DOL Releases Final Amendment to the QPAM Exemption

On April 3, 2024, the U.S. Department of Labor (DOL) published a final amendment (Final Amendment) to Prohibited Transaction Class Exemption 84-14 (QPAM Exemption), the widely used exemption from the prohibited transaction rules under the Employee Retirement Security Act of 1974, as amended (ERISA), and the Internal Revenue Code of 1986, as amended, for transactions involving ERISA covered plans and individual retirement accounts (collectively, Plans) managed by a qualified professional asset manager (QPAM).

While the Final Amendment does not include some changes in the proposed amendment issued by the DOL in July 2022 (the Proposal) (see our prior Advisory), it expands the circumstances for QPAM Exemption ineligibility, provides for a transition period for QPAMs that lose eligibility, requires QPAMs to register with the DOL, and increases asset and equity thresholds necessary for QPAM qualifications.

The Final Amendment takes effect on June 17, 2024. Key aspects of the Final Amendment are summarized below:

Criminal Convictions and Prohibited Misconduct. Prior to the Final Amendment, a QPAM (or its affiliates or any 5% owner) would become ineligible to rely on the QPAM Exemption if it had been convicted or released from imprisonment, whichever is later, as a result of certain crimes (Criminal Convictions). The Final Amendment expands the scope of Criminal Convictions to include foreign crimes that are “substantially equivalent” to the QPAM Exemption’s disqualifying domestic crimes, but specifically excludes convictions and imprisonments in foreign jurisdictions listed by the Department of Commerce as “foreign adversaries.”

In addition, the Final Amendment adds a new category of conduct that can result in loss of eligibility for QPAM Exemption, designated “Prohibited Misconduct,” which includes entering into a non-prosecution (NPA) or deferred prosecution agreement (DPA) that, if successfully prosecuted, would have constituted a crime or conviction in a U.S. federal or state court. (A QPAM must also notify the DOL upon the QPAM (or its affiliates or any 5% owner) entering into foreign NPAs and DPAs within 30 days of such an event, but entering into such an agreement will not result in automatic ineligibility.) In addition, a finding by a federal or state court that a QPAM (or its affiliate or any 5% or more owner) engaged in a pattern or practice of violation of the QPAM Exemption, intentionally violated the provisions of the QPAM Exemption, or provided misleading information to certain federal or state regulators in connection with the QPAM Exemption will result in a loss of eligibility to rely on the QPAM Exemption.

One-Year Transition Period and Notice Requirements. If a QPAM becomes ineligible to rely on the QPAM Exemption, the Final Amendment provides for a one-year transition period during which it may continue to rely on the QPAM Exemption for any client Plans with pre-existing management agreements. In a significant departure from the Proposal which required all QPAMs to update their client agreements with prospective termination and plan indemnification provisions in the event that a QPAM became ineligible, the Final Amendment instead requires a QPAM to notify the DOL and each affected client Plan within 30 days of its failure to satisfy the QPAM Exemption and the resulting initiation of the transition period, including an objective description of facts and circumstances of the applicable Criminal Conviction or Prohibited Misconduct. The notice must also include a statement that, during the transition period, the QPAM will:

• Not restrict the client Plan’s ability to withdraw or terminate its arrangements with the QPAM
• Not impose any fees in connection with such termination or withdrawal other than certain reasonable fees disclosed in advance that are specifically designed either to prevent generally recognized abusive investment practices or to ensure equitable treatment of investors in a pooled fund
• Indemnify and restore actual losses to client Plans from damages resulting from the QPAM’s ineligibility
• Not employ or knowingly engage any individual that participated in the Criminal Conviction or Prohibited Misconduct, as applicable

During the transition period, the QPAM may apply for an individual exemption from the DOL to continue to operate as a QPAM after the transition period ends.

One-Time Notice/Reporting Requirement. The Final Amendment requires QPAMs to provide a one-time notice to the DOL within 90 days of its reliance on the QPAM Exemption. If the QPAM fails to provide a timely notice, there is an automatic 90-day cure period where notice may be provided with an explanation for such failure. Managers also need to provide the DOL with the legal and operating names of each entity relying on the QPAM Exemption within 90 days of June 17, 2024. Any new QPAM or any QPAM that subsequently changes its name will be required to submit a new notification within 90 days. The DOL will maintain a list of investment managers relying on the QPAM Exemption on its publicly available website.

Increased AUM and Equity Thresholds. The Final Amendment increases the assets under management (AUM) and equity capital requirements for QPAM eligibility in a phased manner between 2024 and 2030 (subject to annual adjustments after that time) with each increase effective as of the last day of the fiscal year ending no later than December 31 of such year as provided below:

Investment Decisions. The Final Amendment notes that, in exercising its authority, the QPAM’s actions must be “based on its independent exercise of fiduciary judgment” and “free from bias in favor of the plan sponsor or other parties in interest.”

Recordkeeping Requirements. The Final Amendment requires that the QPAMs maintain records demonstrating compliance with the QPAM Exemption for six years from the date of a covered transaction which must be made reasonably available for examination by various parties, including the DOL, the Internal Revenue Service, plan fiduciaries, contributing employers, and plan participants. Failure to maintain such records demonstrating compliance to the QPAM Exemption may result in the loss of the exemption’s relief for the transaction(s) for which records have not been maintained.

Conclusion

Financial institutions and Plans relying on the QPAM Exemption should consult their legal counsel to review their current policies and procedures to ensure compliance with the new requirements set forth by the Final Amendment.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.