Proposed Rule2022-15702
Proposed Amendment to Prohibited Transaction Class Exemption 84-14 (the QPAM Exemption)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 27, 2022
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document gives notice of a proposed amendment to prohibited transaction class exemption 84-14 (the QPAM Exemption). The QPAM Exemption provides relief from certain prohibited transaction restrictions of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and Title II of ERISA, as codified in the Internal Revenue Code of 1986, as amended (the Code).
Full Text
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<title>Federal Register, Volume 87 Issue 143 (Wednesday, July 27, 2022)</title>
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[Federal Register Volume 87, Number 143 (Wednesday, July 27, 2022)]
[Proposed Rules]
[Pages 45204-45232]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15702]
[[Page 45203]]
Vol. 87
Wednesday,
No. 143
July 27, 2022
Part III
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Proposed Amendment to Prohibited Transaction Class Exemption 84-14 (the
QPAM Exemption); Proposed Rule
Federal Register / Vol. 87 , No. 143 / Wednesday, July 27, 2022 /
Proposed Rules
[[Page 45204]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12022]
Z-RIN 1210 ZA07
Proposed Amendment to Prohibited Transaction Class Exemption 84-
14 (the QPAM Exemption)
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Notice of proposed amendment to class exemption.
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SUMMARY: This document gives notice of a proposed amendment to
prohibited transaction class exemption 84-14 (the QPAM Exemption). The
QPAM Exemption provides relief from certain prohibited transaction
restrictions of Title I of the Employee Retirement Income Security Act
of 1974, as amended (ERISA) and Title II of ERISA, as codified in the
Internal Revenue Code of 1986, as amended (the Code).
DATES: Written comments and requests for a public hearing on the
proposed amendment to the class exemption must be submitted to the
Department within September 26, 2022. The Department proposes that the
amendment, if granted, will be effective 60 days after the date of
publication of the final amendment in the Federal Register.
ADDRESSES: All written comments and requests for a hearing concerning
the proposed amendment to the class exemption should be sent to the
Office of Exemption Determinations through the Federal eRulemaking
Portal and identified by Application No. D-12022:
Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a> at Docket ID
number: EBSA-2022-0008. Follow the instructions for submitting
comments.
See SUPPLEMENTARY INFORMATION below for additional information
regarding comments.
FOR FURTHER INFORMATION CONTACT: Erin Scott Hesse, telephone (202) 693-
8546, Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor (this is not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Comment Instructions
All comments and requests for a hearing must be received by the end
of the comment period. Requests for a hearing must state the issues to
be addressed and include a general description of the evidence to be
presented at the hearing. In light of the current circumstances
surrounding the COVID-19 pandemic, persons are encouraged to submit all
comments electronically and not to submit paper copies. The comments
and hearing requests may be available for public inspection in the
Public Disclosure Room of the Employee Benefits Security
Administration, U.S. Department of Labor, Room N-1513, 200 Constitution
Avenue NW, Washington, DC 20210; however, the Public Disclosure Room
may be closed for all or a portion of the comment period due to
circumstances surrounding the COVID-19 pandemic. Comments and hearing
requests will also be available online at <a href="http://www.regulations.gov">http://www.regulations.gov</a>,
at Docket ID number: EBSA-2022-0008 and <a href="http://www.dol.gov/ebsa">http://www.dol.gov/ebsa</a>, at no
charge.
Warning: All comments received will be included in the public
record without change and will be made available online at <a href="http://www.regulations.gov">http://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information, but DO NOT submit information that you consider to
be confidential, or otherwise protected (such as Social Security number
or unlisted phone number), or confidential business information that
you do not want publicly disclosed. However, if EBSA cannot read your
comment due to technical difficulties and cannot contact you for
clarification, EBSA might not be able to consider your comment.
Additionally, the <a href="http://www.regulations.gov">http://www.regulations.gov</a> website is an ``anonymous
access'' system, which means EBSA will not know your identity or
contact information unless you provide it.
Background
Title I of the Employee Retirement Income Security Act of 1974, as
amended (ERISA), broadly prohibits transactions between plans and
``parties in interest''--in general, people or entities closely
connected to the plans. Title II of ERISA, codified in the Internal
Revenue Code, as amended (the Code), includes parallel prohibitions
applicable to tax-qualified plans \1\ and ``disqualified persons.''
Absent an exemption, ERISA section 406(a)(1)(A) through (D) and Code
section 4975(c)(1)(A) through (D) prohibit, among other things, sales,
leases, loans, and the provision of services between these parties.
Congress enacted these prohibitions to protect plans, their
participants and beneficiaries (including beneficiaries of IRAs), and
IRA owners \2\ from the potential for abuse that arises when plans and
IRAs engage in transactions with closely connected parties. Title I of
ERISA and the Code include statutory exemptions from the prohibited
transaction provisions, and the Department has authority to grant
additional administrative prohibited transaction exemptions on an
individual or class basis under ERISA section 408(a) and Code section
4975(c)(2).\3\ Before granting an administrative exemption, these
provisions require the Secretary of Labor to find that the exemption
is: (i) administratively feasible, (ii) in the interests of the plans
and their participants and beneficiaries and IRA owners, and (iii)
protective of the rights of plan participants and beneficiaries and IRA
owners.
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\1\ These include employee benefit plans as well as individual
retirement accounts and individual retirement annuities (together,
IRAs).
\2\ For purposes of this proposed exemption, the term ``IRA
owner'' refers to the individual for whom an IRA (as defined in the
proposed exemption) is established.
\3\ Effective December 31, 1978, section 102 of Reorganization
Plan No. 4 of 1978, 5 U.S.C. App. (2018), transferred the authority
of the Secretary of the Treasury to issue exemptions of the type
proposed to the Secretary of Labor. Therefore, this notice of
proposed amendment to the QPAM Exemption is issued solely by the
Department.
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The QPAM Exemption permits an investment fund \4\ holding assets of
plans and IRAs that is managed by a ``qualified professional asset
manager'' (QPAM) to engage in transactions with ``parties in interest''
or ``disqualified persons'' to a plan or an IRA, subject to protective
conditions. The proposed amendment would modify Section I(g) of the
exemption, a provision under which a QPAM may become ineligible to rely
on the QPAM Exemption for a period of 10 years if the QPAM, various
affiliates, or five percent or more owners of the QPAM are convicted of
certain crimes. The proposed amendment would: (1) require a one-time
notice to the Department that a QPAM is relying upon the exemption, (2)
require up-front terms in a written management agreement that apply in
the event of ineligibility, (3) update the list of crimes in current
Section I(g) to explicitly include foreign crimes that are
substantially equivalent to the listed
[[Page 45205]]
crimes, (4) expand the circumstances that may lead to ineligibility,
and (5) provide a one-year winding-down period to help plans and IRAs
avoid or minimize possible negative impacts of terminating or switching
QPAMs or adjusting asset management arrangements when a QPAM becomes
ineligible. The proposed amendment would also: (1) provide clarifying
updates to Section I(c) regarding a QPAM's authority over investment
decisions, (2) adjust the asset management and equity thresholds in the
QPAM definition in Section VI(a), and (3) add a new recordkeeping
provision in Section VI(t). The amendment would affect participants and
beneficiaries of plans, owners of IRAs, the sponsoring employers of
such plans or IRAs (if applicable), QPAMs, and counterparties engaging
in transactions covered under the QPAM Exemption.
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\4\ For purposes of the QPAM Exemption, an investment fund
includes single customer and pooled separate accounts maintained by
an insurance company, individual trusts, and common, collective, or
group trusts maintained by a bank, and any other account or fund
subject to the discretionary authority of the QPAM. See Section
VI(b) of the QPAM Exemption.
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The QPAM Exemption \5\
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\5\ Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers, 49 FR 9494 (Mar.
13, 1984) as corrected at 50 FR 41430 (Oct. 10, 1985), as amended at
66 FR 54541 (Oct. 29, 2001), 70 FR 49305 (Aug. 23, 2005), and 75 FR
38837 (July 6, 2010).
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In 1984, the Department granted the QPAM Exemption to permit an
investment fund managed by a QPAM to engage in a broad range of
transactions with parties in interest with respect to a plan, subject
to protective conditions. All references in the QPAM Exemption to
``plan'' also include a plan described in Code section 4975(e)(1), such
as an IRA.\6\ The reference to ``parties in interest'' includes
``disqualified persons'' under the Code.\7\ Throughout this preamble,
all references to ``Plan'' include IRAs, and all references to
``parties in interest'' include ``disqualified persons.'' \8\
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\6\ See Section VI(n) of the QPAM Exemption.
\7\ See Section VI(f) of the QPAM Exemption.
\8\ Although the Department is using the same definition of
``plan'' in the proposed amendment, the Department is proposing a
ministerial change which will capitalize this term. References
throughout this preamble will therefore use the term ``Plan.''
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The Department developed and granted the QPAM Exemption based on
the premise that its broad exemptive relief from the prohibitions of
ERISA section 406(a)(1)(A) through (D) and Code section 4975(c)(1)(A)
through (D) could be afforded for transactions in which a Plan engages
with a party in interest only if the commitments and investments of
Plan assets and the negotiations leading thereto are the sole
responsibility of an independent investment manager.
Part I of the QPAM Exemption (the General Exemption) provides broad
prohibited transaction relief for a QPAM-managed investment fund to
engage in transactions with parties in interest, but it does not
include relief for the QPAM to engage in any transactions involving its
own self-dealing and conflicts of interest, which are prohibited under
ERISA section 406(b)(1) through (3) and 4975(c)(1)(E) and (F). This
important limitation on the relief in the QPAM Exemption serves as a
key protection for Plans that are affected by the exemption. The QPAM
Exemption also includes conditions designed to ensure that the QPAM
does not engage in transactions with parties in interest that have the
power to influence the QPAM's decision-making processes. Additionally,
QPAMs remain subject to the fiduciary duties of prudence and undivided
loyalty, set forth in ERISA section 404, with respect to their client
Plans.
In proposing the QPAM Exemption, the Department expressly indicated
that any entity acting as a QPAM, and those who are in a position to
influence the QPAM's policies, are expected to maintain a high standard
of integrity.\9\ Accordingly, the exemption includes Section I(g),
which provides that a QPAM is ineligible to rely on the exemption for a
period of 10 years if the QPAM, various affiliates, or five percent or
more owners of the QPAM are convicted of certain crimes. Ineligibility
begins as of the date of the judgment of the trial court, regardless of
whether the judgment remains under appeal.
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\9\ Proposed Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers, 47
FR 56945, 56947 (Dec. 21, 1982) (Proposed QPAM Exemption).
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The Qualified Professional Asset Manager
As noted above, the QPAM Exemption provides relief for various
party in interest transactions involving Plan assets that are
transferred to a QPAM for discretionary management, subject to the
protective conditions in the exemption. A QPAM is defined as a bank,
savings and loan association, insurance company, or a registered
investment adviser that meets specified standards regarding financial
size and acknowledges in a written management agreement that it is a
fiduciary with respect to each Plan that retains it as a QPAM. The
Department noted in the 1982 proposed exemption that these categories
of asset managers are subject to regulation by federal or state
agencies and expressed the view that large financial services
institutions would be able to withstand improper influence from parties
in interest (i.e., maintain independence).\10\ The Department believed,
and continues to believe that, as a general matter, transactions
entered into on behalf of Plans with parties in interest are most
likely to conform to ERISA's general fiduciary standards when the
decision to enter into the transaction is made by an independent
fiduciary.
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\10\ Proposed QPAM Exemption, 47 FR at 56947.
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The QPAM's independence and discretionary control over asset
management decisions protect Plans from the danger that parties in
interest will exercise improper influence over decision-making with
regard to Plan assets. The QPAM acts as a fundamental protection
against the possibility that parties in interest could otherwise favor
their own competing financial interests at the expense of Plans, their
participants and beneficiaries, and IRA owners. Because the Department
relies upon the QPAM as a key protection against such improper conduct
and the threat posed by conflicts of interest, it is critically
important that the QPAM, and those who are in a position to influence
its policies, maintain a high standard of integrity. Under the
exemption, QPAMs must have the authority to make decisions on a
discretionary basis without direct oversight for each transaction by
other Plan fiduciaries. Given the scope of their discretion, it is
imperative that the QPAM, its affiliates, and owners avoid engaging in
criminal conduct and other serious misconduct that would jeopardize
Plan assets or call into question the Department's reliance on their
oversight as a key safeguard for Plan participants and beneficiaries
and IRA owners.
Covered Transactions
The QPAM Exemption consists of four separate parts. The General
Exemption set forth in Part I provides broad exemptive relief for a
fund managed by a QPAM to engage in a wide variety of transactions
described in ERISA section 406(a)(1)(A) through (D) and the
corresponding prohibitions of Code section 4975(c)(1)(A) through (D)
with virtually all parties in interest other than those parties who are
most likely to have the power to influence the QPAM.\11\ The General
Exemption covers
[[Page 45206]]
many different types of transactions. For example, the exemption
provides relief for a QPAM to use fund assets to purchase an asset from
a party in interest to a Plan that is invested in the fund. The General
Exemption also facilitates much more complex transactions, such as when
a QPAM designs a fund to replicate the return of certain commodities
indices by investing in futures, structured notes, total return swaps,
and other derivatives where a party in interest to a Plan that invested
in the fund is involved in the transaction.\12\
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\11\ The QPAM Exemption does not extend to transactions
described in PTE 2006-16 (relating to securities lending
arrangements), PTE 83-1 (relating to acquisitions of interests in
mortgage pools), and PTE 82-7 (relating to certain mortgage
financing arrangements). See Section I(b).
\12\ See, e.g., Notice of Proposed Exemption involving Credit
Suisse AG, 79 FR 52365, 52367 (Sept. 3, 2014).
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As a result of the prohibited transaction relief in the exemption,
the QPAM can streamline its compliance with the prohibited transaction
provisions of Title I of ERISA and the Code. The QPAM will generally
not need to keep and routinely check a list of parties in interest
before engaging in a transaction to avoid inadvertently entering into a
prohibited transaction with potentially hundreds, if not thousands, of
parties in interest. The QPAM also will not have to seek an individual
exemption or, alternatively, forgo investment opportunities that would
be in the interest of Plans invested in the investment fund merely
because a party in interest is involved.
In addition to the General Exemption, the QPAM Exemption also
contains additional ``Specific Exemptions'' in Parts II, III, and IV.
Part II of the exemption provides limited prohibited transaction relief
for certain transactions involving those employers and certain of their
affiliates that could not qualify for the General Exemption in Part I.
Paragraph (a) of Part II provides conditional relief for employers and
their affiliates to furnish limited amounts of goods and services to an
investment fund managed by the QPAM, while paragraph (b) of Part II
permits such employers and their affiliates to lease office or
commercial space from an investment fund managed by the QPAM.
Part III provides relief for an investment fund managed by the QPAM
to lease office or commercial space to the QPAM, an affiliate of the
QPAM, or a person who could not qualify under Part I because the person
holds powers to appoint or terminate a QPAM as a manager of the Plan's
assets as described in subparagraph (a)(1) of Part I of the exemption.
Part IV provides relief for a place of public accommodation owned
by the investment fund to furnish services and facilities to all
parties in interest if the services and facilities are furnished on a
comparable basis to the general public. These specific exemptions
provide relief from the specified portions of ERISA section 406(a) and
406(b) and the parallel provisions of Code section 4975(c)(1).
The QPAM Exemption was amended in 2010 to add a new Part V, which
permits a QPAM to rely upon the prohibited transaction relief in Parts
I, III, or IV to manage an investment fund containing the assets of a
Plan sponsored by the QPAM or an affiliate.\13\ In recognition of the
fact that a QPAM does not have the requisite independence from itself
or an affiliate for these transactions, paragraphs (b) and (c) of Part
V requires the QPAM to adopt written policies and procedures designed
to ensure compliance with the exemption conditions and submit to an
annual independent exemption audit. The audit must address compliance
with the required policies and procedures and the applicable objective
requirements of the relevant parts of the exemption.
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\13\ Amendment to Prohibited Transaction Exemption (PTE) 84-14
for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers, 75 FR 38837 (July 6, 2010). The
``Definitions and General Rules'' were redesignated as Part VI.
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Conditions
The conditions of Part I work to ensure that the QPAM is an
independent decision maker that will not be influenced by parties in
interest closely linked to the Plans that are invested in the QPAM-
managed fund. Section I(a) reflects this intention by generally
excluding transactions with parties in interest that would be able to
appoint or terminate the QPAM or negotiate the terms of the management
agreement with the QPAM.\14\
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\14\ Section I(a) was amended in 2005 to permit transactions
involving parties in interest and disqualified persons with respect
to a Plan if the assets of the Plan managed by the QPAM in the fund,
when combined with the assets of other Plans established by the same
employer or an affiliate and managed in the same fund, represent
less than 10 percent of the assets of the investment fund. 70 FR
49305 (Aug. 23, 2005).
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Section I(c) provides that transactions entered into pursuant to
the exemption must be negotiated by or under the authority and general
direction of the QPAM, and that either the QPAM or (so long as the QPAM
retains full fiduciary responsibility with respect to the transaction)
a property manager acting in accordance with written guidelines and
established and administered by the QPAM, makes the decision on behalf
of the investment fund to enter into the transaction. Further, Section
I(c) provides that the transaction must not be part of an agreement,
arrangement, or understanding designed to benefit a party in interest.
This language is intended to preclude, for example, transactions that
are negotiated by an employer but later presented to the QPAM for
approval.\15\ Section I(d) provides that transactions with the QPAM or
a person ``related'' to the QPAM (within the meaning of Section VI(h)
of the exemption) are excluded from the prohibited transaction relief
offered by the exemption. Section I(e) provides that transactions with
a party in interest with respect to a Plan whose assets make up more
than 20% of the total client assets managed by the QPAM are excluded
from the prohibited transaction relief offered by the exemption.\16\
Section I(f) requires the terms of each transaction to be at least as
favorable to the fund as the terms generally available in an arm's
length transaction between unrelated parties.
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\15\ Proposed QPAM Exemption, 47 FR at 56947.
\16\ For purposes of Section I(e), the Plan's assets are
combined with the assets of other Plans maintained by the same
employer or an affiliate or the same employee organization that are
managed by the QPAM.
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Section I(g) provides for ineligibility under the QPAM Exemption if
the QPAM, various affiliates, or five percent or more owners of the
QPAM are convicted of certain crimes.\17\ Specifically, Section I(g)
currently states:
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\17\ See 75 FR 38837 (July 6, 2010) for the text of the QPAM
Exemption that is in effect unless and until this proposed amendment
is finalized.
Neither the QPAM nor any affiliate thereof (as defined in
section VI(d)), nor any owner, direct or indirect, of a 5 percent or
more interest in the QPAM is a person who within the 10 years
immediately preceding the transaction has been either convicted or
released from imprisonment, whichever is later, as a result of: 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 or a crime in which any of the foregoing
crimes is an element; or any other crime described in section 411 of
ERISA. For purposes of this section (g), a person shall be deemed to
have been ``convicted'' from the date of the judgment of the trial
court, regardless of whether that judgment remains under appeal.\18\
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\18\ ERISA section 411 includes: robbery, bribery, extortion,
embezzlement, fraud, grand larceny, burglary, arson, a felony
violation of Federal or State law involving substances defined in
section 802(6) of title 21, murder, rape, kidnaping, perjury,
assault with intent to kill, any crime described in section 80a-
9(a)(1) of title 15, a violation of any provision of this chapter, a
violation of section 186 of this title, a violation of chapter 63 of
title 18, a violation of section 874, 1027, 1503, 1505, 1506, 1510,
1951, or 1954 of title 18, a violation of the Labor-Management
Reporting and Disclosure Act of 1959 (29 U.S.C. 401), any felony
involving abuse or misuse of such person's position or employment in
a labor organization or employee benefit plan to seek or obtain an
illegal gain at the expense of the members of the labor organization
or the beneficiaries of the employee benefit plan, or conspiracy to
commit any such crimes or attempt to commit any such crimes, or a
crime in which any of the foregoing crimes is an element.
[[Page 45207]]
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The exemption defines ``affiliate'' to include parties in control
relationships with the QPAM; parties for which the QPAM is a five
percent or more partner or owner; directors, relatives, or partners of
the QPAM; and officers and employees who are highly compensated or who
have authority with respect to Plan assets.\19\
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\19\ See Section VI(d).
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Additional conditions are applicable to the specific exemptions set
forth in Parts II through V of the exemption.
Purpose and Approach for the Proposed Amendment
Substantial changes have occurred in the financial services
industry since the Department granted the QPAM Exemption in 1984. These
changes include industry consolidation caused by a variety of factors
and an increasingly global reach for financial services institutions,
both in their affiliations and in their investment strategies,
including those for Plan assets. In the years since 1984, the
Department has repeatedly considered applications for individual
exemptions after convictions for crimes causing ineligibility under
Section I(g). The Department has gained extensive experience dealing
with corporate convictions giving rise to QPAM ineligibility (both
domestically and in foreign jurisdictions) pursuant to Section I(g),
and the Department determined that an ineligibility condition tied to
criminal convictions continues to provide necessary protection to
Plans, their participants and beneficiaries, and IRA owners.
In practice, Section I(g) has effectively required QPAMs that
become ineligible but wish to continue to rely on the QPAM Exemption to
seek an individual exemption from the Department. Since 2013, the
Department has received an increasing number of individual exemption
requests involving Section I(g) ineligibility as a result of criminal
convictions occurring within the corporate family of large financial
institutions. Among other things, applicants must fully and accurately
disclose the conduct that led to their ineligibility, including whether
the QPAM was involved; the specific reasons they should be permitted to
continue acting as a QPAM notwithstanding the criminal conduct; the
efforts they have undertaken to promote a culture of compliance; and
the steps they are prepared to take in the future to ensure Plans,
their participants and beneficiaries, and IRA owners are protected. In
order to make its finding under ERISA section 408(a) and Code section
4975(c)(2) when the Department has granted individual exemptions that
permit continued reliance on the QPAM Exemption after a conviction, it
has insisted on the imposition of additional protections, such as a
comprehensive independent compliance audit, and taken action to ensure
that Plans are permitted to withdraw from the asset management
arrangement without penalty and will be indemnified or held harmless in
the event of future misconduct.
Exemption applicants have repeatedly and consistently represented
to the Department that Plan investors would be harmed if a QPAM
abruptly lost exemptive relief as of the conviction date, as dictated
by Section I(g). Although ineligibility as a result of Section I(g)
does not bar a QPAM from acting as a discretionary asset manager for
Plan assets after a conviction, applicants have informed the Department
that the loss of exemptive relief has the potential to disrupt Plan
investments and investment strategies, including with respect to
counterparties to certain transactions who are also relying upon the
prohibited transaction relief in the QPAM Exemption.\20\ Plans may also
experience transition costs if a Plan fiduciary needs to find an
alternative asset manager. To avoid immediate disruption and cost to
Plan asset management arrangements due to an expected conviction, the
Department has granted several one-year temporary individual exemptions
to QPAMs facing ineligibility to provide the Department with sufficient
time to engage in a more intensive review regarding whether a longer-
term individual exemption is warranted.\21\ Moreover, since 2013, both
the one-year and longer-term exemptions have routinely given Plans the
right to exit the relationship with an ineligible QPAM without the
imposition of any fees, penalties, or charges.
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\20\ See, e.g., Notice of Proposed Exemption involving JP Morgan
Chase & Co., 81 FR 83372, 83363 (Nov. 21, 2016).
\21\ In such cases, the Department requires prominent notice be
provided to client Plans along with additional protective conditions
to ensure Plan assets are protected while longer-term prohibited
transaction relief is considered.
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As discussed in greater detail below, these developments have
prompted the Department to propose this amendment to the QPAM
Exemption, which would: (1) require a one-time notice to the Department
that a QPAM is relying upon the exemption, (2) require up-front terms
in a written management agreement that apply in the event of
ineligibility, (3) update the list of crimes in current Section I(g) to
explicitly include foreign crimes that are substantially equivalent to
the listed crimes,\22\ (4) expand the circumstances that may lead to
ineligibility, (5) provide a one-year winding-down period to help Plans
avoid or minimize possible negative impacts of changing QPAMs or
adjusting their asset management arrangements when a QPAM becomes
ineligible, and (6) instruct entities applying for individual exemption
relief based on ineligibility under Section I(g) to review the
Department's most recent individual exemptions involving Section I(g)
ineligibility with an expectation that similar conditions will be
required if an exemption is proposed and granted.
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\22\ This is consistent with the Department's longstanding view
and intended to remove all doubt about foreign convictions, as
discussed in more detail below.
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The amendment also would: (1) make a clarifying revision to Section
I(c) that specifies that the terms of the transaction, commitments,
investment of fund assets, and any corresponding negotiations are the
sole responsibility of the QPAM; (2) increase the asset management and
equity thresholds in the QPAM definition in Section VI(a) commensurate
with changes in the Consumer Price Index since 1984; and (3) add a
standard recordkeeping provision in new Section VI(t).
The Department is proposing this amendment on its own motion,
pursuant to ERISA section 408(a) and Code section 4975(c)(2) and in
accordance with the procedures set forth in 29 CFR part 2570 (76 FR
66637 (October 27, 2011)).
Proposed Amendment to Section I(g)--Reporting to the Department,
Written Management Agreement, and Ineligibility
Subsection I(g)(1)--Reporting to the Department
To ensure that the Department is aware of entities that rely on the
QPAM Exemption for prohibited transaction relief, the Department is
proposing to require each QPAM to report such
[[Page 45208]]
reliance by email to the Department. Each QPAM that relies upon the
exemption must report the legal name of each business entity relying
upon the exemption (and any name the QPAM may be operating under) in
the email to the Department.\23\ The QPAM must only provide this
notification to the Department once unless there is a change to the
legal name or operating name(s) of the QPAM relying upon the exemption.
The Department intends to keep a current list of entities relying upon
the QPAM Exemption on its publicly available website. The Department
requests comment on whether it should require additional identifying
information, such as the CRD number of a registered investment adviser
and whether banks, savings and loan associations, and insurance
companies have similar identifying information that they should be
required to provide.
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\23\ For instance, assume a corporate family is comprised of
legal entities named: Corporate Parent A, Investment Manager B,
Broker-Dealer C, Retail Bank D, and Institutional Bank E (doing
business as InstiBank). Investment Manager B and Institutional Bank
E are the only entities acting as QPAMs. Investment Manager B would
notify the Department that it is acting as a QPAM and its legal name
is Investment Manager B. Institutional Bank E would notify the
Department that it is acting as a QPAM and its legal name is
Institutional Bank E, but it is doing business as InstiBank.
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Subsection I(g)(2)--Written Management Agreement
The fundamental premise of Section I(g) is to require QPAMs to act
with integrity. Therefore, the proposed amendment would require QPAMs
to include certain standards of integrity required under the exemption
in a written management agreement with its client Plans (the Written
Management Agreement). Specifically, the proposed amendment would
require QPAMs to include a provision in their Written Management
Agreement providing that in the event the QPAM, its Affiliates, and
five percent or more owners engage in conduct resulting in a Criminal
Conviction or receipt of a written Ineligibility Notice (described in
more detail below), the QPAM would not restrict its client Plan's
ability to terminate or withdraw from its arrangement with the
QPAM.\24\ This amendment would prevent QPAMs from imposing any fees,
penalties, or charges on client Plans in connection with terminating or
withdrawing from a QPAM-managed investment fund.\25\
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\24\ The terms ``Criminal Conviction'' and ``Ineligibility
Notice'' are discussed in more detail below.
\25\ This would not apply to reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practices or specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors would be excepted. If such
fees, penalties, or charges occur, they must be applied consistently
and in a like manner to all such investors.
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The QPAM would also be required to include a provision in its
Written Management Agreement that would require it to indemnify, hold
harmless, and promptly restore actual losses to each client Plan for
any damages directly resulting from a violation of applicable laws, a
breach of contract, or any claim arising out of the failure of such
QPAM to remain eligible for relief under the QPAM Exemption as a result
of conduct that leads to a Criminal Conviction or Ineligibility Notice.
Actual losses include losses and related costs arising from unwinding
transactions with third parties and from transitioning Plan assets to
an alternative asset manager as well as costs associated with any
exposure to excise taxes under Code section 4975 as a result of a
QPAM's inability to rely upon the relief in the QPAM Exemption. The
QPAM also must agree not to employ or knowingly engage any individual
that participated in the conduct that is the subject of a Criminal
Conviction or Ineligibility Notice. These terms must apply for a period
of at least 10 years from the Ineligibility Date.\26\
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\26\ The term ``Ineligibility Date'' is discussed in more detail
below.
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Subsection I(g)(3) and Sections VI(r) and VI(s)--Types of Misconduct
and Entities That Cause Ineligibility
Criminal Convictions
Although the Department has a longstanding practice of considering
individual exemption applications from QPAMs in connection with foreign
convictions, the proposed definition of Criminal Conviction would
remove any doubt that Section I(g) of the QPAM Exemptions applies to
foreign convictions that are substantially equivalent to the listed
U.S. federal or state crimes.\27\ Moreover, the Department reiterates
that the date of conviction (whether foreign or domestic) triggers
ineligibility under the current QPAM Exemption and the proposed
amendment, rather than the time any particular instance of misconduct
occurred.\28\ The timing of ineligibility is provided in proposed
Section I(h).
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\27\ See, e.g., Prohibited Transaction Exemption (PTE) 2020-01,
85 FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019);
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE
2004-13, 69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'')
Final Authorization Numbers 2003-10E, 2001-02E, and 2000-30E,
available at <a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62</a>.
\28\ In this regard, the Department notes that that any foreign
conviction within the last ten years falls within the scope of
Section I(g). This applies even to misconduct that occurred during
the period between the letter from the Department's Office of the
Solicitor to the Securities Industry and Financial Markets
Association (SIFMA) dated November 2, 2020, and the letter from the
Department's Office of the Solicitor to SIFMA, dated March 23, 2021
(both regarding the treatment of foreign convictions under Section
I(g) of the QPAM Exemption).
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As amended, proposed subsection I(g)(3)(A), covers the same U.S.
federal and state crimes as the current QPAM Exemption, and the
proposed definition of Criminal Conviction in Section VI(r) expressly
covers foreign convictions. The Department's modifications also are
intended to make clear that all crimes listed in the definition and
applicable under Section I(g) are covered by the provision, regardless
of whether they also are expressly referenced in ERISA section 411.
Although the definition of Criminal Conviction broadly includes the
convictions listed in ERISA section 411, the modified text makes clear
that the listed convictions are not limited by any other part or aspect
of ERISA section 411.
Proposed subsection VI(r)(2) makes clear that relevant convictions
include specified foreign convictions. Specifically, Section I(g)'s
ineligibility provision, as amended, would apply to convictions ``by a
foreign court of competent jurisdiction for any crime . . . however
denominated by the laws of the relevant foreign government, that is
substantially equivalent to'' one of the U.S. federal or state crimes
identified in subsection VI(r)(1).
The Department includes the specific reference to foreign
convictions in the proposed amendment to eliminate any ambiguity
regarding whether the identified crimes in current Section I(g) extend
to foreign convictions.\29\ Given that financial services institutions
increasingly have a global reach, both in their affiliations and in
their investment strategies, transactions involving Plan assets are
increasingly likely to involve entities that reside and operate in
foreign jurisdictions. An ineligibility provision that is limited to
U.S. federal and state convictions would ignore these realities and
provide insufficient protection for Plans investing through a QPAM's
international affiliates. Moreover, the Department continues to
[[Page 45209]]
believe that criminal convictions for the types of crimes identified in
the QPAM Exemption are relevant to a QPAM's ability to manage Plan
assets with integrity, care, and undivided loyalty, regardless of
whether the crime occurs in a domestic or foreign jurisdiction. Foreign
crimes of the sort described in the proposed amendment call into
question a firm's culture of compliance just as much as domestic
crimes. Fraud, embezzlement, tax evasion, and the other listed crimes
are signs of potential serious compliance and integrity failures,
whether prosecuted domestically or in foreign jurisdictions.
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\29\ Questions regarding the applicability of foreign
convictions have been raised in advisory opinion requests and in
connection with individual exemption requests.
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In addition, if foreign convictions were not included in Section
I(g), the exemption would potentially impose more lenient conditions on
foreign-based conglomerates than U.S.-based entities, which was not the
Department's intent. In order to make the statutory findings for
issuing exemptions dictated by ERISA section 408(a) and Code section
4975(c)(2), the Department must find that an exemption is in the
interest of and protective of the rights of Plans, their participants
and beneficiaries, and IRA owners. The Department believes that it
could not make these statutorily mandated findings if foreign
convictions were not included within the scope of Section I(g). The
Department requests comments on this section, including whether there
are certain types or aspects of criminal behavior that deserve
additional focus.
Prohibited Misconduct--Generally
The Department is also proposing to add a new category of
misconduct that may lead to ineligibility under Section I(g), which is
described in proposed subsection I(g)(3)(B) as ``participating in
Prohibited Misconduct.'' Proposed Section VI(s) defines Prohibited
Misconduct as (1) any conduct that forms the basis for a non-
prosecution or deferred prosecution agreement that, if successfully
prosecuted, would have constituted a crime described in Section VI(r);
(2) any conduct that forms the basis for an agreement, however
denominated by the laws of the relevant foreign government, that is
substantially equivalent to a non-prosecution agreement or deferred
prosecution agreement described in subsection VI(s)(1); (3) engaging in
a systematic pattern or practice of violating the conditions of this
exemption in connection with otherwise non-exempt prohibited
transactions; (4) intentionally violating the conditions of this
exemption in connection with otherwise non-exempt prohibited
transactions; or (5) providing materially misleading information to the
Department in connection with the conditions of the exemption.
For purposes of proposed Section VI(s), the term ``participating
in'' refers not only to actively participating in the Prohibited
Misconduct but also to knowingly approving of the conduct or having
knowledge of such conduct without taking appropriate and proactive
steps to prevent such conduct from occurring, including reporting the
conduct to appropriate compliance personnel. When a QPAM's
ineligibility is linked to Prohibited Misconduct under any portion of
Section VI(s), the Department will provide affected entities with a
written warning and an opportunity to be heard.\30\ These due process
protections are discussed in more detail below.
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\30\ The Department notes that QPAMs, their Affiliates, and 5%
or more owners that are criminally convicted receive due process
through the formal judicial process.
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Overall, in the Department's view, QPAMs and those in a position to
influence or control a QPAM's policies that repeatedly engage in
criminal conduct or other egregious misconduct in connection with
compliance with the conditions of the exemption do not display the
requisite standards of integrity to rely on the relief provided in the
exemption.
Prohibited Misconduct--Deferred Prosecution and Non-Prosecution
Agreements
The Department's intention in proposing to add subsections VI(s)(1)
and (2) is to ensure that QPAMs are not able to avoid the conditions
related to integrity and ineligibility under Section I(g) simply by
entering into non-prosecution and deferred prosecution agreements with
prosecutors to side-step the consequences that otherwise would result
from a Criminal Conviction. Plans may suffer significant harm if they
are exposed to serious misconduct committed by unscrupulous firms or
individuals that ultimately results in a deferred or non-prosecution
agreement rather than a Criminal Conviction and its consequent
ineligibility under Section I(g).
Prohibited Misconduct--Violations of the Exemption and Misleading
Statements to the Department
The Department is proposing in subsections VI(s)(3) through (5) to
condition eligibility for the exemption on the following additional
components: (i) engaging in a systematic pattern or practice of
violating the conditions of this exemption, (ii) intentionally
violating the conditions of this exemption, or (iii) providing
materially misleading information to the Department in connection with
the exemption. These categories of misconduct weigh against the QPAM
operating with integrity, which is necessary for the QPAM to continue
relying on the broad prohibited transaction relief in the class
exemption.
Engaging in such activities potentially exposes Plans, their
participants and beneficiaries, and IRA owners to risk of harm and
raises serious questions about the Department's reliance on the QPAM as
a key protective component of the exemption. The Department believes
that these components of the eligibility provision will encourage QPAMs
to maintain an appropriate focus on compliance with legal requirements
related to the exemption and the protection of Plans, their
participants and beneficiaries, and IRA owners. In connection with a
robust compliance infrastructure, a minor number of isolated violations
of the conditions of the exemption would not constitute a systemic
pattern or practice.
The Department determined that including these components in the
Prohibited Misconduct definition strikes the appropriate balance of
protecting Plans (and ultimately, participants, beneficiaries, and IRA
owners) while not imposing a condition that is overly broad. The
Department has determined that limiting eligibility in this manner
serves as an important safeguard in connection with the broad
discretion that a QPAM must have to utilize the relief in the exemption
for itself and its client Plans.
With respect to these provisions, the Department intends to rely on
its enforcement authority and program to detect a QPAM's participation
in the types of misconduct included in subsections VI(s)(3) through
(5). These components are constructed so that ineligibility occurs only
in limited circumstances, and even in these circumstances, only after:
(1) an investigation by the appropriate field office, and (2) the QPAM
thereafter receives a written warning that the Department is
considering issuing a written Ineligibility Notice. This written
Ineligibility Notice process gives the QPAM the opportunity to be heard
before the Department issues the notice, which would make the QPAM
ineligible to use the exemption from the date the Department issues the
notice, except that the mandatory one-year winding down period would be
applicable, as discussed below.
[[Page 45210]]
Prohibited Misconduct--Request for Comments
The Department requests comment on the extent to which Section
VI(s) is appropriately tailored to target the types of conduct that
implicates integrity issues that should affect a QPAM's eligibility to
use the exemption in circumstances where it or its five percent or more
owners or Affiliates participate in non-criminal activity that has the
potential to harm Plans and whether additional or alternative elements
may be warranted. The Department also requests comments regarding
whether it should treat any additional activities as Prohibited
Misconduct. To the extent commenters believe additional activities
should be added to the proposed list, the Department request comments
explaining how such actions implicate the QPAM's integrity. The
Department also requests comments as to whether any of the listed
activities should not be included in the list of Prohibited Misconduct.
To the extent commenters believe action(s) should be removed from the
proposed list, the Department requests an explanation of why such
action(s) do not implicate the QPAM's integrity and are not
appropriately included. The Department also requests comments on
whether the due process provisions that apply to the Prohibited
Misconduct ineligibility events also should apply to the Criminal
Conviction events--in whole or in part. The Department is particularly
interested in receiving comments regarding whether and how the process
should apply to foreign Criminal Convictions. For instance, should the
process provide an opportunity for a QPAM to request the Department's
determination regarding whether a foreign conviction is substantially
equivalent to a domestic conviction? Should the Department consider
particular factors such as the elements of the crime and the nature of
the tribunal or investigating entity in making such a determination?
Entities Whose Criminal Convictions or Prohibited Misconduct May Cause
Ineligibility of the QPAM
Section I(g) ineligibility currently applies upon convictions of
QPAMs, their Affiliates, and five percent or more owners of the QPAM.
The Department is not proposing any changes to this aspect of Section
I(g). Therefore, the exemption retains this scope, including the
``control'' definition that pertains to part of the definition for
establishing when an entity is considered an ``Affiliate'' of the QPAM,
which specifically is defined as ``[a]ny person directly or indirectly
through one or more intermediaries, controlling, controlled by, or
under common control with'' the QPAM.\31\ This means that a QPAM's
ineligibility is generally tied to convictions of entities that own
five percent or more of the QPAM or are in control-based relationships
with a QPAM. The Department notes that meaningful control can exist
even with small ownership interests, such as when the entity with the
ownership interest is in a position to influence the QPAM to act or
refrain from acting in a certain manner, including being involved as a
knowing or unknowing participant or benefactor in the conduct that
forms the basis for a Criminal Conviction or Ineligibility Notice.
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\31\ The definition of affiliate also includes directors,
relatives, or partners of those in control-based relationships as
well as employees or officers that are highly compensated or have
direct or indirect authority, responsibility, or control regarding
custody, management, or disposition of plan assets. See Section
VI(d) for a complete definition.
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QPAMs should be careful when entering into joint ventures or other
passive investment ventures where another entity's ownership interest
could jeopardize the QPAM's ability to rely upon the QPAM Exemption.
Such QPAMs should also be cognizant that another entity with an
ownership interest in the QPAM could be using the QPAM, knowingly or
not, to further its own criminal conduct or Prohibited Misconduct.
Ultimately, any such conduct that results in a Criminal Conviction or
Ineligibility Notice will cause the QPAM to become ineligible for the
relief offered under the QPAM Exemption, implicate the terms of the
Written Management Agreement (discussed above), and the conditions of
the mandatory one-year winding-down period (discussed below) and may
impact the QPAM's ability to obtain supplemental individual exemption
relief.
Scope of ``Substantially Equivalent'' Foreign Crimes and Foreign
Prohibited Misconduct and Requesting Review by the Department
If a foreign Criminal Conviction or foreign Prohibited Misconduct
occurs, impacted QPAMs should interpret the scope of this provision
broadly and consistent with the Department's statutorily mandated focus
on the protection of plans in ERISA section 408(a) and Code section
4975(c)(2). In situations where a crime or foreign conduct raises
particularly unique issues related to the substantial equivalence of
the foreign Criminal Conviction or Prohibited Misconduct, the QPAM may
seek the Department's view regarding whether the foreign crime,
conviction, or misconduct is substantially equivalent to a U.S. federal
or state crime or Prohibited Misconduct.
The QPAM will have an opportunity to present its position and have
an opportunity to be heard. However, any QPAM submitting a request for
review should do so promptly, and whenever possible in the case of a
foreign conviction, before a judgment is entered so that the QPAM has
sufficient time to complete the notice obligations under the proposed
mandatory one-year winding-down period, discussed below.
The Department is interested in receiving comments regarding: (1)
whether this process should be formalized in any way, such as by
integrating this review with the process proposed in connection with an
Ineligibility Notice (discussed below); and (2) whether the Department
should consider particular factors, such as the elements of the crime
and the nature of the tribunal or investigating entity in making its
determination.
Proposed Section I(h)--Timing of Ineligibility
The proposed amendment would not change the ten-year ineligibility
period under current Section I(g). Thus, under proposed subsection
I(g)(3), a QPAM would remain ineligible to rely upon the QPAM Exemption
for a period of ten years from the date of ineligibility (the
Ineligibility Date). For Prohibited Misconduct, the ineligibility
period begins as of the date of an Ineligibility Notice, whereas, for a
Criminal Conviction, it begins on the date the trial court enters its
judgment.\32\ The proposed amendment makes it clear that for a foreign
conviction, ineligibility would begin on ``the date of the judgment of
any court in a foreign jurisdiction that is the equivalent of a U.S.
federal or state trial court. . . .'' This refers to a trial court of
original or primary jurisdiction, such as a court of first
instance.\33\ The period of ineligibility would begin on the conviction
date, regardless of whether the judgment is appealed. Only upon a
subsequent final judgment reversing the conviction would a person no
longer be considered ``convicted'' under proposed subsection
I(g)(3)(A).
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\32\ For convictions that also result in imprisonment of a
person, the end of the ten-year period is counted from the date of
release from imprisonment.
\33\ This is generally considered to be the lowest level court
in a particular jurisdiction that has the power to render a judgment
of conviction.
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With respect to Prohibited Misconduct, the QPAM would become
[[Page 45211]]
ineligible to rely upon the QPAM Exemption for a period of ten years
from the date the Department issues the Ineligibility Notice. The
Department seeks comments on the timing of ineligibility.
The Department believes that the approach originally contained in
the QPAM Exemption and retained in the proposal for Criminal
Convictions provides a consistent, administrable, and protective
standard for determining the timing of ineligibility, including for
convictions in foreign jurisdictions. A trial court's determination of
wrongdoing is a more than adequate reason to trigger the conditions for
the Written Management Agreement and initiate the winding-down period
in the absence of an individual exemption permitting continued reliance
on the QPAM Exemption after the Department's full consideration of the
misconduct and steps taken by the firm to redress compliance concerns.
This is true regardless of whether the parties have chosen to appeal
the judgment. In the absence of an individual exemption, the loss of
the ability to rely on the QPAM Exemption simply requires the firm to
conduct its business in a manner that complies with the statutory
prohibitions in Title I of ERISA and the Code. Permitting a firm to
continue to rely on the QPAM Exemption--possibly for years--even after
it has been found guilty by a trier of fact of serious criminal
misconduct is inconsistent with the Department's responsibility to
ensure that the exemption is in the interest of and sufficiently
protects Plans, their participants and beneficiaries, and IRA owners,
as required for the Department to make its findings under ERISA section
408(a) and Code section 4975(c)(2). At a minimum, in such
circumstances, ineligible firms should be required to seek an
individual exemption--based on a public record and full consideration
of the implications of their criminal misconduct. This will ensure that
the substantial relief from the statutory prohibitions that has been
afforded to Plans through the QPAM Exemption is appropriately designed
for the protection of Plans, their participants and beneficiaries, and
IRA owners under a corresponding individual exemption.
Proposed Section I(i)--Warning and Opportunity To Be Heard in
Connection With Prohibited Misconduct--Written Ineligibility Notice
Before issuing a written Ineligibility Notice in connection with
Prohibited Misconduct, the Department will issue a written warning to
the QPAM identifying the conduct implicating subsection I(g)(3)(B) and
providing 20 days for the QPAM to respond. As noted above, the
Department intends to rely on its enforcement authority and program to
detect conduct that would lead to a written warning. If the QPAM does
not respond to the written warning within 20 days, the Department will
issue the written Ineligibility Notice. However, if the QPAM responds
within the 20-day timeframe, the Department will provide the QPAM with
the opportunity to be heard, in person (including by phone or
videoconference on an internet-based platform), or in writing, or a
combination, before the Department decides whether to issue the written
Ineligibility Notice. The opportunity to be heard will be limited to
one conference, which the Department will schedule within 30 days of
the QPAM's response to the written warning, unless the Department
determines in its sole discretion to allow additional conferences. The
written Ineligibility Notice will articulate the basis for the
Department's determination that the conduct described in subsection
I(g)(3)(B) has occurred.
The Department requests comment on this process, specifically
including the length of time to respond to a written warning and
whether additional procedural protections should be incorporated.
Proposed Section I(j)--Mandatory One-Year Winding-Down Period
As part of this proposed amendment, the Department has included a
mandatory one-year winding-down period that begins on the Ineligibility
Date. The winding-down period is designed to accommodate a Plan's
ability to wind down its relationship with the QPAM. Satisfaction of
the conditions of the winding-down period would affect the availability
of relief for all transactions covered by this exemption and directly
implicates the requirements for the Written Management Agreement. This
includes relief for past transactions and any transaction continued
during the one-year winding-down period. Additionally, prohibited
transaction relief during the winding-down period would be subject to
compliance with all of the exemption's conditions other than Section
I(g).
Once the winding-down period begins, relief under the QPAM
Exemption would only be available for existing clients of the QPAM--
i.e., client Plans of the QPAM that had a pre-existing Written
Management Agreement (as required under Section VI(a)) on the
Ineligibility Date for transactions entered into before the
Ineligibility Date. Thus, after the Ineligibility Date, the QPAM would
be prohibited from engaging in new transactions in reliance on the QPAM
Exemption for existing client Plans. Additionally, if the QPAM obtains
new clients during the winding-down period, the exemption would not
apply to transactions entered into on their behalf, unless such relief
is granted in a separate individual exemption.
The Department designed the proposed winding-down period to
mitigate the cost and disruption to Plans, their participants and
beneficiaries, and IRA owners that can occur when a QPAM becomes
ineligible for relief based on proposed subsection I(g)(3). The one-
year winding-down period would provide a QPAM's client Plans with time
to decide whether to hire an alternative discretionary asset manager
that is eligible to operate as a QPAM or continue their relationship
with the ineligible QPAM, which could only provide discretionary asset
management services to them by engaging in transactions in a non-
prohibited manner, relying on alternative exemptions, or pursuing
alternative investment strategies. The Department believes that a one-
year winding-down period would be necessary to ensure that Plans have
sufficient time to engage in a search for an alternative QPAM or
discretionary asset manager if they decide it is in the Plan's best
interest to do so. The Department understands that searching for and
hiring a new QPAM or discretionary asset manager can be complex and
expensive and require care and time, including development of a request
for proposal and an appropriate transition plan to transfer millions of
dollars of investments from one manager to another without causing harm
and losses, including lost opportunity costs, to the Plan.
The winding-down conditions would require the QPAM to provide
notice of its ineligibility under subsection I(g)(3) to its existing
client Plans and the Department (via <a href="/cdn-cgi/l/email-protection#b7e6e7f6faf7d3d8db99d0d8c1"><span class="__cf_email__" data-cfemail="336263727e73575c5f1d545c45">[email protected]</span></a>) within 30 days after
the Ineligibility Date. This notice must include an objective
description of the facts and circumstances upon which the Criminal
Conviction or Ineligibility Notice is based and be written with
sufficient detail, consistent with the QPAM's duties of prudence and
undivided loyalty, to fully inform a Plan fiduciary of the nature and
severity of the criminal conduct or Prohibited Misconduct so that such
Plan fiduciary is able to satisfy, as applicable, its own
[[Page 45212]]
fiduciary duties of prudence and loyalty under Title I of ERISA in the
context of hiring, monitoring, evaluating, and retaining the QPAM.
Within 30 days after the Ineligibility Date, the QPAM must also
notify its client Plans that, as required by subsection I(g)(2)(A) and
(B), the QPAM will not restrict the client's ability to terminate or
withdraw from its arrangement with the QPAM. Thus, the QPAM may not
impose any fees, penalties, or charges on client Plans in connection
with the process of terminating or withdrawing from a QPAM-managed
investment fund except for reasonable fees, appropriately disclosed in
advance, that are specifically designed to prevent generally recognized
abusive investment practices or specifically designed to ensure
equitable treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors. If such fees, penalties, or charges occur, they must be
applied consistently and in a like manner to all such investors.
The notice would also indicate that as required by proposed
subsection I(g)(2)(C), the QPAM will indemnify, hold harmless, and
promptly restores losses to each client Plan for any damages resulting
from a violation of applicable laws, a breach of contract, or any claim
arising out the QPAM's ineligibility under subsection I(g)(3). For
purposes of this provision, actual losses specifically include losses
and costs arising from unwinding transactions with third parties and
from transitioning Plan assets to an alternative discretionary asset
manager.
Additionally, to ensure Plans are protected from bad actors, the
QPAM must not employ or knowingly engage any individual that
participated in conduct that is the subject of a Criminal Conviction or
Ineligibility Notice. For Criminal Convictions, this applies regardless
of whether the individual is separately convicted in connection with
the criminal conduct. The QPAM must adhere to this requirement no later
than the Ineligibility Date.
Because the Ineligibility Date commences the 30-day notice period,
any financial services institution that has remote relationships with
another institution should communicate with that institution to ensure
that it is able to satisfy the notice and indemnity conditions of the
winding-down period if the financial services institution is acting as
a QPAM and will also become ineligible.
Finally, after the one-year period expires, the QPAM could not rely
on the relief provided in the QPAM Exemption unless the Department
grants the QPAM an individual exemption to continue relying upon the
QPAM Exemption. The winding-down period would not be suspended while an
individual exemption application is pending with the Department. The
Department requests comments on the winding-down period, including
whether one year is the appropriate length of time and whether there
are additional protections for Plan participants and beneficiaries and
IRA owners that the Department should consider.
Proposed Section I(k)--Requesting an Individual Exemption
The proposed amendment also would add new Section I(k) to the
exemption, which provides that a QPAM that is ineligible or anticipates
becoming ineligible may, consistent with the exemption procedures at
set forth in 29 CFR part 2570, subpart B, apply for supplemental
individual exemption relief. Section I(k) instructs an applicant, as
part of such a request, to review the Department's most recently
granted individual exemptions involving section I(g) ineligibility with
the expectation that similar conditions will be required if an
exemption is proposed and granted. If an applicant requests the
Department to exclude any term or condition from its exemption that is
included in a recently issued similar individual exemption, the
applicant must accompany such request with a detailed explanation of
the reason such change is necessary and in the interest of and
protective of the Plan, its participants and beneficiaries, and IRA
owners. The Department will review such requests consist with the
requirements of ERISA section 408(a) and Code section 4975(c)(2).
Such applicants also should provide detailed information in their
applications quantifying the specific cost or harms in dollar amounts,
if any, Plans would suffer if a QPAM could not rely on the exemption
after the winding-down period, including the specific dollar amounts of
investment losses resulting from foregone investment opportunities and
any evidence supporting the proposition that investment opportunities
would only be available to Plans on less advantageous terms.
An applicant should not construe the Department's acceptance of an
individual exemption application as a guarantee that the Department
will grant an individual exemption. Therefore, a QPAM that submits an
individual exemption application must ensure that it manages Plan
assets prudently and loyally during the winding-down period with the
expectation that the Department may not grant further exemptive relief.
The Department notes that, in order for it to make the necessary
statutory findings under ERISA section 408(a) and Code section
4975(c)(2), applicants also should anticipate that the Department may
condition individual exemptive relief on a certification by a senior
executive officer of the QPAM (or comparable person) that: (1) all of
the conditions of the winding-down period were met, and (2) an
independent audit reviewing the QPAM's compliance with the conditions
of the one-year winding-down period has been completed.
Applicants may also request more limited relief than is otherwise
available under the QPAM Exemption. For instance, a QPAM may only need
prohibited transaction relief for a particular limited category of
transactions, such as an on-going lease that was entered into on behalf
of an investment fund which is expected to continue past the one-year
winding-down period. In such circumstances, due to the limited nature
of the transaction(s) for which relief is sought, applicants should
discuss the terms and conditions of prior individual exemptions
involving Section I(g) in connection with a request for more limited
prohibited transaction relief. The applicant also should include a
detailed explanation in its application regarding how Plans will be
otherwise protected and why the transaction cannot be unwound prior to
the end of the winding-down period without harm or losses to such
Plans.
Finally, the Department notes that an applicant anticipating that
it will need relief beyond the end of the winding-down period should
apply to the Department for an individual exemption as soon as
practicable. As a fiduciary, the QPAM has obligations with respect to
Plans beyond those required by the QPAM Exemption and should approach
the Department at the earliest point at which it appears a conviction
will occur, such as when a plea agreement has been entered into--even
if the conviction date has not yet occurred--to ensure that appropriate
steps can be taken by or on behalf of its client Plans who ultimately
would be impacted by the QPAM's loss of exemptive relief. QPAMs
affected by a conviction also should not wait until late in the
winding-down period to apply for an individual exemption.
[[Page 45213]]
Proposed Amendment to Section I(c)--Involvement in Investment Decisions
by Parties in Interest
The Department is proposing to modify the language in Section I(c)
consistent with its original intent when granting the QPAM Exemption.
In the 1984 grant notice, the Department stated that an essential
premise of the exemption is that broad prohibited transaction relief
can be afforded:
[O]nly if the commitments and investments of plan assets and the
negotiations leading thereto, are the sole responsibility of an
independent investment manager. It appears to the Department that,
if exemptive relief were to be provided where the QPAM has less than
ultimate discretion over acquisitions for an investment fund that it
manages, the potential for decision making with regard to plan
assets that would inure to the benefit of a party in interest would
be increased.\34\
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\34\ 49 FR at 9497.
The proposed amendatory language in Section I(c) is intended to
make clear that a QPAM must not permit other parties in interest to
make decisions regarding Plan investments under the QPAM's control.
Therefore, the Department is proposing to include in the opening of
Section I(c) a statement providing that the terms of the transaction,
``commitments, investment of fund assets, and any corresponding
negotiations on behalf of the Investment Fund are the sole
responsibility of the QPAM . . . .'' The Department also proposes to
add additional amendatory language at the end of Section I(c) stating
that the prohibited transaction relief in the exemption applies ``only
in connection with an Investment Fund that is established primarily for
investment purposes'' and that ``[n]o 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 because the QPAM would not have sole responsibility
with respect to the transaction as required by this section I(c).''
This language aligns with the following language from the original 1982
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proposal for the QPAM Exemption:
Party in interest transactions that are negotiated by, e.g., an
employer which sponsors a plan, and are then presented to a QPAM for
approval would not qualify for the class exemption as proposed.
However, the exemption, as proposed, would be available even though
the transfer of assets by a plan to a QPAM is subject to general
investment guidelines, so long as there is no arrangement, direct or
indirect, for the QPAM to negotiate, or engage in, any specific
transaction or to benefit any specific person.\35\
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\35\ 47 FR at 56947.
The Department has determined that adding this additional
clarifying language in Section I(c) would eliminate any possible
ambiguity regarding the extent to which a party in interest may be
involved in a transaction with an investment fund managed by a QPAM. A
party in interest should not be involved in any aspect of a
transaction, aside from certain ministerial duties and oversight
associated with plan transactions, such as providing general investment
guidelines to the QPAM. The role of the QPAM under the terms of the
exemption is not to act as a mere independent approver of transactions.
Rather, the QPAM must have and exercise discretion over the commitments
and investments of Plan assets and the related negotiations with
respect to a fund that is established primarily for investment purposes
in order for the relief provided under the exemption to apply.\36\
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\36\ For example, the QPAM Exemption is unavailable if a plan
sponsor hires a QPAM to engage a plan in transactions that do not
include an investment component, such as hiring a party in interest
service provider for a welfare plan. It is also unavailable when a
plan sponsor desires to enter into a party in interest transaction
with its plan but leaves the ultimate determination and review to a
QPAM.
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Proposed Amendment to Section VI(a)--Asset Management and Equity
Thresholds
The QPAM Exemption was originally granted, in part, on the premise
that large financial services institutions would be able to withstand
improper influence from parties in interest. The asset management and
equity thresholds were included to set minimum size thresholds that
would help ensure a QPAM would be able to withstand that influence. In
2005, the Department finalized an amendment to the QPAM Exemption that
included updating the asset management and shareholders' and partners'
equity thresholds for registered investment advisers in the QPAM
definition in subsection VI(a)(4) of the exemption. In connection with
that amendment, the Department indicated that the original thresholds
``may no longer provide significant protections for plans in the
current financial marketplace'' and adjusted the figures based on
changes in the Consumer Price Index.\37\ The Department has determined
that the same rationale necessitates further updates to the registered
investment adviser thresholds and those of other types of QPAMs, such
as banks and insurance companies, which have not been updated since
1984. The Department determined to adjust all the thresholds in Section
VI(a) based on the original published figures in the 1984 grant notice.
This will ensure that changes to the thresholds for all types of
financial institutions reflect the same baseline change to the Consumer
Price Index (i.e., 1984 vs. 2021).\38\ By publication through notice in
the Federal Register, the Department will also make subsequent annual
adjustments for inflation to the Equity Capital, Net Worth, and asset
management thresholds in subsection VI(a)(1) through (4), rounded to
the nearest $10,000, no later than January 31st of each year.
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\37\ Proposed Amendment to PTE 84-14, 68 FR 52419, 52423 (Sept.
3, 2003).
\38\ For purposes of these changes, the Department used March
1984 and December 2021 as the relevant dates in the U.S. Bureau of
Labor Statistics CPI Inflation Calculator available at: <a href="https://www.bls.gov/data/inflation_calculator.htm">https://www.bls.gov/data/inflation_calculator.htm</a>.
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Therefore, in all places in subsection VI(a)(1) through (3) that
currently indicate a $1,000,000 threshold, the Department is proposing
to adjust those figures to $2,720,000. In subsection VI(a)(4), the
Department is proposing to adjust the current assets under management
threshold of $85,000,000 to $135,870,000, and the shareholders' and
partners' equity and the broker-dealer net worth thresholds of
$1,000,000 to $2,040,000.
As a minor ministerial change, the Department is also proposing to
replace ``Federal Savings and Loan Insurance Corporation'' with
``Federal Deposit Insurance Corporation'' in subsection VI(a)(2)
because the Federal Savings and Loan Insurance Corporation was
abolished by Congress in 1989, and its responsibilities were
transferred to the Federal Deposit Insurance Corporation.\39\
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\39\ See Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Public Law 101-73 (1989).
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Proposed Amendment Adding Section VI(t)--Recordkeeping
The proposed amendment also includes a new recordkeeping
requirement in Section VI(t), which would require QPAMs to maintain
records for six years demonstrating compliance with this exemption. The
Department is proposing this amendment to ensure that evidence of
compliance is available for review and to make the QPAM Exemption
consistent with other exemptions that generally impose a recordkeeping
requirement on parties relying on an exemption to ensure they will be
able to demonstrate, and that the Department
[[Page 45214]]
will be able to verify, compliance with the exemption conditions.
Section VI(t) would require that the records be kept in a manner
that is reasonably accessible for examination. The records must be made
available, to the extent permitted by law, to any authorized employee
of the Department or the Internal Revenue Service or another federal or
state regulator; any fiduciary of a plan invested in an investment fund
managed by the QPAM; any contributing employer and any employee
organization whose members are covered by a Plan invested in an
investment fund managed by the QPAM; and any participant or beneficiary
of a Plan or IRA owner invested in an investment fund managed by the
QPAM.
QPAMs also would be required to make such records reasonably
available for examination at their customary location during normal
business hours. Participants and beneficiaries of a Plan, IRA owners,
plan fiduciaries, and contributing employers/employee organizations
would be able to request only information applicable to their own
transactions, and not a QPAM's privileged trade secrets or privileged
commercial or financial information, or confidential information
regarding other individuals. If the QPAM refuses to disclose
information to a party other than the Department on the basis that the
information is exempt from disclosure, the Department would require the
QPAM to provide a written notice, within 30 days, advising the
requestor of the reasons for the refusal and that the Department may
request such information. The requestor would then be able to contact
the Department if it believes it would be useful for the Department to
request the information.
Any failure to maintain the records necessary to determine whether
the conditions of the exemption have been met would result in the loss
of the relief provided under the exemption only for the transaction or
transactions for which such records are missing or have not been
maintained. Such failure would not affect the relief for other
transactions if the QPAM maintains required records for such
transactions.
Other Ministerial Changes
The Department is also proposing a few ministerial changes to the
QPAM Exemption that would not substantively alter the conditions or
relief provided under the exemption. Specifically, the Department
proposes to: (1) change the headings of each portion of the exemption
from ``Part'' to ``Section'', (2) remove many internal cross-references
to definitional provisions and instead capitalize the terms used in
those definitional provisions throughout the exemption,\40\ and (3) add
internal references to ``above'' and ``below'' throughout to direct
readers where to find certain cross-referenced provisions.
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\40\ However, for the sake of clarity, cross-references have
been retained for the term ``Affiliate'' because it is defined in
different ways under Section VI(c) and (d) of the exemption.
---------------------------------------------------------------------------
The Department has corrected two minor typographical errors by
changing: (1) ``assure'' to ``ensure'' in Section V and the related
audit provision in Section VI(q), and (2) ``INHAM'' to ``QPAM'' in
Section VI(p). All references to ``ERISA'' and the ``Code'' have been
updated so that they come before the sections referenced, and
references to the term ``employee benefit plan'' have been removed so
that the exemption uses only the term ``Plan.'' Finally, the
definitional term ``Control'' in Section VI(e) has been amended to
specifically refer to variations of the word ``control'' used
throughout the exemption. Therefore, Section VI(e) now defines the
terms ``Controlling,'' Controlled by,'' ``under Common Control,'' and
``Controls'' in the same manner as the prior single term ``control.''
Regulatory Impact Analysis
Executive Orders 12866, 13563, and Administrative Laws
The Department has examined the effects of this proposed amendment
as required by Executive Order 12866,\41\ Executive Order 13563,\42\
the Paperwork Reduction Act of 1995,\43\ the Regulatory Flexibility
Act,\44\ section 202 of the Unfunded Mandates Reform Act of 1995,\45\
Executive Order 13132,\46\ and the Congressional Review Act.\47\
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\41\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\42\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 18, 2011).
\43\ 44 U.S.C. 3506(c)(2)(A) (1995).
\44\ 5 U.S.C. 601 et seq. (1980).
\45\ 2 U.S.C. 1501 et seq. (1995).
\46\ Federalism, 64 FR 153 (Aug. 4, 1999).
\47\ 5 U.S.C. 804(2) (1996).
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Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, select regulatory approaches that maximize net
benefits (including potential economic, environmental, and public
health and safety effects; distributive impacts; and equity). Executive
Order 13563 emphasizes the importance of quantifying costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
Under Executive Order 12866, ``significant'' regulatory actions are
subject to review by the Office of Management and Budget (OMB).\48\
Section 3(f) of the Executive Order defines a ``significant regulatory
action'' as an action that is likely to result in a rule that may (1)
have an annual effect on the economy of $100 million or more, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or state, local, or tribal governments or communities (also
referred to as ``economically significant''); (2) create a serious
inconsistency or otherwise interfere with an action taken or planned by
another agency; (3) materially alter the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
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\48\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
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OMB, informed by the Department's analysis, has determined that
this proposed amendment is economically significant within the meaning
of section 3(f)(1) of the Executive Order because it may have an annual
effect of $100 million or more on the economy, as discussed in the
Transfers section, below.
The Department has quantified the impact of the proposed amendment
based on the best available data and provides an assessment of its
benefits, costs, and transfers below. Based on this assessment, the
Department concludes that the proposed amendment's benefits would
justify its costs. Pursuant to the Congressional Review Act, OMB
anticipates designating a revised QPAM amendment, if finalized as
proposed, as a ``major rule,'' as defined by 5 U.S.C. 804(2).
Need for Regulation
Substantial changes have occurred in the financial services
industry since the Department granted the QPAM Exemption in 1984. These
changes include industry consolidation caused by a variety of factors
and an increasingly global reach for financial services institutions,
both in their affiliations and in their investment strategies,
including those for Plan assets.
An amendment to the QPAM Exemption is needed to address ambiguity
as to whether foreign convictions are included in the scope of the
ineligibility provision under Section I(g). QPAMs today often have
corporate
[[Page 45215]]
or relationship ties to a broad range of entities, some of which are
located internationally. Additionally, some global financial service
institutions are headquartered or have parent entities that reside in
foreign jurisdictions. These entities may have significant control and
influence over the operation and management of all entities within a
large financial institution's organizational structure, including those
operating as QPAMs for some Plans. Additionally, the international ties
of QPAMs come not just from their affiliations and parent entities, but
also their investment strategies, including those involving Plan
assets.
The Department is also concerned about corporate families and
entities that engage in significant misconduct of a similar type and
quality as the conduct that might lead to a Criminal Conviction, but
which ultimately does not result in a conviction. The amendment is
needed to ensure that QPAMs are not able to avoid the conditions
related to integrity and ineligibility under Section I(g) simply by
entering into non-prosecution and deferred prosecution agreements with
prosecutors to side-step the consequences that otherwise would result
from a Criminal Conviction. Plans may suffer significant harm if they
are exposed to serious misconduct committed by unscrupulous firms or
individuals that ultimately results in a deferred or non-prosecution
agreement rather than Criminal Conviction and consequent ineligibility
under Section I(g). Likewise, intentionally or systematically violating
the conditions of the exemption exposes Plans to significant potential
harm at the hands of those with influence or control over their assets.
In the Department's view, QPAMs and those in a position to influence or
control a QPAM's policies that repeatedly engage in these types of
serious misconduct do not display the requisite standards of integrity
necessary to provide the protection intended for Plans under the
exemption.
Through its administration of the individual exemption program, the
Department also determined that certain aspects of the QPAM Exemption
would benefit from a focus on mitigating potential costs and disruption
to Plans when a QPAM becomes ineligible for the exemptive relief
because of a conviction under Section I(g). Two major ways in which the
amendment would reduce the harmful impact on Plans is by requiring
penalty-free withdrawal and indemnification terms to be included in the
QPAM's Written Management Agreement with its client Plans and including
a one-year winding-down period to avoid unnecessary disruptions to
Plans upon a Criminal Conviction or receipt of an Ineligibility Notice
due to other Prohibited Misconduct. The winding-down period will help
bridge the gap between the QPAM Exemption and the Department's
administration of its individual exemption program in connection with
Section I(g) ineligibility.
The amendment is also needed to update asset management and equity
thresholds to current values in the definition of ``QPAM'' in Section
VI(a). Some of the thresholds that establish the requisite independence
upon which the QPAM Exemption is based have not been updated since
1984, and the thresholds for registered investment advisers have not
been updated since 2005. The amendment will standardize all the
thresholds to current values using the Bureau of Labor Statistics
Consumer Price Index.
Finally, the QPAM Exemption currently lacks a recordkeeping
requirement which the Department generally includes in its
administrative exemptions. The amendment would add a recordkeeping
requirement to ensure QPAMs will be able to demonstrate, and the
Department will be able to verify, compliance with the exemption
conditions.
Together, the Department believes these updates are necessary to
ensure the QPAM Exemption remains in the interest of and protective of
the rights of Plans and their participants and beneficiaries and IRA
owners as required by ERISA section 408(a) and Code section 4975(c)(2).
Affected Entities
Qualified Professional Asset Managers (QPAMs)
The following entities generally qualify for the relief set out in
the current text of the QPAM Exemption:
(1) Banks--as defined in section 202(a)(2) of the Investment
Advisers Act of 1940, with equity capital in excess of $1,000,000.
(2) Savings and loan associations--the accounts of which are
insured by the Federal Savings and Loan Insurance Corporation, with
equity capital or net worth in excess of $1,000,000;
(3) Insurance companies--subject to supervision under state law,
with net worth in excess of $1,000,000; and
(4) Investment advisers--registered under the Investment Advisers
Act of 1940 with total client assets under management in excess of
$85,000,000 and either (1) shareholders' or partners' equity in excess
of $1,000,000 or (2) payment of liabilities guaranteed by an affiliate,
another entity that could qualify as a QPAM, or a broker-dealer with
net worth of more than $1,000,000.
Additionally, the entity must acknowledge that it is a fiduciary
for each Plan it manages in a written management agreement.
QPAMs that meet the current thresholds, but who otherwise will not
meet the new threshold requirements, will also be affected by the
amendment, as they would no longer be able to rely on the QPAM
Exemption.
The Department estimated there are 616 potential QPAMs by
approximating the total number of providers who in 2019 provided
services of ``Investment Management'' and ``Named Fiduciary''
simultaneously to at least one plan, as reported in Schedule C of the
2019 Form 5500, and whose NAICS codes start with the 2-digit 52, which
corresponds to Finance and Insurance Institutions.\49\
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\49\ Using 2019 Form 5500 data, the Department counted in total
1390 service providers who provided services of ``Investment
Management'' and ``Named Fiduciary,'' of which only 765 reported
their business code. Out of these 765 providers, 339 reported their
business code starting with the 2-digit NAICS code 52, yielding a
ratio of 0.44 of potential QPAMs to other providers. Therefore, the
Department estimates that there were 0.44*1390=616 potential QPAMs
in 2019.
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Loss of Ability To Rely on the QPAM Exemption
According to past QPAM Section I(g) individual exemption
applicants, the broad exemptive relief in the QPAM Exemption provides
client Plans access to one of the Department's most advantageous
trading exemptions while ensuring that they are insulated from the
influence of bad actors. According to these past applicants, if an
entity is no longer able to represent that it is a QPAM, client Plans
are far less likely to retain the QPAM as their manager, even in
situations where the client technically does not need the relief
provided by the exemption. Although a QPAM that fails to satisfy
Section I(g) may continue to operate as an asset manager for Plans, the
Department understands that some entities use their QPAM status as an
indicator of their size and/or sophistication to potential client
Plans. Therefore, loss of the ability to rely upon the QPAM Exemption
may create perceived or actual costs in the form of lost opportunities
for the QPAM.
Additionally, the Department understands that many QPAMs perceive
the QPAM Exemption to be one of the simplest exemptions to comply with.
Therefore, even if QPAMs believe alternative exemptions are available,
they may seek QPAM status as an
[[Page 45216]]
additional protection from the risk, even if limited, of exposure to
excise taxes under Code sections 4975(a) and (b) for engaging in non-
exempt prohibited transactions as a result of failing the conditions of
those exemptions.
Some of the costs and transfers associated with the loss of
reliance on the QPAM Exemption are not added costs or transfers imposed
by this proposed amendment, but rather costs attributable to the
criminal behavior of a QPAM or its affiliate. Additionally, the
Department has ultimately granted many applicants individual exemption
relief, which has minimized the costs associated with loss of the QPAM
Exemption. The Department has quantified or qualitatively discussed
costs and transfers that would result from the proposed amendment,
below. Many of the benefits that flow through to Plans, their
participants and beneficiaries, and IRA owners stem from proposed
amendment provisions which impose minimal or no costs but generally
benefit them by providing more certainty, protection, and transitional
support, such as the provision clarifying that foreign convictions are
included in the crimes enumerated in Section I(g), clarification that
QPAMs must not permit other parties in interest to make decisions
regarding Plan investments under the QPAM's control, and the addition
of a mandatory one-year winding-down period.
Plans With Assets in an Investment Fund Managed by a QPAM
The proposed amendment will affect Plans whose assets are held by
an Investment Fund that is managed by a QPAM. The Department does not
collect data on Plans that use QPAMs to manage their assets.
Nevertheless, the Department estimates that a single QPAM services, on
average, 32 client Plans.\50\ Therefore, the Department estimates that
in total there are 19,712 client Plans (616 QPAMs times 32 client Plans
per QPAM). The Department requests comment on the number of Plans that
may need to find an alternative asset manager or investment fund(s) as
a result of the proposed increased thresholds.
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\50\ Although the Department estimates there are 616 QPAMs, it
can only observe and count the number of client Plans corresponding
to 339 QPAMs. The Department counted 10,719 Plans served by these
339 observable QPAMs, yielding an average of 32 client Plans per
QPAM in 2019. The Department acknowledges that these entities do not
necessarily act as QPAMs to their client Plans, and, therefore,
considers this average as an upper limit for the number of client
Plans served by a QPAM.
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Benefits
As noted above, many of the benefits from this proposal to Plans,
their participants, beneficiaries, and IRA owners would stem from new
and amended conditions that would not significantly increase costs, but
would provide more clarity, certainty, protection, and transitional
support. In particular, the Department expects that the proposed
amendment would provide the specific benefits described below.
Written Management Agreement--Subsection I(g)(2)
The proposed terms for the Written Management Agreement will
benefit Plans by providing them with additional certainty that the Plan
and its assets will be insulated from losses if a Criminal Conviction
or Prohibited Misconduct that results in an Ineligibility Notice
occurs. The proposed Written Management Agreement conditions also would
benefit client Plans by ensuring they can terminate the arrangement or
withdraw from a QPAM-managed Investment Fund without penalty, further
ensuring that Plans are not exposed to unnecessary costs when relief
under the exemption is lost through no fault of their own. The
Department also believes requiring a QPAM to agree to these terms
before misconduct occurs establishes a more prominent indication that
the QPAM will operate with integrity throughout its dealings with
client Plans, which provides additional certainty and assurances to
such clients that a Plan's assets will be properly and prudently
managed and protected. Similarly, the Department expects these proposed
conditions will increase the overall value and attractiveness to Plans
of retaining an asset manager that meets the requirements of the QPAM
Exemption.
Ineligibility Due to Foreign Criminal Convictions--Subsection
I(g)(3)(A) and Subsection VI(r)(2)
The QPAM Exemption was issued, in part, based on the principle that
any entity acting as a QPAM--and those who are in a position to
influence a QPAM's policies--should maintain a high standard of
integrity.\51\ This principle is called into question when a QPAM, or
an entity that may be in a position to influence its policies, is
convicted of certain crimes. The Department sought to address this
issue by making entities ineligible for the prohibited transaction
relief in the QPAM Exemption as of the date of the trial court judgment
for any of the crimes listed in Section I(g).
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\51\ Proposed QPAM Exemption, 47 FR at 56947.
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Since the initial grant of the QPAM Exemption, the Department has
granted nine individual exemption requests from QPAM applicants in
connection with a foreign conviction; the first being in 2000.\52\ The
specific reference to foreign-equivalent crimes modernizes the QPAM
Exemption to align with the realities of modern investment practices
engaged in by many Plans. In this regard, removing all doubt that
foreign-equivalent crimes are a basis for ineligibility provides
necessary protections for Plans, as required by ERISA section 408(a)
and Code section 4975(c)(2). This ultimately provides a benefit to
Plans that rely upon QPAMs with strong ties to entities operating in
foreign jurisdictions by not depriving them of the protection provided
by the proposed amendment to Section I(g).
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\52\ See Prohibited Transaction Exemption (PTE) 2020-01, 85 FR
8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019); PTE
2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147 (Oct.
28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE 2004-13,
69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'') Final
Authorization Numbers 2003-10E, 2001-02E, and 2000-30E, available at
<a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62</a>.
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Ineligibility Due to Participating in Prohibited Misconduct--Subsection
I(g)(3)(B) and Section VI(s)
As noted above, the QPAM Exemption is in large part premised on any
entity acting as a QPAM, and those who are in a position to influence
the QPAM's policies, maintaining a high standard of integrity. To
reinforce this standard, the Department proposes to expand the
circumstances that lead to ineligibility to avoid unfair and unequal
treatment of entities and corporate families that have a record of
engaging in malfeasance that ultimately may not result in a Criminal
Conviction. Therefore, this extension of the ineligibility provision of
current Section I(g) provides a benefit to Plans that rely upon QPAMs
that are a part of corporate families with significant compliance
failures by not depriving them of the protections provided under the
proposed amendment to Section I(g).
Mandatory One-Year Winding-Down Period--Section I(j)
The winding-down period benefits Plans because it is designed to
accommodate a Plan's ability to wind-down its relationship with the
QPAM, if necessary. The winding-down period ensures that responsible
Plan fiduciaries have the time and ability to choose an
[[Page 45217]]
alternative discretionary asset manager or investment strategy without
undue cost to the Plan. Under the current text of Section I(g), the
immediate ineligibility of a QPAM upon a judgment of conviction may
expose Plans to potential costs and losses without the necessary time
to make alternative investment arrangements.
Immediate loss of relief under the QPAM Exemption could place Plans
in the difficult position of either: (1) searching for a new asset
manager for the services previously provided by the ineligible QPAM; or
(2) being forced to liquidate assets at inopportune times, incur
transaction costs to sell and repurchase assets, and lose returns while
the assets are in transition. Searching for a new asset manager could
require a particularly resource- and time-intensive process for Plan
fiduciaries.
The proposed amendment benefits Plans by providing Plan fiduciaries
with time and flexibility to determine the best path forward. This
includes the benefit of ensuring Plans can mitigate any potential for
disruption and losses by implicating the terms required in the Written
Management Agreement under proposed subsection I(g)(2). If Plan
fiduciaries decide to retain an ineligible QPAM as a discretionary
asset manager, the one-year winding-down period will give the Plan
fiduciaries time to determine and prepare for any changes that may be
necessary for Plan investments.
Finally, the winding-down period benefits QPAMs by providing
additional time for them to request an individual exemption from the
Department. This will allow QPAMs, consistent with their applicable
fiduciary obligations, to communicate with and assist their client
Plans in determining an appropriate path forward for the management of
Plan assets.
Requesting an Individual Exemption--Section I(k)
In addition to providing more certainty to QPAMs and Plans, the
proposed amendment would also require QPAMs that seek individual
exemption relief to review the Department's most recently granted
individual exemptions with the expectation that similar conditions will
be required if an exemption is proposed and granted. If an applicant
requests the Department to exclude any term or condition from its
exemption that is included in a recently issued similar individual
exemption, the applicant must accompany such request with a detailed
explanation of the reason such change is necessary, in the interest of,
and protective of the Plan, its participants and beneficiaries, and IRA
owners. Applicants also should provide detailed information in their
applications quantifying the specific cost in dollar amounts, if any,
of the harms Plans would suffer if a QPAM could not rely on the
exemption after the winding-down period.
The Department generally requests such information from an
applicant if it is not included in its application. Therefore, the
Department believes that the benefit of this provision will be reduced
costs due to a more streamlined exemption application process because
clearer standards for how an applicant should formulate its application
would be established. The Department requests comment on this
assumption.
Involvement in Investment Decisions by Parties in Interest--Section
I(c)
The proposed modification to the language in Section I(c) will
benefit Plans, their participants and beneficiaries, and IRA owners by
ensuring that the Plan is not engaging in harmful prohibited
transactions that are orchestrated by parties in interest. The
Department understands that some Plan fiduciaries, in conjunction with
hiring a QPAM, may be engaging in abuses of the exemption. The
amendatory language should help ensure that Plans, their participants
and beneficiaries, and IRA owners are not exposed to conflicts of
interest that the QPAM Exemption was not designed to address and for
which the Department should not provide prohibited transaction relief.
Asset Management and Equity Thresholds--Section VI(a)
The Department expects that the benefit associated with the
proposed updates to the asset management and equity thresholds is the
preservation of the underlying intent of the size conditions, which is
to ensure the use of an asset manager that is sufficiently large to be
able to withstand improper influence from parties in interest (i.e.,
maintain independence).
Costs
All QPAMs must acknowledge that they are fiduciaries within the
meaning of Title I of ERISA and/or the Code with respect to each Plan
that has retained the QPAM. In analyzing compliance costs associated
with the amendment, the Department considers the regulatory baseline
that QPAMs already are required to comply with--primarily ERISA's
fiduciary duty requirements (to the extent applicable), the other
existing conditions in the QPAM Exemption, and the individual exemption
process as well as related individual exemptions granted in connection
with Section I(g) ineligibility. The Department does not expect the
amendment to increase, more than marginally, existing costs associated
with QPAM ineligibility and individual exemption requests related to
Criminal Convictions. The Department is uncertain, however, regarding
the number of QPAMs that would become ineligible under the proposed
expansion of the ineligibility provision related to participating in
Prohibited Misconduct. The Department is also uncertain about the
extent to which the proposed changes in asset management and equity
thresholds would give rise to new costs because some QPAMs that meet
the current thresholds no longer would be able to rely on the exemption
if they do not meet the proposed increased thresholds.
The following analysis considers the impact on all QPAMs, except
that the analysis of the cost of the winding-down provision is only
considered for ineligible QPAMs. Although the Department has provided a
cost analysis below, the heightened standards proposed in this
amendment may result in entities being more careful about ensuring that
their compliance programs are sufficiently robust to prevent Prohibited
Misconduct or Convictions from occurring. In this respect, the proposed
exemption would provide clear guardrails that would make the costs
associated with QPAMs becoming ineligible clearly avoidable.
Reporting Reliance on the QPAM Exemption--Subsection I(g)(1)
The Department believes that the one-time requirement to report
reliance on the QPAM Exemption via email to <a href="/cdn-cgi/l/email-protection#124342535f52767d7e3c757d64"><span class="__cf_email__" data-cfemail="742524353934101b185a131b02">[email protected]</span></a> will result in
a minor additional clerical cost. The information required under
subsection I(g)(1) is limited to the legal name of the entity relying
upon the exemption and any name the QPAM may be operating under.
This notification would occur only once for most QPAMs. Therefore,
the Department expects it will take 15 minutes, on average, for each
QPAM to prepare and send this electronic notification. This cost is
estimated to be $8,505.\53\ The Department seeks comment on this
estimate.
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\53\ The cost is based upon the expenditure of 0.25 hours for
each QPAM: (616 QPAMs * 0.25 hours = 154 hours in total). To
calculate the cost, an hourly labor rate of $55.23 is used for a
clerical worker. Therefore, the total cost amounts to: (616 QPAMs *
0.25 hours * $55.23) = $8,505 (rounded). The Department estimates of
labor costs by occupation reflect estimates of total compensation
and overhead costs. Estimates for total compensation are based on
mean hourly wages by occupation from the 2020 Occupational
Employment Statistics and estimates of wages and salaries as a
percentage of total compensation by occupation from the 2020
National Compensation Survey's Employee Cost for Employee
Compensation. Estimates for overhead costs for services are imputed
from the 2017 Service Annual Survey. To estimate overhead cost on an
occupational basis, the Office of Research and Analysis allocates
total industry overhead cost to unique occupations using a matrix of
detailed occupational employment for each NAICS industry. All values
are presented in 2020 dollars.
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[[Page 45218]]
Written Management Agreement--Subsection I(g)(2)
The Department believes that the cost associated with adding the
required terms under subsection I(g)(2) to a QPAM's Written Management
Agreement only would impose costs related to updating existing
management agreements. QPAMs will need to send the update to each of
their client Plans, but the QPAM likely would be able to prepare a
single standard form with identical language and then send it to each
client Plan. For each QPAM, the Department estimates it will take one
hour of in-house legal professional time to update and supplement their
existent standard management agreements, and two minutes of clerical
time to prepare and mail a one-page addition to the agreement to each
client Plan. Including mailing costs, the total estimated cost of this
requirement amounts to $135,540.\54\
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\54\ This cost is based upon the expenditure of one hour of a
legal professional for each of the 616 estimated QPAMs using an
hourly labor rate of $140.96. This labor cost is estimated as (616
QPAMs * 1 hour * $140.96) = $86,831 for legal professional time
(rounded). As specified in the PRA section, the Department estimates
each QPAM serves 32 client Plans on average. The Department also
expects each QPAM will have to append one page to their existing
management agreements and that it will take each QPAM two minutes of
clerical time to prepare and mail this one-page addition to each
client Plan. This labor cost is then estimated as (616 QPAMs * 32
client Plans * (2/60) hours * $55.23) = $36,290 for clerical time
(rounded). The Department estimates that the costs of printing and
mailing one page are $0.05 and $0.58, respectively. Therefore,
adding one page to all management agreements amounts the total
printing and mailing cost to (616 QPAMs * 32 client Plans) * 1 page
* ($0.05 + $0.58) = $12,419 (rounded). The estimated total cost of
the provision is therefore $86,831 + $36,290 + $12,419 = $135,540.
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Ineligibility Due to Foreign Convictions--Subsection I(g)(3)(A) and
Subsection VI(r)(2)
The Department and QPAMs have treated foreign convictions as
causing ineligibility under Section I(g) since at least 2000.\55\
Therefore, the Department believes that the clarifying reference that
includes foreign convictions within the scope of Section I(g) will not
change the costs of the exemption as compared to the current costs.
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\55\ See, e.g., Prohibited Transaction Exemption (PTE) 2020-01,
85 FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019);
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE
2004-13, 69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'')
Final Authorization Numbers 2003-10E, 2001-02E, and 2000-30E,
available at <a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62</a>.
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Mandatory One-Year Winding-Down Period--Section I(j)
To estimate the number of future ineligible QPAMs, the Department
first referred to individual exemptions the Department granted to QPAMs
facing ineligibility under current Section I(g) in connection with 14
separate convictions or possible convictions since 2013.\56\ The
Department believes the individual exemptions granted since 2013
provide the best basis for estimating the number of future ineligible
QPAMs. The Department lacks data regarding the actual number of QPAMs
covered by each individual exemption before 2013; therefore, the
exemptions issued since 2013 best reflect the current legal and
prosecutorial environment that ultimately leads to convictions covered
by current Section I(g). Each individual exemption may affect multiple
QPAMs, so the Department considers the number of affected entities to
be the number of QPAMs covered by each individual exemption. The
Department then estimated the number of QPAMs that might be captured by
the proposed expansion of the ineligibility provision that applies to
participating in Prohibited Misconduct.
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\56\ Ineligible QPAMs that request individual exemptions
generally request relief for the entire ten-year ineligibility
period. However, to engage in thorough fact-finding process and to
verify compliance with certain audit provisions in the individual
exemptions, the Department has granted exemptions that include less
than ten years of relief in many situations. Ineligible QPAMs then
typically apply for an extension of relief even though no additional
conviction has occurred. Additionally, in situations where an
ineligible QPAM is impacted by a subsequent conviction before the
expiration of the ten-year ineligibility period for the initial
conviction, the winding-down period would also not be implicated, so
there is no additional cost burden associated with subsequent
convictions. The Department notes that there were a total of three
subsequent convictions after an initial conviction for some entities
in 2017, 2018, and 2019.
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As shown in the table below, the Department estimates that eight
QPAMs each year would be subject to the one-year winding-down period
after a Criminal Conviction.\57\ The number of QPAMs affected in any
given year is a function of the number of convictions covered by
Section I(g) and the number of entities within a corporate family
operating as QPAMs. Therefore, in some years, the number of affected
QPAMs impacted by ineligibility due to a Criminal Conviction could be
higher than eight, and in other years it could be lower. These
calculations are broken down in the table below.
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\57\ The Department did not include in this estimate any of the
possible QPAMs that have remote relationships with a convicted
entity, identified in the individual exemptions as ``Related
QPAMs.'' The Department has never received comments, questions,
requests for guidance, or separate individual exemption applications
from any entities that would fall into that definition, and
therefore, assumes such entities are not operating as QPAMs. The
Department welcomes input on this assumption.
Table 1--Summary of Past Convictions That Would Implicate the Proposed
Winding-Down Period
[By year] *
------------------------------------------------------------------------
Number of Number of
convictions affected QPAMs
------------------------------------------------------------------------
2013................................ 1 4
2014................................ 1 3
2015................................ 1 20
2016................................ 6 25
2017................................ ................ ................
2018................................ ................ ................
2019................................ ................ ................
2020................................ ................ ................
2021................................ 1 13
-----------------------------------
Total........................... 10 65
[[Page 45219]]
Average......................... 1.1 7.2
Estimated Yearly Average ** 2 8
(rounded)......................
------------------------------------------------------------------------
* The average number of affected QPAMs includes zeros for years without
convictions that would implicate the winding-down period. There were
three convictions during the period from 2017 through 2020 that would
not implicate the winding-down period and associated costs.
** The corresponding calculated averages include decimals; therefore, to
err on the side of caution and inclusion the estimated yearly average
is rounded to the upper integer.
The Department's proposed expansion of the ineligibility provision
to include Prohibited Misconduct that leads to an Ineligibility Notice
likely will increase the number of QPAMs that become ineligible due to
Section I(g). Although the Department does not have precise data to
determine the exact number of QPAMs that would become ineligible due to
this proposed expansion, the Department has assumed the additional
number of ineligible QPAMs to be equal to the eight QPAMs that
experience ineligibility due to a conviction under current Section
I(g), resulting in a total of 16 ineligible QPAMs. The Department
requests comments on this assumption and data or other information that
would allow the Department to more precisely estimate the number of
QPAMs that would lose eligibility due to this proposed expansion.
Because the conditions of the winding-down provision borrow from
the conditions included in the Department's existing individual Section
I(g) exemptions, the Department does not believe there will be any
added cost with respect to the proposed winding-down period for QPAMs
that become ineligible due to a Criminal Conviction relative to the
current baseline of obtaining an individual exemption covering this
same time period. However, an additional eight QPAMs, on average, may
become ineligible each year for participating in Prohibited Misconduct,
implicating the winding-down period and the conditions related to
proposed provisions that are required to be included in the Written
Management Agreement. As a result, QPAMs would have to possibly bear
the costs associated with indemnifying their client Plans for losses
that would occur if they move to a new asset manager. The Department
lacks sufficient data at this time to estimate these costs associated
with the winding-down period and requests comments regarding these
costs. The Department welcomes comments that would provide data to
assist in calculating an estimate.
Notice to Plans--Subsection I(j)(1)
Within 30 days after the conviction date, the QPAM must provide
notice to the Department at <a href="/cdn-cgi/l/email-protection#2e7f7e6f636e4a414200494158"><span class="__cf_email__" data-cfemail="5908091814193d3635773e362f">[email protected]</span></a> and each of its client Plans
stating (i) its failure to satisfy subsection I(g)(3); and (ii) that it
agrees, as required by subsection I(g)(2), not to restrict the ability
of a client Plan to terminate or withdraw from its arrangement with the
QPAM. QPAMs that violate Section I(g) under the current QPAM Exemption
are required to provide this type of notice when they obtain an
individual exemption, so no incremental burden is attributed to this
requirement for QPAMs that become ineligible due to a Criminal
Conviction. However due to the expanded proposed scope of
ineligibility, QPAMs that become ineligible after receiving an
Ineligibility Notice due to participating in Prohibited Misconduct will
incur the cost of sending notices to their client Plans for the first
time. With an average of 32 client Plans per QPAM, the Department
estimates that, in total, four hours of in-house legal professional
time will be required to prepare all notices as well as seven hours of
clerical time for distribution. Including mailing costs, the Department
estimates that the total incremental cost related to ineligibility
after receiving an Ineligibility Notice is $1,090.\58\
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\58\ The burden is estimated assuming 8 QPAMs will need to send
the notice: 8 QPAMs * 0.5 hours of professional legal time = 4 hours
to prepare all notices. The Department also assumes that 80 percent
of all notices will be delivered by regular mail, requiring
approximately two minutes of clerical time to prepare the notices
for mailing, that is, (8 QPAMs * 32 Plans * 0.80 sent by paper) *
(2/60) hours of clerical time = 7 hours (rounded). The Department
also estimates that the cost burden for preparing and mailing the
notices will be approximately equal to $139, that is, 205 * ((2 *
$0.05) + $0.58) = $139 (rounded). Therefore, the total cost
associated with this requirement is (4 * legal professional labor
rate of $140.96) + (7 * clerical labor rate of $55.23) + $139 =
$1,090 (rounded). Any discrepancies in the calculations are a result
of rounding.
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The Department believes the cost of sending this notice to the
Department will be negligible because the QPAM will have already
prepared and sent the notice to client Plans and the notice to the
Department is required to be sent electronically.
Warning and Opportunity To Be Heard in Connection With Prohibited
Misconduct--Section I(i)
As described above, the Department estimates eight QPAMs could
experience ineligibility due to participating in Prohibited Misconduct.
Before QPAMs become ineligible, they would be provided with a written
warning and an opportunity to be heard under Section I(i). As a result,
QPAMs would have to possibly bear the costs associated with this
process. The Department estimates that this process would occur twice
each year, with each process covering four QPAMs that are part of the
same corporate family. The Department estimates that preparing a
response to the ineligibility notice and for a conference with the
Department would require 10 in-house legal professional hours (two
preparations * 10 hours) resulting in 20 total hours at an equivalent
cost of approximately $2,819.\59\ The Department estimates that
preparing a response and preparing for the conference will also require
16 total outside legal professional hours (2 preparations times 8
hours) at a cost of $7,904.\60\ Thus, the total labor cost of preparing
a response and preparing for a conference amounts to $10,723. The
Department requests comment on this cost estimate.
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\59\ This cost is based upon an hourly labor rate of $140.96 for
an in-house legal professional. 2020 National Compensation Survey's
Employee Cost for Employee Compensation.
\60\ The outside legal professional labor rate is a composite
weighted average of the Laffey Matrix for Wage Rates (<a href="http://www.laffeymatrix.com/see.html">http://www.laffeymatrix.com/see.html</a>, Year: 6/01/21-5/31/22): ($381 * 0.4)
+ ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) = $494.
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[[Page 45220]]
Requesting an Individual Exemption--Section I(k)
Proposed new Section I(k) provides that a QPAM that is ineligible
or anticipates that it will become ineligible due to an actual or
possible Criminal Conviction may apply for an individual exemption from
the Department to continue to rely on the relief provided in the QPAM
Exemption for a longer period than the one-year winding-down period. In
such an event, the exemption provides that an applicant should review
the Department's most recently granted individual exemptions involving
Section I(g) ineligibility. If an applicant requests the Department to
exclude any term or condition from its exemption that is included in a
recently granted individual exemption, the applicant must include a
detailed statement with its exemption application explaining the
reason(s) why the proposed variation is necessary and in the interest
and protective of affected Plans, their participants and beneficiaries,
and IRA owners. Such applicants also should provide detailed
information in their applications quantifying the specific cost in
dollar amounts, if any, of any harm its client Plans would suffer if a
QPAM could not rely on the exemption after the winding-down period,
including the specific dollar amounts of investment losses resulting
from foregone investment opportunities and any evidence supporting the
proposition that investment opportunities would only be available to
Plans on less advantageous terms.
Due to the proposed expanded scope of ineligibility to include
participating in Prohibited Misconduct, the Department estimates that
two additional applicants each year would apply for an individual
exemption, each covering four ineligible QPAMs. Each of these two new
applicants will spend 12 hours of in-house legal professional and 13
hours of in-house clerical time preparing the required documentation
for the application that will be used by an outside legal professional.
The Department estimates that total labor costs (wages plus benefits
plus overhead) for an in-house legal professional would average $140.96
per hour and $55.23 per hour for clerical staff.\61\ Therefore, the
Department estimates that preparing this documentation would require 24
in-house legal professional hours (2 applications * 12 hours) and 26
clerical hours (2 applications * 13 hours) resulting in 50 total hours
at an equivalent cost of approximately $4,819.\62\ Further, the
Department estimates that, on average, 25 hours of outside legal
professional time will be spent preparing the documentation for the
application, with a total labor cost for outside legal professionals
estimated to average $494.00 per hour.\63\ The Department estimates
that preparing the applications will also require 50 total outside
legal professional hours (2 applications * 25 hours) at a cost of
$24,700. Thus, the total labor cost of application preparation amounts
to $29,519.
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\61\ See supra, notes 53 and 59. 2020 National Compensation
Survey's Employee Cost for Employee Compensation.
\62\ The 24 in-house legal professional hours are estimated to
cost $3,383 (rounded), and the 26 in-house clerical hours are
estimated to cost $1,436 (rounded). This totals to $4,819 (rounded).
Any discrepancies in the calculations are a result of rounding.
\63\ See supra, note 60.
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For applications that reach the stage of publication of a proposed
exemption in the Federal Register, a notice must be prepared and
distributed to interested parties. If both applications are published
annually, approximately 256 notices will be distributed (this
corresponds to 32 client Plans per each of the eight QPAMs affected by
two applications). Similarly, if the proposed exemptions are ultimately
granted, each of these eight QPAMs will be required to send an
objective description of the facts and circumstances upon which the
misconduct is based to each client Plan. The Department estimates that
the distribution for notices and objective descriptions will require 10
minutes for each one of the 256 interested parties, totaling
approximately 42 hours at a cost of approximately $2,357.\64\ In
addition, material and mailing costs for all of these notices totals
approximately $443.\65\ Therefore, the Department estimates that the
total costs associated with notice distribution would be $2,800.
---------------------------------------------------------------------------
\64\ The total cost is calculated as: ((10/60) hours * 256
interested parties * $55.23 hourly clerical rate) = $2,357
(rounded).
\65\ The Department estimates that 80% of these notices, that
is, 205 notices, will be delivered by regular mail. The Department
further assumes that notices and the descriptions of facts and
circumstances will be delivered separately, comprising 15 and 5
pages, respectively. Therefore, with a printing cost of $0.05 per
page and a mailing cost of $0.58 per notice, the Department
estimates the total mailing cost as 205 * ((15 * $0.05) + $0.58) +
205 * ((5 * $0.05) + $0.58) = $443 (rounded).
---------------------------------------------------------------------------
Additional Requirement for QPAMs Requesting an Individual Exemption
If an applicant requests the Department to exclude any term or
condition from its exemption that is included in a recently granted
individual exemption, the applicant must include a detailed statement
with its exemption application explaining the reason(s) why the
proposed variation is necessary and in the interest and protective of
affected Plans, their participants and beneficiaries, and IRA owners.
In these applications, detailed information would be required
quantifying the specific cost to Plans, in dollar amounts, of the harm
its client Plans would suffer if a QPAM could not rely on the exemption
after the winding-down period. This should include dollar amounts of
investment losses resulting from foregone investment opportunities and
any evidence supporting the proposition that investment opportunities
would only be available to Plans on less advantageous terms.
The Department assumes the eight QPAMs that are estimated to become
ineligible due to the receipt of a written Ineligibility Notice would
incur incremental costs due to the cost quantification requirement
described above and also the requirement to review the Department's
most recently granted individual exemptions involving Section I(g)
ineligibility. To satisfy the requirement to review the Department's
most recently granted individual exemptions, the Department estimates
that it would require three hours of outside legal professional time to
review past individual exemptions and draft this addition to the
individual exemption application. Therefore, for the two applications
covering the eight ineligible QPAMs receiving a written Ineligibility
Notice, the cost associated with the additional requirement totals
$4,288.\66\
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\66\ The burden is estimated assuming 8 QPAMs experience
ineligibility that will need to include this information in their
individual exemption application. Because the average number of
QPAMs covered by a single exemption is four, the cost estimation is
made assuming 2 applications. At an hourly rate of $165.45 for
financial professional time, the cost associated with the cost
quantification requirement is estimated as: (2 applications * 4
hours * $165.45 financial professional rate) = $1,324 (rounded). For
the cost associated with the review of past exemptions, a composite
wage rate is used for the outside legal professional by employing a
weighted average of the legal fees reported in the Laffey Matrix for
Wage Rates (<a href="http://www.laffeymatrix.com/see.html">http://www.laffeymatrix.com/see.html</a>, Year: 6/01/21-5/
31/22): ($381 * 0.4) + ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1)
= $494. The total cost associated with reviewing past exemptions is
then (2 applications * 3 hours * $494 outside legal professional
rate) = $2,964 (rounded). Therefore, the total cost associated with
the additional requirement for QPAMs ineligible due to receiving a
written Ineligibility Notice is ($1,324 + $2,964) = $4,288
(rounded).
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The eight QPAMs that would become ineligible due to a Criminal
Conviction will only incur an incremental cost to ensure they include
in their exemption applications the specific dollar amounts
[[Page 45221]]
of investment losses resulting from foregone investment opportunities
and any evidence supporting the proposition that investment
opportunities would only be available to client Plans on less
advantageous terms. For this requirement, the Department assumes it
would require four hours of a financial professional time to prepare
such a report. Therefore, for the two applications covering the eight
ineligible QPAMs due to a Criminal Conviction, the cost associated with
the additional requirement totals $1,324.\67\
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\67\ The burden is estimated assuming 8 QPAMs experience
ineligibility that will need to include this information in their
individual exemption application. Because the average number of
QPAMs covered by a single exemption is four, the cost estimation is
made assuming 2 applications. At an hourly rate of $165.45 for
financial professional time, this cost is estimated as: (2
applications * 4 hours * $165.45 financial professional rate) =
$1,324 (rounded).
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Involvement in Investment Decisions by Parties in Interest--Section
I(c)
The Department anticipates that the modifications to Section I(c)
will not change the costs of the exemption as compared to cost of the
current QPAM Exemption because the types of transactions that were
intended to be excluded by current Section I(c) are the same types of
transactions intended to be excluded by modified Section I(c).
Asset Management and Equity Thresholds--Section VI(a)
As a result of the proposed adjustments to the asset management and
equity thresholds to the QPAM definition in Section VI(a), the
Department acknowledges some QPAMs may not meet the new threshold
requirements, and, consequently, would no longer be able to rely on the
QPAM Exemption. The Department expects QPAMs and Plans that utilize
these QPAMs to incur costs due to this transition but lacks strong data
to estimate the impact.\68\ The Department has requested similar data
in connection with individual applications for exemptions following
convictions covered by Section I(g), but the data provided by
applicants has been limited, as have been the costs identified by the
applicants. The Department seeks comments and data on the number of
QPAMs who will potentially become unable to rely upon the exemption
(along with the number of Plans and value of Plan assets) that will be
impacted by the increase in asset management and equity thresholds.
---------------------------------------------------------------------------
\68\ Some QPAMs have suggested in the past that there could be
costs associated with unwinding transactions that relied on the QPAM
Exemption and reinvesting assets in other ways. The loss of QPAM
status could also require an asset manager to keep lists of parties
in interest to its client Plans to ensure the asset manager does not
engage in prohibited transactions. However, even without the QPAM
Exemption, a wide variety of investments are available that do not
involve non-exempt prohibited transactions.
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Recordkeeping--Section VI(t)
The amendment would also add a new recordkeeping provision that
would apply to all QPAMs. Due to the fiduciary status of QPAMs and the
existing regulatory environment, the Department assumes that QPAMs
already maintain such records as part of their regular business
practices. In addition, the recordkeeping requirements correspond to
the six-year period in ERISA sections 107 and 413. Therefore, the
Department expects that the recordkeeping requirement would impose a
negligible burden. The Department welcomes comments regarding the
burden associated with the recordkeeping requirement.
If a QPAM refuses to disclose information to any of the parties
listed in Section VI(t), on the basis that information is exempt from
disclosure, the QPAM must provide a written notice advising the
requestor of the reason for the refusal and that the Department may
request such information. The Department does not have data on how
often such a refusal is likely to occur; however, the Department
believes such instances would be rare. As a result, the Department
believes this requirement would impose negligible cost and requests
comments about whether this may happen more frequently and the possible
costs.
Rule Familiarization Costs
The Department estimates that it will take 60 minutes, on average,
for each QPAM to become familiar with the proposed amendment. The
familiarization cost is estimated to be $304,304.\69\ The Department
seeks comment on this estimate.
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\69\ The cost is based upon the expenditure of 1.0 hours for
each of the 616 estimated QPAMs to become familiar with the proposed
amendments: (616 QPAMs * 1 hour = 616 hours in total). To calculate
the cost a composite wage rate is used by employing a weighted
average of the legal fees reported in the Laffey Matrix for Wage
Rates (<a href="http://www.laffeymatrix.com/see.html">http://www.laffeymatrix.com/see.html</a>, Year: 6/01/21-5/31/22):
($381 * 0.4) + ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) = $494.
This amounts to: (616 QPAMs * 1 hour * $494) = $304,304. Note that
QPAMs likely rely on outside specialized legal counsel to help keep
them in compliance with the QPAM Exemption. The specialized outside
legal counsel likely will review the amendment and present updates
to their clients, which means that the costs will be spread out over
multiple clients.
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Summary of Costs
The total estimated annual costs associated with the proposal will
be $487,370 in the first year and $183,066 in subsequent years. Table 2
summarizes the costs for each requirement.
Table 2--Cost Summary
------------------------------------------------------------------------
Aggregate cost
Requirement change (in
dollars)
------------------------------------------------------------------------
Reporting Reliance on the QPAM Exemption.............. $8,505
Written Management Agreement.......................... 135,540
Notice to Plans....................................... 1,090
Written Warning and Opportunity to be Heard........... 10,723
Requesting an Individual Exemption Costs:
Preparation Labor Cost............................ 29,519
Notices Distribution.............................. 2,800
Additional Requirement-Criminal Conviction QPAMs.. 1,324
Additional Requirement-Prohibited Misconduct QPAMs 4,288
Rule Familiarization Costs............................ 304,304
-----------------
First Year Total Estimated Annual Cost............ 498,093
Subsequent Years Total Estimated Annual Cost \1\.. 193,789
------------------------------------------------------------------------
Note: Only quantifiable costs are displayed.
\1\ Excludes Rule Familiarization Costs.
[[Page 45222]]
Transfers
If an asset manager becomes ineligible for relief under the QPAM
Exemption (e.g., because of its participation in Prohibited
Misconduct), its client Plans may choose to transfer assets and revenue
away from the ineligible asset manager to its competitors. From the
Plan's perspective, the reduction in assets entrusted to the original
asset manager (and associated revenue reduction) are offset by the
increase in assets managed by another asset manager or managers (and
associated revenue increase). Even if the impact of the switch is
minimal or neutral from the point of view of the Plan, it is
nevertheless appropriately characterized as a transfer from a societal
perspective.\70\
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\70\ Although a QPAM's client Plans could be expected to move
some or all of its assets to another asset manager if the QPAM is
convicted of an enumerated crime, this discussion does not address
these transfers. The Department has long viewed both domestic and
foreign convictions as causing ineligibility under the existing
exemption. Consequently, the regulatory baseline already includes
the impact of such convictions.
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Although the Department does not have sufficient data to quantify
the likely size of such revenue transfers, they could have an annual
effect that exceeds $100 million due to the significant pool of Plan
assets that QPAMs manage. To the extent the proposed amendment results
in the movement of assets from asset managers that become ineligible to
rely on the exemption because of their Prohibited Misconduct to asset
managers that have not engaged in such misconduct, the associated
revenue transfers promote the Department's objectives in proposing this
amendment to the QPAM Exemption and enhance the security of Plan
investments.
The Department seeks comments on transfers that could result from
the proposed expansion of the QPAM Exemption's ineligibility provision.
The Department is particularly interested in receiving comments
addressing whether a QPAM's client Plans would be likely to move all or
some their assets to an alternative asset manager after a QPAM becomes
ineligible due to the proposed expansion of the ineligibility
provision. The Department also specifically requests comments on the
likely size of the transaction costs associated with searching for and
hiring new asset managers.
Regulatory Alternatives
In order to make the statutory findings for issuing exemptions
dictated by ERISA section 408(a) and Code section 4975(c)(2), the
Department must find that an exemption is in the interest of and
protective of the rights of Plans, their participants and
beneficiaries, and IRA owners. Therefore, the Department provides
several qualitative alternatives to the proposed amendment, as
discussed below, that were considered in connection with the
statutorily mandated exemption requirements.
Do not amend the QPAM Exemption--Continue status quo of addressing
ineligibility under current Section I(g) and only through
administration of the individual exemption program.
The Department considered not expanding the scope of Section I(g)
and maintaining its practice of addressing ineligibility under Section
I(g) only through the individual exemption process. However, immediate
ineligibility under Section I(g) has become a source of uncertainty and
potential disruption to Plans. As the financial services industry has
become increasingly consolidated, the number of entities becoming
ineligible for relief under the QPAM Exemption has grown, prompting
more entities to face ineligibility. Through the individual exemption
process, client Plans would continue to be exposed to the potential for
immediate disruption and transition costs that might otherwise be
avoided through this proposed amendment.
The Department decided against this alternative in favor of this
proposed amendment, relying on its experience processing individual
exemption applications to create a smoother transition between the QPAM
Exemption and the individual exemption program so that a QPAM's client
Plans have certainty regarding their rights after an ineligibility
event occurs.
Amend the QPAM Exemption to expressly exclude foreign convictions.
The Department considered expressly limiting the scope of
convictions to only those in a U.S. federal or state trial courts.
However, given the increasingly global reach of asset managers and
investment strategies, the Department determined such a limitation
would leave Plans less protected and be inconsistent with the ERISA
section 408(a) and Code section 4975(c)(2) required findings. An
affiliated entity's criminal or other misconduct in a foreign
jurisdiction is an important indicator of the integrity of the entire
corporate organization and casts doubt on a QPAM's ability to act in a
manner that will properly protect Plans and their participants and
beneficiaries from the related damages, losses, and other harm that
often result from such criminal or other misconduct.
Amend the QPAM Exemption to remove asset management and equity
thresholds.
As an alternative to updating the asset management and equity
thresholds, the Department revisited whether such thresholds could be
removed entirely from the exemption. The Department determined that
this approach would be inconsistent with one of the core concepts upon
which the QPAM Exemption was based. In the absence of an appropriate
alternative ensuring that a QPAM will remain an independent decision-
maker, free from influence of other Plan fiduciaries, the Department is
unable to justify the removal of the thresholds.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
allow the general public and federal agencies to comment on proposed
and continuing collections of information in accordance with the
Paperwork Reduction Act of 1995 (PRA).\71\ This helps to ensure that
the public understands the Department's collection instructions,
respondents can provide the requested data in the desired format,
reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the Department can
properly assess the impact of collection requirements on respondents.
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\71\ 44 U.S.C. 3506(c)(2)(A) (1995).
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Currently, the Department is soliciting comments concerning the
proposed information collection request (ICR) included in the proposed
QPAM Exemption amendment. To obtain a copy of the ICR, contact the PRA
addressee shown below or go to <a href="https://www.reginfo.gov/public/">https://www.reginfo.gov/public/</a>.
The Department has submitted a copy of the proposed amendment to
the Office of Management and Budget (OMB), in accordance with 44 U.S.C.
3507(d), for review of its information collections. The Department and
OMB are particularly interested in comments that:
<bullet> Evaluate whether the collection of information is
necessary for the functions of the agency, including whether the
information will have practical utility;
<bullet> Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
[[Page 45223]]
<bullet> Enhance the quality, utility, and clarity of the
information to be collected; and
<bullet> Help minimize the burden of the collection of information
on those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronically delivered responses).
Commenters may send their views on the Department's PRA analysis in
the same way they send comments in response to the NPRM as a whole
(e.g., through the <a href="http://www.regulations.gov">www.regulations.gov</a> website), including as part of a
comment responding to the broader NPRM. In addition to having an
opportunity to file comments with the Department, comments about the
paperwork implications of the proposed regulation may also be addressed
to the OMB. Comments should be sent to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Room 10235, New
Executive Office Building, Washington, DC 20503 and marked ``Attention:
Desk Officer for the Employee Benefits Security Administration.'' OMB
requests that comments be received by September 26, 2022, which is 60
days from publication of the proposed amendment to ensure their
consideration.
PRA Addressee: Address requests for copies of the ICR to James
Butikofer, Office of Research and Analysis, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue NW,
Room N-5718, Washington, DC 20210 or by email at: <a href="/cdn-cgi/l/email-protection#b7d2d5c4d699d8c7c5f7d3d8db99d0d8c1"><span class="__cf_email__" data-cfemail="6702051406490817152703080b49000811">[email protected]</span></a>.
ICRs also are available at <a href="https://www.reginfo.gov">https://www.reginfo.gov</a> (<a href="https://www.reginfo.gov/public/do/PRAMain">https://www.reginfo.gov/public/do/PRAMain</a>).
Prohibited Transaction Exemption 84-14, 49 FR 9494 (March 13,
1984), as corrected at 50 FR 41430 (October 10, 1985) and amended at 70
FR 49305 (August 23, 2005) and at 75 FR 38837 (July 6, 2010) (the QPAM
Exemption) permits various parties related to Plans to engage in
transactions involving Plan assets if, among other conditions, the
assets are managed by a QPAM.
The following analysis considers the existing paperwork burden
associated with the existing QPAM Exemption. The Department estimates
that there were 616 QPAMs in 2019.\72\
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\72\ Using Form 5500 data for 2019, the Department counted in
total 1390 service providers who provided services of ``Investment
Management'' and ``Named Fiduciary,'' of which only 765 reported
their business code. Out of these 765 providers, 339 reported their
business code starting with the 2-digit NAICS code 52, yielding a
ratio of 0.44 of potential QPAMs to other providers. Therefore, the
Department estimates that there were 0.44 * 1390 = 616 potential
QPAMs in 2019.
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Paperwork Burden Associated With the QPAM Exemption Information
Collection Requirements
Using 2019 Form 5500 data, the Department estimated there are 616
potential QPAMs by approximating the total number of providers who in
2019 provided services of ``Investment Management'' and ``Named
Fiduciary'' simultaneously to at least one plan, as reported on
Schedule C of the 2019 Form 5500, and whose NAICS codes start with the
2-digit 52, which corresponds to Finance and Insurance
Institutions.\73\ Furthermore, using the same data, the Department
estimates that a single QPAM services, on average, 32 client Plans.\74\
Therefore, the Department estimates that in total there are 19,712
client Plans (616 QPAMs times 32 client Plans per QPAM).
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\73\ The Department counted in total 1390 service providers who
provided services of ``Investment Management'' and ``Named
Fiduciary,'' of which only 765 reported their business code. Out of
these 765 providers, 339 reported their business code starting with
the 2-digit NAICS code 52, yielding a ratio of 0.44 of potential
QPAMs to other providers. Therefore, the Department estimates that
there were potentially 0.44 * 1390 = 616 QPAMs in 2019.
\74\ Although the Department estimates there are 616 QPAMs, it
can only observe and count the number of client Plans corresponding
to 339 QPAMs. The Department counted 10,719 Plans served by these
339 observable QPAMs, yielding an average of 32 client Plans per
QPAM in 2019. The Department acknowledges that these entities do not
necessarily act as QPAMs to their served client Plans, and therefore
considers this average as an upper limit for the number of client
Plans served by a QPAM.
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QPAM-Sponsored Plans--Policies and Procedures--Section V(b)
The existing information collection requirements of the QPAM
Exemption require in-house QPAMs to develop written policies and
procedures designed to ensure compliance with the conditions of the
exemption. Existing in-house QPAMs will have already prepared their
policies and procedures in accordance with the QPAM Exemption, however
some in-house QPAMs may also update their policies and procedures in a
given year. The Department estimates that the burden associated with
preparing policies and procedures will affect ten percent of all in-
house QPAMs, including all new in-house QPAMs and some existing in-
house QPAMs.
The latest Form 5500 estimates from the year 2019 indicate that
there are approximately 118 in-house QPAMs.\75\ Therefore, the
Department estimates that about 12 QPAMs will need to update their
policies and procedures each year.\76\ The Department estimates that
the costs associated with new QPAMs meeting the policies and procedures
requirements of the QPAM Exemption is $1,663.\77\
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\75\ The Department estimated the number of in-house QPAMs in
2019 using the estimated fraction of QPAMs who also sponsored a Plan
in 2019.
\76\ 0.1 * 118 QPAMs = 12 QPAMs (rounded). Any discrepancies may
occur from rounding figures in this summary but not in the actual
calculations.
\77\ The burden is estimated as follows: (0.1 * 118 * 1 hour) =
12 hours (rounded). A labor rate of $140.96 is used for legal
counsel and applied in the following calculation: (0.1 * 118 * 1
hour * $140.96) = $1,663 (rounded).
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QPAM-Sponsored Plans--Independent Audit--Section V(c)
Additionally, the exemption requires in-house QPAMs to engage an
independent auditor to conduct an annual exemption audit and issue an
audit report to the Plan. The Department estimates that each of the 118
in-house QPAMs will use in-house legal professionals, financial
managers, and clerical time to provide documents and respond to
questions from the auditor. The Department assumes QPAMs use either a
law firm or a consulting firm to conduct the exemption audits, and the
Department assumes that the average cost of an exemption audit is
$25,000.\78\ This results in a total estimated cost of $2,950,000.\79\
Additionally, each exemption audit is assumed to require about five
hours of a legal professional's time, 13 hours of a financial manager's
time, and six hours of clerical time for each of the 118 QPAMs to
provide needed materials for the audit. This amounts to an approximate
cost of $3,187 per in-house QPAM, therefore resulting in a total
equivalent cost of $376,070.\80\ The Department requests comment on the
cost and time estimates to conduct the audits.
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\78\ The Department has received information from industry
representatives that the cost of a similar annual audit required by
PTE 96-23 (the INHAM Exemption) may range from approximately $10,000
to $25,000, depending on asset size and how many years the INHAM has
used the auditing firm. Because of the type of audit required for an
in-house QPAM, the Department has assumed that the average cost of
an exemption audit required by the QPAM Exemption would be $25,000.
\79\ Assuming that the average cost of an exemption audit would
be $25,000, 118 QPAMs * $25,000 = $2,950,000.
\80\ The burden is estimated as follows: (118 * 5 hours) + (118*
13 hours) + (118 * 6 hours) = 2,832 hours. A labor rate of $140.96
is used for legal counsel, a labor rate of $165.45 is used for a
financial professional, and a labor rate of $55.23 is used for a
clerical worker. These labor rates are applied in the following
calculation: (118 * 5 hours * $140.96) + (118 * 13 hours * $165.45)
+ (118 * 6 hours * $55.23) = $376,070 (rounded). All labor rates
reflect EBSA estimates.
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[[Page 45224]]
Property Manager Written Guidelines--Section I(c)
The exemption also contains a requirement for written guidelines
when, in certain instances, a property manager acts on behalf of a
QPAM. In this case, the QPAM is required to establish and administer
the guidelines. Because agreements between an institution and a
property manager are customary, the Department estimates that this
requirement will impose no additional burden on QPAMs.
Reporting Reliance on the QPAM Exemption--Subsection I(g)(1)
QPAMs will have to report their reliance on the QPAM Exemption via
email to <a href="/cdn-cgi/l/email-protection#f0a1a0b1bdb0949f9cde979f86"><span class="__cf_email__" data-cfemail="fcadacbdb1bc989390d29b938a">[email protected]</span></a>. This notification would occur only once for most
QPAMs. The information required under subsection I(g)(1) is limited to
the legal name of the entity relying upon the exemption and any name
the QPAM may be operating under. The Department expects it will take 15
minutes, on average, for each QPAM to both prepare and send this
electronic notification. This burden is estimated to amount to 154
hours with an equivalent cost of $8,505.\81\ The Department seeks
comment on this estimate.
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\81\ The cost is based upon the expenditure of 0.25 hours for
each QPAM: (616 QPAMs * 0.25 hours) = 154 hours in total. To
calculate the equivalent cost, an hourly labor rate of $55.23 is
used for a clerical worker. Therefore, the total equivalent cost
amounts to: (616 QPAMs * 0.25 hours * $55.23) = $8,505 (rounded).
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Notice to Plans--Subsection I(j)(1)
Within 30 days after the conviction date or receipt of an
Ineligibility Notice due to participating in Prohibit Misconduct, the
QPAM must provide notice to the Department at <a href="/cdn-cgi/l/email-protection#5a0b0a1b171a3e3536743d352c"><span class="__cf_email__" data-cfemail="366766777b7652595a18515940">[email protected]</span></a> and each of
its client Plans stating (i) its failure to satisfy subsection I(g)(3);
and (ii) that it agrees, as required by subsection I(g)(2), not to
restrict the ability of a client Plan to terminate or withdraw from its
arrangement with the QPAM. With 16 ineligible QPAMs and an average of
32 client Plans per QPAM, the Department estimates that in total eight
in-house legal professional hours will be required to prepare all
notices as well as 13.7 hours of clerical time for distribution. In
addition, mailing costs for all 16 QPAMs amount to $279.\82\
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\82\ The burden is estimated assuming 16 QPAMs will need to send
the notice: 16 QPAMs * 0.5 hours of professional legal time = 8
hours to prepare all notices. The Department also assumes that 80
percent of all notices will be delivered by regular mail, requiring
approximately two minutes of clerical time to prepare the notices
for mailing, that is, (16 QPAMs * 32 Plans * 0.80 sent by paper) *
(2/60) hours of clerical time = 13.7 hours (rounded). The Department
also estimates that the cost burden for preparing and mailing the
notices will be approximately equal to $279, that is, 410 * ((2 *
$0.05) + $0.58) = $279 (rounded). Therefore, the total cost
associated with this requirement is (8* legal professional labor
rate of $140.96) + (13.7* clerical labor rate $55.23) + $279 =
$2,180 (rounded). Any discrepancies in the calculations are a result
of rounding.
---------------------------------------------------------------------------
The Department believes the cost of sending this notice to the
Department will be negligible since the QPAM will already prepare and
send the notice to their client Plans and the notice is required to be
sent electronically.
Recordkeeping--Section VI(t)
The amendment would also add a new recordkeeping provision that
would apply to all 616 QPAMs. Due to the fiduciary status of QPAMs and
the existing regulatory environment in which they exist, the Department
assumes that QPAMs already maintain many of the required records as
part of their regular business practices. In addition, the
recordkeeping requirements correspond to the six-year period in ERISA
sections 107 and 413. The Department expects that the recordkeeping
requirement would impose, on average, a burden of five minutes per
QPAM. Therefore, the Department estimates that the overall hour burden
of this recordkeeping requirement for all 616 QPAMs will be 51 hours
with an equivalent cost of $2,835.\83\ The Department welcomes comments
regarding the burden associated with the recordkeeping requirement.
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\83\ The burden is estimated for the 616 QPAMs as follows: (616
* (5/60) hours) = 51 hours (rounded). A labor rate of $55.23 is used
for clerical workers. These labor rates are applied in the following
calculation: (616 * (5/60) hours * $55.23) = $2,835 (rounded). All
labor rates reflect EBSA estimates.
---------------------------------------------------------------------------
If a QPAM refuses to disclose information to any of the parties
listed in proposed Section VI(t) on the basis that such information is
exempt from disclosure, the QPAM must provide a written notice advising
the requestor of the reason for the refusal and that the Department may
request such information. The Department does not have data on how
often such a refusal is likely to occur; however, the Department
believes such instances would be rare and impose negligible cost. The
Department requests comments about whether this may happen more
frequently and the possible costs.
Requesting an Individual Exemption--Section I(k)
The receipt of an Ineligibility Notice due to Prohibited Misconduct
could lead a QPAM to request an individual exemption. The burden for
filing an application requesting an individual exemption is included in
the ICR for the Exemption Procedure Regulation, which has been approved
under OMB Control Number 1210-0060. Instead of amending that ICR, the
estimated burden for applications from QPAMs receiving an Ineligibility
Notice due to Prohibited Misconduct is included here.\84\ The
Department estimates that applications for this type of individual
exemption would be submitted by, on average, four entities, and require
12 hours of in-house legal professional time and 13 hours of in-house
clerical time to prepare the documentation for the application that
will be used by the outside counsel. The Department estimates that
total labor costs (wages plus benefits plus overhead) for an in-house
legal professional would average $140.96 per hour and $55.23 per hour
for clerical staff.\85\ Therefore, the Department estimates that
preparing the documentation for the application would require 24 in-
house legal professional hours (2 applications * 12 hours) and 26
clerical hours (2 applications * 13 hours) resulting in 50 total hours
at an equivalent cost of approximately $4,819.\86\
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\84\ In three years when control number 1210-0060 is extended,
the increase in requests for individual exemptions will be captured
in the historical data used for the renewal and the burden going
forward will be captured there.
\85\ The Department estimates of labor costs by occupation
reflect estimates of total compensation and overhead costs.
Estimates for total compensation are based on mean hourly wages by
occupation from the 2020 Occupational Employment Statistics and
estimates of wages and salaries as a percentage of total
compensation by occupation from the 2020 National Compensation
Survey's Employee Cost for Employee Compensation. Estimates for
overhead costs for services are imputed from the 2017 Service Annual
Survey. To estimate overhead cost on an occupational basis, the
Office of Research and Analysis allocates total industry overhead
cost to unique occupations using a matrix of detailed occupational
employment for each NAICS industry. All values are presented in 2020
dollars.
\86\ The 24 in-house legal professional hours are estimated to
cost $3,383 (rounded), and the 26 in-house clerical hours are
estimated to cost $1,436 (rounded). This totals to $4,819 (rounded).
Any discrepancies in the calculations are a result of rounding.
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The Department expects that an exemption application related to
QPAM ineligibility generally is prepared by or under the direction of
attorneys with specialized knowledge of ERISA. The Department assumes
that these same attorneys will also prepare and distribute the notice
of the application to interested parties.
Applications for Section I(g) average approximately 25 pages. Due
to the somewhat focused nature of developing an application related to
Section I(g) ineligibility, the Department estimates that, on average,
25 hours of outside
[[Page 45225]]
legal professional time will be spent preparing the documentation for
the application. The Department requests comment on the accuracy of
this assumption. Total labor costs (wages plus benefits plus overhead)
for outside legal professionals are estimated to average $494.00 per
hour.\87\ Therefore, the Department estimates that preparing the
applications will require 50 outside legal professional hours (2
applications * 25 hours) with an equivalent cost of $24,700. This
estimate includes potential meetings with Department personnel as well
as preparation of supplementary documents that are requested by the
Department following some of these meetings.
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\87\ The outside legal professional labor rate is a composite
weighted average of the Laffey Matrix for Wage Rates (<a href="http://www.laffeymatrix.com/see.html">http://www.laffeymatrix.com/see.html</a>, Year: 6/01/21-5/31/22): ($381 * 0.4)
+ ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) = $494.
---------------------------------------------------------------------------
For applications that reach the proposed exemption stage, the QPAM
must prepare and distribute a notice to interested parties. If both
applications result in a published proposed exemption each year,
approximately 256 notices to interested parties will be distributed to
the QPAMs' client Plans, and, if the proposed exemption is granted, an
objective description also must be distributed to interested parties
that describes the facts and circumstances upon which the misconduct is
based.\88\
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\88\ 32 client Plans * 8 QPAMs.
---------------------------------------------------------------------------
The distribution of the notices to interested persons is estimated
to require about five minutes of in-house clerical time per notice.
Therefore, distribution of notices will require approximately 21 hours
at an equivalent cost of approximately $1,178 ((5 minutes/60 minutes) *
256 notices * $55.23 hourly clerical rate). The Department estimates
that 256 notices to interested persons will be sent, and that 205 of
the notices (80 percent) will be distributed via first class mail with
a material cost of $0.05 per page and distribution costs of $0.58 per
notice. The Department estimates that each notice will contain
approximately 15 pages. The foregoing generates an estimated cost of
approximately $273.\89\ The Department further estimates that
approximately 51 (20 percent of the total number of notices) will be
distributed electronically.
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\89\ Through regular mail this cost is estimated as 205 * ((15 *
$0.05) + $0.58) = $273 (rounded).
---------------------------------------------------------------------------
If the proposed exemption is ultimately granted, the requirement
for each QPAM to send an objective description of the facts and
circumstances upon which the misconduct is based is estimated to
require about five minutes of in-house clerical time per notice.
Therefore, distribution of notices will require approximately 21 hours
at an equivalent cost of approximately $1,178 ((five minutes/60
minutes) * 256 notices * $55.23 hourly clerical rate). This will result
in an additional distribution cost for 256 notices of which 205 (80
percent) will distributed via first class mail with a material cost of
$0.05 per page and distribution costs of $0.58 per notice. The
Department estimates that each notice will contain approximately five
pages. This generates an estimated cost of approximately $170.\90\
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\90\ Through regular mail this cost is estimated as 205 * ((5 *
$0.05) + $0.58) = $170 (rounded).
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Additional Requirement for QPAMs Requesting an Individual Exemption
The Department proposed new Section I(k) which indicates that a
QPAM that is ineligible or anticipates that it will become ineligible
due to an actual or possible Criminal Conviction may apply for an
individual exemption from the Department to continue to rely on the
relief provided in this exemption for a longer period than the one-year
winding-down period. In such an event, an applicant should review the
Department's most recently granted individual exemptions involving
Section I(g) ineligibility. If an applicant requests the Department to
exclude any term or condition from its exemption that is included in a
recently granted individual exemption, the applicant must include a
detailed statement with its exemption application explaining the
reason(s) why the proposed variation is necessary and in the interest
and protective of affected Plans, their participants and beneficiaries,
and IRA owners. Such applicants also should provide detailed
information in their applications quantifying the specific cost or
harms in dollar amounts, if any, Plans would suffer if a QPAM could not
rely on the exemption after the winding-down period, including the
specific dollar amounts of investment losses resulting from foregone
investment opportunities and any evidence supporting the proposition
that investment opportunities would only be available to Plans on less
advantageous terms.
All 16 QPAMs would need to include this information if they submit
an exemption application. The Department estimates that it will require
three hours of outside legal professional time to review past
individual exemptions and draft this addition to the individual
exemption application and four hours of a financial professional time.
The estimated total hour burden of this requirement is thus estimated
to total 12 hours of outside legal professional time and 16 hours of
financial professional time, altogether resulting in an equivalent cost
of $8,575.\91\ The Department seeks comments on these estimates and
assumptions.
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\91\ The burden is estimated assuming 16 QPAMs experience
ineligibility that will need to include this in their individual
exemption application. The average number of QPAMs covered by a
single exemption is four. This amounts to: (4 applications * 3
hours) = 12 hours of outside legal professional time, and (4
applications * 4 hours) = 16 hours of a financial professional time.
For an outside legal professional, a composite wage rate is used by
employing a weighted average of the legal fees reported in the
Laffey Matrix for Wage Rates (<a href="http://www.laffeymatrix.com/see.html">http://www.laffeymatrix.com/see.html</a>,
Year: 6/01/21-5/31/22): ($381 * 0.4) + ($468 * 0.35) + ($676 * 0.15)
+ ($764 * 0.1) = $494. This amounts to: (4 applications * 3 hours *
$494 outside legal professional rate) = $5,928. Additionally, at an
hourly rate of $165.45 for financial professional time, this cost is
estimated as: (4 applications * 4 hours * $165.45 financial
professional rate) = $2,647 (rounded). Therefore, the total
estimated equivalent cost of this requirement amounts to: ($5,928 +
$2,647) = $8,575 (rounded).
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Based on the foregoing, the PRA burden associated with the
information collection requirements contained in the QPAM Exemption are
summarized below:
Agency: DOL-EBSA.
Type of Review: Revision.
Title of Collection: Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers under Prohibited
Transaction Exemption 1984-14.
OMB Control Number: 1210-0128.
Affected Public: Business or other for-profits.
Estimated Number of Respondents: 616.
Estimated Number of Annual Responses: 2,404.\92\
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\92\ The Department estimates that in each year, 12 QPAMs will
need to update their policies and procedures, 118 QPAMs will need to
conduct an audit and issue an audit report, 16 ineligible QPAMs will
need to send the notice to 32 plans each within 30 days after the
Ineligibility Date, all 616 QPAMs will have report their reliance on
the QPAM exemption, all 616 QPAMs will need to maintain the records,
two applicants will request an individual exemption, 8 QPAMs will
distribute notices to their 32 interested parties each for
applications that reach the stage of publication, 8 QPAMs will
distribute objective description of the facts to their 32 interested
parties if the correspondent proposed exemption is ultimately
granted, 16 QPAMs will need to add the review of recently granted
exemptions, along with the potential costs to Plans quantification.
This results in a three-year average of 2,404 = (12 + 118 + (16 *
32) + 616 + 616 + 2 + (8 * 32) + (8 * 32) + 16) responses each year.
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Frequency of Response: Annual or as needed.
Estimated Total Annual Burden Hours: 3,241.\93\
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\93\ To satisfy the conditions of the existing QPAM Exemption,
the Department estimates that in each subsequent year, there will be
an hour burden of 3,241. This burden is calculated as follows: (12
hours for a fraction of QPAMs to update their policies and
procedures internally) + (2,832 hours for QPAMs to provide needed
materials for the audit) + (8 hours for ineligible QPAMs to prepare
the notice to Plans) + (13.7 hours for ineligible QPAMs to send by
regular mail the notice to Plans) + (154 hours for reporting the
reliance on the QPAM Exemption) + (51 hours for recordkeeping) + (50
hours for applicant QPAMs to prepare the documentation for the
application) + (50 hours for applicant QPAMs to prepare the
documentation for the application with an outside legal
professional) + (42 hours for the distribution of notices and
objective descriptions for applications that reach the stage of
publication) + (28 hours for QPAMs to include the addition for the
individual exemption application) = 3,241 hours (rounded).
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[[Page 45226]]
Estimated Total Annual Burden Cost: $2,950,722.\94\
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\94\ To satisfy the conditions of the QPAM Exemption, the
Department estimates that in each year, there will be a cost of
$2,950,722. This accounts for the cost of $2,950,000 associated with
hiring a firm to conduct the audit, $279 for the ineligible QPAMs to
send paper notices, $273 for the distribution of notices for
applications that reach the stage of publication via regular mail,
and $170 for the distribution of objective description of the facts
and circumstances via regular mail if the correspondent proposed
exemptions are granted. Any discrepancies in the calculations are a
result of rounding.
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Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \95\ imposes certain
requirements with respect to federal rules that are subject to the
notice and comment requirements of section 553(b) of the Administrative
Procedure Act and are likely to have a significant economic impact on a
substantial number of small entities.\96\ Unless an agency determines
that a proposal is not likely to have a significant economic impact on
a substantial number of small entities, section 603 of the RFA requires
the agency to present an initial regulatory flexibility analysis (IRFA)
of the proposed amendment.
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\95\ 5 U.S.C. 601 et seq. (1980).
\96\ 5 U.S.C. 551 et seq. (1946).
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The Department estimates that there are 616 potential QPAMs by
approximating the total number of service providers who in 2019
provided ``Investment Management'' and ``Named Fiduciary'' services
simultaneously to at least one plan as reported on Schedule C of the
2019 Form 5500, and whose NAICS codes start with the 2-digit 52, which
corresponds to Finance and Insurance Institutions.\97\ There are about
234,440 small firms that report a NAICS code of 52.\98\ The Department
does not know how many QPAMs fit the SBA's small entity definition for
the finance and insurance sector. However, if the Department assumes
that all 616 potential QPAMs are small entities, they will comprise
only 0.3 percent of small firms in this industry (616 possible QPAMS
out of 234,440 small firms with NAICS code 52), which is not a
substantial number of small entities.\99\
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\97\ Using 2019 Form 5500 data, the Department counted in total
1390 service providers who provided services of ``Investment
Management'' and ``Named Fiduciary,'' of which only 765 reported
their business code. Out of these 765 providers, 339 reported their
business code starting with the 2-digit NAICS code 52, yielding a
ratio of 0.44 of potential QPAMs to other providers. Therefore, the
Department estimates that there were 0.44 * 1390 = 616 potential
QPAMs in 2019.
\98\ Source: Small Business Administration calculations of the
number of firms reporting a NAICS code of 52 from the 2017
Statistics of U.S. Businesses.
\99\ The Department also notes that the asset and equity
thresholds were included in the QPAM Exemption as an important
protection to ensure a QPAM is large enough to withstand the
influence of other Plan fiduciaries and parties in interest. The
exemption, by design, was not intended for smaller entities. Without
updates to the size thresholds, this protective aspect of the
exemption will continually erode due to inflation.
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Based on the foregoing, pursuant to section 605(b) of RFA, the
Acting Assistant Secretary of the Employee Benefits Security
Administration hereby certifies that the proposed rule, if promulgated,
will not have a significant economic impact on a substantial number of
small entities. The Department invites comments on this certification.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 requires each
federal agency to prepare a written statement assessing the effects of
any federal mandate in a proposed or final agency rule that may result
in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any one year by state, local, and
tribal governments, in the aggregate, or by the private sector.\100\
For purposes of the Unfunded Mandates Reform Act, as well as Executive
Order 12875, this proposal does not include any federal mandate that
the Department expects would result in such expenditures by state,
local, or tribal governments, or the private sector.\101\
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\100\ 2 U.S.C. 1501 et seq. (1995).
\101\ Enhancing the Intergovernmental Partnership, 58 FR 58093
(Oct. 28, 1993).
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Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism, and requires adherence by federal agencies to specific
criteria in the process of their formulation and implementation of
policies that have ``substantial direct effects'' on the states, the
relationship between the national government and states, or on the
distribution of power and responsibilities among the various levels of
government.\102\ Federal agencies promulgating regulations that have
federalism implications must consult with state and local officials and
describe the extent of their consultation and the nature of the
concerns of state and local officials in the preamble to the final
rule.
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\102\ Federalism, supra note 46.
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In the Department's view, this proposed amendment would not have
federalism implications because it would not have direct effects on the
states, on the relationship between the national government and the
states, nor on the distribution of power and responsibilities among
various levels of government. The Department welcomes input from
affected states regarding this assessment.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve
a fiduciary, or other party in interest or disqualified person with
respect to a Plan, from certain other provisions of ERISA and the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
ERISA section 404 which require, among other things, that a fiduciary
act prudently and discharge their duties respecting the Plan solely in
the interests of the participants and beneficiaries of the Plan.
Additionally, the fact that a transaction is the subject of an
exemption does not affect the requirement of Code section 401(a) that
the Plan must operate for the exclusive benefit of the employees of the
employer maintaining the Plan and their beneficiaries;
(2) Before the amendment to the exemption may be granted under
ERISA section 408(a) and Code section 4975(c)(2), the Department must
find that it is administratively feasible, in the interests of Plans,
their participants and beneficiaries, and IRA owners, and protective of
the rights of participants and beneficiaries of the Plan and IRA
owners;
(3) If granted, the amended exemption is applicable to a particular
transaction only if the transaction satisfies the conditions specified
in the exemption; and
(4) The proposed amendment, if granted, is supplemental to, and not
in derogation of, any other provisions of ERISA and the Code, including
statutory or administrative exemptions and
[[Page 45227]]
transitional rules. Furthermore, the fact that a transaction is subject
to an administrative or statutory exemption is not dispositive of
whether the transaction is in fact a prohibited transaction.
Proposed Amendment
Section I--General Exemption
The restrictions of ERISA section 406(a)(1)(A) through (D) and the
taxes imposed by Code section 4975(a) and (b), by reason of Code
section 4975(c)(1)(A) through (D), shall not apply to a transaction
between a Party in Interest with respect to a Plan and an Investment
Fund (as defined in Section VI(b)) in which the Plan has an interest,
and which is managed by a Qualified Professional Asset Manager (QPAM)
(as defined in Section VI(a)), if the following conditions are
satisfied:
(a) At the Time of the Transaction (as defined in Section VI(i)),
the Party in Interest, or its Affiliate (as defined in Section VI(c)),
does not have the authority to--
(1) Appoint or terminate the QPAM as a manager of the Plan assets
involved in the transaction, or
(2) Negotiate on behalf of the Plan the terms of the management
agreement with the QPAM (including renewals or modifications thereof)
with respect to the Plan assets involved in the transaction;
Notwithstanding the foregoing, in the case of an Investment Fund in
which two or more unrelated Plans have an interest, a transaction with
a Party in Interest with respect to a Plan will be deemed to satisfy
the requirements of this Section I(a) if the assets of the Plan managed
by the QPAM in the Investment Fund, when combined with the assets of
other Plans established or maintained by the same employer (or
Affiliate thereof described in Section VI(c)(1) below) or by the same
employee organization, and managed in the same Investment Fund,
represent less than ten (10) percent of the assets of the Investment
Fund;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 2006-16 (71 FR 63786; October
31, 2006) (relating to securities lending arrangements) (as amended or
superseded),
(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools) (as amended or superseded), or
(3) Prohibited Transaction Exemption 82-87 (47 FR 21331; May 18,
1982) (relating to certain mortgage financing arrangements) (as amended
or superseded);
(c) The terms of the transaction, commitments, and investment of
fund assets, and any associated negotiations on behalf of the
Investment Fund are the sole responsibility of the QPAM. Either the
QPAM, or (so long as the QPAM retains full fiduciary responsibility
with respect to the transaction) a property manager acting in
accordance with written guidelines established and administered by the
QPAM, makes the decision on behalf of the Investment Fund to enter into
the transaction, provided that the transaction is not part of an
agreement, arrangement, or understanding designed to benefit a Party in
Interest. The prohibited transaction relief provided under this
exemption applies only in connection with an Investment Fund that is
established primarily for investment purposes. 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 because the QPAM would not have
sole responsibility with respect to the transaction as required by this
Section I(c);
(d) The Party in Interest dealing with the Investment Fund is
neither the QPAM nor a person Related to the QPAM;
(e) The transaction is not entered into with a Party in Interest
with respect to any Plan whose assets managed by the QPAM, when
combined with the assets of other Plans established or maintained by
the same employer (or Affiliate thereof described in subsection
VI(c)(1) below) or by the same employee organization, and managed by
the QPAM, represent more than twenty (20) percent of the total client
assets managed by the QPAM at the time of the transaction; and
(f) At the Time of the Transaction, and at the time of any
subsequent renewal or modification thereof that requires the consent of
the QPAM, the terms of the transaction are at least as favorable to the
Investment Fund as the terms generally available in arm's length
transactions between unrelated parties;
(g) Integrity.
(1) Reporting reliance on the exemption to the Department. Any QPAM
that relies upon this exemption must notify the Department via email at
<a href="/cdn-cgi/l/email-protection#89d8d9c8c4c9ede6e5a7eee6ff"><span class="__cf_email__" data-cfemail="762726373b3612191a58111900">[email protected]</span></a>. Each QPAM that relies upon the exemption must report the
legal name of each business entity relying upon the exemption in the
email to the Department and any name the QPAM may be operating under.
This notification needs to be reported only once unless there is a
change to the legal name or operating name(s) of the QPAM relying upon
the exemption or the QPAM no longer is relying on the exemptive relief
provided in the exemption.
(2) Written Management Agreement. In its Written Management
Agreement with clients (as required under Section VI(a)), the QPAM must
include a statement that, in the event of a Criminal Conviction
(described in subsection I(g)(3)(A)) or a Written Ineligibility Notice
(described in subsection I(g)(3)(B)) and for at least a period of 10
years, the QPAM:
(A) agrees not to restrict the ability of a client Plan to
terminate or withdraw from its arrangement with the QPAM;
(B) will not impose any fees, penalties, or charges on client Plans
in connection with the process of terminating or withdrawing from an
Investment Fund managed by the QPAM except for reasonable fees,
appropriately disclosed in advance, that are specifically designed to:
(i) prevent generally recognized abusive investment practices or (ii)
ensure equitable treatment of all investors in a pooled fund in the
event such withdrawal or termination may have adverse consequences for
all other investors, provided that such fees are applied consistently
and in a like manner to all such investors;
(C) agrees to indemnify, hold harmless, and promptly restore actual
losses to the client Plans for any damages that directly result to them
from a violation of applicable laws, a breach of contract, or any claim
arising out of the conduct that is the subject of a Criminal Conviction
or Written Ineligibility Notice of the QPAM or an Affiliate (as defined
in Section VI(d)) or an owner, direct or indirect, of a five (5)
percent or more interest in the QPAM. Actual losses specifically
include losses and costs arising from unwinding transactions with third
parties and from transitioning Plan assets to an alternative asset
manager as well as costs associated with any exposure to excise taxes
under Code section 4975 as a result of a QPAM's inability to rely upon
the relief in the QPAM Exemption; and
(D) will not employ or knowingly engage any individual that
participated in the conduct that is the subject of a Criminal
Conviction or Written Ineligibility Notice regardless of whether the
individual is separately convicted in connection with the criminal
conduct.
(3) Ineligibility due to a Criminal Conviction or Written
Ineligibility Notice. Subject to the Ineligibility Date
[[Page 45228]]
provision set forth in Section I(h), a QPAM is ineligible to rely on
this exemption for 10 years following:
(A) A Criminal Conviction, as defined in Section VI(r), of the QPAM
or any Affiliate thereof (as defined in Section VI(d))--or any owner,
direct or indirect, of a five (5) percent or more interest in the QPAM;
or
(B) Receipt by the QPAM or any Affiliate thereof (as defined in
Section VI(d))--or any owner, direct or indirect, of a five (5) percent
or more interest in the QPAM of a Written Ineligibility Notice issued
by the Department for participating in Prohibited Misconduct. For
purposes of this exemption, ``participating in'' refers not only to
active participation in the Prohibited Misconduct, but also to knowing
approval of the conduct, or knowledge of such conduct without taking
active steps to prohibit such conduc
[…truncated; see source link]Indexed from Federal Register on July 27, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.