The Department of Labor (DOL) recently proposed significant changes to a key ERISA prohibited transaction exemption widely used by asset managers for nearly four decades. The exemption allows qualified professional asset managers (QPAMs) to engage in many routine transactions that ERISA would otherwise prohibit. The proposal’s changes to new and existing QPAM relationships might prove disruptive and increase costs for plan sponsors. For example, sponsors would have to take speedy action to maintain their existing QPAM relationships by amending their contracts to add new required provisions within 60 days. These provisions — which include a requirement that QPAMs reimburse plans for certain losses — might increase the cost of asset-management services. A separate provision clarifying that the exemption applies only to investment decisions that are the QPAM’s sole responsibility might limit the investment opportunities available to plans. Comments are due by Oct. 11.
ERISA prohibits plan fiduciaries from engaging in transactions with a broad array of parties in interest — including employers, fiduciaries and service providers — unless a statutory or administrative exemption applies. In 1984, DOL granted a class exemption for QPAMs, allowing them to perform a wide range of transactions for ERISA plans, subject to certain conditions. While other ERISA exemptions may cover some of these transactions, the asset-management industry has come to rely heavily on the QPAM exemption because it provides a single set of uniform conditions that streamline compliance.
The proposal seeks to reflect the consolidation and increasingly global reach of the financial services industry in the nearly 40 years since DOL issued the QPAM exemption. The proposal also draws on DOL’s experience considering individual exemptions for QPAMs that became ineligible for the exemption due to criminal convictions: The exemption currently provides that if an asset manager — or one of its affiliates or controlling persons — is convicted of any of a number of criminal violations, the manager immediately loses its ability to rely on the QPAM exemption for 10 years from the conviction date.
DOL has made various changes to the QPAM exemption over the years, but none has been as significant as this new proposal, which would:
The remainder of this article highlights aspects of the proposal of most interest to plan sponsors.
A QPAM’s written management agreement with plan clients would have to include certain required contractual terms to address future ineligibility. Because the proposal doesn’t provide a transition period for existing agreements, plan sponsors and QPAMs would have only 60 days after publication of the final exemption to add these provisions. Plan sponsors that have dozens of management agreements with various QPAMs may find it challenging to complete the required updates in such a short time frame. The agreement would have to include these features:
DOL proposes requiring a QPAM to implement a one-year winding-down period starting on the date the QPAM becomes ineligible. DOL says the new winding-down period would mitigate the cost and disruption to plans and provide fiduciaries time to consider whether to engage a new asset manager. Failure to comply with this condition could mean the exemption becomes retroactively unavailable for prior transactions entered into before the ineligibility date.
The exemption currently covers transactions negotiated by the QPAM or under the QPAM’s authority and general direction. Perceiving some ambiguity in the current exemption, DOL included language in the proposal “to make clear that a QPAM must not permit other parties in interest to make decisions regarding Plan investments under the QPAM’s control.” DOL says a QPAM must have and exercise discretion over plan investment decisions and can’t simply be an independent approver of transactions.
The proposal would require the terms of the transaction, as well as “commitments, investment of plan assets, and any corresponding negotiations,” to be the QPAM’s sole responsibility. DOL also proposes to exclude “any transaction … planned, negotiated, or initiated by a Party in Interest, in whole or in part.” The agency says these changes align with its original intent in 1984 when first granting the exemption.
As written, these new provisions might raise broader questions about the scope of the exemption. A wide variety of routine investment transactions could involve nonemployer parties in interest pitching potential investment opportunities to a QPAM for consideration. Would DOL view these transactions as initiated by a party in interest, so the QPAM exemption wouldn’t be available? If so, plans could lose out on a range of favorable investment opportunities.
The agency also notes that the exemption wouldn’t cover transactions between a plan and its sponsor, even if a QPAM makes the ultimate determination. This restriction could cast doubt on an independent fiduciary’s ability to rely on the exemption in some situations.
DOL requests comments on all aspects of the proposal, including the appropriateness of the one-year timeline for the winding-down period. DOL also is interested in whether it should consider additional protections for plan participants and beneficiaries. Comments originally were due Sept. 26, but DOL has extended the deadline to Oct. 11 and announced public hearings for Nov. 17 and 18.