On July 27, 2022, the U.S. Department of Labor (the “DOL”) issued notice of a proposed amendment (the “Proposed Amendment”) to Prohibited Transaction Class Exemption 84-14 (which is commonly referred to as the “QPAM Exemption”) that would (as described in more detail below) significantly amend certain of the exemption’s conditions, including:

  • increasing the equity/net worth and assets under management thresholds to qualify as a “qualified professional asset manager” (“QPAM”);
  • adding a new requirement for a QPAM to notify the DOL if it will be relying on the exemption;
  • specifically including foreign criminal convictions in the list of criminal convictions that would make a QPAM ineligible to rely on the exemption;
  • adding new types of prohibited misconduct that would make a QPAM ineligible to rely on the exemption;
  • requiring upfront terms in the QPAM’s written management agreement that would apply in the event the QPAM became ineligible to rely on the exemption as a result of a specified criminal conviction or participation in prohibited misconduct (including indemnification for certain resulting losses/costs);
  • providing for a one-year winding-down period to minimize the impact of a QPAM losing the ability to rely on the exemption as a result of a specified criminal conviction or participation in prohibited misconduct;
  • clarifying the requirement that the terms of the applicable transaction and related negotiations be the sole responsibility of the QPAM; and
  • adding a recordkeeping requirement.

If finalized, the Proposed Amendment would have far-reaching effects on employee benefit plans subject to Title I of ERISA and individual retirement accounts (“IRAs”) subject to Section 4975 of the Code (collectively, “Plans”), and investment funds and separate accounts holding “plan assets” of one or more such Plans (“Plan Asset Entities”).  The Proposed Amendment would affect investment managers managing Plan Asset Entities (including eliminating the ability of certain managers to qualify as a QPAM), employers/plan sponsors of Plans, IRA owners and other fiduciaries responsible for engaging or monitoring investment managers, as well as counterparties to Plan Asset Entities seeking to rely on the QPAM Exemption.

Background

The prohibited transaction rules under Section 406(a)(1)(A)-(D) of ERISA prohibit, among other things, sales, leases, loans and the provision of services between Plans and certain parties related to those Plans referred to as “parties in interest.”[1]  In light of how broadly the term “party in interest” is defined, some Plans could have hundreds or thousands of “parties in interest,” which often results in the practical assumption that every counterparty is a prohibited “party in interest” and every transaction requires an exemption from the prohibited transaction rules.  The alternative would require potentially extremely costly and burdensome (as well as potentially inaccurate) “party in interest” diligence for every transaction involving a Plan (which would be even more difficult for a Plan Asset Entity holding “plan assets” of many Plans).

Thankfully, the QPAM Exemption provides broad exemptive relief from those prohibited transaction restrictions for transactions between a “party in interest” with respect to a Plan and a Plan Asset Entity holding “plan assets” of such a Plan, where the Plan Asset Entity is managed by a QPAM and the other Plan protective conditions of the QPAM Exemption are met.  If the QPAM Exemption is available, it minimizes the need to perform any such “party in interest” diligence and often provides comfort to the parties to the transaction that a “party in interest” prohibited transaction will not occur.  Accordingly, it is quite common for Plan fiduciaries, investment managers and counterparties to seek or require compliance with the QPAM Exemption whenever available (even where it might not be necessary because, for example, another exemption is available or an exemption might not be required because the transaction is not likely to otherwise be prohibited).

In order to qualify as a QPAM with respect to a Plan, the relevant entity must be either a bank, a savings and loan association, an insurance company, or a registered investment adviser that meets certain financial requirements and acknowledges in writing that it is a fiduciary to the Plan.  However, one of the Plan protective conditions of the exemption (which is particularly relevant to the Proposed Amendment) provides that a QPAM would become ineligible to rely on the exemption for a period of 10 years if the QPAM, or various affiliates or five percent or more owners of the QPAM, are convicted of certain crimes.

The Proposed Amendment

In light of significant changes in the financial services industry since the exemption was originally drafted in 1984, the DOL is now seeking (in its view) to modernize the QPAM Exemption accordingly.  Below is a high-level summary of the material aspects of the DOL’s proposed changes.

The DOL is accepting comments on the Proposed Amendment through September 26, 2022.  The Proposed Amendment provides that, if finalized, it would become effective 60 days after the date of publication of the final amendment in the Federal Register.  The Proposed Amendment does not provide for any grandfathering of existing QPAMs or QPAM management agreements.  Accordingly, if the Proposed Amendment is finalized in its current form, existing QPAM management agreements would need to be amended in order to comply with the revised conditions of the exemption.

Increase of equity/net worth and assets under management thresholds to qualify as a QPAM

The Proposed Amendment would increase the financial thresholds necessary for an entity to qualify as a QPAM, to reflect prior inflation (and provides that the DOL would also publish future annual inflation adjustments) as follows:

  • The equity capital or net worth threshold (as applicable) for a bank, a savings and loan association and an insurance company would increase from $1,000,000 to $2,720,000;
  • The current assets under management threshold for a registered investment adviser would increase from $85,000,000 to $135,870,000; and
  • The shareholders’ or partners’ equity threshold for a registered investment adviser would increase from $1,000,000 to $2,040,000.

Requirement for a QPAM to notify the DOL if it will be relying on the exemption

The Proposed Amendment would add a new requirement that a QPAM must notify the DOL by email that it is relying on the QPAM Exemption.

  • A QPAM must report the legal name of each business entity relying on the exemption and any name under which the QPAM may be operating.
  • The notice will only need to be provided once, unless the QPAM changes its legal or operating name, or the QPAM is no longer relying on the exemption.
  • The DOL will publish on its website a list of QPAMs who have provided such notification to the DOL.

Specific inclusion of foreign criminal convictions in the list of criminal convictions that would make a QPAM ineligible to rely on the exemption

As noted above, a QPAM would become ineligible to rely on the QPAM Exemption for a period of 10 years if the QPAM, or various affiliates or five percent or more owners of the QPAM, are convicted of certain crimes (a “Criminal Conviction”).  Although there has been some uncertainty as to whether foreign criminal convictions were included, the Proposed Amendment would remove any such ambiguity and provide that foreign criminal convictions, in addition to domestic criminal convictions, would make a QPAM ineligible to rely on the exemption. Such foreign criminal convictions would include convictions “by a foreign court of competent jurisdiction for any crime … however denominated by the laws of the relevant foreign government, that is substantially equivalent to” one of the enumerated U.S. federal or state crimes identified in the exemption.

Addition of new types of prohibited misconduct that would make a QPAM ineligible to rely on the exemption

The Proposed Amendment would add a new category of misconduct that may lead to ineligibility to rely on the QPAM Exemption for 10 years, referred to as “participating in Prohibited Misconduct.”

  • “Prohibited Misconduct” would be defined as: (i) any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a Criminal Conviction; (ii) 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 above; (iii) engaging in a systematic pattern or practice of violating the conditions of the exemption; (iv) intentionally violating the conditions of the exemption; or (v) providing materially misleading information to the DOL in connection with the conditions of the exemption. Prohibited Misconduct described in clauses (iii) through (v) above would be determined through “an investigation by the appropriate field office” of the DOL.
  • “Participating in” such misconduct includes not only active participation but also knowingly approving of the conduct or having knowledge of such conduct without taking appropriate and proactive steps to prevent such conduct from occurring, including reporting the conduct to appropriate compliance personnel.
  • When a QPAM’s ineligibility is linked to participating in Prohibited Misconduct, the DOL will provide the QPAM with a written warning and an opportunity to be heard.  If the QPAM does not respond to the warning or fails to convince the DOL otherwise, the DOL will issue a “Written Ineligibility Notice” to the QPAM.

Requirement to include new upfront terms in the QPAM’s written management agreement

The Proposed Amendment would require a QPAM to include certain standards of integrity, considered by the DOL to be a fundamental requirement of a QPAM, in the QPAM’s written management agreement with its client Plans.

  • Specifically, the Proposed Amendment would require the QPAM’s written management agreement to provide that in the event the QPAM, or an its affiliate or a five percent or more owner of the QPAM, (i) engages in conduct resulting in a Criminal Conviction or (ii) receives a Written Ineligibility Notice from the DOL, the QPAM would not restrict its client Plan’s ability to terminate its arrangement with the QPAM or withdraw from the applicable Plan Asset Entity managed by the QPAM for at least a period of 10 years.
  • The QPAM would be prohibited from imposing any fees, penalties, or charges on the client Plan in connection with such termination or withdrawal (except for reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or 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, provided any such fees are applied consistently and in a like manner to all such investors).
  • The QPAM’s written management agreement would be required to include a provision requiring the QPAM to indemnify, hold harmless, and promptly restore actual losses to each client Plan for any damages directly resulting from a violation of applicable laws, a breach of contract, or any claim arising out of the QPAM’s ineligibility to rely on the exemption as a result of a Criminal Conviction or receipt of a Written Ineligibility Notice. Actual losses include losses and costs arising from unwinding transactions with third parties and from transitioning Plan assets to an alternative asset manager as well as costs associated with any exposure to excise taxes under Section 4975 of the Code.
  • The QPAM would also be required to contractually agree not to employ or knowingly engage any individual that participated in the conduct that is the subject of a Criminal Conviction or Written Ineligibility Notice.

One-year winding-down period to minimize the impact of a QPAM losing the ability to rely on the exemption as a result of a Criminal Conviction or receipt of a Written Ineligibility Notice

Any QPAM that becomes ineligible to rely on the exemption as a result of a Criminal Conviction or receipt of a Written Ineligibility Notice must engage in a winding-down period, which is only available to existing Plan clients.  During such one-year period, the QPAM must fully comply with the conditions of the exemption, it must ensure that it manages each Plan’s assets prudently and loyally, and it must comply with the following additional conditions:

  • Within 30 days, the QPAM must provide notice to the DOL and each of its client Plans stating: (i) its failure to satisfy such condition of the exemption and the resulting initiation of the one-year winding-down period; (ii) that it will not restrict the ability of its client Plans to terminate or withdraw from its arrangement with the QPAM nor impose fees, penalties, or charges on the client Plan in connection with such terminating or withdrawal; and agrees to indemnify, hold harmless, and promptly restore losses to the client Plan resulting therefrom; and (iii) an objective description of the facts and circumstances upon which the Criminal Conviction or Written Ineligibility Notice is based, written with sufficient detail to fully inform the client Plan’s fiduciary of the nature and severity of the conduct so that such fiduciary can satisfy its fiduciary duties of prudence and loyalty with respect to hiring, monitoring, evaluating, and retaining the QPAM in a non-QPAM capacity;
  • No later than the date it becomes ineligible to rely on the exemption, the QPAM must not employ or knowingly engage any individual that participated in the conduct that was the subject of the Criminal Conviction or Written Ineligibility Notice;
  • The QPAM may not engage in new transactions in reliance on the exemption for existing client Plans; and
  • After the one-year winding-down period expires, the QPAM may not rely on the exemption until the expiration of the 10-year ineligibility period unless it obtains an individual exemption from the DOL permitting it to do so. The Proposed Amendment would also add new requirements with respect to any application for such an individual exemption.

Clarification of the requirement that the terms of the applicable transaction and related negotiations be the sole responsibility of the QPAM

The Proposed Amendment would clarify that a QPAM must not permit other “parties in interest” to make decisions regarding Plan investments under the QPAM’s control, and that the QPAM must have sole responsibility over the terms of transactions, commitments, investment of Plan assets, and any associated negotiations.

  • A “party in interest” should not be involved in any aspect of a transaction, aside from certain ministerial duties and oversight associated with Plan transactions, such as providing general investment guidelines to the QPAM. Under the Proposed Amendment, there would be no relief under the exemption for any transaction that has been planned, negotiated or initiated in whole or in part by a “party in interest” to the Plan and presented to the QPAM for approval.
  • The Proposed Amendment would also provide that the exemption would apply only in connection with a Plan Asset Entity that is “established primarily for investment purposes” and that no relief would be available for any transaction that is 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 such a transaction and the role of the QPAM is not to act as a mere independent approver of a transaction.

Addition of a recordkeeping requirement

The Proposed Amendment would requires a QPAM to maintain records for six years demonstrating compliance with the exemption.

  • The records must be maintained in a manner that is reasonably accessible at a QPAM’s customary business location during normal business hours for examination by the DOL, the IRS, other federal or state regulators, any Plan fiduciary, any contributing employer or employee organization whose members are covered by the Plan, and any Plan participant or beneficiary.
  • However, such parties are only permitted to access records relevant to their transactions, and the QPAM does not need to provide access to privileged trade secrets or privileged commercial or financial information of the QPAM.

*          *          *

As noted above, if finalized in its current form, the Proposed Amendment would significantly impact investment managers acting or seeking to act as QPAMs, Plan fiduciaries responsible for engaging or monitoring QPAMs and counterparties relying or seeking to rely on the QPAM Exemption.

For ERISA Plan fiduciaries, it is also important to recognize that ERISA’s fiduciary duties of prudence and loyalty apply in the context of hiring, monitoring and retaining/firing an investment manager regardless of whether the investment manager qualifies as a QPAM or may utilize the QPAM Exemption.

We will continue to monitor any developments in this area and, as always, remain available to answer any questions you may have.

[1] Similar rules exist under Code Section 4975(c)(1)(A)-(D)) with respect to “disqualified persons.”  For purposes of this discussion, any references to the prohibited transaction rules under Section 406 of ERISA and “parties in interest” apply equally to the prohibited transaction rules under Section 4975 of the Code and “disqualified persons.”

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Photo of Ira G. Bogner Ira G. Bogner

Ira G. Bogner is the immediate former chair of the Firm’s Tax Department and a member of the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee. Ira represents a varied list of clients, including financial…

Ira G. Bogner is the immediate former chair of the Firm’s Tax Department and a member of the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee. Ira represents a varied list of clients, including financial service companies, entertainment industry clients, and tax-exempt organizations, and also actively represents individual executives in executive compensation matters.

Ira counsels clients with respect to the tax, securities law disclosure, corporate governance, stock exchange and other requirements relevant to executive compensation arrangements. Ira also provides advice regarding equity arrangements, employment agreements, change in control agreements and all other types of executive compensation arrangements, including guidance regarding “409A,” “162m,” “457A,” and “280G.”

Ira frequently is called on to structure and analyze alternative investments for pension trusts and other exempt organizations. He also works with the Firm’s corporate and real estate lawyers in structuring and maintaining investment funds that include participation by pension plans. Through his work in the investment fund area Ira has obtained substantial experience in applying the rules provided under the “plan asset” regulations, including the operation of venture capital operating companies and real estate operating companies. He has assisted in the formation of private equity, real estate, infrastructure and hedge funds, including “fund of funds.” Ira also has advised clients on both avoiding ERISA “plan asset” status and operating an investment fund in accordance with ERISA.

Areas of Concentration

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including:

  • investment of plan assets
  • implementation of employee benefit plans

  • employee benefit issues in mergers and acquisitions

  • awarding of equity-based compensation

  • negotiation and drafting of employment agreements and severance arrangements

  • structuring, analyzing and maintaining investment funds that are suitable for plan investors

Thought Leadership

Ira has published a number of articles in publications such as The New York Law Journal, The New Jersey Law Journal, The Daily Deal, The Journal of Pension Planning and Compliance, Mergers and Acquisitions (The Monthly Tax Journal), The Journal of Taxation and Regulation of Financial Institutions, The Metropolitan Corporate Counsel, European Private Equity & Venture Capital Associations, The LPA Anatomised and Private Equity International and has been named to the Board of Advisors of the Journal of Taxation and Regulation of Financial Institutions. He also has lectured on topics such as the classification of workers, drafting employment agreements, equity alternatives for senior executives, investing IRA assets, the plan asset regulations, shareholder approval of equity plans, Code Section 409A, and key provisions for ERISA investors investing in a private equity fund.

Recognition

Ira has been recognized and ranked by various directories. US Legal 500 has carried the following comments: “Ira Bogner is ‘available, responsive and knowledgeable;” “Ira Bogner ‘provides a level of comfort with respect to business issues that is rare in the world of ERISA;” “Ira Bogner is the ‘go-to guy for fund sponsors needing help with ERISA.’”

Photo of Neal Schelberg Neal Schelberg

Neal serves as legal counsel to numerous pension and welfare benefit plans subject to ERISA. His clients span a wide variety of industries, including professional sports, teamsters, building and construction, health care, industrial, wholesale and retail food and newspaper publishing. He has particular…

Neal serves as legal counsel to numerous pension and welfare benefit plans subject to ERISA. His clients span a wide variety of industries, including professional sports, teamsters, building and construction, health care, industrial, wholesale and retail food and newspaper publishing. He has particular experience representing insolvent and financially distressed multiemployer pension plans.

He practices the full spectrum of employee benefits law. From advising on compliance issues, to negotiating benefit provisions in mergers and other business reorganizations and advising benefit plan clients and sponsors on investment transactions in traditional and alternative asset classes, Neal deftly hones in on the critical issues in order to protect the plan fiduciaries and meet their business needs.

Neal has been widely recognized as a leading employee benefits practitioner in Proskauer’s Employee Benefits & Executive Compensation Group which is rated “Tier 1” by The Legal 500 United States, a leading legal directory which rates firms and lawyers based on client feedback. Clients cite Neal as ‘one of a kind’ – he is the only practitioner in the field I would select to brief a CEO or corporate board.”

He is a former Chair of the ERISA Advisory Council, having been appointed to this position by the U.S. Secretary of Labor in 2014

Neal is a frequent lecturer and prolific author for many organizations such as the International Foundation of Employee Benefit Plans, the Law Education Institute and the Practising Law Institute. He has also been quoted in numerous journals and periodicals.

He serves as a board member for the National Association of Drug Abuse Programs and the D.C. 9 Scholarship Fund.

Photo of Steven Weinstein Steven Weinstein

Steven D. Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare…

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Steven advises clients in all aspects of pension plan tax qualification and plan administration, including drafting of plan documents and employee communications; providing advice relating to corporate acquisitions and mergers; and negotiating investment management agreements, trust agreements, recordkeeping and custodial contracts, and other plan-related contracts.

In the tax-qualified plan area, Steven assists clients concerning the rules relating to discrimination testing, participation, vesting, cash or deferred arrangements, plan limitations and plan distributions. He also counsels clients regarding voluntary correction programs offered by the Internal Revenue Service and Department of Labor.

In addition, he counsels a wide array of clients on issues relating to fiduciary responsibility in connection with the administration and operation of employee benefit programs, particularly with respect to advice relating to the investment of plan assets. The latter advice includes the rules governing investment diversification, determination of plan assets, foreign indicia of ownership, prohibited transactions, and exclusive benefit and prudence. He also advises employers in connection with the implementation of all phases of reduction-in-force programs, including the drafting of severance plans and related documents, as well as employee communications required to effect these programs.

Steven has wide-ranging experience with health and welfare plans, particularly regarding the new rules issued under the Affordable Care Act (ACA). As a member of Proskauer’s interdisciplinary Health Care Reform Task Force, he assists clients and other Firm lawyers in preparing for the numerous changes resulting from ACA.

His experience is extensive in advising Fortune 500 companies with respect to the structure of their benefit plans and how such plans may be affected by corporate transactions. He also regularly counsels plan fiduciary committees as to best procedural practices to reduce potential exposure to fiduciary breach claims. His clients are most frequently in the manufacturing, financial services and entertainment sectors.

Steven has significant experience in assisting clients with the implementation and ongoing operation of non-qualified retirement plans and other types of executive compensation, including issues relating to ERISA coverage, and Section 409A and Section 457A compliance. He also advises clients in connection with executive employment agreements and change-in-control or severance arrangements.

Photo of Adam Scoll Adam Scoll

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard…

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard to compliance with ERISA’s complex fiduciary duty and prohibited transaction rules.

Adam regularly advises private investment fund sponsors regarding the structuring of their funds in order to accept investments from ERISA-covered pension trusts, including compliance with the ERISA “plan asset” regulations and the operation of venture capital operating companies (VCOCs) and real estate operating companies (REOCs).

Adam also represents both employers and senior executives in the negotiation and drafting of employment and separation agreements, deferred compensation plans, and equity and “phantom equity” arrangements, including compliance with the nonqualified deferred compensation rules under Sections 409A and 457A of the Internal Revenue Code.

Photo of Pamela Onufer Pamela Onufer

Pamela is a special pension investment counsel who focuses her practice on ERISA, with special emphasis on ERISA’s fiduciary and prohibited transaction rules. She has extensive experience assisting both single-employer and multiemployer benefit plan clients in reviewing and negotiating various investment-related agreements and…

Pamela is a special pension investment counsel who focuses her practice on ERISA, with special emphasis on ERISA’s fiduciary and prohibited transaction rules. She has extensive experience assisting both single-employer and multiemployer benefit plan clients in reviewing and negotiating various investment-related agreements and documents, including documentation related to separate accounts, collective trust funds, private equity funds, hedge funds, fund-of-funds, custody agreements, trust agreements, portfolio transition management agreements, investment policies and guidelines and ISDAs.