, the proposed amendment will be effective 60 days after the final amendment is published in the Federal Register.

The DOL’s proposed amendment to the QPAM exemption is broad. If finalized in its current form, the proposed amendment would make the following changes to the QPAM exemption.

  • Expand the list of crimes and prohibited offenses

Currently, if a QPAM, or its affiliates or 5% or more of the owners, are convicted of specified crimes (a “criminal conviction”), the QPAM cannot rely on the QPAM exemption for 10 years thereafter. . The proposed amendment would expand the list of specified crimes to include foreign crimes that are substantially similar to the listed crimes.

The proposed amendment would also allow the DOL to issue a written notice of ineligibility (“Notice of Ineligibility”) to a QPAM that engages in, or whose affiliates or 5% or more owners engage in, a prohibited misconduct, including any conduct that forms the basis of a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a criminal conviction, as well as the systematic or intentional violation of the terms of the QPAM Exemption or providing materially misleading information to the DOL about its reliance on the QPAM Exemption.

A QPAM who receives a notice of ineligibility will not be able to claim the QPAM exemption for 10 years thereafter. Before issuing a notice of ineligibility, the DOL would have to provide a written warning to QPAM, which would trigger a 20-day period in which QPAM could request a hearing on the notice.

  • Increase asset management and capital thresholds

The proposed amendment would increase the asset and equity management thresholds to qualify as QPAM. Registered investment advisers would be required to have assets under management greater than $135.87 million (increased by $85 million) and shareholder or partner equity greater than $2.04 million (increased by $1 million). The DOL would make subsequent annual adjustments to these inflation thresholds no later than January 31 of each year.

  • Develop the required provisions for written management agreements; Indemnification obligations

Currently, a QPAM must have a written administration agreement with each client of the Plan in which the QPAM acknowledges that it is a trustee of the Plan. According to the proposed amendment, the management agreement with the Plan should also include a statement to the effect that in the event of a criminal conviction or receipt of a notice of ineligibility and for a period of at least 10 years by the following, the MAQP:

  • will not limit the ability of the Plan to terminate the management agreement;
  • will not impose any fees, penalties or charges on the Plan for a withdrawal from a fund managed by the APQM, with the exception of reasonable fees, disclosed in advance, which are intended to prevent abusive practices or to ensure fairly from other investors in the fund;
  • indemnify the Plan for damages that directly result from QPAM’s violation of applicable laws, breach of contract, criminal conviction or receipt of a notice of ineligibility; and
  • will not knowingly employ or engage anyone who has participated in any conduct resulting in a criminal conviction or notice of ineligibility.

Under the proposed amendment, compensable losses would include losses and costs associated with unwinding transactions and transitioning to another asset manager, as well as costs associated with excise taxes for related prohibited transactions.

The proposed amendment does not include a grandfather clause for existing management agreements. Therefore, if the proposed amendment is finalized in its current form, all MAQPs will need to amend their management agreements with current clients of the Plan to include these required provisions.

  • Imposing new record keeping requirements

Under the proposed change, a QPAM would have to retain records for six years after a transaction to demonstrate compliance with the QPAM exemption. QPAM would be required to make these records available to the DOL, the IRS and, with some exceptions, client plan trustees, contributing employers and employee organizations, and participants and beneficiaries. Failure to comply with these record keeping requirements would render QPAM ineligible for QPAM exemption only for those transactions for which proper records were not kept. The proposed amendment does not specify the types of documents that would meet this requirement.

  • Create a single DOL notification requirement for all QPAMs

The proposed change would require all QPAMs to notify the DOL by email of their intent to avail themselves of the QPAM exemption. The notice must include the legal name of each business entity claiming the QPAM exemption and any name under which the QPAM may operate. The notice need only be provided once unless there is a change in the legal name or operation of the APQM. The DOL intends to make publicly available on the DOL website a list of entities relying on the QPAM exemption.

  • Establish a one-year liquidation period and related notice requirements

The proposed amendment would create a one-year wind-up period for MAQPs that become ineligible for the MAQP exemption. During this period, the QPAM exemption would remain available for transactions for existing customers that were entered into before the ineligibility date, but not for new transactions. To be eligible for this relief, the GAQP must notify client Plans of its inability to avail itself of the GAQP exemption within 30 days of becoming ineligible, and remind them of their compensation and related rights under their written management.

  • Clarify the scope of the QPAM exemption

The proposed amendment would require that the terms of any transaction, commitment and investment of fund assets for which the QPAM exemption is sought, and any related dealings on behalf of the fund, are the sole responsibility of QPAM. According to the DOL, this wording is intended to exclude coverage of transactions negotiated by an interested party but subsequently presented to QPAM for approval. The proposed amendment would also provide that the QMAL exemption only applies to funds that are established primarily for investment purposes. According to the DOL, this language is intended to exclude coverage for transactions that do not have an investment component, such as hiring an interested party to provide services to a wellness plan.

The comment period on the proposed amendment ends on September 26, 2022. If finalized, the proposed amendment will be effective 60 days after the final amendment is published in the Federal Register.

QPAMs who would not meet the increased asset management or capital thresholds under the Proposed Amendment, or who would prefer not to comply with the requirements of the Proposed Amendment, should consider the availability of other exemptions from prohibited transactions, including ERISA’s statutory exemption for reasonable contracts or agreements with service providers who have interests in clients’ plans.

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