Proposed Rule2022-20099
Initial Regulatory Flexibility Analysis for 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
September 16, 2022
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document gives notice of the Department's Initial Regulatory Flexibility Analysis for a proposed amendment to prohibited transaction class exemption 84-14 (the QPAM Exemption).
Full Text
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<title>Federal Register, Volume 87 Issue 179 (Friday, September 16, 2022)</title>
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[Federal Register Volume 87, Number 179 (Friday, September 16, 2022)]
[Proposed Rules]
[Pages 56912-56920]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-20099]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12022]
Z-RIN 1210 ZA07
Initial Regulatory Flexibility Analysis for 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 Initial Regulatory Flexibility Analysis for the
proposed amendment to the QPAM Exemption.
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SUMMARY: This document gives notice of the Department's Initial
Regulatory Flexibility Analysis for a proposed amendment to prohibited
transaction class exemption 84-14 (the QPAM Exemption).
DATES: Written comments must be submitted to the Department by October
11, 2022.
ADDRESSES: All written comments concerning the Initial Regulatory
Flexibility Analysis 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="https://www.regulations.gov">https://www.regulations.gov</a> at Docket
ID
[[Page 56913]]
number: EBSA-2022-0008. Follow the instructions for submitting
comments.
See SUPPLEMENTARY INFORMATION below for additional information
regarding comments.
FOR FURTHER INFORMATION CONTACT: James Butikofer, telephone (202) 693-
8434, Office of Research and Analysis, Employee Benefits Security
Administration, U.S. Department of Labor (this is not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Comment Instructions
All comments must be received by the end of the comment period. 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 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
will also be available online at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, at Docket
ID number: EBSA-2022-0008 and <a href="https://www.dol.gov/ebsa">https://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="https://www.regulations.gov">https://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="https://www.regulations.gov">https://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.
Reason for the Supplemental Initial Regulatory Flexibility Analysis
The Department published a proposed amendment to PTE 84-14 (the
QPAM Exemption) on July 27, 2022 (the Proposed QPAM Amendment).\1\ The
Department originally provided a 60-day comment period in the Proposed
QPAM Amendment, which was scheduled to expire on September 26, 2022.
The Department then extended this initial comment period until October
11, 2022, in a Federal Register notice published on September 7,
2022.\2\ In the same notice, the Department announced that it is
scheduling a virtual public hearing regarding the Proposed Amendment on
November 17, 2022 (and if necessary, November 18, 2022). In connection
with the hearing, the Department will also provide a supplementary
comment period that will end approximately 14 days after the hearing
transcript is posted on EBSA's website.
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\1\ 87 FR 45204.
\2\ 87 FR 54715.
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Pursuant to section 605(b) of the Regulatory Flexibility Act
(RFA),\3\ the Acting Assistant Secretary of the Employee Benefits
Security Administration certified that the Proposed QPAM amendment
would not have a significant economic impact on a substantial number of
small entities. After consulting with the Small Business
Administration's Office of Advocacy, however, the Department has
decided to publish this Initial Regulatory Flexibility Analysis (IRFA)
explaining its possible impact on small entities. The Department
requests comments by October 11, 2022, the same deadline as the
extended comment period for the Proposed QPAM amendment. Although the
Department is aligning the deadlines for comments regarding the
supplemental IRFA and the Proposed QPAM amendment, the Department will
provide additional time for public input on all aspects of the Proposed
QPAM Amendment (including the supplemental IRFA) when the comment
period reopens on the hearing date.
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\3\ 5 U.S.C. 601 et seq. (1980).
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Regulatory Flexibility Act (RFA)
The RFA 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.\4\ Unless an agency determines that a proposal is not
expected to have a significant economic impact on a substantial number
of small entities, section 603 of the RFA requires the agency to
present an IRFA of the Proposed QPAM Amendment.
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\4\ 5 U.S.C. 551 et seq. (1946).
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The Department emphasizes that the QPAM Exemption has always been
premised on the QPAM being an entity of sufficient size to withstand
undue influence from parties in interest. The Department clearly stated
this position in the preamble to the initial proposal in 1982:
The minimum capital and funds-under-management standards of the
proposed exemption are intended to [ensure] that the eligible
fiduciaries managing the accounts or funds (``investment funds'') .
. . are established institutions which are large enough to
discourage the exercise of undue influence upon their decision-
making processes by parties in interest.\5\
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\5\ 47 FR 56945, 56947 (Dec. 21, 1982).
When the exemption was granted in 1984, the Department declined to
reduce or delete the minimum asset and equity thresholds as requested
by some commenters.\6\ Furthermore, when the Department raised the
thresholds for investment advisers in 2005, it stated that the
thresholds had ``not been revised since 1984 and may no longer provide
significant protections for plans in the current financial
marketplace.'' \7\
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\6\ See 49 FR 9494, 9502 (Mar. 13, 1984).
\7\ See Proposed QPAM Amendment, 68 FR 52419, 52423 (Sept. 3,
2003).
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Despite the importance of a QPAM being sufficiently large to
withstand undue influence from parties in interest, in an abundance of
caution, the Department is issuing this supplemental IRFA, which
analyzes and seeks public comment on potential economic impacts of the
Proposed QPAM Amendment on small entities.
Need for and Objectives of the Proposed QPAM Amendment
As noted in the preamble of the Proposed QPAM 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.
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 56914]]
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,\8\ 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.
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\8\ The Proposed QPAM Amendment defines ``Criminal Conviction''
to mean the person or entity: (1) is convicted in a U.S. Federal or
state court or released from imprisonment, whichever is later, as a
result of any felony involving abuse or misuse of such person's 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 a crime identified in ERISA section 411; or
(2) is convicted by a foreign court of competent jurisdiction as a
result of a crime, however denominated by the laws of the relevant
foreign government, that is substantially equivalent to an offense
described in (1), above. See 87 FR 45204, 45231-32.
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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.\9\ The winding-down period would
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.
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\9\ The Proposed QPAM Amendment defines ``Prohibited
Misconduct'' to mean: (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 (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.
See 87 FR at 45232.
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The Proposed QPAM 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 Proposed QPAM Amendment
would 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 Proposed QPAM Amendment would add a
recordkeeping requirement to ensure QPAMs would be able to demonstrate,
and the Department would 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, their participants and beneficiaries, and
individual retirement account (IRA) owners as required by section
408(a) of the Employee Retirement Income Security Act of 1974 (ERISA)
and section 4975(c)(2) of the Internal Revenue Code (Code).
Affected Small Entities
Qualified Professional Asset Managers (QPAMs)
The following entities generally qualify or would qualify for the
relief set out in the QPAM Exemption and Proposed QPAM Amendment:
(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
(proposed increase to $2,720,000);
(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 (proposed increase
to $2,720,000);
(3) Insurance companies--subject to supervision under state law,
with net worth in excess of $1,000,000 (proposed increase to
$2,720,000); and
(4) Investment advisers--registered under the Investment Advisers
Act of 1940 with total client assets under management in excess of
$85,000,000 (proposed increase to $135,870,00) and either (1)
shareholders' or partners' equity in excess of $1,000,000 (proposed
increase to $2,040,000) 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 (proposed increase to
$2,040,000).
The Proposed QPAM Amendment also provides that the Department would
make subsequent annual inflation adjustments to these thresholds,
rounded to the nearest $10,000, no later than January 31 of each year
and announce the increased thresholds in a Federal Register notice.
Estimates of QPAMs
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
[[Page 56915]]
North American Industry Classification System (NAICS) codes start with
the 2-digit 52, which corresponds to Finance and Insurance
Institutions.\10\ There are about 234,440 small firms that report a
NAICS code of 52.\11\ Because the SBA's small entity definitions are
generally based upon revenues and not asset management or equity
thresholds, the Department does not know how many QPAMs fit the SBA's
small entity definitions for the finance and insurance sector nor how
many of those would be affected by the Proposed QPAM Amendment.
However, the Department acknowledges that it is possible that some
small entities that meet the SBA's definitions could be significantly
impacted by the Proposed QPAM Amendment.
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\10\ 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.
\11\ Source: Small Business Administration calculations of the
number of firms reporting a NAICS code of 52 from the 2017
Statistics of U.S. Businesses.
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The Department expects that small entities remaining eligible to
rely upon the amended exemption as proposed should expect to be
impacted the same as entities described in the Department's Regulatory
Impact Analysis for the Proposed QPAM Amendment, which begins at 87 FR
45214. However, due to the proposed increases to asset management and
equity thresholds in the definition of ``QPAM'' in Section VI(a) of the
amendment, if finalized, some entities may not satisfy this definition.
In that case, they would no longer be able to rely upon the QPAM
Exemption. Those entities may fall within the SBA's small entity
definitions. Additionally, to the extent plans that are small entities
are more likely to hire a QPAM that is a small entity, the Proposed
QPAM Amendment could also impact them. The Department requests comments
regarding how likely this is to occur.
Plans With Assets in an Investment Fund Managed by a QPAM
The Proposed QPAM Amendment would 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 on average, a single QPAM
services 32 client Plans.\12\ Therefore, the Department estimates that
there are 19,712 client Plans (616 QPAMs * 32 client Plans per QPAM) in
total. The Department also estimates there could be approximately 60.4
million participants in plans serviced by potential QPAMs, with most
being in large plans.\13\
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\12\ 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.
\13\ The Department estimated an average of 3,151 participants
per plan among the 10,719 Plans served by the 339 observable
potential QPAMs. Applying this average to all estimated 19,712
client plans leads to 60.4 million participants in affected plans
(19,712 client Plans * 3,151 participants per client Plan).
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The Department estimates that three percent of client Plans are
small.\14\ The Department does not view this as a substantial number of
small plans. For purposes of this IRFA, the Department considers a
small entity to be an employee benefit plan with fewer than 100
participants.\15\ The basis of this definition is found in ERISA
section 104(a)(2), which permits the Secretary of Labor to prescribe
simplified annual reports for pension plans that cover fewer than 100
participants. Under section 104(a)(3), the Secretary may also provide
for exemptions or simplified annual reporting and disclosure for
welfare benefit plans. Pursuant to the authority of section 104(a)(3),
the Department has previously issued certain simplified reporting
provisions and limited exemptions from reporting and disclosure
requirements for small plans.\16\ While some large employers may have
small plans, in general small employers maintain small plans. Thus,
EBSA believes that assessing the impact of the Proposed QPAM Amendment
on small plans is an appropriate substitute for evaluating the effect
on small entities. The definition of small entity considered
appropriate for this purpose differs, however, from a definition of
small business that is based on size standards promulgated by the Small
Business Administration (SBA) \17\ pursuant to the Small Business
Act.\18\
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\14\ Using the 2019 Form 5500 the Department estimates that only
three percent of the 10,719 Plans served by the 339 observable
potential QPAMs are small plans, having less than 100 participants.
\15\ The Department consulted with the Small Business
Administration's Office of Advocacy before making this
determination, as required by 5 U.S.C. 603(c) and 13 CFR 121.903(c).
Memorandum received from the U.S. Small Business Administration,
Office of Advocacy on July 10, 2020.
\16\ See 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-
46, and 2520.104b-10. Such plans include unfunded or insured welfare
plans covering fewer than 100 participants and satisfying certain
other requirements.
\17\ 13 CFR 121.201.
\18\ 15 U.S.C. 631 et seq.
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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 and other amendments.
Impacts of the Exemption
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 Proposed QPAM 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 Proposed QPAM 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 the Proposed
QPAM 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.
[[Page 56916]]
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#abfafbeae6ebcfc4c785ccc4dd"><span class="__cf_email__" data-cfemail="95c4c5d4d8d5f1faf9bbf2fae3">[email protected]</span></a> would 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 would take 15 minutes, on average, for each
QPAM to prepare and send this electronic notification. This cost is
estimated to be approximately $14 per entity.\19\ The Department
requests comments on this estimate.
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\19\ The cost is based upon the expenditure of 0.25 hours for
each QPAM: To calculate the cost, an hourly labor rate of $55.23 is
used for a clerical worker. Therefore, the total cost amounts to:
(0.25 hours * $55.23) = $14 (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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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 would 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 would 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 approximately $220 per entity.\20\
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\20\ This cost is based upon the expenditure of one hour of a
legal professional for each QPAM using an hourly labor rate of
$140.96. As specified in the PRA section, the Department estimates
each QPAM serves 32 client Plans on average. The Department also
expects each QPAM would have to append one page to their existing
management agreements and that it would 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 (32 client Plans *
(2/60) hours * $55.23) = $58.90 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
32 client per Plans * 1 page * ($0.05 + $0.58) = $ 20 (rounded). The
estimated total cost of the provision is therefore $141 + $58.90 +
$20 = $220 (rounded).
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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.\21\
Therefore, the Department believes that the clarifying reference that
includes foreign convictions within the scope of Section I(g) would not
change the costs of the exemption as compared to the current costs.
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\21\ 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)
The Department estimated that eight QPAMs each year would be
subject to the one-year winding-down period after a Criminal
Conviction. 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. The Department's proposed
expansion of the ineligibility provision to include Prohibited
Misconduct that leads to an Ineligibility Notice likely would increase
the number of QPAMs that become ineligible due to Section I(g).
Although the Department does not have the 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 would 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 possibly have to 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. The Department also lacks data to
estimate the number of ineligible QPAMs that would be small entities,
and requests comments regarding this number.
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#a0f1f0e1ede0c4cfcc8ec7cfd6"><span class="__cf_email__" data-cfemail="99c8c9d8d4d9fdf6f5b7fef6ef">[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
would incur the cost of sending notices to their client Plans for the
first time. The Department estimates that total incremental cost
related to ineligibility after receiving an
[[Page 56917]]
Ineligibility Notice is $135 per entity (including mailing
expenses).\22\
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\22\ The burden is estimated assuming each QPAM services (on
average) 32 plans. Notice preparation and distribution is estimated
to require 0.5 hours of professional legal time and roughly 0.85
hours of clerical time. The Department also assumes that 80 percent
of all notices would be delivered by regular mail and would consist
of two pages. Therefore, the total per entity cost associated with
this requirement is (0.5 hours legal professional labor rate of
$140.96) + (0.85 hours * clerical labor rate of $55.23) + [80%
mailed * (2 pages * $0.05 per page + $0.58 postage)] = $135
(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 would be negligible because the QPAM would 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 possibly have to 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 $352.\23\ The Department estimates that preparing
a response and preparing for the conference would also require two
total outside legal professional hours for each QPAM resulting in a
cost of $988.\24\ Thus, the total labor cost of preparing a response
and preparing for a conference amounts to $1,340 per entity. The
Department requests comment on this cost estimate.
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\23\ 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.
\24\ 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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Requesting an Individual Exemption--Section I(k)
Proposed new Section I(k) provides that a QPAM that is ineligible
or anticipates that it would 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 expansion of the 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. The
Department estimates that each of these two new applicants would spend
12 hours of in-house legal professional and 13 hours of in-house
clerical time preparing the required documentation for the application
that would be used by an outside legal professional. The Department
estimates the per entity cost associated with document preparation for
the application at approximately $2,410.\25\ Further, the Department
estimates that, on average, 25 hours of outside legal professional time
would be spent preparing the documentation for the application per QPAM
application, with a labor rate for outside legal professionals
averaging $494.00 per hour resulting in a total of $12,350 in outside
legal costs per application.\26\ Thus, the total labor cost of each
application preparation amounts to nearly $15,000.
---------------------------------------------------------------------------
\25\ 12 in-house legal professional hours at $140.96 per hour
yields $1,692 (rounded), and the 13 in-house clerical hours are
estimated to cost $718 (rounded). This totals to $2,410 (rounded).
Any discrepancies in the calculations are a result of rounding.
\26\ See supra, note 24.
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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 would 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 would 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 would require
10 minutes for each of the 32 plans the QPAM serves, totaling
approximately 10.67 hours at a cost of approximately $295.\27\ In
addition, material and mailing costs for these notices totals
approximately $55 per QPAM.\28\ Therefore, the Department estimates
that the total costs per QPAM associated with notice distribution would
be approximately $350.
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\27\ The total cost is calculated as: [(10/60) hours * 32
interested parties * $55.23 hourly clerical rate] = $295 (rounded).
\28\ The Department estimates that 80% (26) of these notices,
would be delivered by regular mail. The Department further assumes
that notices and the descriptions of facts and circumstances would
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 (26 * (15 * $0.05) + $0.58) + (26 * (5 * $0.05) + $0.58) = $55
(rounded).
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The Department anticipates that few small entities would be
impacted by the ineligibility provision based on its past applicants.
Additionally, the Department expects that a small entity would be more
likely to fall below the average of 32 client Plans. Therefore, the
expected cost to small entity QPAMs would be lower than the estimated
average cost.
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
[[Page 56918]]
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, the Department estimates
the cost associated with the additional requirement totals $2,144 per
application, or roughly $536 per affected QPAM.\29\
---------------------------------------------------------------------------
\29\ At an hourly rate of $165.45 for financial professional
time, the cost associated with the cost quantification requirement
is estimated as: (4 hours * $165.45 financial professional rate) =
$662 (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 estimated as (3
hours * $494 outside legal professional rate) = $1,482 (rounded).
Therefore, the total cost associated with the additional requirement
for QPAMs ineligible due to receiving a written Ineligibility Notice
is ($662 + $1,482) = $2,144 (rounded).
---------------------------------------------------------------------------
The eight QPAMs that would become ineligible due to a Criminal
Conviction would only incur an incremental cost to ensure they include
in their exemption applications 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 client Plans on less advantageous terms. For
this requirement, the Department assumes it would require four hours of
a financial professional's time to prepare such a report. Therefore,
each of two applications covering the eight ineligible QPAMs due to a
Criminal Conviction is estimated to cost $662, which amounts to $165
per affected QPAM.\30\
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\30\ At an hourly rate of $165.45 for financial professional
time, the cost per application is estimated as: (4 hours * $165.45
financial professional rate) = $662 (rounded). Assuming each
application covers 4 QPAMs yields 165 ($662/4 = $165).
---------------------------------------------------------------------------
The impact could be less as the Department anticipates that few
small entities would be impacted by the ineligibility provision based
on its past applicants. Additionally, the Department expects that a
small entity would be more likely to fall below the average of 32
client Plans.
Involvement in Investment Decisions by Parties in Interest--Section
I(c)
The Department anticipates that the modifications to Section I(c)
would not change the costs of the exemption as compared to the 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.\31\ 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, including those that meet the SBA definitions of a small entity,
who would potentially become unable to rely upon the exemption (along
with the number of Plans and value of Plan assets) that would be
impacted by the increase in asset management and equity thresholds.
---------------------------------------------------------------------------
\31\ 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.
---------------------------------------------------------------------------
Change in Revenue Due to Adjustments to the Asset Management and Equity
Thresholds
If an asset manager is no longer eligible for relief under the QPAM
Exemption (i.e., because it no longer satisfies the asset management
and equity thresholds), its client plans may choose to transfer assets
and the related revenue away from the 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 plan's perspective, it may lead to lost
revenue for small QPAMs if plans move assets away from a small QPAM or
lead to revenue gains if a small QPAM received some of these assets
that are moved.\32\
---------------------------------------------------------------------------
\32\ Although a QPAM's client Plans could be expected to move
some or all of its assets to another asset manager if the QPAM that
manages their assets 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.
---------------------------------------------------------------------------
The Department does not have sufficient data to quantify the likely
size of such asset and revenue changes or the number of impacted small
QPAMs. These revenue changes could have a significant impact on small
QPAMs experiencing revenue gains or losses from assets that are moved.
The Department also does not have sufficient data to estimate whether
the assets being transferred away from small QPAMs will be transferred
to large entities or to other small entities that are able to meet the
proposed increases to asset management and equity thresholds. However,
this proposed requirement would promote the protective nature of the
exemption by ensuring a QPAM is of a sufficient size to resist undue
influence from parties in interest (i.e., maintain independence).
The Department is 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 if the QPAM that manages their
assets no longer meets the asset management and equity thresholds.
[[Page 56919]]
Recordkeeping--Section VI(t)
The Proposed QPAM 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. The Department
requests comments about whether this may happen more frequently and the
possible costs.
Rule Familiarization Costs
The Department estimates that it would take 60 minutes, on average,
for each QPAM to become familiar with the Proposed QPAM Amendment. The
familiarization cost is estimated to be approximately $494 per
QPAM.\33\ The Department seeks comment on this estimate.
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\33\ The cost is based upon the expenditure of 1.0 hours for
each QPAM to become familiar with the Proposed QPAM Amendment. 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: (1 hour * $494) = $494. 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 would review the amendment and present updates to
their clients, which means that the costs would be spread out over
multiple clients.
---------------------------------------------------------------------------
Summary of Quantified Costs
The total, per entity, quantified annual costs associated with the
Proposed QPAM Amendment would be $728 in the first year and $220 in
subsequent years for plans in compliance with the exemption. Table 1
summarizes the per entity costs for each requirement and the estimated
annual costs associated with the amendment for QPAMs in compliance with
the exemption, QPAMs with prohibited misconduct, and QPAMs with
convictions.
Table 1--Incremental Costs Associated With Proposed QPAM Amendment, per Entity
----------------------------------------------------------------------------------------------------------------
Cost for QPAMs
with Cost for QPAMS
Cost for QPAMs prohibited with a
Requirement in compliance misconduct conviction
with exemption (estimated 8 (estimated 8
per year) per year)
----------------------------------------------------------------------------------------------------------------
Reporting Reliance on the QPAM Exemption........................ $14 $14 $14
Written Management Agreement.................................... 220 220 220
Notice to Plans................................................. .............. 135 ..............
Written Warning and Opportunity to be Heard..................... .............. 1,340 ..............
Requesting an Individual Exemption Costs:....................... .............. .............. ..............
Preparation Labor Cost.......................................... .............. .............. ..............
Notices Distribution............................................ .............. 350 ..............
Additional Requirement-Criminal Conviction QPAMs................ .............. .............. 165
Additional Requirement-Prohibited Misconduct QPAMs.............. .............. 536 ..............
Rule Familiarization Costs...................................... 494 494 494
-----------------------------------------------
First Year Total Estimated Annual Cost........................ 728 3,089 893
Subsequent Years Total Estimated Annual Cost \1\............ 0 2,361 165
----------------------------------------------------------------------------------------------------------------
Notes: Only quantifiable costs are displayed.
Additionally, two individual exemption applications associated with ineligible QPAMs (caused by either
prohibited misconduct or a conviction) are estimated each year at an estimated cost of approximately $15,000
per entity.
\1\ Excludes rule familiarization and the initial reporting reliance costs.
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
alternatives, as discussed below, that were considered in connection
with the statutorily mandated exemption requirements.
Phase-In and Incremental Increases to Asset Management and Equity
Thresholds Over Longer Period
The Department considered a longer phase-in period and incremental
increases for the proposed updates to the asset management and equity
thresholds. This alternative could reduce the likelihood that a small
entity QPAM would no longer be able to satisfy the definition of QPAM
and lose the corresponding ability to rely upon the exemption.\34\
---------------------------------------------------------------------------
\34\ For instance, an incremental increase over a longer period
might allow a small entity to increase the size of its business in
tandem with the increases to the asset management and equity
thresholds.
---------------------------------------------------------------------------
The Department determined that a significant lag in updating the
thresholds to current CPI-adjusted values had the potential to deprive
Plans of the important protective nature of these aspects of the QPAM
definition. The Department requests comments on alternative effective
dates for the increases and/or appropriately protective incremental
increases and time periods for such increases.
[[Page 56920]]
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. Doing so could have avoided any
cost impact or revenue loss to small entities associated with losing
eligibility to rely on the QPAM exemption due to the increased
thresholds.
The Department determined that this approach would be inconsistent
with one of the core concepts upon which the QPAM Exemption was based
(i.e., independence of the QPAM). As the Department noted in the
preamble of the Proposed QPAM Amendment, the QPAM Exemption was
originally granted, in part, on the premise that large financial
institutions would be able to withstand undue influence from parties in
interest.\35\ 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.\36\
---------------------------------------------------------------------------
\35\ See the Proposed QPAM Amendment, 87 FR 45213 (emphasis
added).
\36\ Id. at 45215.
---------------------------------------------------------------------------
In the absence of an appropriate alternative ensuring that a QPAM
would remain an independent decision-maker, free from influence of
other insiders to the Plan and Plan sponsor, the Department is unable
to justify the removal of the thresholds. The Department requests
comments on alternatives that could minimize the potential impact of
the Proposed QPAM Amendment on small entities, especially with respect
to the increased asset management and equity thresholds.
Duplicate, Overlapping, or Relevant Federal Rules
The Department has attempted to avoid duplication of requirements.
The required policies and procedures and exemption audit are unique to
the circumstances of the particular transactions covered by the
exemption and do not replicate any other requirements by state or
Federal regulations.\37\ The exemption permits respondents to satisfy
the requirements for written guidelines between the QPAM and a property
manager with documents that are already in existence due to ordinary
and customary business practices, provided such documents contain the
required disclosures.\38\
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\37\ See Section V of the current QPAM Exemption. The
requirements of Section V were not discussed in this IRFA because
the Proposed QPAM Amendment would not change the existing
requirements of Section V.
\38\ See Section I(c) of the current QPAM Exemption and Proposed
QPAM Amendment. The amendment would not modify this aspect of
Section I(c).
Signed at Washington, DC, this 13th day of September, 2022.
Ali Khawar,
Acting Assistant Secretary, Employee Benefits Security Administration,
U.S. Department of Labor.
[FR Doc. 2022-20099 Filed 9-14-22; 4:15 pm]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on September 16, 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.