On Tuesday, the Department of Labor’s Employee Benefits Security Administration proposed an amendment to an almost 40-year-old prohibited transaction exemption that allows major financial firms to manage retirement assets.
The changes relate to misconduct and convictions involving financial institutions and money managers, as well as their employees and subsidiaries.
The proposed amendment to the Class Prohibited Transaction Exemption 84-14, also known as the Qualified Professional Asset Manager (QPAM) Exemption, will “ensure the exemption continues to protect plans, participants and beneficiaries, individual retirement account owners and their interests,” according to the department.
The exemption permits large financial institutions to manage retirement assets even if potential conflicts of interest exist with the plan from other areas where the firm does business.
However, a company jeopardizes its exemption status in the event of wrongdoing. The changes come at a time of industry consolidation by major firms.
“QPAM is a very important exemption for managers of private funds that hold plan assets and certain other institutions,” said ERISA expert Joshua Waldbeser, an attorney with high-profile law firm Faegre Drinker. “QPAM has a very practical, common-sense purpose —it allows asset managers to transact as independent fiduciaries with counterparties who just incidentally happen to be parties-in-interest to benefit plan investors, where there is no material reason to be concerned about abuses.
The DOL claims that since the exemption’s 1984 creation, substantial changes have occurred in the financial services industry, including industry consolidation and the increasingly global reach of financial services institutions in their affiliations and investment strategies, including plan assets.
READ THE NOTICE OF THE PROPOSED AMENDMENT HERE
“Unfortunately, in some cases there are no good or practical alternatives to QPAM,” Waldbeser added. “This is especially true where the manager is transacting in assets for which there is no generally recognized market to determine pricing, which is often the case for certain private funds.”
He explained that the fundamental structure of the exemption would remain largely in place, but there is more to the proposal than just the clarification as to foreign convictions. Asset managers should review the changes carefully with legal counsel.
“The amendment would protect plans and participants by expanding the ineligibility provision to include additional types of serious misconduct.”
“Just, for example, the proposal would require QPAMs to register as such with the DOL. That’s an example of a requirement that, if missed, could potentially have significant consequences.”
The amendment would protect plans and their participants and beneficiaries by:
- Addressing perceived ambiguity as to whether foreign convictions are included in the scope of the exemption’s ineligibility provision.
- Expanding the ineligibility provision to include additional types of serious misconduct.
- Focusing on mitigating potential costs and disruption to plans and IRAs when a QPAM becomes ineligible due to a conviction or participates in other serious misconduct.
- Updating asset management and equity thresholds in the definition of “Qualified Professional Asset Manager.”
- Adding a standard recordkeeping requirement that the exemption currently lacks.
- Clarifying the requisite independence and control that a QPAM must have with respect to investment decisions and transactions.
The department urges plan representatives and other interested parties to provide input on the proposal.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
