DOL Publishes QPAM Exemption Amendments: Action Items and Considerations for QPAMs, Plan Sponsors

The US Department of Labor (DOL) published final amendments to Prohibited Transaction Class Exemption 84-14, the so-called “QPAM Exemption,” in the Federal Register on April 3, 2024. The amendments are anticipated to affect certain financial institutions that manage assets of employee benefits plans subject to the Employee Retirement Income Security Act (ERISA), but as discussed below, these rules also impact plan sponsors/investing fiduciaries.

Background

The QPAM Exemption plays an important role in the management of assets of employee benefit plans and trusts subject to ERISA. Investment managers to ERISA plan assets commonly rely on the QPAM Exemption to avoid violations of ERISA’s prohibited transaction rules, and the parallel prohibited transaction provisions of Section 4975 of the Internal Revenue Code.

For that reason, we expect that DOL’s final amendments to the QPAM Exemption will impact a wide range of investment managers and financial institutions that manage ERISA plan assets, including US Securities and Exchange Commission (SEC)-registered investment advisers, banks, and insurance companies that manage ERISA plan assets in separately managed accounts, collective investment trusts, insurance company separate accounts, and private investment funds that are subject to ERISA (such as hedge funds). The final amendments to the QPAM Exemption have a general effective date of June 17, 2024.

In an earlier ML BeneBits blog post, our team highlighted key changes to the QPAM Exemption. In this LawFlash, we set out action items for managers that seek to rely on the QPAM Exemption, and for plan sponsors/investing fiduciaries using third-party managers that may rely on the QPAM Exemption.

Action Items for QPAMs

Investment managers and other fiduciaries that seek to rely on the QPAM Exemption should consider the following measures:

Promptly Submit Required Notification to the DOL: September 15 Deadline

Entities relying on the QPAM Exemption are now required to notify the DOL by e-mail of the legal name of each business entity relying upon the exemption and any other name under which the QPAM may be operating. The general rule is that the notice must be provided within 90 calendar days of reliance on the exemption or when a QPAM changes its legal or operating name. QPAMs are also permitted to give notice to the DOL if the entity no longer seeks to rely upon the exemption.

According to DOL staff, for entities currently relying on the QPAM Exemption, the deadline to provide notice is 90 calendar days following the June 17, 2024 general effective date of the amendments: September 15, 2024. We recommend providing that notice as soon as practicable. We have provided a simple form below, which you may choose to use.

We understand the DOL intends to use the information from these notifications to maintain a list of entities relying on the QPAM Exemption that is available to the public on its website.

Calculate AUM and Equity to Ensure Satisfaction of QPAM Minimum Thresholds

The final amendment increases the thresholds of assets under management (AUM) and owners’ (e.g., shareholder/partner) equity levels that an entity must satisfy to qualify as a QPAM. Importantly, the first increase in these thresholds is required to be met starting on the last day of the QPAM’s fiscal year that is completed on or before December 31, 2024. The table below details the increases in these thresholds as set forth in the final amendment:

Entities that fall short of the asset or equity thresholds, with a fiscal year-end on or before June 17, should contact legal counsel to discuss this further. All other entities should ensure they meet the requirements on or prior to their next fiscal year-end and/or discuss this further with counsel.

Note, too, that these thresholds can be increased by the DOL through notice in the Federal Register, no later than January 31 of each year, after 2030.

Confirm Policies and Procedures Satisfy New Recordkeeping Requirement and Other Revised Conditions

The amended QPAM Exemption adds a new recordkeeping requirement. QPAMs must now keep records that demonstrate compliance with the QPAM Exemption for not less than six years from the date of the particular transaction.

Keep in mind that these records could be requested by the DOL as part of a DOL audit or investigation. Further, these records can be requested by plan sponsors/investing fiduciaries, so those seeking to rely on the QPAM Exemption should consider developing a process to anticipate and promptly respond to those requests, including identifying whether records can be withheld (as the exemption provides an exception from disclosure for privileged trade secrets and privileged commercial or financial information).

For example, managers can consider whether drafting a white paper or other internal memorandum to demonstrate compliance with this new requirement would be both helpful to document compliance and useful to provide as a response to any request for documentation supporting compliance with this requirement.

Additionally, QPAMs should consider reviewing their ERISA compliance policies to determine if any amendments are necessary or appropriate to update the compliance policy in accordance with the QPAM Exemption amendments. For example, we often see investment managers adopt ERISA compliance policies and procedures that describe the QPAM Exemption for internal and ERISA compliance and training purposes. These policies and procedures may now be outdated and need to be updated.

Monitor for Any New Issues Raised by the Expanded Definition of Ineligible Conduct

A key condition of the QPAM Exemption is a prohibition on being able to rely on the exemption if the QPAM or its affiliate have been convicted of certain crimes or engaged in certain other specified misconduct. The amended QPAM Exemption clarifies and expands the scope of conduct that could make a financial institution ineligible to rely on the QPAM Exemption. In particular, the expansion includes conduct occurring outside the United States or engaged in by foreign affiliates.

Among the changes, the amended QPAM Exemption now explicitly includes—as conduct that makes the exemption unavailable—convictions for foreign crimes that are substantially equivalent to certain domestic crimes (unless the conviction occurs in a country that is a US “foreign adversary”).

The amended QPAM Exemption also expands the definition of “prohibited misconduct,” making an entity ineligible to rely on the exemption to include (1) certain domestic non-prosecution agreements or deferred prosecution agreements, (2) intentionally engaging in conduct that violates the conditions of the QPAM Exemption, or (3) providing materially misleading information to the DOL or other regulatory authority in connection with the conditions of the QPAM Exemption. Categories (2) and (3) are only triggered in a proceeding brought by the DOL or certain other federal or state government agencies, and only if included as a finding or determination in a final judgment or court-approved settlement.

In light of the above, new compliance and monitoring may be needed, especially with respect to the expanded foreign crime and foreign jurisdiction provisions. Another change is the addition of a one-year transition window for any entity that becomes ineligible to rely on the QPAM Exemption. Entities that need to rely on that transition window may wish to consult legal counsel on how best to navigate that window.

For any entity that becomes ineligible due to criminal conduct, the QPAM Exemption continues to impose a 10-year ineligibility period, unless the QPAM applies for and receives an individual exemption from the DOL to continue relying on the relief provided by the QPAM Exemption.

Evaluate Existing and Model Agreements, Etc. for Representations Around QPAM

Contract changes may be needed as a consequence of the QPAM Exemption amendments, particularly with regard to representations and warranties around QPAM status and prohibited transactions. Managers may want to examine existing and model contracts on this point.

Take Care to Avoid ‘Rent-A-QPAM’ Status: Potential Impact on Subadvisory Relationships

The final amendment adds language to prevent a QPAM from “blessing” a transaction without “independent exercise of fiduciary judgment and free from any bias in favor of the interests of the plan sponsor or other parties in interest.” This has been viewed as an effort to avoid what are referred to as “rent-a-QPAM” or “QPAM-for-a-day” arrangements.

As amended, the QPAM Exemption now requires that the QPAM not “uncritically approve transactions, commitments, or investments negotiated, proposed, or approved by the plan sponsor or other parties in interest,” but rather that the QPAM have “sole responsibility” using “its own independent exercise of fiduciary judgment” with respect to any transaction for which it seeks coverage under the exemption.

This requirement may be of particular relevance to collective trusts where the trustee has delegated investment management authority to investment advisers and to other types of funds or arrangements involving co-investments and subadvisory relationships. For these types of arrangements, additional review of governing documents/contract documents may be needed to confirm the manager can satisfy the amended “independent exercise of fiduciary judgment” requirement.

Consider Other Exemptions

The changes to the QPAM Exemption noted above may make the exemption unavailable to certain managers in certain circumstances, currently or in the future. To plan ahead for those contingencies, managers may wish to consider whether other exemptions, including class or statutory exemptions, may be available to exempt investment transactions from the prohibited transactions rules, or whether there is a need to apply to the DOL for an individual exemption.

Considerations for Plan Sponsors

Although the changes to the QPAM Exemption most directly impact investment managers, the changes should also be considered by ERISA plan sponsors/plan fiduciaries in their role of appointing fiduciaries. For example, if a plan utilizes a manager that can no longer satisfy the amended QPAM exemption requirements, additional consideration may be warranted.

In light of this, plan sponsors may want to consider actions such as the following:

• Ask existing managers (and in the future, new managers) to confirm if they will continue to qualify as a QPAM and be able to rely upon the QPAM Exemption as amended for covered transactions if needed
• Inquire (and adding, in the future, a process to inquire) about the manager’s compliance with certain of the new QPAM requirements, such as the required notification to the DOL and the new AUM and equity thresholds, as applicable, as well as the absence of any misconduct that would cause it to lose eligibility to rely on the QPAM Exemption and the new recordkeeping requirements
• Evaluate existing relationships and contracts to confirm if amendments are needed to any existing QPAM contracts and contract representations in light of the QPAM Exemption amendments.

In addition, plans may find certain investment managers proactively reaching out to address some of the above points, such as by providing contract amendments and/or new contract representations.

Sample DOL Section I(k) Notice