Introduction
This alert is directed at our clients and friends whose 401(k) or defined benefit plans (“Plans”) are invested in private investment funds that are subject to ERISA and that they also manage. An investment manager that is relying on Prohibited Transaction Exemption 84-14 (the “QPAM Exemption” or the “Exemption”) with respect to such a fund must have an independent compliance audit performed by June 30, 2013 for transactions that took place in 2012 in order for the QPAM Exemption to apply. If you are a QPAM managing the investments of your own Plan directly you will also need to have a QPAM audit. These requirements do not apply if the only retirement investments of the management company’s employees and principals in the over-25%-fund are through individual retirement accounts (“IRAs”).
Background
The QPAM Exemption provides relief from the prohibited transaction rules of Section 406 of ERISA and the parallel provisions of Section 4975 of the Code with respect to transactions that are entered into by a “qualified professional asset manager” or “QPAM.” The QPAM Exemption is based on the premise that transactions entered into by an independent and sophisticated asset manager on behalf of a Plan are most likely to conform to ERISA’s general fiduciary standards. Previously, the Exemption was interpreted to mean that the QPAM had to be independent of any party that was involved in a transaction. In updating the QPAM Exemption, the DOL stated that in its view, the independence requirement also prevented an investment manager from being a QPAM to an employee benefit plan that the investment manager or an affiliate sponsored (an “Affiliated Plan”). The DOL amended the QPAM Exemption in 2010 to provide that a QPAM may rely on the Exemption with respect to Affiliated Plans if it meets certain additional requirements. Those requirements are outlined below.
Part V of the QPAM Exemption
In order for a QPAM to rely on the Exemption with respect to transactions effected for an Affiliated Plan, the following conditions must be met:
Discretionary Authority: The QPAM must have discretionary authority or control with respect to the plan assets involved in the transaction (i.e., no “renting” a QPAM).
Written Policies and Procedures: The QPAM must adopt written policies and procedures that are designed to assure compliance with the conditions of the Exemption (“Policies and Procedures”). Specifically, the Policies and Procedures must describe the steps adopted by the QPAM to ensure that:
(a) the manager meets the requirements to be a QPAM;
(b) the manager has the requisite “discretionary authority or control” over the plan assets involved in the transaction; and
(c) the transaction is not entered into with any person excluded from relief by the Exemption.1
Independent Audit: An independent auditor who has appropriate technical training or experience with ERISA’s fiduciary responsibility provisions must conduct an annual exemption audit that is due six months after the end of the year to which the audit relates. The audit for the period that ended December 31, 2012 must be completed by June 30, 2013.
This audit must consist of the following:
(a) A review of the Policies and Procedures for consistency with each of the objective requirements of the Exemption.
(b) A test of a representative sample of the Plan’s transactions during the audit period that is sufficient in size and nature to afford the auditor a reasonable basis to make specific findings regarding whether the QPAM is in compliance with the Policies and Procedures and the objective requirements of the Exemption and to render an overall opinion regarding such compliance.
(c) A determination as to whether the QPAM has satisfied the definition of a QPAM.
Following completion of the exemption audit, the auditor must issue a written report to the Plan which contains the auditor’s specific findings as well as a description of the steps performed by the auditor during the course of its review.
If you have any questions regarding the QPAM Exemption, the Policies and Procedures, or the exemption audit requirements, please contact S. John Ryan ((212) 574-1679 or ryans@sewkis.com) or Michael O’Brien ((212) 574-1505 or obrienm@sewkis.com).
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1 The Exemption does not apply to transactions with certain parties in interest to plans that represent (a) 10% or more of a single commingled investment fund, (b) 20% or more of the QPAM’s total client AUM or (c) certain persons that are “related” to the QPAM. For more information regarding these limitations, please contact one of the attorneys listed at the end of this alert.
