On April 3, 2024, the U.S. Department of Labor (DOL) published significant modifications to Prohibited Transaction Class Exemption 84-14 (the QPAM Exemption). The amendment becomes effective on June 17, 2024; however, certain provisions provide additional time for compliance.
The QPAM Exemption is widely relied upon by ERISA fiduciaries and counterparties due to its simplicity, broad coverage and clarity. The changes complicate the QPAM Exemption’s use and limit its utility. The amendment finalizes many of the changes proposed by the DOL in 2022. While the most challenging provision of the 2022 proposal has been dropped, the final QPAM Exemption requires immediate action and long-term consideration by investment managers of ERISA plan assets.
If you currently rely upon the QPAM Exemption, you must take certain actions to be able to continue to rely on the exemption. It is also recommended that you reach out to Seward & Kissel to discuss the applicability of these changes to your situation. The changes in the final QPAM Exemption include the following:
- In order to qualify as a QPAM a manager must have the following client assets under management as of the end of the prior fiscal year (starting in 2030 this amount will be adjusted annually for inflation):
- Currently – $85,000,000
- December 31, 2024 – $101,956,000
- December 31, 2027 – $118,912,000
- December 31, 2030 – $135,868,000
- In order to qualify as a QPAM a manager must have shareholders’ or partners’ equity in excess of the following (starting in 2030 this amount will be adjusted annually for inflation):
- Currently – $1,000,000
- December 31, 2024 – $1,346,000
- December 31, 2027 – $1,694,000
- December 31, 2030 – $2,040,000
- Any investment manager that relies upon the exemption must notify the DOL by email within 90 days of its reliance upon the QPAM Exemption (the initial notification for existing QPAMs is due by September 15, 2024). There is a similar notification obligation for a change of the legal or operating name of a QPAM. The DOL will provide a list of QPAMs on its public website.
- A QPAM must retain records necessary to determine whether the conditions of the QPAM Exemption have been met with respect to every transaction involving plan assets for a period of six years and make such records available to a number of listed persons, including any participant of any plan managed by the QPAM.
The final QPAM Exemption clarifies that a QPAM may rely on a prudently selected and monitored entity to assist a QPAM in managing plan assets. QPAMs can employ sub-advisers and/or other advisers with specific expertise so long as the QPAM retains the authority to determine the terms of the transaction, commitment and investment. In addition, the QPAM must ensure that investments sourced or recommended by a sub-adviser, if made, are based on the QPAM’s own independent exercise of fiduciary judgement and free from any bias in favor of the interests of any party in interest to the plan.
The final QPAM Exemption includes the following provisions which significantly expand the types of misconduct that will prevent an investment professional from relying on the QPAM Exemption:
- The final QPAM Exemption expands the types of misconduct that disqualifies reliance on the QPAM Exemption, to include: (1) convictions of financial crimes similar to the listed U.S. felonies by non-US courts; (2) non-prosecution agreements and deferred prosecution agreements with a U.S. federal or state prosecutor’s office or regulatory agency; and (3) any criminal or civil conviction brought by a list of U.S. federal and state entities and regulators if the conviction is for participation in actions which violate the conditions of the QPAM exemption or for providing materially misleading information to U.S. federal or state entities or regulators.
- Notice must be sent to the DOL if the QPAM or any affiliate participates in “prohibited misconduct” or enters into a non-prosecution agreement or deferred prosecution agreement with a foreign government that is substantially equivalent to a non-prosecution agreement or deferred prosecution agreement with a U.S. agency as discussed above. A foreign non-prosecution agreement or deferred prosecution agreement does not prevent a QPAM from relying on the QPAM Exemption.
- A QPAM who is no longer able to rely on the exemption due to a criminal conviction or prohibited misconduct must provide its ERISA plan clients with a One Year Transition Period during which the manager can continue to rely on the QPAM Exemption. During this period the QPAM must:
- Indemnify, hold harmless and restore actual losses to all plans for any damages resulting from such criminal conviction or prohibited misconduct including losses and costs arising from transitioning the plan assets to an alternative asset manager and from unwinding transactions.
- Allow any client plan to terminate or withdraw from its arrangement with the QPAM.
- Not impose any fees, penalties, or charges on plans in connection with the process of terminating or withdrawing except for reasonable fees, appropriately disclosed in advance, that are specifically designed to: (a) prevent generally recognized abusive investment practices or (b) ensure equitable treatment of all investors in a pooled fund.
- Not Employ or knowingly engage any individual who participated in the conduct that is the subject of the criminal conviction or prohibited misconduct.
If you are currently relying upon the QPAM exemption, we note that while the most problematic aspects of the proposal have been eliminated, the final QPAM Exemption requires a governmental notification, potential public disclosure and possible indemnifications. As other prohibited transaction exemptions may now provide the required exemptive relief without these obligations, QPAMs should reach out to Seward & Kissel to explore if these other exemptions may better suit your management of ERISA assets.
For further information regarding this amendment, please contact S. John Ryan at (212) 574-1679, Bradley Fay at (212) 574-1429, Michael O’Brien at (212) 574-1505, or Shayna Roth at (212) 574-1309.
