U.S. Department of Labor Publishes Final Amendment to the Qualified Professional Asset Manager (QPAM) Exemption

On April 3, 2024, the U.S. Department of Labor (DOL) published a final amendment (the Amendment) to Prohibited Transaction Class Exemption 84-14 (the Exemption), which will become effective June 17, 2024.

The Exemption is frequently relied on by professional managers of pooled funds or accounts that constitute “plan assets” under the Employee Retirement Income Security Act of 1974 as amended (ERISA) and that are subject to the prohibited transaction rules under ERISA and Section 4975 of the Internal Revenue Code. Absent an exemption, the prohibited transaction rules prohibit any transaction between a manager using “plan assets” and certain parties related to the underlying plans and accounts (referred to as parties in interest).

The Exemption allows managers that meet the requirements to qualify as a “qualified professional asset manager,” or QPAM, to engage in certain investment transactions that would otherwise violate the prohibited transaction rules, without being in violation of such rules.

The Amendment makes some significant changes to the Exemption, including the following.

Requirement to Provide Notice

• Current Requirement: QPAMs do not need to notify the DOL that they are relying on the Exemption.
• New Requirement: The Amendment requires a QPAM to submit a one-time email notice to the DOL setting forth the legal and operating name(s) of the QPAM. The email notice must be sent to the DOL at QPAM@dol.gov within 90 days of the QPAM’s reliance on the Exemption. For a QPAM that is relying on the Exemption as of the effective date of the Amendment, this email must be sent no later than September 15, 2024.
  • If needed, there is generally an additional 90-day period to cure inadvertent failures to report. If, at the end of the 180 days, a QPAM still has failed to report or has not provided the required explanation for why it has failed to provide timely notice, the Exemption will not be available for transactions that occur until the failure is fully cured.
  • A QPAM must provide an updated notice to the DOL if there is a change to a legal or operating name for such QPAM or the QPAM is no longer relying on the exemption.
  • The DOL intends to maintain a current list of entities relying on the Exemption on its website. 

Changes in Amounts of Equity and Client Assets Under Management (AUM) Required for QPAM Status

• Current Requirement: The Exemption currently contains certain net capital and AUM requirements for QPAMs, which vary depending on the type of entity acting as the manager. For a registered investment adviser, the current requirements are
  • AUM in excess of $85 million
  • shareholders’ or partners’ equity (Equity) in excess of $1 million  
• New Requirement: The Amendment increases the AUM and Equity thresholds in 2024, 2027, and 2030, as described below. A QPAM will be required to satisfy the increased thresholds effective as of the last day of the QPAM’s fiscal year ending in the year during which the increase takes effect. For registered investment advisers, the thresholds are increased as follows:
  • effective for the fiscal year ending no later than December 31, 2024: 
    • AUM: $101,956,000 
    • Equity: $1,346,000
  • effective for fiscal years ending no later than December 31, 2027:  
    • AUM: $118,912,000 
    • Equity: $1,694,000
  • effective for fiscal years ending December 31, 2030:  
    • AUM: $135,868,000 
    • Equity: $2,040,000 

The Amendment also states that the DOL will make subsequent annual adjustments for inflation to the AUM and Equity thresholds no later than January 31 of each year (rounded to the nearest $10,000). It appears these adjustments will commence for years after 2030, although the Amendment is somewhat ambiguous on this point.

Requirements Regarding a QPAM’s Authority Over Investment Decisions

• Current Requirement: The Exemption covers transactions that are negotiated under the authority and general direction of a QPAM.
• Clarification: The Amendment clarifies that the QPAM must not “act as a mere independent approver of transactions.” Instead, the QPAM must have and exercise sole discretion over the investments of plan assets and the related negotiations on behalf of the plan. Specifically, a manager may not be appointed to “uncritically approve transactions, commitments, or investments negotiated, proposed, or approved by the plan sponsor, or other party in interest.”

Recordkeeping Requirement

• Current Requirement: The Exemption does not currently include specific requirements that a QPAM maintain records demonstrating compliance with the Exemption.
• New Requirement: The Amendment requires that QPAMs maintain records for six years, beginning as of the date of a transaction with respect to which the QPAM relied on the Exemption, demonstrating compliance with the Exemption. Those records must be available for examination by the DOL, plan fiduciaries, and plan participants, among others. The DOL clarified that the records requirement does not require a QPAM to maintain records for each transaction but, instead, requires the QPAM to maintain records demonstrating that it complies with the conditions of the Exemption, such as satisfying the definition of QPAM. If a QPAM fails to maintain the necessary records for a transaction, the QPAM will lose the exemptive relief for such transaction.

Significant Expansion of Disqualifying Provisions for Certain Criminal Convictions and Prohibited Misconduct

• Current Requirement: A QPAM cannot rely on the Exemption during the 10-year period following the later of the date on which the QPAM (or certain of its affiliates) is convicted of, or the date on which it is released from imprisonment with respect to, certain specified crimes.
• New Requirement — Criminal Convictions: The Amendment expands the circumstances in which a QPAM could be disqualified for criminal convictions. Under the Amendment, a QPAM cannot rely on the Exemption during the 10-year period following the later of the date on which the QPAM (or certain of its affiliates) is convicted of, or the date on which it is released from imprisonment with respect to, any of the following.
  • Domestic Crimes
    • any felony involving abuse or misuse of such person’s employee benefit plan position or employment, or position or employment with a labor organization
    • any felony arising out of the conduct of the business of a broker, dealer, investment adviser, bank, insurance company, or fiduciary
    • income tax evasion
    • any felony involving the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities
    • conspiracy or attempt to commit any such crimes
    • any crime that is identified or described in ERISA Section 411

• Foreign Crimes
  • any conviction by a foreign court of competent jurisdiction as a result of a substantially equivalent offense to the offenses listed above under “Domestic Crimes” (excluding convictions or imprisonments in countries that are listed on the foreign adversary list maintained by the Department of Commerce)

• New Requirement — Prohibited Misconduct: The Amendment adds new disqualifications and reporting obligations for “prohibited misconduct.”
  • Domestic Prohibited Misconduct: A QPAM cannot rely on the Exemption during the 10-year period following the later of the date on which the QPAM (or certain of its affiliates)
    • enters into a nonprosecution agreement (NPA) or deferred prosecution agreement (DPA) where the alleged activity, if successfully prosecuted, would have constituted a domestic crime described above;
    • is found or determined in a final judgment or court-approved settlement by a federal or state criminal or civil court of violating or engaging in a systematic pattern or practice of violating the Exemption; or
    • provided materially misleading information to the DOL or certain other governmental regulatory bodies in connection with the conditions of the Exemption.
  • Foreign Prohibited Misconduct: QPAM disqualification does not occur automatically as a result of the execution by the QPAM or certain of its affiliates of the foreign equivalent of a NPA or DPA. Instead, this event requires the QPAM to notify the DOL and describe the prohibited misconduct. Notice of such foreign prohibited misconduct is due to the DOL (by emailing QPAM@dol.gov) within 30 calendar days of the date the applicable agreement is executed.

• New Requirement — One-Year Transition Period After Criminal Misconduct or Domestic Prohibited Misconduct: Historically, plans have informed the DOL that the sudden loss of exemptive relief under the Exemption by a related QPAM due to a criminal conviction is disruptive to plans. Consequently, the DOL has granted several one-year temporary individual exemptions to QPAMs facing ineligibility. Under the final rule, if the QPAM is disqualified, the QPAM enters a one-year transition period and can continue to execute new and old transactions for the plan if the QPAM meets the associated conditions. This period will permit the QPAM to request an individual prohibited transaction exemption for future periods.
• New Requirement — Indemnification: If a QPAM is disqualified as described above, the QPAM must indemnify the plan for “actual losses” suffered by each plan for any damages directly resulting out of the failure of such QPAM to remain eligible for relief under the Exemption (including costs associated with the transition to a new QPAM).

Knowledge management lawyer Katie Dean contributed to this Sidley Update.