Rule2024-06059
Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (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
April 3, 2024
Effective
June 17, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document gives notice of a granted 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 89 Issue 65 (Wednesday, April 3, 2024)</title>
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[Federal Register Volume 89, Number 65 (Wednesday, April 3, 2024)]
[Rules and Regulations]
[Pages 23090-23144]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-06059]
[[Page 23089]]
Vol. 89
Wednesday,
No. 65
April 3, 2024
Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Amendment to Prohibited Transaction Class Exemption 84-14 for
Transactions Determined by Independent Qualified Professional Asset
Managers (the QPAM Exemption); Final Rule
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules
and Regulations
[[Page 23090]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12022]
Z-RIN 1210 ZA07
Amendment to Prohibited Transaction Class Exemption 84-14 for
Transactions Determined by Independent Qualified Professional Asset
Managers (the QPAM Exemption)
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Final amendment to class exemption.
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SUMMARY: This document gives notice of a granted 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: The amendment is effective June 17, 2024.
FOR FURTHER INFORMATION CONTACT: Brian Mica, telephone (202) 693-8540,
Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor (this is not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
Title I of ERISA broadly prohibits transactions between plans and
any ``party in interest''--who, in general, are people or entities
closely connected to ERISA-covered employee benefit plans as defined in
ERISA section 3(3). Title II of ERISA, codified in the Code, includes
parallel prohibitions applicable to ``disqualified persons'' \1\ who,
in general, are persons or entities closely connected to plans \2\ as
defined in Code section 4975(e)(1).
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\1\ The term ``disqualified person'' is defined in Code Section
4975(e)(2) and is similar to definition of the term ``party in
interest'' codified in ERISA section 3(14). All references to
``party in interest'' in this Preamble and the QPAM exemption
include ``disqualified person.''
\2\ For purposes of the exemption that term ``Plans'' includes
plans and Individual Retirement Accounts (IRAs) described in Code
section 4975(e)(1) and ERISA-covered employee benefit plans
described in ERISA section 3(3) (referred to as ``Plans,'' and
``IRAs'' herein). Although the Department is using the same
definition of ``plan'' in the final amendment that previously
existed in the QPAM Exemption, the Department is finalizing a
ministerial change which will capitalize this term when referring to
plans impacted by the amendment.
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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, and IRA owners \3\ from the potential
for abuse that arises when plans and IRAs engage in transactions with
closely connected parties.
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\3\ For purposes of this Final Amendment, the term ``IRA owner''
refers to the individual for whom an IRA (as defined in the Final
Amendment) is established.
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The Department grants this exemption, which was proposed on its own
motion, pursuant to its authority under ERISA section 408(a) and Code
section 4975(c)(2).\4\ As required by ERISA section 408(a) and Code
section 4975(c)(2), the Department finds that the exemption is
administratively feasible, in the interests of Plans and their
participants and beneficiaries and protective of the rights of
participants and beneficiaries of Plans and IRA owners.
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\4\ The exemption also is granted in accordance with procedures
set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27,
2011)). Please note that 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
to the Secretary of Labor. Therefore, this notice of amendment to
the QPAM Exemption is issued solely by the Department.
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The QPAM Exemption permits an investment fund \5\ holding assets of
Plans and IRAs that is managed by a ``qualified professional asset
manager'' (QPAM) to engage in transactions with a ``party in interest''
or ``disqualified person'' to Plans or an IRAs, subject to protective
conditions.\6\ This amendment modifies 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
certain owners of the QPAM are convicted of certain crimes. As
discussed in detail below, this amendment: (1) requires a QPAM to
provide a one-time notice to the Department that the QPAM is relying
upon the exemption; (2) updates the list of crimes enumerated in the
prior version of Section I(g) to explicitly include foreign crimes that
are substantially equivalent to the listed crimes; (3) expands the
circumstances that may lead to ineligibility; and (4) provides a one-
year winding down (transition) 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
pursuant to Section I(g), and gives QPAMs a reasonable period to seek
an individual exemption, if appropriate.\7\
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\5\ 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.
\6\ 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).
\7\ As further discussed below, the Department has substituted
the term ``transition period'' for the term ``winding-down period''
that it used in the proposed amendment. The terms have the same
meaning.
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This amendment also: (1) provides clarifying updates to Section
I(c) regarding a QPAM's authority over investment decisions; (2)
adjusts the asset management and equity thresholds in the QPAM
definition in Section VI(a); and (3) adds a new recordkeeping provision
in Section VI(u). The amendment will affect participants and
beneficiaries of Plans, IRA owners, the sponsoring employers of such
Plans or IRAs (if applicable) and other plan sponsors, QPAMs, and
counterparties engaging in transactions covered under the QPAM
Exemption.
Background of the QPAM Exemption
In 1984, the Department published the QPAM Exemption, which permits
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. The Department developed and granted the QPAM
Exemption based on the premise that it could provide broad exemptive
relief from the prohibitions of ERISA section 406(a)(1)(A) through (D)
and Code section 4975(c)(1)(A) through (D) 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.
Section I of the QPAM Exemption (the General Exemption) \8\
provides broad
[[Page 23091]]
prohibited transaction relief for a QPAM-managed Investment Fund to
engage in transactions with a Party in Interest, but it does not
include relief for the QPAM to engage in any transactions involving its
own self-dealing or conflicts of interest or kickbacks, 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 a Party in
Interest that has 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.
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\8\ The Department proposed a ministerial change to replace
``Part'' with ``Section'' in the QPAM Exemption. For consistency,
the Department is using only the term ``Section'' throughout this
preamble. The Department also proposed a ministerial change to
capitalize defined terms in the QPAM Exemption and is using those
capitalized terms throughout this preamble as they are being
finalized in this amendment.
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The General Exemption covers many different types of transactions.
For example, the exemption provides relief for a QPAM to use fund
assets to purchase an asset from certain Parties in Interest \9\ 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.\10\ In addition to the General
Exemption, the QPAM Exemption also contains ``Specific Exemptions'' in
Sections II, III, and IV, which the Department is not modifying in this
amendment.
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\9\ The plural form has the same meaning as the singular defined
term ``Party in Interest.''
\10\ See e.g., Notice of Proposed Exemption involving Credit
Suisse AG, 79 FR 52365, 52367 (Sept. 3, 2014).
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When it proposed the QPAM Exemption in 1982, 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.\11\ 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 owners of a five (5) percent or more interest in 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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\11\ Proposed Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers, 47
FR 56945, 56947 (Dec. 21, 1982).
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The Qualified Professional Asset Manager
A QPAM is defined as a bank, savings and loan association,
insurance company, or registered investment adviser that meets
specified asset and equity thresholds set forth in the exemption and
acknowledges in a Written Management Agreement that it is a fiduciary
with respect to each of its client Plans. 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).\12\ As a general matter, the Department's position
continues to be that transactions entered into on behalf of Plans with
a Party 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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\12\ Id. at 56947.
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The QPAM's independence and discretionary control over asset
management decisions protect Plans from the danger that a Party in
Interest will exercise improper influence over decision-making
regarding 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. 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 certain owners avoid engaging in criminal conduct and
other serious misconduct that would jeopardize Plan assets or call into
question the Department's reliance on the QPAM's oversight as a key
safeguard for Plan participants and beneficiaries and IRA owners.
Purpose and Approach for the Final Amendment
Substantial changes have occurred in the financial services
industry since the Department granted the QPAM Exemption in 1984. These
changes include industry consolidation and an increasingly global reach
for financial services institutions, both in their affiliations and
their investment strategies, including those for Plan assets. In the
years since 1984, the Department has repeatedly considered applications
for individual exemptions in connection with convictions for crimes
causing ineligibility under Section I(g). Through processing these
applications, the Department has gained extensive experience analyzing
QPAMs' failures to comply with Section I(g) of the QPAM Exemption as a
result of corporate convictions in domestic and foreign jurisdictions.
This experience has affirmed the Department's position that an
ineligibility condition tied to criminal convictions provides necessary
protection to Plans, their participants and beneficiaries, and IRA
owners.
In practice, Section I(g) has effectively required QPAMs that
become ineligible to seek an individual exemption to continue their
reliance on the QPAM Exemption. Since 2013, the Department has received
an increasing number of individual exemption requests involving Section
I(g) ineligibility due to criminal convictions occurring within the
corporate family of large financial institutions. To ensure that these
exemptions are protective of Plans and participants and beneficiaries
and in their interests as required by ERISA section 408(a) and Code
section 4975(c)(2), the Department has required applicants to fully and
accurately disclose: (1) the criminal conduct that led to their
ineligibility, including whether the QPAM was involved; (2) the
specific reasons they should be permitted to continue acting as a QPAM
notwithstanding the criminal conduct; (3) the efforts they have
undertaken to promote a culture of compliance in their corporate
family; and (4) the steps they will take in the future to ensure Plans,
their participants and beneficiaries, and IRA owners are protected. In
these individual QPAM exemptions, the Department included additional
protections, such as a comprehensive independent compliance audit and
allowing client Plans to withdraw from their asset management
arrangements with the ineligible QPAM without penalty. These exemptions
have also required the QPAM to indemnify or hold their client Plans
harmless in the event that the QPAM, or an Affiliate, or
[[Page 23092]]
owner of a five (5) percent or more interest engages in future
misconduct.
Exemption applicants have consistently represented to the
Department that Plan investors would be harmed if a QPAM abruptly loses
exemptive relief as of the conviction date, as dictated by Section
I(g). Although Section I(g) ineligibility 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 under the QPAM Exemption has the potential to disrupt
Plan investments and investment strategies, especially for transactions
involving Plan counterparties that also are relying upon the relief
provided in the QPAM Exemption.\13\ According to these applicants,
Plans may also experience transition costs if a Plan fiduciary needs to
find an alternative asset manager on short notice after a QPAM becomes
ineligible.
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\13\ See e.g., Notice of Proposed Exemption involving JP Morgan
Chase & Co., 81 FR 83372, 83363 (Nov. 21, 2016).
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To protect Plans against the immediate disruption and costs caused
by their QPAMs losing eligibility immediately upon conviction, the
Department has granted several one-year temporary individual exemptions
to QPAMs facing ineligibility. These individual exemptions provided the
Department with sufficient time to engage in a more intensive review of
information submitted by the applicants to determine whether a longer-
term individual exemption was warranted to provide extended relief at
the end of the one-year period.\14\ Moreover, since 2013, both the one-
year and longer-term exemptions have provided Plans with the important
opportunity to exit from their asset management arrangements with a
QPAM without the imposition of certain fees, penalties, or charges.
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\14\ 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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Regulatory Administrative Record for the Proposed Amendment
The developments discussed above prompted the Department to propose
the amendment to the QPAM Exemption on July 27, 2022, with an initial
60-day comment period that was set to expire on September 26, 2022 (the
Proposed Amendment).\15\ After the Department published the Proposed
Amendment, it received two letters requesting an extension of the
comment period.\16\ The Department responded to the requests by
extending the initial comment period for an additional 15 days until
October 11, 2022, in a Federal Register Notice published on September
7, 2022,\17\ and received 31 comment letters during this initial
extended comment period.
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\15\ 87 FR 45204.
\16\ See Public Comment #1 from American Bankers Association et
al. and Public Comment #2 from American Retirement Association. The
extension requests can be accessed here: <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/</a>.
\17\ 87 FR 54715.
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Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA),
the Acting Assistant Secretary of the Employee Benefits Security
Administration (EBSA) certified that the Proposed 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 (SBA), however, the Department decided to publish a
Supplementary Initial Regulatory Flexibility Analysis (IRFA) that
explained the Proposed Amendment's potential impact on small
entities.\18\ The Department requested comments on the IRFA by October
11, 2022, the same deadline as the extended comment period for the
Proposed Amendment.
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\18\ 87 FR 56912 (Sep. 16, 2022).
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In the September 7, 2022, Federal Register notice, the Department
announced that it would hold a virtual public hearing on its own motion
on November 17, 2022 (and if necessary, on November 18, 2022), to
provide an opportunity for all interested parties to testify on
material information and issues regarding the Proposed Amendment.\19\
The Department received 13 requests to testify at the hearing. The
notice also indicated the Department would: (1) reopen the public
comment period from the hearing date until approximately 14 days after
the Department publishes the hearing transcript on EBSA's website; and
(2) publish a Federal Register notice announcing that the Department
posted the hearing transcript to EBSA's website and providing the
closing date for the reopened comment period.
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\19\ 87 FR 54715.
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The Department held the virtual public hearing on November 17,
2022, and reopened the comment period on the hearing date.\20\ The
reopened comment period closed on January 6, 2023, and the Department
received 150 additional comments.\21\
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\20\ The hearing did not continue on November 18, 2022, because
the Department was able to schedule all witnesses that requested to
testify on one day.
\21\ See <a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07</a>.
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On March 23, 2023, the Department reopened the Proposed Amendment's
comment period again because it understood that at least one interested
party may have had additional information to provide the Department
that was not submitted by the January 6, 2023 comment period
deadline.\22\ The reopened comment period provided an opportunity for
all interested parties to submit additional information until April 6,
2023, and the Department received seven comments during this reopened
comment period.\23\
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\22\ 88 FR 17466.
\23\ See <a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07</a>.
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The rulemaking process has provided the Department with a robust
administrative record. After careful consideration of the approximately
200 comments received during the public comment periods and testimony
presented at the public hearing, the Department is finalizing the
Proposed Amendment (the Final Amendment), with the revisions discussed
below.
Section I(g)--Reporting to the Department, Written Management
Agreement, and Ineligibility
Reporting to the Department--Note: This Requirement has been moved
from Subsection I(g)(1) of the Proposed Amendment to Section I(k) of
this Final Amendment.
The Proposed Amendment would have required each QPAM that relies
upon the exemption to report its legal name (and any name the QPAM may
be operating under) by email to the Department at <a href="/cdn-cgi/l/email-protection#c29392838f82a6adaeeca5adb4"><span class="__cf_email__" data-cfemail="5f0e0f1e121f3b303371383029">[email protected]</span></a>.\24\ The
Department proposed that the QPAM would need to provide this
notification to the Department only once unless the legal or operating
name(s) of the QPAM relying upon the exemption was changed. The
Department also indicated its intent to maintain a current list of
entities relying upon the QPAM Exemption on its publicly available
website.
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\24\ 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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[[Page 23093]]
The Department received a variety of comments on this proposed
reporting requirement. Some commenters opposed the requirement in part
because no other prohibited transaction exemption requires
``registration'' or a listing on a publicly available website.
Commenters also indicated that the publication of a list of QPAMs on
the Department's website has the potential to mislead Plan participants
and beneficiaries and IRA owners into thinking that a manager's
inclusion or exclusion signifies whether the Department has endorsed
its eligibility to rely on the exemption.
After considering these comments, the Department is finalizing the
notice provision with the modifications discussed below. The notice
requirement provides the Department with knowledge of the investment
managers that are relying on the exemption and will serve as an
important reminder to investment managers relying on the QPAM Exemption
that the ``QPAM'' title and status are tied to an administrative
prohibited transaction exemption that requires compliance with the
exemption's conditions.
With respect to publishing the list on its website, the Department
has significant experience publicly posting information in a manner
that is not misleading. Additionally, the Department notes that a wide
variety of information regarding investment advisers, including
disciplinary violations, currently is publicly available through
BrokerCheck.\25\ The importance of having this information publicly
available to provide Plan fiduciaries and participants and
beneficiaries, and IRA owners with the ability to know whether their
investment managers (or potential managers) are relying on the QPAM
Exemption outweighs any harm that could occur if the information were
misleading.
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\25\ BrokerCheck is an online tool provided by FINRA that
provides information regarding brokers and investment advisers such
as employment history, certifications, licenses, and any violations.
<a href="https://brokercheck.finra.org/">https://brokercheck.finra.org/</a>.
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Commenters also noted that it is important for the Department to
ensure that it has appropriate resources to maintain the list of QPAMs
and keep it current. The Department appreciates this concern. Although
there will likely be an initial wave of QPAMs reporting to the
Department, the Department anticipates that minimal resources will be
necessary to keep an updated list over the long-term.
Commenters also expressed concern that a QPAM could easily overlook
the requirement to update the Department when it changes its legal or
trade name, which could lead it to commit a series of inadvertent
prohibited transactions that would only end when the QPAM reports its
updated name to the Department. Related to this concern, commenters
also requested the Department clarify that an inadvertent failure to
report would not be considered Prohibited Misconduct \26\ or otherwise
jeopardize a manager's ability to rely on the QPAM Exemption.
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\26\ Prohibited Misconduct was defined in proposed Section
VI(s). See below for additional discussion of comments regarding the
Proposed and Final Amendment definition.
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The Department did not intend for the reporting requirement to
create compliance issues for QPAMs that could jeopardize the
availability of the prohibited transaction relief in the QPAM
Exemption. Therefore, to avoid inadvertent failures during the period
immediately after an entity begins relying on the QPAM Exemption or
changes its name, the Department has revised the proposed provision to
provide QPAMs with an initial 90-day period to report to the Department
and an additional 90-day period to cure inadvertent failures to report.
If the QPAM fails to report within the initial 90-day period, it must
submit an explanation during the 90-day cure period for why it failed
to provide timely notice. If, at the end of the 180 days, a QPAM still
has failed to report, or has not provided the required explanation, the
exemption will not be available for transactions that occur until the
failure is fully cured. Furthermore, the Department confirms that an
isolated instance of failing to report generally would not be
considered Prohibited Misconduct that would result in ineligibility
under Section I(g)(1)(B).
Several commenters also indicated that the Proposed Amendment did
not appear to provide any mechanism for an entity to ``de-register''
after it initially reports to the Department. In response to this
comment, the Department added new language to the end of Section I(k)
(Subsection I(g)(1) of the Proposed Amendment) to allow an entity that
reported to the Department to notify the Department that it no longer
is relying on the exemption. After the Department receives this notice,
it will remove the entity from its list of QPAMs that are relying on
the QPAM Exemption.
Another commenter recommended that if the Department is seeking a
list of entities operating as QPAMs, the Department could assign a new
separate identifying code to QPAMs that would be used to report the
QPAMs' services to a Plan on Schedule C of the Form 5500. While the
Department appreciates this comment and suggestion, modifying the Form
5500 is not part of this amendment, and the Department's objective
would not be met using the current Form 5500 for this purpose.
Finally, a proponent of the requirement noted that the Department
cannot effectively monitor QPAM compliance if it cannot even identify
QPAMs or estimate the number and amount of assets managed by QPAMs. The
Department notes that in addition to assisting the Department in
monitoring compliance, the reporting requirement will ensure the
Department has better information regarding the number of QPAMs that
are relying on the exemption, which will provide important data the
Department can use to estimate impacts if it considers future
amendments to the exemption. Therefore, the Department has retained
this requirement in the Final Amendment because it is important for
firms that are relying on the exemption to provide identifying
information to the Department and for such firms to establish a
compliance framework that is sufficient to ensure that they can always
satisfy the exemption's conditions.
Written Management Agreement (WMA)--Proposed Subsection I(g)(2)
<SUP>27</SUP>
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\27\ Subsection I(g) of the Proposed Amendment has been
renumbered and the requirements in Proposed Section I(g)(2) are now
contained in Section I(i) in this Final Amendment.
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As previously stated in this preamble, the fundamental premise of
Section I(g) has always been for a QPAM and those in a position to
control or influence its policies to act with integrity. The Proposed
Amendment included a new requirement for all QPAMs to update their WMAs
to include a provision that in the event the QPAM, its Affiliate, or
five percent or more owners engage in conduct resulting in a Criminal
Conviction or Participation In Prohibited Misconduct, the QPAM would
not restrict its client Plans' ability to terminate or withdraw from
their arrangement with the QPAM.\28\ The proposed requirement also
would have prevented QPAMs from imposing certain fees, penalties, or
charges on client Plans in connection with terminating or withdrawing
from a QPAM-managed Investment Fund.\29\
[[Page 23094]]
Finally, the Proposed Amendment would have required QPAMs to include a
provision in their WMAs that they would 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 Participation in
Prohibited Misconduct.
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\28\ The terms ``Criminal Conviction'' and ``Prohibited
Misconduct'' are discussed in more detail below.
\29\ 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.
---------------------------------------------------------------------------
Many commenters expressed concerns with these proposed WMA
provisions. They were particularly opposed to the WMA condition being
imposed on all QPAMs immediately upon the effective date of the
provision, and not only those QPAMs who become ineligible under Section
I(g).\30\ Other commenters indicated that these WMA provisions should
simply be imposed as conditions that are not required to be included in
contracts or as contractual guarantees.
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\30\ Many commenters used terms such as ``disqualified'' or
``disqualification'' in their comment letters to describe
ineligibility under Section I(g). The Department has used the terms
``ineligibility'' and ``ineligible'' throughout this preamble for
consistency with the heading for Section I(g) in this Final
Amendment and to avoid confusion that the term ``disqualified''
indicates that the definition of ``qualified professional asset
manager'' is not satisfied.
---------------------------------------------------------------------------
Many commenters indicated that the process to update WMAs is
difficult and complicated and would take much longer to comply with
than the Department's proposed 60-day effective date. Some commenters
indicated that at least 18 months would be required to come into
compliance, and that the amendment process would be very costly. These
commenters noted that even if a manager made only the required
amendments to its WMA, such amendments typically would require investor
consent, including consent by non-Plan investors who might be adversely
affected by the changes. Additionally, if QPAMs were required to
include a new indemnification clause in their WMA, commenters indicated
that QPAMs would likely also need to update and revise their agreements
with many other parties to address the same contingencies that
necessitate the new indemnifications and other required changes for
their client Plans. Finally, some commenters suggested that if the
Department requires QPAMs to include these provisions in their WMAs,
the requirement should apply only to contracts that are executed or
materially modified after the effective date of the Final Amendment.
After carefully considering these comments, the Department has
decided to remove the requirement for all QPAMs to revise their WMAs.
Instead, the Department has moved the condition into the Transition
Period provision of this Final Amendment. This modification means that
after the effective date of the Final Amendment, only QPAMs that become
ineligible to rely on the exemption will have to comply with the
indemnification and penalty-free withdrawal provisions. As a result,
the Final Amendment's Transition Period provision will operate in a
similar manner to recent Section I(g) individual exemptions granted by
the Department, which have imposed indemnification and penalty-free
withdrawal requirements on QPAMs only after they become ineligible
under Section I(g).
The Final Amendment indicates that any QPAM that experiences a
Section I(g) triggering event must provide client Plans with a One-Year
Transition Period and comply with the associated conditions that are
discussed below. In this Final Amendment, the Department made some
minor non-substantive adjustments to the language in the Proposed
Amendment regarding the prohibited transaction relief available and
obligations of the QPAM during the Transition Period. The Final
Amendment indicates that relief under the exemption during the
Transition Period is available for a maximum period of one year after
the Ineligibility Date if the QPAM complies with each condition of the
exemption throughout the one-year period. No relief will be available
for any transactions (including past transactions) effected during the
One-Year Transition Period unless the QPAM complies with each condition
of the exemption during such one-year period.
A few commenters opined that the requirement that the QPAM agree
not to restrict a Plan's ability to withdraw from an Investment Fund
that invests in illiquid assets such as a private equity or real estate
fund, may present additional challenges and harm Plans' investment
returns. The Department understands the additional challenges
associated with funds that are less liquid. However, as noted in the
Proposed Amendment, a QPAM that faces ineligibility may seek
supplemental individual exemption relief from the Department. As also
noted in the Proposed Amendment, an applicant may request a more
limited scope of relief for a supplemental individual exemption that
captures only those transactions that present liquidity problems. The
individual exemption process is best suited for addressing those
concerns and the Department stresses the importance of submitting an
individual exemption application as soon as possible after a QPAM
learns that a Section I(g) triggering event is expected to occur.
Applying promptly is not only consistent with the QPAM's fiduciary
obligations, but also helps ensure that the Department has sufficient
time to review the exemption application before the end of the One-Year
Transition Period.
Some commenters maintained that QPAMs should not have to indemnify
and restore losses beyond what is already required under ERISA because
ERISA already provides sufficient protections for Plans to recover
losses. The Department disagrees. Until now, the exemption lacked
additional safeguards to ensure Plans and IRA owners are not exposed to
substantial collateral costs that result from criminal or other
misconduct that is beyond their control. When QPAMs breached their
obligations and faced the loss of QPAM status, they commonly argued
that the Department should grant relief, notwithstanding their
misconduct, lest the Plans and IRA owners sustained the collateral
costs and injury associated with the loss of QPAM status. The express
obligation to indemnify and restore losses caused by the QPAM's own
misconduct mitigates this danger and prevents Plans from being locked
into disadvantageous relationships with firms that have proved unable
or unwilling to meet the exemption's conditions.
Commenters also indicated that client Plans and QPAMs should be
allowed to negotiate indemnification because liability and
indemnification provisions are often already in place, which are
intended to protect Plans if a non-exempt prohibited transaction or
breach of fiduciary duty occurs. The Department is concerned that all
client Plans do not have the same bargaining leverage to negotiate the
type of indemnification provisions included in the Final Amendment.
Moreover, such commenters did not provide any specific examples of the
types of indemnification provisions that may
[[Page 23095]]
already be included in their agreements with Plan customers.
Nevertheless, the Department's modification in the Final Amendment to
limit the WMA requirements to the Transition Period should mitigate
this concern because the requirement will only be imposed upon entities
experiencing an event that triggers Section I(g).
Some commenters focused on the term ``actual losses'' and argued
that this standard should not include the costs for Plans to transition
to an alternative asset manager because such costs are not normally
paid for by a terminated manager. The Department believes that this
argument is misplaced. Whether a cost is normally paid for by a
terminated manager is not determinative of whether the Department
should include a provision in the Final Amendment to protect Plans as
mandated by ERISA section 408(a) and Code section 4975(c)(2). When an
asset manager becomes ineligible to rely upon the relief provided in
the QPAM Exemption due to a violation of Section I(g), which is outside
the control of the client Plan, it is appropriate for the wrongdoer to
bear the associated costs.
Commenters also noted the ambiguity regarding the full range of
costs that are required to be indemnified. Relatedly, commenters
indicated that asset managers will be unable to insure against such
losses. They argued that it is very difficult, if not impossible, to
quantify ``investment losses resulting from foregone investment
opportunities'' for a variety of reasons, including the type of
investment manager, the ebbs and flows of investment needs and
opportunities, and the costs or needs of a replacement manager.
The Department acknowledges that there is uncertainty regarding the
full range of such costs, but notes that it has consistently imposed
these indemnification and loss restoration obligations in recent
individual exemptions following violations of Section I(g), and that
the affected firms have nevertheless chosen to continue acting as QPAMs
after receiving relief from the Department. Commenters have provided no
evidence that the condition has resulted in the imposition of
unwarranted costs upon Plans or QPAMs, or that there had been any
significant adverse impacts stemming from imposition of the condition
in the context of individual exemptions. Nor have they provided any
compelling evidence suggesting that the costs caused by further
breaches after felony convictions, or the associated uncertainties, are
better borne by the affected Plans than by the QPAMs. In the
Department's view, it is wholly appropriate that the QPAM, rather than
the Plan, sustain the costs stemming from the QPAM's failure to meet
the exemption's conditions or violations of the law. Moreover, by
limiting the WMA requirements to the Transition Period provisions in
the Final Amendment, the Department sharply reduces the scope of the
QPAM's potential liability and the need to determine possible costs up
front. As noted above, this Final Amendment simply adopts the same
overall approach to Section I(g) ineligibility that has been a core
component of the Department's recently granted Section I(g) individual
exemptions.\31\
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\31\ See e.g., Exemption From Certain Prohibited Transaction
Restrictions Involving Pacific Investment Management Company LLC, 88
FR 42953 (July, 5, 2023); Exemption for Certain Prohibited
Transaction Restrictions Involving Citigroup, Inc., 88 FR 4023 (Jan.
23, 2023); Exemption for Certain Prohibited Transaction Restrictions
Involving DWS Investment Management Americas, Inc. (DIMA or the
Applicant) and Certain Current and Future Asset Management
Affiliates of Deutsche Bank AG, 86 FR 20410 (April 18, 2021).
---------------------------------------------------------------------------
One commenter also noted that the WMA requirement in subsection
I(g)(2)(C) of the Proposed Amendment referenced Code section 4975
excise taxes. The commenter indicated that since the indemnification
runs to the Plan and a Plan is not liable for excise taxes, this
provision does not make sense. After considering this comment, the
Department has retained the reference to the excise taxes. This
provision is intended to ensure that a QPAM does not impose costs or
fees on a Plan in connection with excise taxes incurred by the QPAM.
Finally, a commenter argued that the provision should not cover
non-prosecution agreements (NPAs), deferred prosecution agreements
(DPAs), or any other ineligibility trigger captured within the
definition of Prohibited Misconduct. As discussed below, the Department
has modified the scope of NPAs and DPAs captured within the definition
of Prohibited Misconduct. The Department believes that conduct severe
enough to warrant an NPA or DPA should trigger the same conditions as
Criminal Convictions. Therefore, while the Final Amendment reflects the
modified scope of the NPAs and DPAs that are affected, the Department
declines to remove this protection as it applies to NPAs and DPAs
covered under the Final Amendment.
Types of Misconduct and Entities That Cause Ineligibility--Proposed
Subsection I(g)(3) <SUP>32</SUP> and Sections VI(r) and VI(s)
---------------------------------------------------------------------------
\32\ Subsection I(g)(3) of the Proposed Amendment has been
renumbered as Subsection I(g)(1) of the Final Amendment.
---------------------------------------------------------------------------
Criminal Convictions
Since 1984 when the QPAM Exemption was initially granted, Section
I(g) ineligibility has captured convictions of QPAMs, their Affiliates,
and five percent or more owners of the QPAM. As noted above, because
the Department relies upon the QPAM as a key protection in the
exemption, it is critically important that the QPAM, and those who are
positioned to influence its policies, maintain a high standard of
integrity. QPAMs, affiliates, and related parties that engage in
serious criminal misconduct do not display the requisite standard of
integrity expected of such entities under the exemption.
While the Department did not propose any changes to the scope of
entities captured by Section I(g),\33\ some comments focused on the
breadth of Section I(g), including the proposed expansion of Section
I(g) to capture the Participation In Prohibited Misconduct by a QPAM,
its Affiliates, or its owners of a five (5) percent or more interest.
Some commenters noted that the financial services industry has
experienced significant consolidation in the decades since the QPAM
Exemption was granted, with the result that a QPAM may be a small part
of a very large organization. One commenter also suggested that the
Department's proposed expansion of the ineligibility provision to
include Prohibited Misconduct would impose an unjustified penalty based
on the size and complexity of firms relying on the exemption.
---------------------------------------------------------------------------
\33\ The Department recognizes that the proposed inclusion of
Prohibited Misconduct may seem to broaden the scope of entities
captured, but the Department characterizes that as broadening the
scope of misconduct. The Proposed Amendment did not change the five
percent ownership threshold or definition of Affiliate that is
applicable to Section I(g).
---------------------------------------------------------------------------
Some commenters contended that existing Section I(g) of the QPAM
Exemption results in unjust application of automatic ineligibility.
Commenters suggested that Section I(g) should focus on crimes committed
by affiliates that are positioned to influence the QPAM's policies or
have power or influence to compromise the QPAM's ERISA compliance, or
crimes that involve the QPAM itself. According to one commenter, there
should be a direct relationship between the crime and the services
provided by the QPAM. A
[[Page 23096]]
variety of commenters expressed disagreement with what they perceived
to be the Department's position, i.e., that remote convictions call a
QPAM's integrity into question. These commenters asserted that Section
I(g) imposes ineligibility in circumstances where the entities or
individuals engaging in criminal conduct are not, in fact, in a
position to influence the QPAM's policies. One commenter also opined
that remote convictions resulting in ineligibility run counter to the
purposes of ERISA section 408(a). Another commenter suggested that the
Department should reserve ineligibility only for the most egregious
convictions of the QPAM involving ERISA assets. Others preferred the
Department's narrow approach in PTE 2020-02 because it limits
ineligibility to the entity providing investment advice or other
affiliates engaged in the business of providing investment advice to
Plans.
At the same time, some of these commenters indicated that inclusion
of criminal convictions as an ineligibility trigger at the QPAM entity
level could be appropriate. Similarly, some commenters agreed that
crimes committed by a parent entity that can exercise management and
control over the QPAM's day-to-day business and decision-making could
be relevant for an ineligibility provision based on criminal
convictions. A few commenters suggested that the Department rely on the
``controlled group of corporations'' or ``under common control''
standards as defined in Code section 414(b) and (c) if it decides to
retain the current breadth of Section I(g).
The Department disagrees with the suggestion that disqualification
is appropriate only when the QPAM itself was directly involved in the
crime or only when the crime specifically involves plan assets or
services to ERISA-covered plans. Serious crimes of the sort enumerated
in Section I(g) are directly relevant to a corporate family's culture
of compliance. When a company with multiple affiliated entities has
engaged in such conduct or ignored criminal misconduct when it is
occurring (or possibly even endorsed the misconduct), the likelihood
that the same or similar conduct will be ignored when engaged in at the
QPAM entity increases. This is particularly true where the bad actor is
the corporate parent of the QPAM, but also rings true when it is an
affiliated company that is controlled by the same corporate parent as
the QPAM.
Affiliated and related companies commonly hold themselves out as an
integrated entity, have common or overlapping supervisory and control
structures, and share a common corporate culture. Accordingly, serious
criminal misconduct is a red flag indicating potential compliance
problems that extend beyond the specific actors that directly engaged
in the misconduct. Similarly, the commission of any of the enumerated
criminal offenses is relevant to the assessment of likely future
misconduct beyond the narrow confines of the particular customers and
service providers directly affected by the conduct that resulted in a
conviction. If, for example, a company engaged in embezzlement or
price-fixing with respect to non-plan customers, there is little basis
for plan customers to be sanguine about the improbability of such
conduct with respect to plan customers and plan assets.
Moreover, the practical impact of the exemption's disqualification
provisions is not that QPAMs are precluded from making their case to
the Department that the criminal conviction should not result in a
lengthy bar from reliance on the exemption. Rather, the consequence is
that the disqualified QPAM would have to apply for an individual
exemption if it wishes to rely on the class exemption for a period that
extends beyond the Transition Period. In the context of such an
individual exemption application, the QPAM would be in a better
position to present evidence on the scope of its involvement in the
criminal conduct, its independence from any bad actors, current
corporate culture and compliance structures, and other information
relevant to assessing whether it should be permitted to continue
relying on this exemption, notwithstanding the conviction. Similarly,
the Department would have the time and ability to consider such issues
on a case-specific and context-sensitive basis that takes into account
the evidence submitted as part of a formal record. Also, based on the
Department's experience processing individual exemption applications,
many of the convictions and criminal misconduct the Department has
dealt with over the past decade have not involved conduct that is
isolated to remotely related affiliates within the QPAM's corporate
ownership structure.\34\
---------------------------------------------------------------------------
\34\ Even in situations where the convicted entity appeared
remote, the Department has seen pervasive compliance failures at
various other entities within the corporate family, including at
parent entities.
---------------------------------------------------------------------------
Financial Industry Consolidation
The Department recognizes that the legal landscape for the
financial services industry has changed since 1984. When the QPAM
Exemption was originally granted, there were established legal and
regulatory barriers in the U.S. that prevented banking, securities, and
insurance companies from consolidating. However, the passage of the
Graham-Leach-Bliley Act in 1999 \35\ removed these barriers, which led
many commercial banks, investment banks, securities firms, and
insurance companies to consolidate. The Department understands that
significant consolidation has occurred since 1999 and that the scope of
entities captured by Section I(g) has not been revisited since those
and other changes occurred in the financial services industry. The
Department continues to stand by the original premise for Section I(g),
which largely is focused on entities who are in control-based
relationships with a QPAM, can influence the activities of a QPAM or
are likely to share a common corporate culture.
---------------------------------------------------------------------------
\35\ Public Law 106-102; 113 Stat. 1338.
---------------------------------------------------------------------------
The Department reminds QPAMs, as it did in the Proposed Amendment,
that control-based relationships remain directly relevant for
triggering ineligibility under Section I(g) because of the Affiliate
definition.\36\ Meaningful control can exist even when entities that
have small ownership interests in a QPAM are positioned to influence
the QPAM's decision to engage or refrain from engaging in conduct that
can form the basis for a Criminal Conviction or Participation In
Prohibited Misconduct. The Department continues to believe that
corporate malfeasance at entities that control, are under common
control with, or are controlled by the QPAM indicates the possibility
of increased risk of harm to client Plans and IRA owners . The
Department notes that a controlling relationship exists when one entity
directly or indirectly has or exercises a significant influence over
the management or policies of another entity. Control in this context
does not require that the first entity has the ability to exercise
complete domination or absolute authority over all aspects of the
management or policies of the second entity.
---------------------------------------------------------------------------
\36\ The Affiliate definition continues to include ``[a]ny
person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with'' the QPAM.
See Section VI(d) for a complete definition.
---------------------------------------------------------------------------
Foreign Criminal Convictions
The Department has a longstanding practice of considering
individual exemption applications from QPAMs in connection with foreign
convictions.\37\
[[Page 23097]]
The Proposed Amendment would have added a definition of Criminal
Conviction that was intended to remove any doubt that Section I(g)
applies to foreign convictions that are substantially equivalent to the
listed U.S. federal or state crimes. In the Proposed Amendment, the
Department specifically requested comments on this section, including
whether there are certain types or aspects of criminal behavior that
deserve additional focus. The Department also indicated that QPAMs
should interpret the scope of this provision broadly with respect to
foreign convictions 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).
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\37\ 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>.
---------------------------------------------------------------------------
The Department stated that in situations where a crime raises
particularly unique issues related to the substantial equivalence of
the foreign Criminal Conviction, the QPAM may seek the Department's
views regarding whether the foreign crime, conviction, or misconduct is
substantially equivalent to a U.S. federal or state crime. However, the
Department cautioned that any QPAM submitting a request for review
should do so promptly, and whenever possible, before a judgment is
entered in a foreign conviction so the QPAM has sufficient time to
complete the notice obligations under the One-Year Transition Period.
The Department also requested comment on whether there should be an
additional process for requesting the Department's determination
regarding whether a foreign conviction is substantially equivalent to a
domestic conviction. The Department asked whether particular factors,
such as the elements of the crime and the nature of the tribunal or
investigating entity, should be considered in making such a
determination.
Many commenters provided input regarding the explicit inclusion of
foreign crimes in the Proposed Amendment. At least one commenter
indicated that it did not agree that the status of foreign convictions
under Section I(g) (as it has existed since 1984) has been a settled
matter. As amended, Section I(g) will remove all doubt regarding the
coverage of foreign criminal convictions, which are now specifically
referenced in the exemption's text.
Some commenters indicated that the Proposed Amendment did not
provide the intended certainty regarding foreign convictions because
there could be difficulty determining whether any given foreign crime
is a felony, or whether it is substantially equivalent to a felony
under U.S. law.\38\ Some commenters also expressed skepticism that the
Department has the competence and jurisdiction to interpret foreign law
fairly and accurately for these purposes. A variety of commenters also
raised questions regarding the proposed ``substantially equivalent''
standard, and expressed concern that foreign jurisdictions may not
adhere to basic due process protections. Multiple commenters suggested
that the Department should establish a formal process by which a QPAM
may request a determination from the Department regarding whether a
foreign conviction is substantially equivalent to a domestic conviction
before it results in ineligibility. One commenter recommended that this
should include an opportunity for the QPAM to present its position as
to why a foreign conviction may not be substantially equivalent to a
domestic conviction. Another commenter suggested the ``substantially
equivalent'' standard for foreign criminal convictions should apply
only where the factual record of such conviction, when applied to
United States federal criminal law, would likely lead to a criminal
conviction in the United States. Other commenters expressed further
concerns that the Proposed Amendment would inappropriately equate
criminal convictions levied in countries that have less robust or
reliable legal systems with those convictions handed down by U.S.
courts. One commenter suggested that the Proposed Amendment has the
potential to play into the hands of foreign nations that intend to harm
investment managers having substantial operations in the United States
or its allies. The Department notes that although the crimes listed
explicitly in Section I(g) use the term ``felony,'' the crimes adopted
by reference from ERISA section 411 are not, nor have they ever been,
limited to felonies.
---------------------------------------------------------------------------
\38\ One commenter also noted that several jurisdictions such as
the United Kingdom, Canada, Ireland, Australia, and New Zealand do
not rely on a legal category of ``felony'' which could compound
issues for making a substantially equivalent determination in such
cases.
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To add clarity and ensure consistency between Section (r)(1) and
(r)(2), the Department added the phrase ``or released from
imprisonment, whichever is later'' to the sentence, ``(r) `Criminal
Conviction' means the person or entity that: (2) is convicted by a
foreign court of competent jurisdiction or released from imprisonment,
whichever is later, 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 (r)(1), above. . . .''
With respect to the ``substantially equivalent'' standard for
foreign crimes, the Department did not add a formal process to the
Final Amendment to make such determinations. The Department does not
expect that questions of this nature will arise frequently, but when
they do, impacted entities may contact the Office of Exemption
Determinations for guidance, as they have done for many years. In
general, the Department has not had difficulty determining whether the
foreign crimes were substantially equivalent to domestic crimes and
does not expect to have any difficulty with these determinations in the
future. Additionally, the One-Year Transition Period, and the ability
to apply for an individual exemption, provide parties with the time and
the opportunity to address any issues about the import of any specific
foreign conviction and its relevance to ongoing relief from full
application of the prohibited transaction provisions. The Department is
not aware that any convictions have occurred in foreign nations with
the intent to harm U.S.-based investment managers and believes there is
a low likelihood that this has occurred. Further, the types of foreign
crimes that the Department has seen in recent QPAM individual exemption
requests have consistently related to the subject financial
institution's management of financial transactions and/or culture of
compliance. These underlying foreign crimes have included the
following:
<bullet> attempting to peg, fix, or stabilize the price of an
equity in anticipation of a block offering in Japan (PTE 2023-13, 88 FR
26336 (April 28, 2023));
<bullet> illicit solicitation and money laundering for the purposes
aiding tax evasion in France (PTE 2019-01, 84 FR 6163 (February 26,
2019)); and
<bullet> spot/futures-linked market price manipulation in South
Korea (PTE 2015-15, 80 FR 53574 (September 4, 2015)).
Nevertheless, to address the concern expressed in the public
comments that convictions have occurred in foreign nations with the
intent to harm U.S.-based investment managers, the Department has
revised the definition Criminal Conviction in Section VI(r)(2) of this
Final Amendment to exclude
[[Page 23098]]
foreign convictions and imprisonments that occur within foreign
jurisdictions that are included on the Department of Commerce's list of
``foreign adversaries.'' \39\
---------------------------------------------------------------------------
\39\ 15 CFR 7.4. The list of foreign adversaries currently
includes the following foreign governments and non-government
persons: The People's Republic of China, including the Hong Kong
Special Administrative Region (China); the Republic of Cuba (Cuba);
the Islamic Republic of Iran (Iran); the Democratic People's
Republic of Korea (North Korea); the Russian Federation (Russia);
and Venezuelan politician Nicol[aacute]s Maduro (Maduro Regime). The
Secretary of Commerce's determination is based on multiple sources,
including the National Security Strategy of the United States, the
Office of the Director of National Intelligence's 2016-2019
Worldwide Threat Assessments of the U.S. Intelligence Community, and
the 2018 National Cyber Strategy of the United States of America, as
well as other reports and assessments from the U.S. Intelligence
Community, the U.S. Departments of Justice, State and Homeland
Security, and other relevant sources. The Secretary of Commerce
periodically reviews this list in consultation with appropriate
agency heads and may add to, subtract from, supplement, or otherwise
amend the list. Section VI(r)(2) of the Final Amendment will
automatically adjust to reflect amendments the Secretary of Commerce
makes to the list.
---------------------------------------------------------------------------
A few commenters also indicated that the proposed changes to
Section I(g) are unnecessarily broad in application and will impose
unnecessary costs and burdens on Plans. The Department's experience,
however, is that the overall number of QPAMs and client Plans that have
been impacted by Section I(g) violations has been small compared to the
total number of QPAMs and client Plans,\40\ and the Department believes
that this will continue to be the case. Thus, there should not be a
significant change to the costs or burdens imposed on Plans as a result
of explicitly including foreign convictions in Section I(g). In any
event, when misconduct rises to the level that it results in
ineligibility under Section I(g), the resultant costs and burdens are
appropriate to ensure that a QPAM's client Plans are adequately
protected when a QPAM becomes ineligible.
---------------------------------------------------------------------------
\40\ This belief is based on the number of QPAMs suggested by
commenters and represented in an updated estimate in this Final
Amendment versus the number of QPAMs and client Plans identified in
individual exemption applications.
---------------------------------------------------------------------------
Some commenters recognized that when the foreign affiliate itself
is providing investment management services to a Plan, the integrity of
the foreign affiliate may be relevant. Commenters indicated that if the
Department includes foreign convictions, ineligibility should be
limited at least to entities that fall into the tax code definition of
``Controlled Group'' with respect to a QPAM. The Department appreciates
the recognition by these commenters that at least some misconduct in
foreign jurisdictions is relevant to the QPAM's integrity. However, the
Department disagrees that the correct standard for determining when
misconduct could be relevant should be limited to the ``Controlled
Group'' definition. The Department believes that the approach taken in
the exemption with regards to the scope of entities captured by Section
I(g) in the ownership test and definition of Affiliate provides
significant protections for Plans and participants and the commenter
has not provided a reasoned basis why altering this scope would provide
additional protections. Therefore, the Department has not altered the
scope of entities captured by Section I(g) with respect to Criminal
Convictions.
Proponents of the Proposed Amendment's addition of foreign crimes
to Section I(g) indicated that large financial institutions that engage
in financial crimes usually do so across multiple jurisdictions,
arbitraging regulatory loopholes and pressuring weaker jurisdictions to
curtail regulation. They urged the Department not to ignore foreign
activity due to the modern realities of multinational financial
institutions.
The Department agrees that criminal convictions for the types of
crimes identified in the QPAM Exemption are relevant to a QPAM's
willingness and 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
Final 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. In the modern era of increased globalization and
multinational companies, corporate parents and affiliates may reside in
jurisdictions other than the United States. Their criminal misconduct
in other jurisdictions is no less concerning to the Department than
when such misconduct occurs in the United States. In fact, if foreign
convictions were not included in Section I(g), the exemption would
potentially impose more lenient conditions on foreign-based
conglomerates than it does on U.S.-based entities, which is not the
Department's intention, because it is not sufficiently protective of
Plans.
A few commenters suggested alternatives to the Department's
approach to foreign convictions in the Proposed Amendment. One
commenter suggested that the Department should adopt an approach
modeled after the Security and Exchange Commission's (SEC's)
consideration of foreign crimes when determining whether to disqualify
persons from serving in various capacities at an Investment Company
under the Investment Company Act of 1940. It is the Department's
understanding that, under the Investment Company Act of 1940,
disqualification is automatic for specified domestic crimes, but that
the SEC provides notice and a hearing before disqualification for
foreign crimes.\41\
---------------------------------------------------------------------------
\41\ See Investment Company Act of 1940, 15 U.S.C. 80a-9.
---------------------------------------------------------------------------
After consideration of the comment and the differences in statutory
text and purposes at issue under ERISA, the Code, and the Investment
Company Act of 1940, the Department has decided not to adopt the
commenter's suggestion. The QPAM Exemption permits entities to enter
into transactions that ERISA and the Code otherwise prohibit because of
the danger they pose to Plans, their plan participants and
beneficiaries, and IRA Owners. Before the Department grants an
exemption from the law's strict prohibitions, it has an obligation to
find that the exemption is in the interest of participants and
protective of their rights. Under the QPAM Exemption, these findings
crucially turn on the financial institution's culture of compliance.
Misconduct that results in a criminal conviction of an entity under
Section I(g) of the QPAM Exemption, whether domestic or foreign, calls
into serious question whether the QPAM has the integrity and culture of
compliance on which the exemption is premised. Accordingly, after
conviction of a serious crime, a financial institution, its affiliates,
and related parties should not expect to have the automatic right to
continue to engage in transactions that are otherwise illegal, but for
the exemption. Nevertheless, the firm may always apply to the
Department for an individual exemption based on a full and fair
consideration of the firm's criminal conduct and the relevant facts,
circumstances, and context, if the firm believes that it should still
receive a dispensation from application of the otherwise generally
applicable prohibited transaction provisions, as companies have done
over the years.
Relatedly, a commenter suggested the QPAM could be required to
certify that its failure to meet the requirements of the QPAM Exemption
arose solely from the foreign affiliate's criminal conduct and that no
entities holding Plan assets
[[Page 23099]]
actively Participated In the criminal conduct that is the subject of
the conviction. Based on the certification, the Department could
inquire further and make its decision based on the facts of the
specific situation. Another alternative offered by a commenter was
simply to require a QPAM to notify a Plan of the conviction, and then
allow the Plan sponsor to decide whether to continue its arrangement
with the QPAM.
The Department's focus is on the protection of Plans and their
participants and beneficiaries, as it decides whether to give QPAMs
relief from the requirements of otherwise applicable law (i.e., the
categorical prohibitions of ERISA Section 406(a) and Code section
4975(c)(1)). The Department declines to take the other recommended
approaches because as explained in other parts of this preamble, the
Department is not merely concerned about crimes that have already
impacted Plan assets, but compliance frameworks that have an increased
potential to place Plan assets at risk. Criminal Convictions, even in
foreign jurisdictions, for the types of crimes and by the entities
captured by Section I(g) raise significant concerns. The Department
disagrees with the suggestion that it would be sufficiently protective
of Plans, their participants, and beneficiaries simply to require
notice of the QPAM's criminal conviction and leave it to the
fiduciaries to decide whether to engage in otherwise prohibited
transactions with the QPAM. When Congress enacted ERISA, it chose not
to broadly empower plan fiduciaries to opt out of the prohibited
transaction provisions on a voluntary basis, but rather charged the
Department with the responsibility to craft protective conditions that
meet the statutory standards set forth in ERISA section 408(a).
The crimes enumerated in Section I(g) are serious violations that
call into question the willingness and ability of the QPAM to adhere
consistently to the fiduciary norms and standards that are critical to
entrusting them with license to engage in otherwise illegal
transactions. To the extent a QPAM believes that it should be permitted
to engage in such transactions after the expiration of the Transition
Period, notwithstanding its conviction, the Department has concluded
that the interests of Plan participants and beneficiaries and IRA
Owners are best protected by the procedural protections, public record,
and notice and comment process associated with individual exemption
applications. In the context of an individual exemption application,
the Department has unique authority to efficiently gather evidence,
consider the issues, and craft protective conditions that meet the
statutory standard. If the Department concludes, consistent with the
statutory standards set forth in ERISA 408(a) and Code section
4975(c)(2), that an individual exemption is appropriate, Plan
fiduciaries remain free to make their own independent determinations
whether to engage in transactions with the QPAM. In the first instance,
however, the Department must consider the unique facts and
circumstances surrounding the conviction based on its statutory role
and obligations, and craft appropriate conditions if it appears that an
exemption is proper. The Department has a critical role in providing
appropriate regulatory protections, even in situations where a Plan
fiduciary has some authority, discretion, and obligations of its own.
Prohibited Misconduct
The Department proposed to add a new category of misconduct that
could lead to ineligibility under Section I(g), described as
``participating in Prohibited Misconduct.'' \42\ Proposed Section VI(s)
defined Prohibited Misconduct as:
---------------------------------------------------------------------------
\42\ As proposed, this definition applied to Participation In
Prohibited Misconduct by the QPAM or its five percent or more owners
and Affiliates.
(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.
The Department explained in the preamble of the Proposed Amendment
that the term ``participating in'' referred 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. The Department proposed that, where a QPAM's ineligibility
is linked to Prohibited Misconduct under any portion of Section VI(s),
the Department would provide affected entities with a written warning
and an opportunity to be heard.
The Department requested comments on the extent to which Proposed
Section VI(s) was appropriately tailored to target non-criminal
activity by the QPAM (or its owners of a five (5) percent or more
interest, or Affiliates) that raised integrity issues that had the
potential to harm Plans and whether additional or alternative elements
were warranted. The Department also requested comments regarding
whether to add any conduct as Prohibited Misconduct, and if so, to
include an explanation for how such actions would implicate a QPAM's
integrity. The Department also requested comments as to whether any of
the proposed Prohibited Misconduct should be removed and an explanation
of why such conduct does not affect the QPAM's integrity.
With respect to these provisions, the Department explained in the
Proposed Amendment that it intended to rely on its enforcement
authority and program to detect a QPAM's Participation In the types of
Prohibited Misconduct included in proposed subsections VI(s)(3) through
(5).\43\ In the Proposed Amendment, the Department built in due process
components so that ineligibility would occur only in limited
circumstances, and even in those circumstances, the process to make the
QPAM ineligible would have begun only after two initial steps: (1) an
investigation by the appropriate field office, and (2) receipt by the
QPAM thereafter of a written warning that the Department was
contemplating issuing a Written Ineligibility Notice. The Proposed
Amendment's Written Ineligibility Notice process would have allowed the
QPAM the opportunity to be heard before the Department were to issue an
actual notice, which would have made the QPAM ineligible to use the
exemption from the date the Department issued the notice, except that
the mandatory One-Year Transition Period would have been applicable in
the same manner as with ineligibility caused by a Criminal Conviction.
---------------------------------------------------------------------------
\43\ Section VI(s) has been renumbered in the Final Amendment as
section VI(s)(1), (2)(A), (B), and (C).
---------------------------------------------------------------------------
General Comments on Proposed Prohibited Misconduct Provision
One supporter of the Proposed Amendment indicated that inclusion of
additional categories of misconduct was appropriate because the
commenter
[[Page 23100]]
believed that Section I(g)'s limited focus on crimes that resulted in a
conviction had contributed to serial misconduct by corporate
wrongdoers. The commenter expressed concern that some corporate
wrongdoers could take advantage of loopholes to avoid a conviction when
the conduct was ultimately serious enough to warrant a conviction.
Many opponents of the amendment recommended that the ``Prohibited
Misconduct'' standard and provisions be deleted entirely. They stated
that the expansion of Section I(g) to include Prohibited Misconduct
erodes certainty that the QPAM Exemption provides regarding
eligibility.
Specific Comments Regarding Including Non-Prosecution Agreements (NPAs)
and Deferred Prosecution Agreements (DPAs) as Prohibited Misconduct
Some commenters recommended that the Department consult with the
Department of Justice (DOJ) and the SEC to get a better sense of how
the proposed inclusion of NPAs and DPAs as Prohibited Misconduct would
impact their enforcement abilities. Some commenters also noted that
financial institutions may agree to a NPA or DPA for reasons that are
unrelated to ERISA. These commenters opined that the Department seemed
to be mischaracterizing the nature and use of NPAs and DPAs, as well as
their objectives (such as avoiding the collateral consequences of
penalizing innocent parties). According to some commenters, prosecutors
do not enter into these agreements lightly or with the intention of
allowing financial institutions to ``sidestep'' the consequences of
their actions. Some commenters also asserted that even where an
institution believes it has not engaged in wrongdoing and would prevail
on the merits in a court of law, they may prefer to enter into a NPA or
DPA for a variety of reasons. For example, one commenter indicated that
even where an institution believes it has not engaged in wrongdoing and
would prevail on the merits in a court of law, it may prefer to enter
into a NPA or DPA if it is concerned with its reputation on unrelated
matters (that do not rise to the level of covered convictions) that
could be introduced during a protracted trial.
Some commenters also offered alternatives to ineligibility in
connection with NPAs or DPAs. For instance, one commenter suggested
that the Department could require a QPAM that enters into one of these
agreements to notify each Plan it manages that: (1) the QPAM has
entered such an agreement; and (2) the Plan can terminate its
relationship with the QPAM if it chooses to do so, without penalty.
Some commenters expressed additional concern that financial
institutions will be less willing to enter into NPAs or DPAs if doing
so would result in ineligibility under the QPAM Exemption. These
commenters indicated that they believed this outcome may not be in the
public interest. For instance, one commenter suggested that if entering
into a DPA or NPA would effectively end a firm's ERISA investment
management business, the firm may not be able to enter into the
agreement, even when doing so is the best resolution for the government
prosecutor involved.
A proponent of the Department's Proposed Amendment to include NPAs
and DPAs as ineligibility triggers noted that since the exemption was
proposed in 1982, the use of NPAs and DPAs has skyrocketed, with many
companies avoiding prosecution for serious misconduct due to factors
unrelated to their culpability. The commenter opined that to fully
protect Plans from unscrupulous behavior by asset managers, the
Department must, as proposed, include NPAs and DPAs within the
definition of Prohibited Misconduct that triggers QPAM ineligibility
when the conduct at issue involves a listed crime.
Another commenter identified a lack of clarity as to whether an NPA
or DPA would have to involve the manager's parent or whether it could
involve the manager's most remote affiliate or an entity with only a
five percent ownership interest in the manager.
Several commenters also expressed specific concerns over expanding
QPAM ineligibility to agreements with foreign governments that are
substantially equivalent to domestic NPAs and DPA. These commenters
expressed concern that the proposal provided the Department with
unfettered discretion to determine whether a foreign NPA or DPA entered
into by the QPAM or an Affiliate was substantially equivalent to a
domestic NPA or DPA, and they questioned whether the Department has the
necessary proficiency in criminal justice and international law, or
jurisdictional authority to make such determinations.
Other commenters also suggested that it would be difficult for the
Department to apply the substantially equivalent standard in the
context of foreign NPAs and DPAs due to the claimed vagaries of foreign
laws and prosecutorial practices and the effect of expanding the reach
of Section I(g) in this manner on law enforcement efforts by other U.S.
agencies and the possible extraterritorial impact on non-U.S. law
enforcement and U.S. relations with foreign governments.
One commenter stated that Department should not treat the conduct
of an affiliate which has no or little nexus or relationship to the
QPAM as disqualifying and pointed out the practical considerations that
are necessary to identifying foreign equivalents of these agreements as
well as the significant risk that these agreements may be imposed in
foreign jurisdictions that do not provide due process protections.
Another commenter asserted that the connection of foreign agreements to
a QPAM's compliance culture is speculative and tenuous and does not
provide any meaningful protection to participants and beneficiaries.
One commenter claimed that including foreign equivalents of NPAs
and DPAs has the potential to play into the hands of foreign nations
that wish to harm the operations of U.S.-based investment managers. For
example, the commenter suggested that rogue foreign nations could bring
dubious claims against a U.S.-based investment manager and force them
to execute a DPA or NPA with that government in order to continue
operations in that foreign country.
Another commenter questioned how the Department would know if
something would be ``successfully'' prosecuted for purposes of the
requirement in Section VI(s) that the NPA or DPA be based on
allegations that, if successfully prosecuted, would have constituted a
crime described in Section VI(r) of the exemption.
The Department's Response to Comments and Treatment of DPAs and NPAs
Under the Final Amendment
In response to these comments, the Department consulted with the
DOJ and the SEC to affirm its understanding of NPAs and DPAs,
particularly the level of culpability on the part of the QPAM that
would accompany such an agreement. Based on these consultations, the
Department understands that, as a matter of course, these domestic NPAs
and DPAs are accompanied by Statements of Fact that establish the basis
for criminal liability. In most cases, the offending party avoids
prosecution for the crime on the basis of the party's agreement to
enter into, and comply with, the terms of the agreement.
After considering comments on the Proposed Amendment's inclusion of
NPAs and DPAs as Prohibited Misconduct in the Proposed Amendment, the
Department has
[[Page 23101]]
determined to include this provision in the Final Amendment with a
modification discussed below.
In cases where the QPAM, 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 has executed an NPA or DPA, the Department
has precisely the same concerns about the QPAM's compliance culture,
and its ability and willingness to adhere to its fiduciary obligations
and the exemption conditions, as it does when any of these parties have
been formally convicted of the crime. The cause for concern about the
QPAM is not the conviction per se, but rather the serious misconduct
that underlies the conviction. In these cases, responsible federal or
state officials have resolved serious claims of misconduct against
parties through the execution of a formal agreement voluntarily entered
into with the parties. In these circumstances, if the alleged
misconduct is sufficient to form the basis for an NPA or DPA that is
entered into by the QPAM, 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, it is appropriate to treat the agreement as cause
for ineligibility under Section I(g), subject to the parties' ability
to apply for an individual exemption before, during, or after the One-
Year Transition Period provided for in this exemption.
Moreover, any due process concerns with including NPAs and DPAs as
Prohibited Misconduct are addressed by the change to the Prohibited
Misconduct provision in the Final Amendment providing that
ineligibility does not occur until after a QPAM, 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 has executed an NPA or
DPA. Those agreements result from criminal investigations and are
voluntarily entered into by the parties. QPAMs and other affected
entities that enter into an NPA or DPA generally will be afforded the
numerous due process protections that are associated with criminal
investigations and negotiating these agreements.
Under the revised provision in the Final Amendment, QPAMs, their
Affiliates, or five (5) percent or more owners that enter into an NPA
or DPA should have sufficient time to prepare for the implications of
becoming ineligible under this Final Amendment as a result of the
process surrounding the negotiation and execution of the agreement. In
either case, the QPAM must commence the One-Year Transition Period and
submit an individual exemption application for extended relief a soon
as possible if it wants to continue using the QPAM exemption after the
One-Year Transition Period expires.
After considering comments on the Proposed Amendment's inclusion of
foreign-equivalent NPAs and DPAs in the Proposed Prohibited Misconduct
definition, the Department has decided to remove foreign equivalent
agreements from the definition of Prohibited Misconduct in Section
VI(s) of the Final Amendment. While the Department is confident in its
ability to apply the foreign equivalence standard to NPAs and DPAs
entered into by the QPAM or its Affiliates, and although the Department
has concerns about conduct that might give rise to a foreign equivalent
NPA or DPA, it has concluded that it has insufficient information on
those agreements to treat them as a cause for ineligibility under
Section I(g). In this context, the Department notes that it has not
received individual exemption requests from QPAMs or their Affiliates
in which a foreign equivalent agreement was implicated.
The Department also is not aware of any instances where foreign
governments have used agreements that are substantially equivalent to
domestic NPAs and DPAs to harm U.S.-based investment managers and, as
with foreign criminal convictions, we believe there is a low likelihood
that this activity has occurred. However, in light of the comments, the
Department has concluded that it does not have sufficient certainty
about the use of these agreements outside the U.S., and about the
procedural protections associated with the agreements in foreign
jurisdictions, to justify finalizing this particular part of the
proposed Prohibited Misconduct provision at this time. Therefore, the
Department's position is that the uncertainties surrounding foreign
agreements raised by some commenters outweigh the protective benefits
that would accrue to Plans and their participants and beneficiaries by
including foreign agreements in the Prohibited Misconduct provision.
Although the Department is removing the foreign equivalent of NPAs
or DPAs as an ineligibility trigger, the Final Amendment to Section
I(g)(2) requires the QPAM to notify the Department when the QPAM, 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
executes a domestic or foreign equivalent NPA or DPA. This notice will
give the Department the ability to take appropriate additional action
in specific cases and will provide the Department with broader
information about these practices as the QPAM exemption continues to be
relied upon by parties in the future. The Department notes that QPAMs
should err on the side of caution when determining whether an agreement
with a foreign government entity is the substantial equivalent of a
domestic NPA or DPA that must be reported to the Department pursuant to
amended Section I(g)(2).
After reviewing and considering the comments offering alternatives
to ineligibility in connection with NPAs or DPAs, in particular only
requiring QPAMs to provide a notice to Plans, the Department's position
is that mere notice to the Plans is not sufficiently protective to
address circumstances where a NPA or DPA with a U.S. federal or state
prosecutor's office or regulatory agency reflects serious misconduct by
the QPAM. Further, solely relying on a QPAM's notification to Plans
that the QPAM committed serious misconduct would not be an appropriate
justification for the Department to ignore such serious misconduct and
to forego taking appropriate action.
In response to the comment asserting that a lack of clarity exists
regarding whether an NPA or DPA would have to involve the QPAM's parent
or whether it could involve the QPAM's most remote affiliate or an
entity with only a five (5) percent ownership interest in the manager,
the Department has clarified in the Final Amendment that the Prohibited
Misconduct provision in Section VI(s)(1) includes NPAs and DPAs entered
into by the QPAM, or any Affiliates, or owners of five (5) percent or
more of the QPAM, with a U.S. federal or state prosecutor's office or
regulatory agency.
In response to comments that questioned how the Department would
know if something would be ``successfully'' prosecuted, the Department
notes that the focus of the provision is not on whether a criminal
prosecution would have been successful if the case had not been
settled, but rather whether the allegations by state or federal
officials that resulted in the NPA or DPA described one of the
disqualifying crimes set forth in VI(r). The provision does not require
the Department to know if something would be successfully prosecuted.
Instead, it requires the Department to determine whether the conduct
associated with the NPA or DPA would ``if successfully prosecuted''
constitute Prohibited Misconduct as defined in paragraph VI(s)(1). In
such cases, the parties have
[[Page 23102]]
voluntarily entered into a settlement based on allegations of
disqualifying misconduct. There is sufficient cause for concern in all
such cases about the entities' culture of compliance to trigger
ineligibility, start the One-Year Transition Period, and require the
parties to seek an individual exemption if they would like to continue
to receive an exemption permitting them to engage in conduct that is
otherwise prohibited by ERISA and the Code. Moreover, as noted above,
NPAs and DPAs are commonly supported by Statements of Fact that
establish the basis for criminal liability by the parties entering into
the agreements.
While the Department is removing foreign equivalents of NPAs and
DPAs as Section I(g) ineligibility events in the Final Amendment, as
discussed above it is adding a notice requirement that applies when the
QPAM, its owners of a five (5) percent or more interest, or Affiliates
enter into a foreign equivalent of an NPA or DPA or Participate In
Prohibited Misconduct as defined in Section VI(s). Specifically,
Section I(g)(2) requires the QPAM to submit a notice to <a href="/cdn-cgi/l/email-protection#227372636f62464d4e0c454d54"><span class="__cf_email__" data-cfemail="aafbfaebe7eacec5c684cdc5dc">[email protected]</span></a>
within 30 calendar days after the Ineligibility Date for the Prohibited
Misconduct as determined under Section (I)(h)(2) or the execution date
of the substantially-equivalent foreign NPA or DPA, if the QPAM, 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,
Participates In any Prohibited Misconduct as defined in Section VI(s)
or enters into an agreement with a foreign government that is
substantially equivalent to a NPA or DPA described in section VI(s)(1).
The QPAM must include a description of the Prohibited Misconduct in the
notice and provide the name of and contact information for the person
or entity that is responsible for handling this matter to the
Department.
The Department clarifies that the Prohibited Misconduct conditions
in Section VI(s)(1), regarding entering into an NPA or DPA with a U.S.
federal or state prosecutor's office or regulatory agency, and the
corresponding notification requirement in Section I(g)(2), are
prospective only, and therefore only apply to QPAMs, their Affiliates,
and owners of a five (5) percent or more interest who have executed
NPAs or DPAs on or after June 17, 2024 based on facts that, if
successfully prosecuted, would have constituted a crime specified in
VI(r) of the Final Amendment.
Specific Comments Regarding Prohibited Misconduct Under the Written
Warning Letter and Ineligibility Notice Process
In the Proposed Amendment, the Department specifically requested
comments on the sufficiency of the due process protections provided in
connection with the Prohibited Misconduct provision. Several commenters
expressed concern that the due process protections of the written
warning letter and Written Ineligibility Notice provisions were
insufficient. For example, some commenters stated that:
<bullet> the proposed standards were inadequate to protect the due
process rights of QPAMs, because the process provided the Department
with potentially unlimited discretion to decide what types of
misconduct would trigger ineligibility to be made by an independent,
disinterested decision-maker;
<bullet> the Department's ineligibility process lacks sufficient
due process and a final determination by a neutral third-party judge,
and therefore, provides the Department with unilateral discretion;
<bullet> due process requires an adversarial process that is
adjudicated by an independent third party;
<bullet> if the ineligibility process for Prohibited Misconduct is
retained, the Department should develop a process that includes: (1)
rules for establishing a factual record, including adequate time and
opportunity for the accused institution to review, challenge, and
supplement the record; (2) formal rules for soliciting input from
federal, state, and/or foreign prosecutors involved in the negotiated
agreement at issue, if any; (3) procedures for selecting an independent
decision-maker responsible for making factual and legal determinations;
(4) procedural guardrails to ensure that Department officials involved
in alleging Prohibited Misconduct are not able to engage in conduct
that would bias the decision-maker (e.g., prohibiting ex parte
communications); and (5) an automatic stay of any agency determinations
during the pendency of federal litigation challenging the
determination;
<bullet> If the Department does not remove the written warning
letter and Written Ineligibility Notice process from the final
exemption, the final exemption must provide an opportunity for review
by an administrative law judge, court, or similar truly independent
decision maker with the authority to decide whether a QPAM will be
disqualified, as opposed to providing that authority to itself.
Additionally, some commenters expressed concern that proposed
definition of the phrase ``participating in'' was vague and overbroad.
The Department's Response to Specific Comments Regarding the Written
Warning Letter and Written Ineligibility Notice
After considering the due process concerns expressed in comments
regarding the Proposed Amendment, the Department is removing from the
Final Amendment the written warning letter and Written Ineligibility
Notice process that was associated with Prohibited Misconduct. The
Department now is requiring the requisite factual determinations for
Prohibited Misconduct defined in Section V(s)(2) to have been made in
specified judicial proceedings.
Specifically, under the Final Amendment, a QPAM will become
ineligible under Section I(g) as a result of Prohibited Misconduct as
defined in Section VI(s)(2) if the QPAM, any Affiliates thereof (as
defined in Section VI(d)), or any owner, direct or indirect, of a five
(5) percent or more interest in the QPAM is found or determined in a
final judgment, or court-approved settlement by a federal or state
criminal or civil court in a proceeding brought by the Department, the
Department of Treasury, the Internal Revenue Service, the Securities
and Exchange Commission, the Department of Justice, the Federal Reserve
Bank, the Office of the Comptroller of the Currency, the Federal
Depository Insurance Corporation, the Commodities Futures Trading
Commission, a state regulator, or state attorney general to have
Participated In one or more of the following categories of conduct
irrespective of whether the court specifically considers this exemption
or its terms:
(A) engaging in a systematic pattern or practice of conduct that
violates the conditions of this exemption in connection with otherwise
non-exempt prohibited transactions;
(B) intentionally engaging in conduct violates the conditions of
this exemption in connection with otherwise non-exempt prohibited
transactions; or
(C) providing materially misleading information to the Department
or the Department of Treasury, the Internal Revenue Service, the
Securities and Exchange Commission, the Department of Justice, the
Federal Reserve Bank, the Office of the Comptroller of the Currency,
the Federal Depository Insurance Corporation, the Commodities Futures
Trading Commission, a state regulator or a state attorney general in
[[Page 23103]]
connection with this exemption's conditions.
By removing the warning letter and Written Ineligibility Notice
process and instead providing for ineligibility only after a
Conviction, a court's final judgment, or a court-approved settlement,
QPAMs, their Affiliates, and/or owners of a five (5) percent or more
interest thereby are disqualified only after the culpable entity was
afforded full due process in a legal proceeding overseen by a court.
Section V(s)(2) is much narrower than the proposal inasmuch as it
covers the types of misconduct specified in the proposal only when the
misconduct is established in court proceedings brought by state or
federal regulators. It ensures that the finding of misconduct was
subject to the robust procedural protections provided by such
proceedings.
Furthermore, by removing the warning letter and Written
Ineligibility Notice process, and redefining Prohibited Misconduct in
Section VI(s)(2) to be based on legal process that results in a court's
final judgment or court-approved settlement, the QPAM will have been
provided with sufficient notice that the conduct at issue is Prohibited
Misconduct that causes ineligibility. This will give QPAMs sufficient
time to apply for an individual exemption during the One-Year
Transition Period.
More generally, the Department notes that the modification in the
Final Amendment removes the Department from the process of making a
factual determination that Prohibited Misconduct has occurred. Instead,
for purposes of ineligibility due to Prohibited Misconduct in Section
VI(s)(2), the court's final judgment (or approved settlement) must
resolve the factual issue of whether any of these parties Participated
In the conduct that constitutes Prohibited Misconduct as defined in
Section VI(s)(2). Under the provision, the court does not have to make
a specific legal finding regarding whether such conduct constitutes
Prohibited Misconduct as defined in Section VI(s)(2) of the exemption,
but rather whether, as a factual matter, the parties engaged in the
specific conduct defined as Prohibited Misconduct in Section VI(s)(2).
The Department has made changes to Section VI(s)(2) to make this
distinction clear. The Department cautions QPAMs, their Affiliates, and
owners of a five (5) percent or more interest that final judgments and
court-approved settlements that include a finding that such conduct has
occurred will cause immediate ineligibility under Section I(g). In
these situations, a QPAM that intends to continue to rely on the QPAM
exemption following the One-Year Transition Period that begins on the
Ineligibility Date should submit an exemption application to the
Department as soon as possible.
As mentioned above, some commenters expressed concern that the
proposed definition of the phrase ``participating in'' was vague and
overbroad. The Department disagrees with this concern. The parameters
of the definition are similar to other definitions and conditions the
Department has included in administrative exemptions it has issued
since ERISA's enactment almost fifty years ago. Additionally, the
commonly accepted definition of what it means to ``participate in''
conduct is well understood. The Proposed Amendment specifically
provided additional guidance in the text of Proposed Section I(g)(3)(B)
regarding what the Department meant by using the term ``participating
in.'' \44\ Therefore, the Department has not changed the definition of
``Participating In'' in the Final Amendment but has included in the
definition the defined terms ``Participate In,'' ``Participates In,''
``Participated In,'' and ``Participation In'' for clarity and accuracy
and has moved the definition to the Definitions and General Rules in
Section VI(t).\45\
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\44\ The preamble also specifically stated, ``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.'' 87 FR at 45209.
\45\ Due to this change, the Recordkeeping provision is
redesignated as Section VI(u).
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Costs Associated With Ineligibility Based on Participating In
Prohibited Misconduct
Several commenters also noted that regardless of the reason for
ineligibility, Plans would be exposed to substantial costs if a QPAM
becomes ineligible. These commenters recommended that the Department
exercise extreme caution before causing more QPAMs to face
ineligibility. Some commenters also expressed concerns that the
imposition of ineligibility is harmful to the Plans and their
participants and beneficiaries and prevents appointing fiduciaries from
exercising discretion to determine the best course of action for the
Plan by placing constraints on the Plan's choice of QPAMs.
The Department notes that the Proposed Amendment and this Final
Amendment appropriately place the burden associated with the costs of
ineligibility on the QPAM. In response to the comment, the Department
included the One-Year Transition Period in the Final Amendment to
reduce the costs and burdens associated with the possibility of
ineligibility, and to provide affected QPAMs with an opportunity to
apply for individual exemptions with appropriate conditions. Therefore,
the Department disagrees that the ineligibility provision unduly
prevents fiduciaries from exercising their discretion.
In crafting the amendments, the Department was also mindful that
the conduct that constitutes Prohibited Misconduct under the terms of
the exemption is quite serious and that engaging in such conduct calls
into question the QPAM's culture of compliance. The grant of an
exemption involves a discretionary determination by the Department to
permit parties to engage in conduct that is otherwise categorically
prohibited by ERISA and the Code and it requires specific findings
aimed at ensuring that the exemption is appropriately protective of the
Plan and participant interests at stake in the regulation of tax-
preferred retirement plans. While the prohibited transaction provisions
constrain fiduciary choice, those constraints are expressly imposed by
the statute for the protection of plan participants and beneficiaries.
An exemption is not justified merely by pointing to a constraint
expressly imposed by law and noting that it interferes with fiduciary
discretion; all prohibited transaction provisions constrain fiduciary
choice. The conditions of the QPAM Exemption are publicly and widely
available, and the possibility that a QPAM could become ineligible if
it participates in serious misconduct is clear. Moreover, if a
fiduciary does not want to provide the additional protections included
in this Final Amendment, it may pursue other options to receive
prohibited transaction relief, such as using another relevant class
prohibited transaction exemption or seeking an individual prohibited
transaction exemption. Additionally, the sophistication of fiduciaries
varies dramatically based on a variety of factors. The Department has
an obligation to protect Plans and their participants and
beneficiaries, even if an individual Plan fiduciary views such
protections as unnecessary.
However, as noted above, the Department modified the scope of the
Prohibited Misconduct provision in the Final Amendment; first, by
removing foreign agreements that are equivalent to
[[Page 23104]]
NPAs and DPAs from the definition of Prohibited Misconduct in Section
VI(s)(1) and second, by basing ineligibility as a result of Prohibited
Misconduct defined in Section VI(s)(2) on a factual finding or
determination by a court that the conduct described in Section
VI(s)(2)(A) through (C) occurred, which should reduce the number of
QPAMs that become ineligible. Moreover, the indemnification provision
will ensure that Plans are not bearing the costs of ineligibility for
QPAMs that become ineligible.
Both Categories of Prohibited Misconduct Only Will Apply Prospectively
Finally, several commenters requested clarification that the
Prohibited Misconduct provisions of Section VI(s)(1) and (2) will
result in ineligibility of a QPAM only on a prospective basis. In
response, the Department confirms that ineligibility tied to Prohibited
Misconduct related to executing NPAs and DPAs in Section VI(s)(1) of
the Final Amendment will be applied only on a prospective basis that
commences on the execution date of NPAs or DPAs with a U.S. federal or
state prosecutor's office or regulatory agency that falls on or after
June 17, 2024.
Similarly, under the Final Amendment, Section VI(s)(2)
determinations of Prohibited Misconduct will apply prospectively as of
the date of a court's final judgment or court-approved settlements that
fall on or after June 17, 2024.
Violations of the Exemption and Misleading Statements
One commenter requested that the Department provide examples of
Prohibited Misconduct for violations of the exemption or misleading
statements so that firms are not caught off guard for Participating In
Prohibited Misconduct. Another commenter requested clarification that
inadvertent technical errors, such as failure to timely notify the
Department of a legal name change, should not be deemed to be providing
materially misleading information to the Department. As a general
matter, the Department's position is that such inadvertent technical
errors do not result in Prohibited Misconduct, particularly when such
errors are corrected consistent with ERISA and Code standards, as
applicable. Similar to Convictions, the exemption's Prohibited
Misconduct provisions are aimed at protecting Plans and IRA owners from
conduct that calls into question a QPAMs integrity and compliance
culture and inadvertent technical errors, especially such errors that
are promptly corrected, should not amount to such conduct.
With respect to mistakes in timely reporting a legal name change,
the Department modified the reporting requirement in this Final
Amendment to address such issues, as discussed above in connection with
the reporting requirement. As discussed in detail above, the
modifications in the Final Amendment to the definition of Prohibited
Misconduct in Section V(s)(2) whereby requisite factual determinations
are made through a judicial proceeding will put a QPAM and its
Affiliates on notice regarding conduct that is defined as Prohibited
Misconduct in Section V(s)(2)(A) through (C).
Section I(h)--Timing of Ineligibility
The Proposed Amendment did not include any direct changes to the
ten-year ineligibility period under current Section I(g).\46\ The
Department added a new provision, Section I(h), that specified the
timing of ineligibility. In the Proposed Amendment, for Prohibited
Misconduct, the ineligibility period would have begun as of the date of
a Written Ineligibility Notice, whereas, for a Criminal Conviction, it
would have begun on the date the trial court enters its judgment.\47\
The Proposed Amendment clearly stated 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.\48\ The period
of ineligibility would have begun on the conviction date, regardless of
whether the judgment is appealed or the appeal has suspensive effect.
Only upon a subsequent final judgment reversing the conviction would a
person no longer be considered ``convicted'' for purposes of this
exemption.
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\46\ The One-Year Transition Period, however, has an impact on
how a QPAM approaches the first year after experiencing an
ineligibility trigger.
\47\ 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.
\48\ 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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This Final Amendment retains the ineligibility start date for a
Criminal Conviction as the date the trial court enters its judgment.
However, because the Final Amendment does not include the proposed
warning and Written Ineligibility Notice process, the timing for
Prohibited Misconduct in Section I(h)(2) of the Final Amendment has
been modified. In the Final Amendment, the ineligibility period for
Participating In Prohibited Misconduct begins on the date, on or after
June 17, 2024 that the QPAM, 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:
(A) executes an NPA or DPA described in Section VI(s)(1)); or
(B) is found or determined in a final judgment in certain federal
or state court proceedings (regardless of whether the judgment is
appealed) or a court-approved settlement to have Participated In the
conduct that meets the definition of Prohibited Misconduct in Section
VI(s)(2).
In the Proposed Amendment the Department specifically sought
comments on the timing of ineligibility. One commenter suggested that
the Winding-Down (Transition) Period should be restructured into two
distinct periods: the first to allow a QPAM to apply for an individual
exemption, and the second period to prevent disruption and assist Plans
in the event a transition is needed to a new QPAM. The Department
believes it has functionally provided this structure in the Final
Amendment. The One-Year Transition Period provides time for transition
that was not previously included in the exemption. As noted earlier in
this preamble, an ineligible QPAM should initiate an individual
exemption request as soon as it reasonably believes its Plan clients
likely will be harmed without additional prohibited transaction relief
after the Transition Period ends. The Department notes that it will
continue to consider individual exemption requests for ineligible QPAMs
to be able to continue providing services, as well as requests for
additional transitional relief to allow their client Plans to search
for and hire a new asset manager.
Proposed Section I(i) \49\--Warning and Opportunity to be Heard in
Connection With Prohibited Misconduct--Written Ineligibility Notice
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\49\ Certain sections of the Final Amendment have been
renumbered and Section I(i) in the Final Amendment has been
redesignated as the One-Year Transition Period Due to Ineligibility.
---------------------------------------------------------------------------
The Department proposed an additional process that would be tied to
a determination that a QPAM had participated in Prohibited Misconduct.
In the proposal, before issuing a Written Ineligibility Notice in
connection with Prohibited Misconduct to the QPAM, the Department
indicated it would have issued a written warning, identified the
Prohibited Misconduct, and provided 20
[[Page 23105]]
days for the QPAM to respond. The Proposed Amendment also indicated
that if the QPAM failed to respond to the written warning within 20
days, the Department would have issued the Written Ineligibility
Notice. However, if the QPAM responded within the 20-day timeframe, the
Department would have provided the QPAM with the opportunity to be
heard either in person (including by phone or a videoconference) or in
writing, or a combination of both, before the Department decided
whether it would have issued the Written Ineligibility Notice.
As discussed under the Specific Comments Regarding Prohibited
Misconduct under the Written Ineligibility Notice Process heading
above, some commenters questioned the sufficiency of the process
leading to a warning letter and Written Ineligibility Notice, citing
due process concerns and specifically, the lack of an adversarial
process adjudicated by an independent third party (such as review by an
administrative law judge or federal court). Relatedly, another
commenter indicated that these provisions within the Proposed Amendment
would have provided the Department with too much discretion to cause a
QPAM's ineligibility. One commenter specifically noted the additional
due process protections provided through the court system for Criminal
Convictions are not present for a QPAM that Participates In Prohibited
Misconduct. Another commenter noted that the lack of an appeals process
as part of the proposed Written Ineligibility Notice process could
provide the Department with unchecked power.
As more fully discussed above under the Specific Comments Regarding
Prohibited Misconduct under the Written Ineligibility Notice Process
heading, in response to the process concerns expressed by commenters,
the Department has removed the proposed warning letter and Written
Ineligibility Notice process and modified the definition of Prohibited
Misconduct under Section VI(s). Removing the proposed warning letter
and Written Ineligibility Notice process from this Final Amendment, and
instead providing that a QPAM's ineligibility under Section VI(s)(2)
only occurs after a Conviction, a court's final judgment, or a court-
approved settlement, will afford QPAMs, their Affiliates, and owners of
a five (5) percent or more interest with substantial due process in a
legal proceeding that is overseen by a court, not the Department. Also,
this Final Amendment provides that ineligibility occurs under Section
VI(s)(1) when a QPAM, 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 executes an NPA or DPA with a U.S. federal or
state prosecutor's office or regulatory agency, which generally will
afford QPAMs and their Affiliate(s) and owner(s) with the due process
protections that are associated with related criminal investigations.
Section I(i)--Mandatory One-Year Transition Period
Certain sections of the Final Amendment have been renumbered and
Proposed Section I(j) is now Section I(i) in the Final Amendment. As
part of the Proposed Amendment, the Department included a mandatory
one-year Winding-Down Period that would have begun on the Ineligibility
Date. The Winding-Down Period was designed to provide Plans with the
ability to wind down their relationships with a QPAM immediately after
the QPAM becomes ineligible to rely on the exemption. Satisfaction of
the conditions of the Winding-Down Period would affect the availability
of relief for all transactions covered by this exemption. As proposed,
the Department intended to include relief for past transactions and any
transaction continued during a one-year Winding-Down Period.
One commenter indicated that the term ``winding-down'' was
pejorative and should be replaced with more neutral nomenclature such
as a term indicating it is a transition period. The Department did not
intend for the term to be pejorative. Therefore, the Department has
substituted the word ``Transition'' for ``Winding-Down'' to avoid the
possible unintended implication that the Department intended the term
``Winding-Down'' to mean that the QPAM was necessarily going out of
business as a QPAM on the Ineligibility Date. The Department stresses,
however, that future relief based on an individual exemption
application is not guaranteed, and the new term should not be read to
suggest otherwise.
As noted above, the QPAM is free to apply for an individual
exemption that would enable it to continue its eligibility to act as a
QPAM and engage in transactions that would otherwise be prohibited
after the expiration of the Transition Period, although there is no
guarantee that the Department will grant such an exemption. Prohibited
transaction relief during the Transition period would be subject to
compliance with all conditions of the exemption except Section I(g)(3),
which is renumbered Section I(g)(1) in this Final Amendment.
The Proposed Amendment provided that once the Transition Period
begins, relief under the QPAM Exemption would only be available for
transactions undertaken for the QPAM's existing clients--i.e., the
QPAM's client Plans 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 obtained new client
Plans during the Transition Period, the Proposed Amendment would not
provide relief under the QPAM Exemption for any transactions the QPAM
entered into on their behalf, unless such relief was granted in a
separate individual exemption.
The Department designed the proposed Transition 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. The proposed One-Year Transition Period was intended to give a
QPAM's client Plans 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. The Department
believed that a One-Year Transition 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 proposed Transition Period conditions required the QPAM to
provide notice of its ineligibility to its existing client Plans and
the Department (via <a href="/cdn-cgi/l/email-protection#edbcbdaca0ad898281c38a829b"><span class="__cf_email__" data-cfemail="89d8d9c8c4c9ede6e5a7eee6ff">[email protected]</span></a>) within 30 days after the
Ineligibility Date. The proposed notice was required to: (1) include an
objective description of the facts and circumstances upon which the
Criminal Conviction or Written Ineligibility Notice \50\ is based; (2)
be written with sufficient detail, consistent with the QPAM's duties of
prudence and undivided loyalty under ERISA, to fully inform a Plan
fiduciary of the nature and severity of the criminal conduct or
Prohibited Misconduct; and (3) be sufficient enough to enable such Plan
fiduciary to satisfy its fiduciary duties of
[[Page 23106]]
prudence and loyalty under Title I of ERISA when hiring, monitoring,
evaluating, and retaining the QPAM.
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\50\ The Written Ineligibility Notice has been removed from this
Final Amendment therefore, the term ``Written Ineligibility Notice''
in Section I(i) has been replaced with the term ``Prohibited
Misconduct'' in the Final Exemption.
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The Proposed Amendment required that within 30 days after the
Ineligibility Date, the QPAM would have to notify its client Plans
that, as required by the proposed WMA provisions, the QPAM will not
restrict the client's ability to terminate or withdraw from its
arrangement with the QPAM. Thus, the QPAM would not be permitted to
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 Proposed Amendment also required the QPAM to indemnify, hold
harmless, and promptly restore 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. For
purposes of this provision, the Proposed Amendment indicated that
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 were protected from bad actors, the
Proposed Amendment required the QPAM not to employ or knowingly engage
any individual that Participated In conduct that is the subject of a
Criminal Conviction or Prohibited Misconduct. For Criminal Convictions,
this would apply regardless of whether the individual is separately
convicted in connection with the criminal conduct. The Proposed
Amendment indicated that the QPAM must adhere to this requirement no
later than the Ineligibility Date.
Finally, the Proposed Amendment prohibited the QPAM from relying on
the relief provided in the QPAM Exemption after the One-Year Transition
Period unless the Department granted the QPAM an individual exemption
allowing it to continue relying upon the exemption. The Proposed
Amendment provided that the Transition Period would not be suspended
while an individual exemption application is pending with the
Department.
The Department requested comments on the Transition 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.
Many commenters argued that the proposed prohibition on the QPAM
engaging in any new transactions during the Transition Period, even for
existing clients, should be removed. These commenters indicated that
QPAMs who become ineligible should be permitted to make new investments
during the Transition Period on behalf of their client Plans that
conform to investment guidelines approved by a Plan fiduciary during
the Transition Period. In support of this position, commenters
indicated that when QPAMs have been engaged to carry out an investment
strategy that requires them to continually make new investments, the
proposed prohibition on engaging in new transactions for existing
clients could be particularly detrimental. For instance, there could be
a series of transactions that require ongoing adjustments (such as in
the case of swaps and other derivatives), and an inability to adjust
these transactions could detrimentally impact the QPAM's client Plans
and counterparties alike.
After considering these comments, the Department agrees that to
avoid the potential harm that QPAMs' client Plans could suffer if their
investments are effectively frozen, it is appropriate to remove the
prohibition on QPAMs entering into new transactions for existing client
Plans during the Transition Period. The Department reminds QPAMs that
they must meet their fiduciary obligations of prudence and loyalty set
forth in ERISA section 404 when making investment decisions on behalf
of their ERISA-covered Plan clients and IRA clients (to the extent that
ERISA section 404 is applicable) during the Transition Period.
One commenter suggested that the Department included the Transition
Period provisions in the Proposed Amendment because it clearly assumed
that QPAMs' client Plans would want to fire their asset manager. The
Department did not intend to convey this view in the Proposed
Amendment. The Department included this provision in the Proposed
Amendment to provide an ineligible QPAM's client Plans with an off-ramp
if they choose to terminate their relationship with the asset manager.
The Department's sole reason for including the Transition Period
provisions is to protect the affected Plans. Thus, for example, if a
Plan chooses to retain its relationship with a QPAM that becomes
ineligible, it may do so, but the Department's intention is to prevent
Plans from being locked into a contractual arrangement with an
ineligible QPAM.
Multiple commenters indicated that the process for replacing a
larger Plan's investment manager typically takes more than one year and
suggested alternative timeframes for the Transition Period. For
example, commenters suggested the Department extend the Transition
Period to at least 18 months or two years, and another commenter
offered the alternative of having the Transition Period last at least
until after the Department makes a final determination regarding
whether to grant or deny the QPAM's individual exemption application.
After considering these comments, the Department decided not to
change the timeframe for the Transition Period in the Final Amendment.
The Department recognizes that in some cases a longer Transition Period
could be necessary but determined the best way to address this
circumstance is through the individual exemption process on a case-by-
case basis. Performing the necessary analysis during the individual
exemption process will ensure the Department has sufficient information
to appropriately consider whether additional protections are necessary
for impacted Plans based on the QPAM's particular facts and
circumstances. The Department does not believe it is appropriate to
extend the Transition Period until a formal decision on an individual
exemption has been made as the Department processes individual
exemption applications on a case-by-case basis and the timeframes for
each case vary. Therefore, the duration of the Transition Period would
be uncertain.
One commenter noted that the Department's participant disclosure
regulation requires any change to a defined contributions plan's
designated investment alternatives to be disclosed to participants at
least 30 days (but not more than 90 days) in advance. The commenter
indicated that it appeared that the Department has not considered the
practical limitations of such notices on the duration of the Transition
Period. The one-year duration of the Transition Period, however,
provides more than sufficient time to accommodate the requirements of
the participant disclosure regulation. If additional relief is needed
beyond the one-year period, the QPAM may request a supplemental
individual exemption to ensure that such a change is made accordingly.
[[Page 23107]]
One commenter asserted that the Proposed Amendment did not clearly
indicate the QPAM's obligations to non-ERISA investors in a pooled fund
or how these investors would be treated. Another commenter suggested
that the Department should focus on the issue of pooled funds, where
QPAMs will need to balance the interests of Plans leaving the fund with
those Plans remaining in the fund. The Proposed Amendment and this
Final Amendment treat non-ERISA and Plan investors in a similar manner
to the way the Department has addressed this issue in individual
exemptions related to Section I(g) ineligibility. Specifically, the
provision prohibiting a QPAM from imposing fees, penalties, or charges
in the Proposed Amendment includes an explicit exception for
``reasonable fees, appropriately disclosed in advance, that are
specifically designed to: (a) prevent generally recognized abusive
investment practices or (b) 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.''
The Department has retained this exception in this Final Amendment,
which addresses the commenter's concern.
Some commenters indicated that Plans should be given more control
over the decision to continue relying on the QPAMs. The commenters
suggested that the Department give Plans the ability to decide whether
to terminate or withdraw from their relationship with a QPAM and the
flexibility to determine a timeline for withdrawal. One commenter
asserted that Plans choose asset managers based on their reputation and
expertise in specific areas of asset management. The commenter added
that the Plan is in the best position to determine whether it is in the
Plan's best interests to terminate or withdraw from their relationship
with the QPAM. As discussed above, however, ultimately the decision on
whether to grant relief from ERISA and the Code's prohibited
transaction provisions rests with the Department. In the Department's
view, the individual exemption process provides a full, fair, and open
process for the Department to determine whether a QPAM should be
permitted to engage in otherwise prohibited transactions post-
conviction, and if so, the conditions which should be placed on such
relief. To the extent QPAMs obtain such individual exemptions, Plans
remain free to rely upon them to engage in transactions that would
otherwise be prohibited if the QPAMs meet the conditions that are
specified in the exemptions.
Finally, one commenter noted that to fully effectuate the intent of
the Transition Period provisions for stable value investment contracts,
the length of the period should be based on the duration of the
underlying investment portfolio or as otherwise provided under the
terms of the contract for an extended or amortized termination. The
Department declines to give preferential treatment to QPAMs responsible
for such investment contracts in this manner. Here too, the individual
exemption process is best suited to address any specific issues or
concerns based on the nature of the QPAM's investments or investment
practices.
Finally, the Department made a few additional ministerial changes
to the Transition Period provisions in the Final Amendment. First, the
Department capitalized the term ``Transition Period.'' \51\ Second, the
Department modified the first sentence of the Transition Period
provision to clarify its focus on client Plans, by replacing the phrase
``engage in'' with ``provide,'' and by dividing the first sentence into
two sentences to improve readability. Third, the Department replaced
the Proposed Amendment's reference to subsection I(g)(2) (regarding the
WMA) with a reference to subsection I(i) because the Department moved
the WMA requirements to this subsection. Finally, as noted above, since
the Written Ineligibility Notice provisions have been removed from the
Final Amendment, the term ``Written Ineligibility Notice'' as used in
this Section in the Proposed Amendment, now has been replaced with the
term ``Prohibited Misconduct.''
---------------------------------------------------------------------------
\51\ The Department capitalized the term in other Sections of
the Final Amendment as well.
---------------------------------------------------------------------------
Section I(j)--Requesting an Individual Exemption
The Proposed Amendment included a new Section I(k),\52\ which
provided that a QPAM that is ineligible or anticipates becoming
ineligible may apply for supplemental individual exemption relief. The
Proposed Amendment's Section I(k) instructed 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. Proposed Section I(k) also indicated that if an
applicant wished to exclude any term or condition from its exemption,
the applicant would need to 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. Proposed Section I(k) indicated that the Department would
review such requests consistent with the requirements of ERISA section
408(a) and Code section 4975(c)(2).
---------------------------------------------------------------------------
\52\ Section I(k) of the Proposed Amendment has been renumbered
in the Final Amendment as Section I(j).
---------------------------------------------------------------------------
To facilitate the processing of an individual exemption
application, proposed Section I(k) also instructed applicants to
provide detailed information in their applications quantifying the
specific cost or harms in dollar amounts, if any, that Plans would
suffer if a QPAM could not rely on the exemption after the Transition
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.
Proposed Section I(k) also indicated that 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 Transition Period with the understanding that final
approval of an individual exemption is not guaranteed.
The Proposed Amendment reinforced that for the Department 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 Transition Period were met, and (2) an
independent audit reviewing the QPAM's compliance with the conditions
of the Transition Period has been completed.\53\ QPAMs affected by a
conviction also should not wait until late in the Transition Period to
apply for an individual exemption.
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\53\ The Department additionally clarifies that the
certification of the independent audit would come at some point
after an individual exemption is granted and the One-Year Transition
Period has ended.
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The Department received a few comments on this new provision. One
commenter noted that the conditions that have been incorporated into
the most recent individual exemption that
[[Page 23108]]
apply to a particular QPAM may not be appropriately tailored to a
subsequent application and fact pattern. Another commenter indicated
that the Department is increasingly adopting onerous conditions for
granting individual exemptions and seems even less likely to grant
them. Yet another commenter opined that an ineligible QPAM may be
unlikely to receive an individual exemption that is usable.
Considering the serious corporate criminal misconduct the
Department has seen in Section I(g) individual exemption applications
and audits submitted to the Department as required by granted
individual exemptions, the Department remains convinced that the proper
starting point for individual exemption conditions should be the
Department's most recently-issued individual exemptions. This
procedural standpoint is neither new nor undisclosed. For decades, the
Department has generally crafted proposed exemptions for similarly
situated applicants that contain similar conditions, subject to the
Department's periodic reevaluation of the exemption conditions to
ensure that they remain appropriately protective for the Department to
make the findings required by ERISA section 408(a) and Code section
4975(c)(2).
The Department will consider the individual facts and circumstances
of each application, but Section I(j) (formerly section I(k) in the
Proposed Amendment) is intended to clearly provide the appropriate
starting point for applicants that are preparing an exemption
application in connection with Section I(g) ineligibility. Regarding
the commenter's reference to the Department's onerous conditions, over
the past decade, the Department's experience indicates that QPAM
ineligibility under Section I(g) has occurred in most cases due to
serious corporate criminal misconduct. The Department believes that it
has tailored the conditions of the most recent Section I(g) individual
exemptions to appropriately address the potential for significant
financial harm to Plans, while providing workable relief. Moreover, if
a QPAM is concerned about the usability of a Section I(g) individual
exemption, then the QPAM, its Affiliates, and owners of a five (5)
percent or more interest may structure their conduct to avoid engaging
in transactions that are otherwise legally prohibited or rely on
exemptions other than the QPAM Exemption to avoid the consequences that
result from Section I(g) ineligibility.
The Department also notes that applicants may request more limited
relief than the QPAM Exemption otherwise provides. For example, 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 Transition 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
before the end of the Transition Period without harm or losses to such
Plans.
Finally, the Department reminds any applicant anticipating that it
will need relief beyond the end of the One-Year Transition Period to
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 it appears a conviction will
occur, such as when a plea agreement has been entered into--even if the
conviction date has not yet been set--to ensure that appropriate steps
can be taken by or on behalf of its client Plans ultimately impacted by
the QPAM's loss of exemptive relief.
Section I(c)--Involvement in Investment Decisions by a Party in
Interest
The Proposed Amendment included modifications to Section I(c) of
the QPAM exemption that are consistent with the Department's original
intent when granting the 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 only if the
negotiations leading to, and the commitments and investments of, plan
assets are the sole responsibility of an independent investment
manager. The Department reasoned in the 1984 grant notice that the
potential for decision making with regard to plan assets that would
inure to the benefit of a party in interest would be increased if
exemptive relief were provide in circumstances where the QPAM has less
than ultimate discretion over acquisitions for an investment fund that
it manages.\54\
---------------------------------------------------------------------------
\54\ 49 FR at 9497.
---------------------------------------------------------------------------
The proposed new language in Section I(c) was intended to make
clear that a QPAM must not permit a Party in Interest to make decisions
regarding Plan investments under the QPAM's control. The Proposed
Amendment included 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. . . .'' \55\ The
Department also proposed to add 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).'' \56\ For example, as stated in 1982 proposal for the
QPAM Exemption, a plan sponsor that negotiates a transaction and then
presents it to a QPAM for approval would not qualify for the relief in
the class exemption. The 1982 proposal further states that the relief
in the proposed exemption 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.\57\
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\55\ 87 FR at 45227.
\56\ Id.
\57\ 47 FR at 56947.
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The Department received numerous comments regarding the proposed
changes to the wording of Section I(c). Some of these commenters
indicated their understanding of the Department's view that a QPAM
should not act as a rubber stamp to approve transactions designed by
the Party in Interest who appointed the QPAM. Similarly, commenters
indicated they shared the goal of preventing the QPAM Exemption from
being abused, i.e., a QPAM being used to ``sanitize'' a transaction
where there is an underlying goal to avoid the restrictions of the
prohibited transaction rules. One commenter also indicated that it
understood the Department has long maintained that QPAMs should not
simply act as ``mere independent approvers'' but should be intimately
involved in the negotiation and approval of the transaction. The
[[Page 23109]]
commenter believed that this interpretation is widespread in the market
and needs no clarification. Another commenter also indicated that the
original QPAM Exemption was clear and understood by practitioners--a
named fiduciary could not appoint a QPAM to approve a pre-negotiated
transaction nor could the appointing fiduciary retain a veto or
approval right over any transaction.
Commenters also raised a variety of other general issues and
concerns with the proposed changes to Section I(c). One commenter noted
that the Department has not identified any evidence of harm
necessitating changes to the language of Section I(c). Another
commenter suggested that any proposal to make changes to the way
various Plan fiduciaries interact with QPAMs should be the subject of a
separate, carefully crafted proposal with stakeholder input and
regulatory cost analysis. A commenter also asked whether the
Department's clarifications were meant to refer to Plan sponsors
instead of a Party in Interest with no ability to meaningfully
influence a transaction.
The Department has an ongoing interest and responsibility under
ERISA section 408(a) and Code section 4975(c)(2) to revisit and update
exemptions on an ongoing basis to ensure that that they maintain their
protective purpose. Although Section I(a) of the exemption directly
addresses Plan sponsors, Section I(c) provides additional protections
that also apply to the Plan sponsor. These conditions are intended to
work together, not separately, to prevent a Plan sponsor from
attempting to influence a transaction. To the extent QPAMs are already
fully complying with the Department's expectation of independent
judgment, and not acting as mere rubber stamps, appropriate clarifying
language should impose no additional burden. It is essential to the
achievement of the exemption's aims, however, that the Department's
expectations be clear in this regard.
Modifications to Section I(c) are appropriate to ensure the
Department's intent is understood by practitioners, QPAMs, and their
client Plans. It is also important for QPAMs to be mindful of the
requirements of the exemption rather than simply deriving the benefits
of calling themselves QPAMs while ignoring the QPAM Exemption's core
requirements and protective intent. Moreover, the Department notes that
Section I(c) requires the asset manager to act independently, as a
general matter, from Plan sponsors and Parties in Interest. Without an
overarching compliance-focused approach to its asset management
arrangement and Section I(c), the protective purpose of ensuring the
QPAM's independence is undermined.
Commenters raised a variety of other topics, such as: (1) the
amount of permitted involvement by a Party in Interest/Plan sponsor in
investment decisions, including voting proxies; (2) arrangements that
involve multiple investment managers; (3) transactions initiated or
negotiated by a Party in Interest; (4) sub-advisers and collective
investment trusts; (5) pension risk transfers; (6) an Investment Fund
established primarily for investment purposes; (7) eliminating all the
changes in the Proposed Amendment; and (8) alternatives to the changes
in the Proposed Amendment. The Department revised the wording of
Section I(c) in this Final Amendment in response to some of these
comments, as discussed below. However, the Department reemphasizes that
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 sole discretion over the commitments and investments of
Plan assets and the related negotiations on behalf of the Plan with
respect to an Investment Fund that is established primarily for
investment purposes for the relief provided under the exemption to
apply.
Involvement in Investment Decisions
One commenter opined that Plan sponsors and Plan fiduciaries should
be able to have meaningful involvement in the process of negotiating an
investment contract's investment guidelines without affecting the
ability of the investment manager to rely on the QPAM Exemption.
Another commenter requested that the Department clarify that routine
monitoring meetings and inquiries by Plan fiduciaries with respect to a
manager's trading strategies do not constitute ``planning.'' One
commenter also requested clarification that nothing in the Proposed
Amendment would prevent the trustees of multiemployer plans from
retaining or delegating the right to vote proxies held by the QPAM, or
to exercise other similar shareholder rights, even if such proxies or
rights relate to investments in a Party in Interest.
The Department notes that routine monitoring of meetings and
inquiries by Plan fiduciaries would not be considered ``planning'' for
purposes of Section I(c). This type of involvement is consistent with a
fiduciary's obligations under ERISA section 404 and the Department's
prior guidance regarding investment guidelines that may be provided to
the QPAM. For clarity, the Department is changing the word ``because''
to ``to the extent'' in the proposed sentence:
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).
That sentence now reads:
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 to the extent
the QPAM would not have sole responsibility with respect to the
transaction as required by this Section I(c).
With respect to proxies and exercising other shareholder rights,
the Department notes that the QPAM Exemption was never intended to
cover transactions in which a Party in Interest is making the decisions
pertaining to specific transactions. The possibility that Plan
fiduciaries have been relying upon the QPAM Exemption for such
transactions highlights one of the reasons the Department proposed
changes to Section I(c). The Department would generally consider
reliance on the QPAM Exemption in these cases to be an abuse or misuse
of the QPAM Exemption.\58\ Importantly, as the Department stated in the
preamble of the original granted exemption in 1984, the Department
``does not interpret Section I(c) as exempting a subsidiary transaction
unless such transaction is itself subject to relief under the class
exemption and the applicable conditions are met.'' \59\
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\58\ Any parties that require more detailed guidance on the
applicability of the QPAM Exemption to certain transactions may
submit an advisory opinion request to the Department.
\59\ 49 FR at 9497.
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Multiple Investment Managers
Commenters indicated that Plan sponsors often hire multiple
investment managers to execute the Plan's overall investment strategy
with each manager being given certain assets to manage in a particular
manner. And since only the Plan sponsor knows the overall strategy, it
is natural and beneficial for the Plan sponsor to be able to have
ongoing dialogues with their managers without those dialogues
disqualifying the manager from serving as a QPAM.
The Department notes that the proposed changes to Section I(c) were
not intended to prevent Plan sponsors
[[Page 23110]]
from having ongoing dialogue with an investment manager. The
Department's intent and additional clarification regarding the proposed
changes re-emphasize that a Plan sponsor can provide investment
guidelines to a QPAM. The natural corollary would be for Plan sponsors
to revisit those investment guidelines at appropriate intervals. One of
the Department's key points with the proposed changes to Section I(c)
is that any direction from a Plan sponsor or other Party in Interest
for a QPAM to engage in a particular transaction would be contrary to
the intent of Section I(c). A Plan sponsor that utilizes multiple
QPAMs, however, may interact with each manager as part of a larger
overall investment strategy as long as the QPAMs retain the sole
authority to engage in transactions in accordance with the strategy,
and there is no direct or indirect arrangement for any QPAM to
negotiate, or engage in, any specific transaction or to benefit any
specific person.
Initiating, Planning, and Negotiation Transactions
Many commenters raised concerns regarding the use of the word
``initiate'' in the Department's proposed changes to Section I(c). Some
commenters expressed concern because Investment Fund transactions in
derivatives or other investment products that are developed and pitched
to a QPAM by a financial institution acting as a service provider to
the QPAM--a common scenario in the derivatives market--could be
interpreted as initiated by a Party in Interest. Commenters also
indicated that even if a transaction is not of a type that is
customarily negotiated, the counterparty Party in Interest would still
be involved. A few commenters opined that the reference to a
transaction being ``negotiated'' by the Party in Interest and then
``presented to a QPAM for approval'' is sufficient to achieve the
Department's objective. Further, a commenter indicated that the
proposed amendments mischaracterize the actual application of a QPAM's
discretionary authority. This commenter indicated that if not
eliminated, the terms ``planned,'' ``negotiated,'' and ``initiated''
should be clarified to address the Department's concerns more directly.
For example, if the Department is concerned about the practice of
hiring a QPAM for the sole purpose of approving a particular
transaction already contemplated and/or negotiated by another Plan
fiduciary, the Department should craft language more narrowly aimed at
preventing this situation.
The Department notes that whether a particular sales pitch or an
offer of an investment product from a Party in Interest would run afoul
of the intent of Section I(c), including the proposed changes, depends
on the associated facts and circumstances. It would be inappropriate
for the Department to embed these facts and circumstances into an
exemption condition, because the exemption would become unduly complex
and unworkable. As a general matter in this regard, QPAMs should
interpret the protective nature of Section I(c) expansively and avoid
responding to any sales pitch or offer with respect to a proposed
transaction that would call into question whether the QPAM is
ultimately solely responsible for planning, negotiating, and initiating
the transaction.
In order to further clarify this concept, the Department has added
the following sentences to Section I(c): ``In exercising its authority,
the QPAM must ensure that any transaction, commitment, or investment of
fund assets for which it is responsible are based on its own
independent exercise of fiduciary judgment and free from any bias in
favor of the interests of the Plan sponsor or other parties in
interest. The QPAM may not be appointed or relied upon to uncritically
approve transactions, commitments, or investments negotiated, proposed,
or approved by the Plan sponsor, or other parties in interest.''
Sub-Advisers and Collective Investment Trusts
A few commenters indicated that the Department's proposed language
could be interpreted to restrict the use of sub-advisers by a QPAM,
including in the context of collective investment trusts (CITs).
Commenters indicated that utilizing sub-advisers to make
recommendations for certain investments in which they specialize or
possess expertise is important because a QPAM may otherwise be
compelled to do its own research before investing Plan assets, even
when the QPAM can more readily rely upon a sub-adviser with specialized
expertise regarding certain types of assets. Commenters noted that
QPAMs regularly delegate certain investment responsibilities to a sub-
adviser but retain authority to approve transactions. With respect to
CITs, commenters indicated that in order to comply with securities and
banking laws, the sponsoring trust company generally retains ultimate
investment authority, but typically appoints a sub-adviser who invests
the CIT's assets on a day-to-day basis. Commenters felt the proposed
revision to Section I(c) would present a structural conundrum for CITs
and their providers given the standards imposed by the federal
securities laws and OCC regulations. According to commenters, the
proposed language requires that the QPAM have the ``sole authority''
over the transaction. Commenters indicated that neither the sponsoring
trust company nor sub-adviser have the sole authority, although both
are fiduciaries under ERISA and may need to rely on the QPAM Exemption.
The Department expects that a QPAM may rely on the specific
expertise of a prudently selected and monitored entity to assist the
QPAM in prudently managing Plan assets. Therefore, a QPAM's delegation
of certain investment-related responsibilities to a sub-adviser does
not, by itself, violate Section I(c), as long as the QPAM retains sole
authority with respect to planning, negotiating, and initiating the
transactions covered by the QPAM Exemption. A QPAM should not ``more
readily'' rely on a sub-adviser that has specialized expertise, in
order to engage in a particular transaction, if the reliance means that
the QPAM would not have sole authority with respect to planning,
negotiating, and initiating the transaction.
Furthermore, parties that participate in arrangements that do not
clearly identify which party has the ultimate responsibility and
authority to engage in a particular transaction should not assume that
the transaction is permitted by the QPAM Exemption. The Department
recommends that affected parties involved in such transactions seek an
advisory opinion or request other guidance from the Department
regarding whether the QPAM Exemption is available for such
transactions.
Pension Risk Transfers
One commenter suggested the proposed changes to Section I(c) could
render the QPAM Exemption unavailable for pension risk transfers where
a Plan purchases an annuity from an insurance company in connection
with the termination of the Plan or to annuitize a subset of the Plan's
participant population. The commenter did not provide specific details
as to what aspects of proposed Section I(c) would potentially create
problems for this type of transaction, however. The QPAM Exemption is
designed to accommodate a broad range of prudent investment
transactions, and the Department does not believe that the exemption
poses any special impediment to such transactions as they may relate to
pension risk transfers. If
[[Page 23111]]
the commenter's concerns remain after it considers the Department's
modifications to Section I(c) in the Final Amendment, the affected
parties may seek an advisory opinion or request other guidance from the
Department regarding whether the QPAM Exemption is available for such
transactions.
Fund Established Primarily for Investment Purposes
In connection with the Department's proposed language that the
Investment Fund must be established primarily for investment purposes,
one commenter requested the Department clarify that this includes a
fund that is established for mixed-use purposes that contains an
investment component. The commenter indicated the fund may have certain
non-investment purposes, such as the payment of benefits and Plan
expenses. Another commenter indicated that the QPAM Exemption long has
been used by Plans to hire managers, as well as trustees, custodians,
and recordkeepers, regardless of the type of Plan (pension, savings, or
welfare).
The Department notes that a fund that contains only a minor
investment component would not be eligible for the relief provided by
the QPAM Exemption. This is true regardless of the Plan type. If a Plan
has mixed-use purposes, the Plan sponsor should establish a separate
account for any investments held directly by the Plan in order to rely
upon the QPAM Exemption for that portion of the Plan's assets.
Relatedly, a fund or other pool of Plan assets that contains no
investment assets would not be able to rely upon the QPAM Exemption.
However, as provided in Section I(c) of this Final Amendment, an
Investment Fund that makes distributions and/or engages in other
activities that are ancillary to the fund's primary investment purpose
will not fail to be an Investment Fund established primarily for
investment purposes. The Department provides this additional
clarification in the Final Amendment because distributions and other
ancillary services are generally necessary in order for investment
funds to operate.
Recommended Alternatives
One commenter made a specific recommendation regarding the wording
of Section I(c) that would specify that the QPAM ``represents the
interest of the Investment Fund.'' The Department accepts this
suggested modification in addition to the other modifications discussed
above.
Another commenter suggested the Department should issue separate
guidance on Section I(c) that makes clear that a QPAM is expected to
act prudently on behalf of its Plan clients for any investment
opportunity that the QPAM may become aware of and where the QPAM is not
conflicted--regardless of how it became aware of the opportunity. The
commenter added that as long as the QPAM has the ultimate discretionary
authority and responsibility for deciding whether to enter into a given
transaction, the QPAM should not be prohibited from transactions merely
because such transaction is planned, negotiated, or initiated by a
Party in Interest.
The Department believes many of the revisions to Section I(c) in
this Final Amendment and related preamble discussion provide the
requested guidance. If questions remain regarding the source of
investment opportunities in relation to the QPAM's discretionary
authority, the Department encourages interested parties to submit an
advisory opinion request that details the particular facts and
circumstances that raise issues under Section I(c).
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 Department included
the asset management and equity thresholds in the exemption to set
minimum size thresholds that would help ensure a QPAM would be able to
withstand such influence. In 2005, the Department finalized an
amendment to the QPAM Exemption that updated the asset management and
shareholders' and partners' equity thresholds for registered investment
advisers in the QPAM definition in subsection VI(a)(4).\60\ 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.\61\
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\60\ 70 FR 49305.
\61\ Proposed Amendment to PTE 84-14, 68 FR 52419, 52423 (Sept.
3, 2003).
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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,
because they have not been updated since 1984. Therefore, the
Department is adjusting all of 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).\62\
---------------------------------------------------------------------------
\62\ 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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The Proposed Amendment would have adjusted the $1,000,000 threshold
in subsection VI(a)(1) through (3) to $2,720,000 and the assets under
management threshold of $85,000,000 and the shareholders' and partners'
equity and the broker-dealer net worth thresholds of $1,000,000 in
subsection VI(a)(4) to $135,870,000 and $2,000,000, respectively. In
this Final Amendment, the Department decided to increase the thresholds
in three-year increments beginning in the year 2024 and ending in 2030.
The final incremental adjustment will raise the thresholds to the
amounts included in the Proposed Amendment. The incrementally adjusted
threshold amounts are provided in subsection VI(a)(1) through (4) of
the Final Amendment. By publication through notice in the Federal
Register no later than January 31st every year, the Department will
make subsequent annual adjustments for inflation to the Equity Capital,
Net Worth, and asset management thresholds in subsection VI(a)(1)
through (4) that are rounded to the nearest $10,000.
As a minor ministerial change, the Department proposed to replace
the reference to ``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.\63\ The
Department received no comments on this ministerial change and retains
it in this Final Amendment.
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\63\ See Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Public Law 101-73 (1989).
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The Department received several comments regarding the proposed
asset management and equity thresholds. One commenter noted that the
proposed increases may have a material impact on the market for both
small and large managers. The commenters stated the sudden increase in
the thresholds could force small organizations out of the market, which
would prevent small managers and start-up managers from utilizing the
QPAM Exemption and put them at a competitive disadvantage.
[[Page 23112]]
As the Department previously stated, the QPAM Exemption was never
intended for small investment managers, and the exemption's minimum
asset and equity thresholds are intended to ensure that the fiduciaries
managing Plan assets are established institutions that are large enough
not to be unduly influenced in their discretionary decision-making
process by Parties in Interest. By spreading out the proposed increases
occurring with this Final Amendment incrementally from 2024 through
2030, the impact of a sudden increase in the threshold will be greatly
reduced. This longer implementation period will provide ample
opportunity for QPAMs to prepare and be on notice that the thresholds
are increasing in this manner and on an annual basis thereafter. The
Department notes that small asset managers or start-ups can apply for
individual exemptive relief to use the QPAM Exemption if they are
detrimentally impacted by the Final Amendment's increase to the equity
and asset thresholds, and the Department will consider those requests
on a case-by-case basis. An individual exemption, if granted, would
allow the Department to develop conditions for this circumstance that
would ensure the QPAM retains the appropriate independence and the
means to provide remedies to harmed Plans.
Another commenter stated that changes of such significance should
not be undertaken in the absence of an identifiable harm or evidence
supporting such harm to Plans, participants, and/or beneficiaries. The
Department disagrees and notes that the original intent and protection
of the exemption will erode if the asset and equity thresholds are
allowed to become irrelevant with the passage of time. What was
considered a large institution that could serve the protective purposes
of the exemption in 1984 would not be considered sufficiently large by
current standards. For the protective nature of the QPAM Exemption to
remain effective and relevant, the Department must update the asset and
equity thresholds to ensure that they keep pace with financial and
economic growth in the marketplace.
A commenter suggested the Department should conduct a survey or
issue a request for information designed to gather data necessary to
make an informed decision as to whether the thresholds should be
increased and, if so, to what extent. It is clear, however, that the
asset and equity thresholds have not kept pace with the economic and
financial growth of the marketplace, and the Department has undertaken
a robust and thorough rulemaking process for this Final Amendment.
Another commenter recommended that at the least, the Department
should grandfather QPAMs that met the pre-existing requirements and
allow them to continue to rely on the QPAM Exemption. The Department
declines to make this modification because allowing entities that fail
to meet the thresholds to avail themselves of the relief in the QPAM
Exemption would undermine the exemption's core purpose.
The Department received a comment stating that annual indexing of
the equity and asset thresholds will create situations where an entity
is a QPAM on one day, and not thereafter, leaving its client Plans in a
precarious position if the Plans are invested in continuing
transactions dependent on the QPAM Exemption. By incrementally
increasing the asset and equity thresholds, the Department is
effectively putting QPAMs on notice that the thresholds will increase
according to a predictable metric (the CPI), which will provide an
opportunity to prepare and manage their ERISA assets accordingly before
the increases are fully implemented.\64\
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\64\ This includes possibly seeking individual exemption relief
in such circumstances.
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Another comment stated that the indexing should only happen once
every five years, with a one-year effective date transition. The
Department declines to adopt this approach to the indexing. Five-year
indexing periods could lead to substantial deficiencies with respect to
QPAMs' compliance with the equity and threshold requirements of this
exemption. As a general matter, asset managers seeking to rely on this
exemption should be constantly aware of all the requirements of this
exemption, including the equity and threshold requirements, and take
appropriate action in response to the risk of non-compliance, including
by not engaging in prohibited transactions or by relying on and
complying with alternative exemptions. Further, the current asset and
equity thresholds are very outdated, and their ineffectiveness would be
exacerbated by waiting an additional five years to increase them.
Finally, a commenter recommended that the Department clarify that
the new dollar thresholds published by January 31st annually in the
Federal Register will not be applicable until January 1st of the
following year. The Department has made this clarification in the Final
Amendment by providing that each increase in the thresholds will be
effective as of the last day of the QPAM's fiscal year in which the
increase takes effect. The Department also will include the annual
notice of increases on the class exemption section of EBSA's
website.\65\
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\65\ Available at: <a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/class">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/class</a>.
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Section VI(u)--Recordkeeping
The Proposed Amendment also included a new recordkeeping
requirement in Section VI(t), which would require QPAMs to maintain
records for six years demonstrating compliance with this exemption. The
Recordkeeping requirement has been redesignated as Section VI(u) in
this Final Amendment.\66\ The Department proposed this addition to make
the QPAM Exemption consistent with other exemptions that generally
impose a recordkeeping requirement on parties relying on an exemption
and to ensure they will be able to demonstrate, and that the Department
will be able to verify, compliance with the exemption conditions.
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\66\ The Department moved the definition of ``Participating In''
that appeared in Section I(g)(3) of the Proposed Amendment into the
Definitions and General Rules at Section VI(t) of this Final
Amendment.
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The Recordkeeping requirement of the Proposed Amendment 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 and an 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
[[Page 23113]]
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.
The Department received several comments opposing the Proposed
Amendment's recordkeeping requirement. Some commenters indicated that
the specific recordkeeping requirements are unnecessary given the
existing recordkeeping requirements under ERISA section 107. Other
commenters added that the requirement does not add materially to the
protective provisions already in place in the exemption and
unnecessarily increases regulatory compliance costs. Commenters also
pointed to other status-based exemptions that do not impose any
recordkeeping requirement on a transaction-by-transaction basis, while
others, like the insurance company general account exemption (PTE 95-
60) \67\ and INHAM exemption (PTE 96-23) \68\ do not have a
recordkeeping requirement at all.
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\67\ As amended and restated at 87 FR 12985, 12996 (Mar. 8,
2022).
\68\ As amended and restated at 76 FR 18255 (Apr. 1, 2011).
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Some commenters noted that only the Department (with respect to
ERISA Title I plans) and the IRS (with respect to ERISA Title II plans,
including IRAs) have the authority to enforce the terms of the QPAM
Exemption. Therefore, those commenters argued that requiring that
records be made available to employers, unions, and participants,
beneficiaries, and IRA owners, raises the risk of unnecessary
litigation and could cause QPAMs to increase the fees they charge to
Plans as a result. One commenter added that there are practical reasons
why having to retain records sufficient for a determination of
compliance is unworkable or otherwise not cost effective. For example,
a commenter argued that despite the Department's expectation that the
recordkeeping requirements would impose a negligible burden, this
requirement will, in fact, prove burdensome and costly because QPAMs
will need to be able to demonstrate compliance for every transaction
and, in some cases, to prove a negative. Another commenter asked for a
simplified recordkeeping requirement that would require QPAMs to
undertake prudent efforts to maintain accurate records reflecting their
QPAM duties and responsibilities while another commenter suggested the
Department should modify the Proposed Amendment to require process-
based records of compliance rather than transactional records. Another
commenter asked for clarification that the six-year recordkeeping
requirement does not create any new obligation to document the basis
for satisfaction of the exemption conditions. One commenter indicated
it is unclear what it means to ``verify'' compliance with the
conditions of the QPAM Exemption.
The Department's response to these comments is that these concerns
are overstated and inconsistent with how recordkeeping requirements
operate in prohibited transaction exemptions. The extent to which
transaction-by-transaction records are necessary depends on the facts
and circumstances. The Department often includes a recordkeeping
requirement in its administrative prohibited transaction exemptions to
ensure that the parties relying on an exemption can demonstrate, and
the Department can verify, compliance with the exemption's conditions.
Given the broad relief provided by this exemption, including a specific
recordkeeping requirement is necessary for the Department to verify
that the exemption conditions are being satisfied rather than relying
on ERISA's general recordkeeping requirement to maintain records. Given
the large number and variety of transactions entered into in reliance
on the QPAM Exemption, the Department did not intend for this provision
to require transaction-by-transaction recordkeeping. Rather, the
condition is focused on requiring the QPAM to retain records
satisfactory to prove compliance with the applicable conditions for any
section of the exemption the QPAM relied upon, such as satisfying the
definition of QPAM, and records supporting the limitation on the
involvement of Parties in Interest in investment transactions. The
QPAM's reliance on specific transactions covered by Sections II through
V of the exemption will require it to maintain more detailed records
such as, but not limited to, copies of leases, sales agreements,
service contracts, audit reports, policies and procedures, and detailed
descriptions of real estate. Financial institutions are accustomed to
keeping records of their transactions as a part of their regular
business practices and generally have recordkeeping systems already in
place.
Additionally, a commenter noted that the National Bank visitorial
powers provision and the Office of the Comptroller of the Currency
(OCC) regulations would prevent Plan investors from accessing the
records of national banks and federal savings associations. The
commenter asserted that this could lead to an unintended discriminatory
effect between these banks and state-chartered banks, which may not
have the same available safeguards on the release of a QPAM bank's
records. The Department notes that if the OCC regulations, in fact, bar
Plan investors from accessing this information, that is no reason to
bar others from accessing the records. If the commenter's purported
restriction on access to national bank records is meaningful to Plan
sponsor fiduciaries, then they are free to choose a QPAM that is not
restricted from providing access to such records.
One commenter asked the Department to withdraw the recordkeeping
requirement entirely, or if not, to modify it to be consistent with the
recordkeeping requirement in PTE 2020-02. As stated above, the
Department often includes a recordkeeping condition in administrative
prohibited transaction exemptions to ensure compliance with the
exemption. The recordkeeping requirement in PTE 2020-02 was developed
specifically for that exemption and the specific relief for investment
advice provided pursuant to certain conditions.
A commenter also requested that the 30-day window for producing
records should be expanded to at least 90 days and a QPAM should have
90 days to provide notice of grounds for non-production. The Department
notes that because QPAMs are fiduciaries, the Department is unpersuaded
that additional time is necessary or consistent with the QPAM's
fiduciary status. The Department believes a longer period would be
required only if a QPAM is not already maintaining the records
necessary to demonstrate compliance with this condition. To allow a
QPAM additional time to produce, or indicate that it is not producing,
records would be directly contrary to the purpose of the recordkeeping
condition.
[[Page 23114]]
Other Ministerial Changes
The Department did not receive any comments regarding the
ministerial changes in the Proposed Amendment. Therefore, the
Department is finalizing the proposed ministerial changes as proposed,
which include: (1) changing the headings of each portion of the
exemption from ``Part'' to ``Section,'' (2) removing many internal
cross-references to definitional provisions and instead capitalizing
the terms used in those definitional provisions throughout the
exemption,\69\ and (3) adding internal references to ``above'' and
``below'' throughout to direct readers where to find certain cross-
referenced provisions.
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\69\ 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.
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The Department 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 only uses the term ``Plan.'' Finally, the Department
has amended the definition of the term ``Control'' in Section VI(e) so
that it specifically refers 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
The Department has examined the effects of the Final Amendment as
required by Executive Order 12866,\70\ Executive Order 13563,\71\ the
Congressional Review Act,\72\ the Paperwork Reduction Act of 1995,\73\
the Regulatory Flexibility Act,\74\ section 202 of the Unfunded
Mandates Reform Act of 1995,\75\ and Executive Order 13132.\76\
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\70\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\71\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 21, 2011).
\72\ 5 U.S.C. 804(2) (1996).
\73\ 44 U.S.C. 3506(c)(2)(A) (1995).
\74\ 5 U.S.C. 601 et seq. (1980).
\75\ 2 U.S.C. 1501 et seq. (1995).
\76\ Federalism, 64 FR 43255 (Aug. 10, 1999).
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Executive Order 12866 (Regulatory Planning and Review), Executive Order
14094 (Modernizing Regulatory Review), and 13563 (Improving Regulation
and Regulatory Review)
Under Executive Order 12866 (as amended by Executive Order 14094),
the Office of Management and Budget (OMB)'s Office of Information and
Regulatory Affairs determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
executive review by OMB. As amended by Executive Order 14094, section
3(f) of Executive Order 12866 defines a ``significant regulatory
action'' as a regulatory action that is likely to result in a rule that
may: (1) have an annual effect on the economy of $200 million or more;
or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local, territorial, or tribal governments
or communities; (2) create a serious inconsistency or otherwise
interfere with an action taken or planned by another agency; (3)
materially alter the budgetary impact of entitlements, grants, user
fees or loan programs or the rights and obligations of recipients
thereof; or (4) raise legal or policy issues for which centralized
review would meaningfully further the President's priorities or the
principles set forth in the Executive Order. OMB has determined that
the Final Amendment is a significant regulatory action under Section
3(f)(1) of Executive Order 12866.
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; the regulation is tailored to impose the least burden on
society, consistent with achieving the regulatory objectives; and in
choosing among alternative regulatory approaches, the agency has
selected those approaches that maximize net benefits. Executive Order
13563 recognizes that some benefits are difficult to quantify and
provides that, where appropriate and permitted by law, agencies may
consider and discuss qualitative values that are difficult or
impossible to quantify, including equity, human dignity, fairness, and
distributive impacts.
The Department has quantified the impact of the Final 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 Final Amendment's benefits would justify
its costs. Pursuant to the Congressional Review Act, OMB has designated
the Final Amendment 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.
Today's asset management industry has been marked by industry
consolidation and an increasingly global reach. As a result, QPAM
affiliations and investment strategies, including those involving Plan
assets, have changed significantly since 1984. This Final Amendment
updates some of the key elements of the QPAM Exemption to ensure that
Plans affected by the exemption remain protected in light of the
changes in the industry, and that the QPAM Exemption remains consistent
with the original intent.
The Final Amendment addresses ambiguity as to whether foreign
convictions are included in the scope of the ineligibility provision
under Section I(g). QPAMs today often have corporate or relationship
ties to a broad range of entities, some of which are located
internationally. Additionally, some global financial service
institutions may be headquartered, or have parent entities, in foreign
jurisdictions. These entities may have significant control and
influence over the operation of all entities within its organizational
structure, including those operating as QPAMs. Moreover, the
international ties of QPAMs extend to their investment strategies,
including those involving Plan assets.
The Final Amendment also expands ineligibility to include QPAMs
(and as applicable, an Affiliate or owner of a five (5) percent or more
interest) that Participate In Prohibited Misconduct, such as conduct
that has resulted in QPAMs entering into an NPA or DPA with a U.S.
federal or state prosecutor's office or regulatory agency; a systematic
pattern or practice of violating the exempti
[…truncated; see source link]Indexed from Federal Register on April 3, 2024.
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