Publication

DOL Issues Proposed Amendment to QPAM Exemption

August 25, 2022

Key Takeaways:

The DOL is proposing an amendment to the QPAM exemption that (among other things) would:
  • expand the types of misconduct that can result in a QPAM’s ineligibility to rely on the QPAM exemption;
  • significantly increase the asset management and equity thresholds for QPAMs;
  • impose new reporting and recordkeeping requirements on QPAMs; and
  • require amendments to existing QPAM investment management agreements.


The Department of Labor (“DOL”) recently issued a proposed amendment to prohibited transaction class exemption 84-14 (the “QPAM Exemption”). The QPAM Exemption permits an investment fund managed by a qualified professional asset manager (“QPAM”) to engage in certain otherwise ERISA prohibited transactions with a “party in interest” to a qualified benefit plan (“Plan”) invested in the fund. Currently, there are no reporting or recordkeeping requirements for relying on the QPAM Exemption. The proposed amendment, which is intended to protect Plans against the effects of consolidation and globalization in the financial services industry, would expand the types of misconduct for which a QPAM can become ineligible for the QPAM Exemption (in part by including foreign crimes and misconduct by affiliates). However, the proposed amendment would affect all managers relying on the QPAM Exemption because (as described in greater detail below), it would require all QPAMs to revise existing management agreements with Plan clients, satisfy new recordkeeping and notice requirements, and meet increased asset management and equity thresholds.

The period for submitting comments on the proposed amendment ends on September 26, 2022. If finalized, the proposed amendment would become effective 60 days after publication of the final amendment in the Federal Register. The DOL’s proposed amendment to the QPAM Exemption is extensive. 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 Misconduct
Currently, if a QPAM, or its affiliates or 5% or greater 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 ineligibility notice (“Ineligibility Notice”) to a QPAM that engages in, or whose affiliates or 5% or greater owners engage in, prohibited misconduct, including any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a Criminal Conviction, as well as systematically or intentionally violating the conditions of the QPAM Exemption or providing materially misleading information to the DOL about its reliance on the QPAM Exemption.

A QPAM that receives an Ineligibility Notice would be unable to rely on the QPAM Exemption for 10 years thereafter. Before issuing an Ineligibility Notice, the DOL would have to provide a written warning to the QPAM, which would trigger a 20-day period in which the QPAM could request a hearing on the notice.
  • Increase Asset Management and Equity Thresholds
The proposed amendment would increase the asset management and equity thresholds to qualify as a QPAM. Registered investment advisers would be required to have assets under management in excess of $135.87 million (increased from $85 million) and shareholder or partner equity in excess of $2.04 million (increased from $1 million). The DOL would make subsequent annual adjustments to these thresholds for inflation no later than January 31 of each year.
  • Expand the Required Provisions for Written Management Agreements; Indemnification Obligations
Currently, a QPAM must have a written management agreement with each Plan client in which the QPAM acknowledges that it is a fiduciary to the Plan. Under the proposed amendment, the management agreement with the Plan would also have to include a statement to the effect that, in the event of a Criminal Conviction or receipt of an Ineligibility Notice and for a period of at least 10 years thereafter, the QPAM:
  • will not restrict the Plan’s ability to terminate the management agreement;
  • will not impose any fees, penalties or charges on the Plan for withdrawing from a fund managed by the QPAM, except reasonable fees, disclosed in advance, that are designed to prevent abusive practices or to ensure equitable treatment of the fund’s other investors;
  • will indemnify the Plan for damages that directly result from the QPAM’s violation of applicable laws, breach of contract, Criminal Conviction or receipt of an Ineligibility Notice; and
  • will not employ or knowingly engage any individual that participated in conduct resulting in a Criminal Conviction or Ineligibility Notice.
Under the proposed amendment, indemnifiable losses would include losses and costs from unwinding transactions and from transitioning to another asset manager, as well as costs associated with excise taxes for related prohibited transactions.

The proposed amendment does not include a grandfathering provision for existing management agreements. Therefore, if the proposed amendment is finalized in its current form, all QPAMs will have to amend their management agreements with existing Plan clients to include these required provisions.
  • Impose New Recordkeeping Requirements
Under the proposed amendment, a QPAM would have to retain records for six years following a transaction to demonstrate compliance with the QPAM Exemption. The QPAM would be required to make these records available to the DOL, the IRS and, unless an exception applies, a client Plan’s fiduciaries, contributing employers and employee organizations, and participants and beneficiaries. Failure to comply with these recordkeeping requirements would result in the QPAM’s ineligibility for the QPAM Exemption solely for transactions for which proper records were not maintained. The proposed amendment does not specify the types of records that would satisfy this requirement.
  • Create a One-Time DOL Notice Requirement for all QPAMs
The proposed amendment would require all QPAMs to notify the DOL by email of their intent to rely on the QPAM Exemption. The notice must include the legal name of each business entity relying on the QPAM Exemption and any name the QPAM may be operating under. The notice only has to be provided once unless there is a change in the QPAM’s legal or operating name(s). The DOL intends to make a list of entities relying on the QPAM Exemption publicly available on the DOL’s website.
  • Establish a One-Year Winding-Down Period and Related Notice Requirements
The proposed amendment would create a one-year winding-down period for QPAMs who become ineligible for the QPAM Exemption. During this period, the QPAM Exemption would remain available for transactions for existing clients that were entered into before the ineligibility date, but not for any new transactions. To qualify for this relief, the QPAM must notify client Plans of its inability to rely on the QPAM Exemption within 30 days after becoming ineligible, and remind them of their indemnification and related rights under their written management agreements.
  • 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 claimed, and any associated negotiations on behalf of the fund, be the sole responsibility of the QPAM. According to the DOL, this language is intended to preclude coverage for transactions that are negotiated by a party in interest but later presented to the QPAM for approval. The proposed amendment would also provide that the QPAM Exemption only applies to funds that are established primarily for investment purposes. According to the DOL, this language is intended to preclude coverage for transactions that do not have an investment component, such as hiring a party in interest to provide services to a welfare plan.
  • Next Steps
The period for submitting comments on the proposed amendment ends on September 26, 2022. If finalized, the proposed amendment would become effective 60 days after publication of the final amendment in the Federal Register.

QPAMs who would not satisfy the increased asset management or equity 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 prohibited transaction exemptions, including ERISA’s statutory exemption for reasonable contracts or arrangements with service providers who are parties in interest to client Plans.

For more information on this topic, please contact Terry Martland, or Marc Nawyn.