The US Department of Labor (DOL) final amendment to Prohibited Transaction Class Exemption 84-14, the so-called QPAM Exemption that is commonly relied upon by investment managers for ERISA-governed employee benefit plans and individual retirement accounts to avoid potential prohibited transaction issues, was published in the Federal Register on April 3, with the changes becoming effective on June 17, 2024.
The key changes to the exemption are as follows:
- QPAM “Registration” Requirement: Amended Section I(k) requires every manager seeking to rely on the exemption to notify the DOL that it intends to do so by email. Notice must be provided within 90 calendar days of the manager’s reliance and within 90 days of any change to the manager’s legal or operating name. A 90-day cure period is available for a manager that fails to provide the required notification. If the manager fails to report within 180 days or fails to provide an explanation for why it failed to provide timely notice during the 90-day cure period, the exemption will not be available until the failure is cured (i.e., until the manager notifies the DOL of its intent to rely on the exemption). QPAMs’ names will be publicly available on a DOL website. While not specifically stated in the final amendment notice, managers that currently rely on the exemption may wish to provide the Section I(k) notice by the June 17, 2024 effective date of the changes to avoid any question of the exemption’s continued availability.
- Note: See Morgan Lewis’s template Section I(k) notice and internal QPAM tracking worksheet.
- Crimes/Prohibited Misconduct Ineligibility: The final amendment clarifies and expands the provisions under which a firm would become ineligible to use the QPAM Exemption as a result of the firm itself, or an affiliate, having been convicted of certain crimes or having engaged in certain other specified misconduct. The key changes are as follows:
- Clarify that non-US criminal convictions are covered (excluding, in response to comments, convictions, and imprisonment in a country included on the US Department of Commerce’s list of “foreign adversaries,” as updated from time to time).
- Add a category of “prohibited misconduct,” which includes entering into a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA) with a US federal or state prosecutor’s office or regulatory agency based on factual allegations that would (if successfully prosecuted) have constituted a criminal conviction rendering the firm ineligible, as well as a final judgment or court-approved settlements in a regulatory or criminal proceeding that includes a finding of engagement in certain categories of misconduct related to prohibited transactions or violation of the conditions of the QPAM Exemption. The final amendment makes clear that any matters falling within this new category lead to ineligibility on a prospective-only basis, and thus only if, for example, the NPA or DPA is executed, or the date of the court judgment or settlement falls, on or after the June 17, 2024 effective date.
- Note: There are likely to be many interpretive questions regarding the types of factual allegations that could trigger disqualification under this provision. Firms will want to carefully consider the potential impact of entering into an NPA or DPA, or court-approved settlements raising the types of issues described in the final amendment, on the availability of the exemption on a case-by-case basis.
While a number of comments asked the DOL to limit the types of conduct that could trigger ineligibility, the DOL said such issues are addressed by providing, under the final amendment, not for immediate ineligibility but for (1) a one-year transition period to permit an orderly transition of the firm’s clients to other managers and (2) an opportunity to apply to the DOL for an individual exemption to continue to use the QPAM Exemption despite the criminal conviction or other misconduct, both subject to a number of conditions and restrictions.
- “Sole Authority/Responsibility” Provision: The proposal would have added general language requiring that the terms of transactions and any associated negotiations be the “sole responsibility of the QPAM,” and further indicated that relief would not be available where any party in interest had “planned, negotiated, or initiated” a transaction, “in whole or in part,” raising a number of questions on how routine market activities and interactions would be affected, as well as the ability of a plan sponsor to monitor an appointed investment manager. The final amendment moderates this language by focusing more specifically on the DOL’s concern that a QPAM not be appointed or relied upon to approve transactions negotiated, proposed, or approved by other parties such that the QPAM is not exercising its own independent judgment. There may still be interpretive questions around what it means for the QPAM to retain “sole authority” or “sole responsibility” for transactions in particular circumstances, but the preamble makes clear that this is intended to be a more flexible standard than suggested by the wording in the proposal.
- Increase in AUM and Equity Thresholds Under the QPAM Definition: The levels of assets under management and owners’ equity required for a firm to qualify as a QPAM were last adjusted in 2005. The final amendment would raise the minimum owners’ equity threshold in phases between 2025 and 2031 from the current $1 million to $2.72 million (or $2.04 million for registered investment advisers), and the minimum assets under management threshold for registered investment advisers from the current $85 million to $135.9 million. Thereafter, the DOL has the authority to make annual adjustments to these thresholds for inflation, to be declared no later than January 31 of each year to take effect as of the last day of the firm’s fiscal year.
- Recordkeeping Requirements. The final amendment adds a recordkeeping requirement to the exemption.
The preamble to the final amendment provides a fairly detailed explanation of the changes and the DOL’s reason for these changes, addressing a number of issues raised in particular with regard to the crimes/prohibited misconduct ineligibility provisions.
Please let us know if we can assist in analyzing the impact of these changes.