DOL finalizes amendment to the QPAM exemption that affects investment advisers

Overview and background 

With this amendment, the DOL purports to address the substantive changes in the financial services industry that have occurred since it first issued the QPAM exemption in 1984, such as the consolidation of the asset management industry, increased global reach of financial services, and inflation. The DOL also noted that there has been an increase in the number of individual exemption requests by QPAMs in the recent years, which it seeks to curtail with this amendment.

The DOL’s final amendment follows its July 2022 proposal and subsequent rounds of public comments and hearings. The final amendment includes certain modifications from the proposal that make the exemption narrower in some respects but it is more rigorous in terms of compliance obligations to investment advisers, as further discussed below.

What is the QPAM exemption?

Generally, the U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA) prohibits transactions between plans (such as employee benefit plans and individual retirement accounts (IRAs)) and parties in interest (which include certain entities related to the plan, fiduciaries, and those providing services to the plan), unless an exemption is available. Because the QPAM exemption provides broad exemptive relief from prohibited transactions between a plan and a party in interest, the exemption is the most commonly used PTE investment of plan assets.

QPAMs are typically independent fiduciaries, such as banks, insurance companies, registered investment advisers, or savings and loan associations that meet certain asset and equity thresholds. A QPAM must acknowledge in an investment management agreement that it is a fiduciary with respect to each plan client, in addition to meeting a number of other conditions. One additional key condition is that the QPAM maintain a standard of integrity, and Section I(g) of the QPAM exemption specifies how a QPAM may be eligible or may become ineligible to rely on the exemption.

What does the final amendment entail?

Among other things. the final amendment modifies Section I(g) of the QPAM exemption, which prescribes when a QPAM, its affiliates, or 5% or more owners or partners of the QPAM may become ineligible to rely on the exemption. The rules under the final amendment are extensive, but summarized below are some key aspects of the amended QPAM exemption (please note that certain terms used hereunder have defined meanings under the exemption):

Key points summary

The final amendment to the QPAM exemption:

1. Requires that QPAMs provide notice to the DOL to rely on the exemption;
2. Increases the asset and equity thresholds that must be met for an entity to qualify as a QPAM;
3. Clarifies that a QPAM must have sole responsibility over transactions relying on the exemption;
4. Expressly includes foreign convictions as an ineligibility event;
5. Expands the ineligibility provision with types of prohibited misconduct;
6. Adds various notice requirements regarding ineligibility of QPAMs;
7. Mandates a one-year transition period upon a QPAM becoming ineligible; and
8. Requires recordkeeping with respect to QPAM transactions.

1. QPAM notification requirement

The final amendment requires that each QPAM provide a one-time notice to the DOL via email (QPAM@dol.gov) stating its intention to rely on the QPAM exemption, the legal name of each business entity relying upon the exemption, and any name under which the QPAM is operating. QPAMs must provide this notice to the DOL within 90 days of its reliance on the exemption or any changes to legal or operating names. There is an additional 90-day cure period for any QPAM that inadvertently fails to provide such notice in the initial 90-day period, which must include an explanation of such failure. If the QPAM fails to provide such explanation within the cure period, it loses the relief provided by the exemption. Based on the effective date of the final amendment, the last date for a QPAM currently relying on the exemption to meet the initial notice requirement would be September 15, 2024. A QPAM may optionally notify the DOL, at any time, that it no longer relies on the QPAM exemption.

2. Increase of asset and equity thresholds for qualification as QPAM

The final amendment modifies the definition of a QPAM to increase the asset under management (AUM) and equity thresholds that determine whether an entity qualifies as a QPAM. The adjustments reflect inflation, or specifically, changes to the Consumer Price Index and help ensure that QPAMs would be sufficiently protected from influence by parties in interest.

The AUM and equity thresholds have been increased as follows:

Effective as of the last day of the fiscal year ending no later than December 31, 2024

• AUM: USD101,956,000
• Shareholders’ or Partners’ Equity: USD1,346,000

Effective as of the last day of the fiscal year ending no later than December 31, 2027

• AUM: USD118,912,000
• Shareholders’ or Partners’ Equity: USD1,694,000

Effective as of the last day of the fiscal year ending no later than December 31, 2030

• AUM: USD135,868,000
• Shareholders’ or Partners’ Equity: USD2,040,000

As a departure from the proposal, the final amendment introduces an incremental increase every three years, starting from a lower initial threshold in 2024 and ending in 2030, by which the threshold would reach the amounts initially proposed.

The DOL had amended the QPAM exemption in 2005 for the same reason, and the final amendment notes that the DOL will make subsequent annual adjustments for inflation by publication through notice in the Federal Register no later than January 31 of each year.

3. Clarification of QPAM’s sole discretion over exemptive transactions

In the final amendment, the DOL clarifies that a QPAM must retain its independence and control over transactions, commitments, or investments of fund assets for which it is relying on the QPAM exemption. The QPAM must not act as a mere rubber stamp to uncritically approve transactions designed by plan sponsors or other parties in interest that appointed the QPAM; rather, the QPAM must be solely responsible for the planning, negotiation, and initiating of transactions relying on the QPAM exemption and exercise unbiased fiduciary judgement. A QPAM may, however, rely on the expertise of a sub-adviser if the QPAM prudently selects and monitors the sub-adviser and retains sole authority over the transactions covered by the QPAM exemption.

4. Inclusion of foreign convictions as an ineligibility event

Whereas the QPAM exemption previously included conviction or release from imprisonment as a result of certain domestic crimes as a disqualifying event, the final amendment now expressly clarifies that foreign convictions would also render a QPAM, its affiliates, or 5% or more owners of the QPAM ineligible to rely on the exemption.

However, the final amendment excludes convictions or imprisonments that occur within a foreign country included on the U.S. Department of Commerce’s list of foreign adversaries, which currently include China, Cuba, Iran, North Korea, Russia, and Venezuela (under Nicolás Maduro), despite opposition.

5. Expansion of prohibited misconduct categories

In addition to the criminal convictions mentioned above, the final amendment expands the list of disqualifying events by adding prohibited misconduct, which occurs when a QPAM, affiliate, or a 5% or more owner of a QPAM (a) enters into a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA) with a U.S. agency where the factual allegations thereunder would have constituted a crime under the QPAM exemption if successfully prosecuted, or (b) is found or determined to have participated in certain categories of conduct that call into question a QPAM’s culture of compliance (e.g., systematic or intentional violation of the exemption, or providing misleading information to government agencies with respect to the exemption’s conditions) in a final judgment or court-approved settlement by a federal or state court in a proceeding brought by a governmental body.

Unlike the proposed amendment, the final amendment excluded foreign equivalents of NPAs or DPAs from the definition of prohibited misconduct and removed the DOL’s authority to issue warning letters and written ineligibility notices to QPAMs that it perceived to have engaged in prohibited misconduct. This was to limit factual determinations to be made in judicial proceedings brought by certain federal agencies, rather than by the DOL itself.

6. QPAM ineligibility notice requirements

The final amendment includes additional notice requirements to QPAMs that become ineligible under the exemption:

Prohibited misconduct or foreign NPA or DPA

• A QPAM must notify the DOL if the QPAM, its affiliate, or any 5% or more owner of the QPAM participates in prohibited misconduct (described above) or enters into an NPA or DPA with a foreign government that is substantially equivalent to a domestic NPA or DPA. This notice must be sent within 30 calendar days of the QPAM becoming ineligible due to the prohibited misconduct or the execution date of the foreign equivalent NPA or DPA and must include the description of the prohibited misconduct or relevant foreign agreement and the QPAM’s name and contact information.

One-year transition period due to ineligibility

• Within 30 days of the date of becoming ineligible to rely on the exemption due to a criminal conviction or prohibited misconduct, a QPAM must provide written notice to the DOL and its plan clients about its ineligibility and the commencement of a one-year transition period as a result (further described below). In this notice, the QPAM must (i) objectively describe the circumstances resulting in the QPAM’s criminal conviction or prohibited misconduct, (ii) state that the QPAM will not restrict the plan client’s ability to terminate or withdraw from its arrangement with the QPAM, free of any fees, penalties, or charges (other than reasonable fees), and (iii) agree to indemnify and restore any losses to its plan clients for any damages resulting from the QPAM’s violation of applicable laws, breach of contracts, or any claims arising out of its loss of eligibility under the exemption, during the transition period.

7. Mandate of one-year transition period

The final amendment adds an automatic and mandatory one-year transition period upon a QPAM becoming ineligible to rely on the exemption due to a criminal conviction or prohibited misconduct. Initially referred to as the “winding down period” in the proposed amendment, this transition period is intended to help plans minimize possible costs and disruptions from adjusting their asset management arrangements when a QPAM becomes ineligible and to provide QPAMs with reasonable time to apply for applicable individual exemptions.

As mentioned above, the QPAM must notify the DOL and its plan clients in writing, within 30 days of its ineligibility date, describing its ineligibility and the resulting one-year transition period. During the transition period, the QPAM may continue to rely on the exemption with respect to plan clients for which it was already relying on the exemption as of the ineligibility date. Once the one-year transition period ends, the QPAM cannot rely on the QPAM exemption for ten years, unless it receives an individual exemption from the DOL.

The proposed amendment would have required a QPAM to preemptively amend all existing written agreements with plan clients to include specific client indemnification language that would be applicable in the event of ineligibility. The final amendment limits such requirement to only written agreements upon the QPAM becoming ineligible as a result of criminal conviction or prohibited misconduct.

8. Recordkeeping for QPAM transactions

Consistent with recent PTEs granted by the DOL, the final amendment requires a QPAM to maintain records necessary for certain parties (e.g., federal or state regulators or fiduciaries, contributing employers, employee organizations, participants, or beneficiaries covered by a plan or investment fund managed by the QPAM) to determine whether the conditions of the QPAM exemption have been met with respect to a transaction.

Records must be maintained for a six-year period from the date of the applicable transaction in a manner reasonably accessible for examination at a customary location during normal business locations. A QPAM’s failure to maintain the necessary records will result in the loss of relief under the QPAM exemption only for the transaction for which such records are missing or have not been maintained, and a loss or destruction of records due to circumstances beyond the QPAM’s control during the six-year period will not result in a prohibited transaction.

If a QPAM refuses to disclose necessary information to a party other than the DOL on the basis that the information is exempt from disclosure, the QPAM must provide a written notice to the requesting party, within 30 days of the request, explaining its reasons for the refusal and that the DOL may request such information.

When will the final amendment take effect?

The final amendment would take effect 75 days from the date it was published in the Federal Register, which is June 17, 2024.

Who will be impacted by the final amendment?

Many of the provisions in the QPAM exemption apply not only to QPAMs but also to their affiliates, including persons under common control with the QPAM and 5% or more owners or partners of the QPAM. Furthermore, the final amendment now has an international scope for their respective conduct, as described above.

The final amendment will impact investment managers that currently rely on or intend to rely on the QPAM exemption. By extension, it may also affect entities that rely on the services of QPAMs, such as plan sponsors that will need to ensure their potential asset managers qualify for the QPAM exemption.

What are some considerations for investment advisers and plan sponsors?

• Investment advisers will need to reassess not only the way they manage plan assets but also the conduct of their affiliates and 5% or more owners of the QPAM, in and outside of the U.S., to consider whether individual exemptions will be needed pursuant to the final amendment for existing and new clients.
• Investment advisers relying on or planning to rely on the QPAM exemption should consult with ERISA counsel to understand the new requirements and their potential impact and to ensure ongoing qualification and compliance under the final amendment.
• Investment advisers relying on the QPAM exemption should review the new notice requirements and prepare for applicable written notices to the DOL or plan clients in advance of deadlines.
• Investment advisers with affiliates that may have engaged in criminal misconduct, whether in the U.S. or abroad, should work with legal advisers to assess their eligibility under the QPAM exemption, provide any requisite notices, or apply for individual exemptions, as applicable.
• While the final amendment does not require updates to existing documentation, investment advisers and plan sponsors should review and update disclosures under applicable transaction documents or client agreements to reflect and inform parties of updates under the final amendment.
• Plan sponsors may wish to conduct more extensive due diligence or obtain additional assurances when appointing asset managers to ensure their eligibility under the QPAM exemption and that requirements under the QPAM exemption have been and will continue to be met.
• Investment advisers and plan sponsors that currently rely on the QPAM exemption may wish to consider other available PTEs, and the requirements and conditions thereunder, in the event that QPAM eligibility or use of the exemption may be impacted by the final amendment.
• Investment advisers relying on the QPAM exemption should review and ensure that their current recordkeeping policies and practice satisfy the new requirements under the final amendment.

We are happy to discuss how the DOL’s final amendment may impact your business or to help revising relevant documentation to best protect your interests and to ensure compliance with the amended exemption.