On April 3, 2024, the U.S. Department of Labor (DOL) published a final amendment to one of the most commonly used prohibited transaction exemptions between benefit plan sponsors and investment managers. Prohibited Transaction Exemption 84-14 (PTE 84-14), also known as the qualified professional asset manager (QPAM) Exemption, allows investment managers to engage in transactions on behalf of benefit plan clients that would otherwise violate ERISA, as long as certain conditions are met.
The final amendment arrives nearly two years after the DOL first issued its proposed amendment. The proposed amendment set off rounds of comments and concerns from investment managers. While the DOL’s stated objective of the final amendment is to provide additional protections to benefit plans and their participants, investment managers face consequential changes under the new requirements.
Registration Requirement
Entities seeking relief under the QPAM Exemption will be required to report their reliance on the QPAM Exemption by emailing such reliance to the DOL, which intends to publish a list of QPAMs relying on the exemption on its website. The email to the DOL should expressly state the legal name of the entity (and any name that the QPAM may be operating under) and that the entity is affirmatively relying on the QPAM Exemption. Notice will generally only be required once unless the legal or operating name of the QPAM changes.
QPAMs will have up to 90 days to send the notice to the DOL when they begin to rely on the exemption or if they change their legal or operating name. QPAMs will also have a 90-day period to cure if they fail to provide notice in this window. To cure, the QPAM will be required to provide notice and an explanation for why it failed to provide timely notice.
If a QPAM has failed to report at the end of the 180-day period, it may not rely on the exemption until cured.
Asset Requirement
The final amendment will increase the current assets required to be held by QPAMs to comply with the exemption. For registered investment advisors, the required assets under management will rise to $135,868,000 and the required shareholder or partner equity will rise to $2,040,000 by the end of 2030. Different limits apply to banks or insurance companies wishing to act as QPAMs. The increases will occur in three-year increments, beginning in 2024 and ending in 2030.
These increasing asset requirements do not contain a grandfathering provision, meaning a QPAM that currently qualifies for the exemption but fails to meet increasing asset requirements will lose its eligibility.
Records Requirement
The final amendment requires QPAMs to keep records of their compliance with the QPAM Exemption for six years. These records must be readily accessible and be made available to the Department of Labor, Internal Revenue Service, other state or federal regulators, fiduciaries of plans serviced by the QPAM, and any participant or beneficiary of a plan in an investment fund managed by the QPAM upon request. This includes making the records available for examination at their typical location during business hours.
While plan sponsors and participants will only be able to request information about their own transactions and will not be able to request a QPAM’s privileged trade secrets or privileged commercial or financial information, the QPAM must still be prepared to redact relevant information and respond to these requests within 30 days. Failure to reply to requests may result in the loss of the QPAM Exemption, and this may increase operating expenses of QPAMs.
If the QPAM fails to maintain the records required to determine whether the conditions of the exemption have been met, the DOL will conclude that the exemption was not available for any transactions unsupported by the record database.
Direction by Plan Sponsors
A long-standing requirement of the QPAM Exemption is that a QPAM must ensure that any transaction, commitment, or investment of fund assets is based on its own fiduciary judgment. The final amendment strengthens this requirement by stating that a QPAM must exercise “sole discretion” over the commitments and investments of the plan assets and the negotiations on behalf of the plan. However, addressing concerns from plan fiduciaries, the DOL notes that regular meetings, typical monitoring activities, and coordinating activities between a plan sponsor and a QPAM will not disqualify a QPAM under this requirement.
Written Management Agreement
Under the prior proposed amendment, QPAMs were required to prospectively amend their written management agreements (WMAs) between themselves and investors to contain provisions stating that the QPAM would not restrict its client plans’ ability to terminate or withdraw from their arrangement with the QPAM if the QPAM lost its eligibility and that the QPAM would indemnify, hold harmless, and promptly restore client plans for any losses or damage arising out of the QPAM’s failure to maintain eligibility for the QPAM Exemption.
Now under the final amendment, these WMA amendments are not required and only QPAMs that become ineligible to rely on the exemption will have to comply with the indemnification and penalty-free withdrawal requirements. This change from the proposed amendment represents substantial relief for investment managers that would otherwise be responsible for renegotiating all current WMAs within a short time. Ineligible QPAMs will still be required to notify client plans and agree to these provisions within 30 days of becoming ineligible for the exemption.
Conduct and Types of Entities That Cause Ineligibility
The final amendment will render investment managers and their affiliates that have certain foreign convictions ineligible to function as a QPAM. This is an expansion of the current QPAM requirements, which only include domestic convictions. The DOL has also added domestic non-prosecution agreements to the list of “prohibited misconduct” that would bar an asset manager from serving as a QPAM.
In response to concerns that the foreign conviction requirement would bar asset managers with convictions in countries that may not have due process, foreign convictions from countries on the Department of Commerce’s “foreign adversary list” will not count. This list currently includes China, Cuba, Iran, North Korea, Russia, and Venezuela.
Unlike the proposed amendment, the new requirements under the final amendment are prospective only. This means that current QPAMs will not be immediately barred from serving as a QPAM. However, QPAMs will need to be especially careful when they enter future settlements, whether with foreign or domestic regulatory bodies, since the factual stipulations alone may be sufficient for the DOL to determine that the QPAM is ineligible for the exemption. The final amendment also requires that the QPAM provide notice to the DOL if the QPAM engages in prohibited conduct or executes an agreement with a foreign government that is substantially similar to a non-prosecution or deferred prosecution agreement so that the DOL may investigate.
Key Points
To summarize the requirements under the final amendment, a QPAM will need to:
- Register via email with the DOL within 90 days of relying on the exemption.
- Observe and comply with the asset requirements that will adjust every three years and be adjusted for inflation.
- Maintain records evidencing eligibility for the QPAM Exemption for the last six years and make them available to key regulatory agencies and client plan fiduciaries upon request.
- Make decisions on client plan assets solely on its own fiduciary judgment.
- Carefully consider any settlement agreements or convictions (foreign or domestic) to determine whether they constitute prohibited conduct or a conviction under the QPAM Exemption.
- Understand that if it becomes ineligible, it may not restrict client plans’ ability to terminate their agreement or charge them additional fees due to termination, and it must indemnify them for any damages due to the ineligibility.
While there are no immediate steps plan sponsors need to take in reaction to the final amendment, plan sponsors engaging QPAMs should be aware that QPAMs will have increased compliance requirements, which may lead to additional costs.
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