DOL Finalizes Changes to the Qualified Professional Asset Manager (QPAM) Exemption: What Investment Managers Need to Know

At a Glance

• In its public-facing documents, the change most emphasized by the DOL is the expansion of circumstances under which a firm can lose its eligibility to act as a QPAM, due to certain criminal matters or other misconduct. 
• The final amendment continues to restrict the planning, negotiation and initiation of transactions by parties-in-interest, which may create practical questions and challenges in certain contexts. 
• A QPAM must exceed certain minimum thresholds relating to its capitalization or size. QPAMs that are RIAs must also exceed a minimum threshold of “total client assets under management and control.” These thresholds are increasing and will continue to increase further under the final amendment.
• There is a new requirement to maintain certain records, and to disclose information upon an investor’s request. While the DOL expects that the recordkeeping requirement will not create substantial financial burdens, concern has been expressed that the “accessibility” provisions may be used to demand the disclosure of information for purposes of litigation against the QPAM.
• There is a new requirement to provide email notifications to the DOL where the QPAM will be relied upon by firms. Email notifications to the DOL should not be particularly complicated or burdensome, but a failure to provide one — for example due to inadvertence following a name change — is an example of a seemingly minor misstep that could have significant consequences.

On April 3, 2024, the U.S. Department of Labor (DOL) published an updated final version of prohibited transaction class exemption 84-14, also known as the qualified professional asset manager exemption (PTCE 84-14 or the QPAM Exemption). The changes will primarily impact registered investment advisers (RIAs), banks and insurance companies who manage retirement plan or IRA assets directly, or who manage certain types of funds or other vehicles for which the underlying assets are deemed to constitute “plan assets” under the look-through rules in the Employee Retirement Income Security Act of 1974 (ERISA) and DOL regulations. The most impactful changes included in the amended QPAM Exemption include:

• Expansion of the circumstances under which a firm may lose QPAM eligibility to include foreign crimes and new categories of “prohibited misconduct,” and the addition of a one-year transition period following such a loss of QPAM status;
• Changes to the degree of required independence and control that a QPAM must have over transactions;
• Increases to the firm size and assets under management thresholds for QPAMs;
• A new recordkeeping requirement; and
• A new requirement for firms to inform the DOL via email of their reliance on the QPAM Exemption, and of any business and trade names (including any changes).

The amended QPAM Exemption will become effective June 17, 2024, which is 75 days from the April 3 publication date.

In addition to single customer accounts and plan trusts, the types of “plan assets” vehicles potentially impacted include collective investment trusts (CITs) and other group trusts, as well as partnerships and private funds for which the participation by benefit plan investors is deemed to be “significant” under the DOL’s 25% test, and many insurance company accounts. Because the QPAM Exemption is only necessary when “plan assets” are being managed, the changes will not generally impact the management of the assets of vehicles that are not deemed to hold plan assets under the look-through rules, including mutual funds and other investment companies registered under the Investment Company Act of 1940, and private funds that constitute venture capital operating companies (VCOCs) or real estate operating companies (REOCs) or for which the participation by benefit plan investors is not deemed “significant” under the 25% test.

Background

The prohibited transaction restrictions set forth under Section 406(a) of ERISA generally prevent ERISA plans from entering, directly or indirectly, into any investment or other business transaction with a counterparty that is a “party-in-interest” to the plan. Similar restrictions are set forth under Section 4975 of the Internal Revenue Code with respect to dealings with “disqualified persons” to tax-qualified retirement plans and IRAs. Parties-in-interest and disqualified persons are similarly defined and broad terms, which encompass not only plan sponsors and fiduciaries, but also nonfiduciary service providers and certain other parties having relationships with plans and IRAs, as well as the respective affiliates of these various parties. The policy concern underlying these prohibitions, which the DOL has emphasized throughout its rulemaking process, is that the decisions of plan and IRA fiduciaries could be tainted by undue influence when dealing with counterparties having the types of relationships that make them parties-in-interest and/or disqualified persons.

Owing to the breadth of the “party-in-interest / disqualified person” definitions (as well as increased affiliations and consolidation within the financial services industry), it is a practical necessity to provide exemptive relief from these broad prohibitions, in order to permit investment and investment-related transactions to proceed in ordinary course through the marketplace. The fundamental concept of PTCE 84-14, which was first established in 1984 and updated most recently in 2010, is that certain “qualified professional asset managers” should be able to effectively represent the best interests of plans and IRAs as independent discretionary fiduciaries, under circumstances in which other fiduciaries (such as plan sponsors or IRA owners) might be more susceptible to undue influence. RIAs and other firms who satisfy the QPAM requirements can rely on PTCE 84-14 when managing plan/IRA assets directly or indirectly through “plan assets” vehicles, subject to a handful of other requirements and safeguards. For example but not limitation, firms relying on the QPAM Exemption are required to acknowledge their fiduciary status in a written management agreement and have a sufficiently diverse clientele, and certain restrictions are likewise imposed at the level of individual transactions and the specific parties-in-interest / disqualified persons with whom they can deal. 

It should also be noted that the QPAM Exemption does not generally provide relief for fiduciary “self-dealing” transactions — i.e., situations in which the QPAM itself has an economic conflict of interest.

While the QPAM Exemption is not the only exemption that permits investment-related dealings between plans/IRAs on one hand and parties-in-interest / disqualified persons on the other (alternative exemptions are available in certain cases, and in others — for example, securities lending — it is specifically required that other exemptions be utilized), it is nonetheless the preferred exemption in most cases for asset managers and counterparties alike, owing to its flexibility across many types of transactions and counterparty relationships, and its relative administrative ease. 

In July 2022, the DOL proposed a number of changes to the QPAM Exemption, certain of which were met with significant pushback from the industry. Among others, concerns were expressed that certain aspects of the proposal would have imposed unclear and possibly unworkable standards on asset managers in practice. Feedback was provided to the DOL through both a public hearing and multiple comment periods, during which about 200 comment letters were submitted. While the new, finalized version of PTCE 84-14 contains a number of important clarifications and significant improvements from the July 2022 proposal, there remain some ambiguities that may prove challenging to navigate in certain cases. Likewise, it imposes some new and amended requirements that will affect asset managers more generally. 

Below is a more detailed summary of those changes that we regard as likely being the most impactful. 

Expanded QPAM Ineligibility Provisions

In its public-facing documents, the change most emphasized by the DOL is the expansion of circumstances under which a firm can lose its eligibility to act as a QPAM, due to certain criminal matters or other misconduct. Under the currently applicable version of PTCE 84-14, QPAM eligibility is lost if the QPAM itself, or any affiliate or 5% direct or indirect owner of the QPAM, has been convicted or released from prison during the previous 10 years as a result of certain criminal acts. They include (but are not limited to) certain felonies relating to employee benefit plans; labor unions; any business as a broker, investment adviser, bank, insurance company or fiduciary; and a number of other offenses involving theft, fraud or certain other forms of financial misconduct. In the new, final version to be applicable starting June 17 of this year, eligibility to act as a QPAM would also be lost for 10 years due to:

1. A conviction in a foreign country, or release from imprisonment, for an offense that is “substantially equivalent” to an already-listed offense under U.S. or state law; or
2. Participation in “Prohibited Misconduct,” a newly defined category that includes (paraphrasing):

• entering into a nonprosecution or deferred prosecution agreement with certain federal or state prosecutors or regulators with respect to an already-listed offense under U.S. or state law, or
• a final court finding (or settlement) in a proceeding brought by a federal or state prosecutor or regulator that the QPAM has engaged in a systematic pattern or practice of violating the exemption’s conditions, intentionally engaged in conduct that violates the exemption’s conditions, or provided materially misleading information to the prosecutor or regulator in connection with the exemption’s conditions.

It should be reiterated that QPAM status can be lost through a violation not just by the QPAM itself, but also its affiliates and 5% owners. If this occurs, the investment manager may wish to seek an individual exemption from the DOL allowing it to continue to act as a QPAM despite the conviction or “Prohibited Misconduct.” Many of the individual exemptions recently issued by the DOL have been granted to investment managers under these circumstances, owing to misconduct by foreign affiliates.

Finally, if a firm loses its ability to act as a QPAM, a one-year transition period applies, during which otherwise prohibited transactions will still be exempted, in order to mitigate potential costs and disruption to plans and IRAs. If this occurs, the investment manager must provide email notice to the DOL, and notice to each of its plan/IRA clients. The notice must inform such clients that, during the transition period, the firm (subject to certain exceptions):

• will not restrict plans’ ability to terminate their relationships with the investment manager, 
• will not impose fees or penalties for withdrawal, with certain exceptions,
• will broadly indemnify such clients for certain resulting financial damages, and 
• will refrain from knowingly employing or engaging with any individual whose conduct was the basis for the criminal conviction or Prohibited Misconduct. 

One change from the July 2022 proposal is that clients need only receive the above assurances if QPAM eligibility is lost; under the proposal these types of requirements would have to have been set forth previously in case eligibility were lost at some point in the future, which would have required amendments to thousands of investment management agreements and fund documents. 

Degree of Independence/Control Required

While the expanded circumstances under which QPAM eligibility may be lost is the change that has received the most attention in the press, the DOL’s “clarification” as to the required degree of independence and control is another that may affect asset managers in certain circumstances.

Under the currently applicable version of PTCE 84-14, it is required that the terms of the transaction be negotiated either by the QPAM, or under the “authority and general direction” of the QPAM. And it generally must be the QPAM that makes the decision to enter into the transaction. The July 2022 proposed amendment included additional language, stating that any transaction would have to be the sole responsibility of the QPAM, and that this requirement would fail in any case when a party-in-interest / disqualified person planned, negotiated or initiated the transaction. This additional language appeared to have been included largely to address concerns about using professional asset managers to rubber-stamp previously negotiated transactions, a practice sometimes referred to as “renting” a QPAM. Under the final amendment, the DOL added more clarifying language — it reads in relevant part:

In exercising its authority, the QPAM must ensure that any transaction, commitment, or investment of fund assets for which it is responsible [is] based on its own independent exercise of fiduciary judgment and free from any bias in favor of the interests of the Plan sponsor or other parties in interest. The QPAM may not be appointed or relied upon to uncritically approve transactions, commitments, or investments negotiated, proposed, or approved by the Plan sponsor, or other parties in interest (emphasis added)

…

No relief is provided under this exemption for any transaction that has been planned, negotiated, or initiated by a Party in Interest, in whole or in part, and presented to a QPAM for approval to the extent the QPAM would not have sole responsibility with respect to the transaction… (emphasis added).

While this clarification is helpful, the final amendment continues to restrict the planning, negotiation and initiation of transactions by parties-in-interest, which may create practical questions and challenges in certain contexts. For example, certain asset managers may retain the ultimate decision-making authority with respect to “plan assets” transactions but rely upon sub-advisers with particular expertise. Without limitation, this is a common model for CITs, when the bank trustee is generally the discretionary fiduciary but sub-advisers are utilized for particular strategies and asset classes. In its preamble commentary, the DOL addresses concerns about these types of models by stating that delegation to sub-advisers is not problematic in and of itself, but goes on to say that:

A QPAM should not “more readily” rely on a sub-adviser that has specialized expertise, in order to engage in a particular transaction, if the reliance means that the QPAM would not have sole authority with respect to planning, negotiating, and initiating the transaction.

While the exact standard is not set forth in objective terms, on its face this passage could be read to imply that sub-advisers should not be afforded particular deference, and that CIT trustees and other QPAMs utilizing sub-advisers may be expected to observe a more deliberative internal decision-making process than might be assumed in certain cases.

Even more broadly, many investment-related transactions will involve an offering from a counterparty, or some manner of “sales pitch” or similar interaction. Similar to the above, the preamble commentary makes clear that the final exemption can still be relied upon in such cases (if not, this would significantly impair its practical use), but goes on to caution that:

The Department notes that whether a particular sales pitch or an offer of an investment product from a Party in Interest would run afoul of the intent of [the exemption conditions relating to QPAM independence and control] depends on the associated facts and circumstances. …QPAMs should interpret the protective nature of [such exemption conditions] expansively and avoid responding to any sales pitch or offer with respect to a proposed transaction that would call into question whether the QPAM is ultimately solely responsible for planning, negotiating, and initiating the transaction (emphases added).

It is clear from its preamble commentary that the DOL views the QPAM independence/control provision as a principles-based requirement, noting that the types of “facts and circumstances” above cannot be practically reduced to a workable, objective test. Owing to the lack of specific, objective standards in this regard, asset managers who are concerned about these provisions should consult with legal counsel.

Size / Assets Under Management (AUM) Thresholds

In order to help ensure that any firm relying upon PTCE 84-14 can be relied upon to act as an independent fiduciary free from undue influence, a QPAM must exceed certain minimum thresholds relating to its capitalization or size. QPAMs that are RIAs must also exceed a minimum threshold of “total client assets under management and control” (i.e., assets under management) which is measured as of the last day of their most recent fiscal year, and a minimum threshold for shareholders’ or partners’ equity which is measured as of the firm’s most recent balance sheet prepared under GAAP within the prior two years.

Under the newly finalized exemption, the above thresholds will be increased in accordance with the Consumer Price Index (CPI), with the initial increases being phased in over a “six-plus” year period, as follows:

Under the July 2022 proposal, increases to the above thresholds would have been implemented all at once. The “phased” implementation is intended to minimize the immediate impact on smaller firms, although there will still be RIAs and others that will lose their ability to rely on the QPAM Exemption as a result.

In addition, the exemption indicates that the DOL will continue to make subsequent annual CPI adjustments to these thresholds no later than each January 31, to be effective as of the fiscal year ending no later than December 31 of the same calendar year. This will be another variable that firms close to the applicable threshold(s) will need to monitor.

Recordkeeping

Similar to a number of other exemptions, the amended QPAM Exemption imposes a requirement to maintain records demonstrating compliance with its conditions for six years, with relief provided when records are lost or destroyed due to circumstances outside the QPAM’s control. Such records must be maintained in an accessible format and reasonably available at the QPAM’s customary location during normal business hours, and may be inspected not only by the IRS and DOL, but also other regulators, plan fiduciaries, employers, unions, plan participants and IRA owners (in each case solely with respect to their own investments, with exceptions for trade secrets and other privileged information). If information requested by one of these parties is not provided (other than when it is exempt from disclosure) a notice must be provided to the party describing the reasons for nondisclosure, and explaining that the DOL may request the information.

As to scope, the preamble commentary indicates the DOL’s belief that most firms already maintain financial records, such that this requirement should not impose an additional material burden. It also clarifies that, while the need to maintain transaction-by-transaction records will depend on facts and circumstances, generally speaking:

Given the large number and variety of transactions entered into in reliance on the QPAM Exemption, the Department did not intend for this provision to require transaction-by-transaction recordkeeping. Rather, the condition is focused on requiring the QPAM to retain records satisfactory to prove compliance with the applicable conditions for any section of the exemption the QPAM relied upon, such as satisfying the definition of QPAM, and records supporting the limitation on the involvement of Parties in Interest in investment transactions.

While the DOL expects that the recordkeeping requirement will not create substantial financial burdens, concern has been expressed that the “accessibility” provisions may be used to demand the disclosure of information for purposes of litigation against the QPAM.

Email Notification to the DOL

Any firm relying on PTCE 84-14 will be required to notify the DOL via email within 90 days and must provide the legal name of the business entity relying on the exemption and any other name it may be operating under. This email notification must be sent to QPAM@dol.gov, and will be required only once unless the QPAM changes its legal name or any operating name, in which case notice must again be furnished within 90 days. For an inadvertent failure to provide a required notice during the applicable 90-day period, an additional 90-day grace period is provided, during which the missed notice can be provided along with an explanation for the prior notice failure. If this process is completed within the additional 90-day period, the QPAM will not lose its ability to rely upon the exemption.

These email notifications should not be particularly complicated or burdensome, but a failure to provide one — for example due to inadvertence following a name change — is an example of a seemingly minor misstep that could have significant consequences.

In Closing

Both the new final version of PTCE 84-14 and the currently applicable version contain a number of technical requirements and nuances, and the above is not intended to be an exhaustive discussion of either one. Asset managers who may be affected by these changes, or who otherwise have questions about QPAM compliance, are encouraged to contact legal counsel. In some cases — for example, smaller firms who may not exceed the increased AUM and/or size requirements for QPAMs — it may be necessary to consider other exemptive relief or make other changes. Firms who lose their eligibility to utilize PTCE 84-14 due to a criminal matter or other “Prohibited Misconduct” (including by an affiliate or 5% owner) on or after June 17, 2024, may need to consider applying for an individual exemption.

Finally, it should be noted that this article addresses only the “General Exemption” set forth under Section I of PTCE 84-14, which is relied upon by the financial services industry at-large with respect to general dealings in the marketplace. It does not address the special requirements imposed under certain other sections of PTCE 84-14, including the limited relief provided for dealings with counterparties who are plan sponsors, or the requirements that apply for QPAM-sponsored plans.