On April 3, 2024, the U.S. Department of Labor (“DOL”) amended the prohibited transaction class exemption for qualified professional asset managers (“QPAM”) under the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (such amendment, the “QPAM Amendment”). The QPAM Amendment will go into effect on June 17, 2024 (the “Effective Date”).
In general, without an exemption, under ERISA’s prohibited transaction rules, most transactions (including purchases, sales, leases, and loans) between (x) an ERISA-governed employer-sponsored retirement plan (a “plan”, or multiple “plans”), an individual retirement account (“IRA”), and certain commingled investment vehicles whose portfolios constitute “plan assets” due to a high percentage of ownership by plans or IRAs, and (y) “parties-in-interest”, or people or entities closely connected to the plan, including plan service providers, are prohibited. Without exemptions, the interconnected nature of plans, service providers and transactors in the industry would otherwise make it difficult to avoid prohibited transactions or would force plans to forgo many transactions merely because they may involve a party-in-interest. The intent of the QPAM exemption has been to allow plans and IRAs to engage in transactions with parties-in-interest if such transactions are entered into under the direction of an investment adviser that meets the qualifications set out in the QPAM exemption. The QPAM qualifications are intended to ensure that the investment manager is one of sufficient size, scope, independence, and with an acknowledged fiduciary status with respect to the plan, thereby reducing the potential for conflicts of interest that may result from the investment manager’s self-dealing or acting to promote the investment manager’s financial interests at the expense of the plan or the IRA.
Currently, among other requirements, a registered investment adviser may rely on the QPAM exemption if it has more than $85 million in assets under management (“AUM”) and more than $1 million in shareholder or partner equity. The QPAM Amendment increases the foregoing AUM and equity requirements on a graduated scale, as set forth below:
effective for the fiscal year ending December 31, 2024:
AUM: $101,956,000
Equity: $1,346,000
effective for the fiscal year ending December 31, 2027:
AUM: $118,912,000
Equity: $1,694,000
effective for the fiscal year ending December 31, 2030:
AUM: $135,868,000
Equity: $2,040,000
The QPAM Amendment allows the DOL to adjust these thresholds based on inflation, on January 31st of each year. At this time, it appears that these threshold increases will also continue in the periods after 2030.
Currently, any transaction relying on the QPAM exemption needs to be under the authority and general direction of the QPAM. Typically, QPAMs could approve otherwise prohibited transactions selected by, and negotiated by, other advisers. The QPAM Amendment provides that the QPAM exemption will only apply if the QPAM exercises direct discretion over the investment of plan assets and related negotiations on behalf of the plan.
In addition, there are currently no notification requirements for those managers relying on the QPAM exemption. Going forward, an investment manager wishing to rely on the QPAM exemption will be required to provide notice to the DOL that it has relied on the QPAM exemption. As of now, it appears that a QPAM (or its agent) can send a one-time email to the DOL (to: QPAM@dol.gov) containing the legal and operating name of the QPAM relying on the QPAM exemption, within ninety (90) days of the QPAM’s reliance on the exemption. For example, for those relying on the QPAM exemption for a transaction on the Effective Date of the QPAM Exemption, the email to the DOL would be due within ninety (90) days after the Effective Date, which would be by September 15, 2024. The DOL plans to keep a list of those managers that are relying on the QPAM exemption. If a QPAM changes its name after notice is sent, such name change would require a subsequent email notifying the DOL of the QPAM’s new name.
Further, there is currently no recordkeeping requirement under the QPAM exemption. Pursuant to the QPAM Amendment, QPAMs relying on the QPAM exemption must maintain certain records for six (6) years beginning on the date of the transaction that relies on the QPAM exemption, demonstrating compliance with the exemption. Such records must be available for examination by the DOL, plan fiduciaries, and plan participants.
Currently, an investment manager cannot rely on the QPAM exemption (or qualify as a QPAM) within ten (10) years of it, or its affiliates, having been convicted or released from prison with respect to certain specified crimes. Under the QPAM Amendment, these restrictions are broadened to include the following domestic crimes:
any felony involving abuse or misuse of an employee benefit plan position or employment or position or employment with a labor organization;
any felony arising out of the conduct of the business of a broker, dealer, investment adviser, bank insurance company or fiduciary;
income tax evasion;
any felony involving the larceny, theft, robbery, extortion forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities;
conspiracy or attempt to commit any such crimes or a crime in which any of the foregoing crimes is an element; or
other crimes identified under ERISA Section 411.
The QPAM Amendment also specifies that convictions of substantially equivalent foreign crimes bar investment managers entities from relying on the QPAM exemption.
Additionally, the QPAM Amendment specifies that the following disqualifies an investment manager from relying on the QPAM exemption:
entering into a non-prosecution agreement or a deferred prosecution agreement of the domestic crimes listed above;
a court determination or judgment that the QPAM is engaged in a systematic pattern or practice of violating the QPAM exemption; or
providing materially misleading information to the DOL or certain other governmental regulatory bodies in connection with the requirements of the QPAM exemption.
It should be noted that if an investment manager executes a foreign non-prosecution agreement or a deferred prosecution agreement, it is not automatically disqualified from relying on the QPAM exemption. Instead, the DOL requires notification (including description of the agreement) via email, within thirty (30) days of the execution of the applicable agreement.
The DOL (x) has acknowledged that some investment managers that are currently qualified to rely on the QPAM exemption will be ineligible for the exemption after the QPAM Amendment takes effect and (y) has included a one (1)-year transition period for investment managers that are not eligible to continue relying on the QPAM exemption. Investment managers may always seek an individual exemption from the DOL, if appropriate. Investment managers that are disqualified from relying on the QPAM exemption by the QPAM Amendment must indemnify the plan for actual losses resulting from the investment manager’s inability to remain eligible to rely on the QPAM exemption (including costs related to the transition).
The QPAM exemption has been widely relied upon by investment managers to ERISA plans. For some investment managers, it is not always clear when they need to, or should, rely on the QPAM exemption for a particular transaction or account. Those managers that are currently (x) providing investment management services to ERISA plans, and/or (y) relying on the QPAM exemption should review the QPAM Amendment to determine if they will remain eligible to continue to rely on the QPAM exemption after June 17, 2024. If so, they should ensure that the new notice to the DOL of the investment manager’s reliance is made in a timely fashion, as discussed above. If you would like assistance with reviewing the QPAM exemption and/or analyzing certain accounts or transactions to which it may apply, or if you have any questions regarding this article, please contact Tom Kennedy at tkennedy@sadis.com or 212.573.8038, or Samantha Romano at sromano@sadis.com or 332.330.2354.
