ARTICLE
15 April 2024

The Department Of Labor Finalizes Changes To The QPAM Exemption – A Favored Management Tool Gets Less User-Friendly

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Goodwin Procter LLP

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At Goodwin, we partner with our clients to practice law with integrity, ingenuity, agility, and ambition. Our 1,600 lawyers across the United States, Europe, and Asia excel at complex transactions, high-stakes litigation and world-class advisory services in the technology, life sciences, real estate, private equity, and financial industries. Our unique combination of deep experience serving both the innovators and investors in a rapidly changing, technology-driven economy sets us apart.
On April 3, 2024, the Department of Labor (DOL) published final changes to Prohibited Transaction Class Exemption 84-14, commonly known as the "QPAM Exemption".
United States Employment and HR
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On April 3, 2024, the Department of Labor (DOL) published final changes to Prohibited Transaction Class Exemption 84-14, commonly known as the "QPAM Exemption".1 The changes make reliance on the QPAM Exemption more burdensome and challenging and may result, over time, in fewer choices for ERISA and IRA plan investors, their managers and their counterparties.2 The changes go into effect on Monday, June 17, 2024.

Parties Affected by The Changes

  • ERISA and IRA plan investors and their discretionary investment managers, including, banks, insurance companies and registered investment advisers, whether managing plan assets in separately managed accounts or pooled funds.
  • Lenders, banks, insurers, broker-dealers and other financial counterparties that finance, trade with and provide services to ERISA and IRA accounts and pooled funds.
  • Changes will be particularly important to debt, real estate, alternatives and private strategies, where the QPAM exemption is often the favored exemption.

The Major Changes

  • Requires managers to notify the DOL in advance of reliance on the QPAM Exemption, thus precluding unplanned reliance (e.g., as a fallback to other exemptions).
  • Requires managers to notify the DOL of a criminal conviction or other disqualifying event.
  • Raises minimum financial qualifications (i.e., net equity and assets under management) for QPAMs, thus making QPAM status more expensive and harder for newer or smaller managers, even if they are run by sophisticated, experienced professionals.
  • Expands the scope of disqualifying events to clearly include foreign convictions (putting to rest the current debate), domestic and foreign deferred prosecution and non-prosecution agreements and certain dispositions of civil proceedings, thereby increasing the risk of disqualification, especially for managers that are part of large or multi-national organizations.
  • Expands the scope of disqualifying conflicts, requiring that managers be free of "bias" in favor of plan sponsors or counterparties, but without defining that term. This vague new requirement supplements existing requirements seeking to ensure that managers act independently, including requirements that managers (i) be independent of the plan sponsors and others with authority over their hiring, (ii) be unrelated to counterparties with whom they transact, and (iii) avoid transactions designed to benefit counterparties (instead of plan clients). Managers that are part of larger organizations with multiple lines of business and deep connections across markets may find proving the absence of bias particularly challenging (e.g., when transacting with important clients and trading partners). The "free of bias" requirement would seem to create additional litigation risk, given that many courts view exemptions as affirmative defenses and will require managers relying on the QPAM Exemption to prove that its conditions are met, including the absence of impermissible bias. Proving this negative will be difficult at any point in a case, but likely impossible at the motion to dismiss stage.
  • Requires disqualified managers to provide to existing client plans a one-year transition period along with certain onerous contractual protections (e.g., broad client indemnities against losses and the costs of transitioning to other managers). While providing a welcome interim benefit to managers who will seek individual exemptive relief to continuing relying on the QPAM Exemption, this transition relief may be unworkable for separately managed account strategies or open-end pooled funds, as the relief only applies to clients at the time of disqualification (and not to new clients coming into a fund or strategy during the one-year period).
  • While nominally stated as a mandate to all disqualified managers, the requirement to provide a transition period should, as a practical matter, apply only to managers needing or wishing to rely on the QPAM Exemption following disqualification (and not to managers who choose to cease using it). Indeed, as the DOL explains in the preamble to the final exemption, the penalty for failing to comply with the transition period conditions is simply the loss of relief for transactions effected or continued during the transition period. Nowhere in the preamble does the DOL suggest that the penalty would include a retroactive loss of relief for pre-disqualification transactions.

Select Action Items for Managers

  • Consider whether the changes to the exemption raise current or foreseeable future hurdles to continued reliance (e.g., whether new financial minimums can be met or whether there are current or pending criminal or civil proceedings that could result in disqualification).
  • For managers unable or unwilling to continue relying on the QPAM Exemption (either exclusively or alongside other exemptions), (i) review and modify relationship agreements (e.g., investment management agreements and guidelines, fund documentation, and trading agreements) with clients and counterparties accordingly and (ii) review and modify accordingly relevant policies, procedures and training materials (e.g., relating to onboarding, portfolio management, trading, and compliance).
  • For managers continuing to rely on the QPAM Exemption—
    • Notify the DOL;
    • Review and modify (or create) relevant policies, procedures and training materials (e.g., relating to onboarding, portfolio management, trading, and compliance) to address the changes in the exemption conditions, including systems to monitor for disqualifying events across all covered affiliates;
    • Consider the potential for, and impact of, disqualification on existing businesses and strategies and whether to develop a contingency plan (e.g., whether alternative exemptions will work and, if not, whether and to what extent the transition period requirements will impact current relationship structures and agreements, including termination and liquidity provisions). If a contingency plan is already in place, consider modifications in light of the new requirements;
    • Consider any increase in the risk of disqualification prior to a merger, acquisition or other corporate action; and
    • For managers with governmental plan clients contractually requiring compliance with the QPAM Exemption, consider the impact of the changes on those client relationships, including whether the changes even apply and, if so, whether to negotiate alternatives.

Footnotes

1 89 Fed. Reg. 23090 (April 3, 2024), available at https://www.govinfo.gov/content/pkg/FR-2024-04-03/pdf/2024-06059.pdf

2 The Employee Retirement Income Security Act of 1974, as amended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
15 April 2024

The Department Of Labor Finalizes Changes To The QPAM Exemption – A Favored Management Tool Gets Less User-Friendly

United States Employment and HR

Contributor

At Goodwin, we partner with our clients to practice law with integrity, ingenuity, agility, and ambition. Our 1,600 lawyers across the United States, Europe, and Asia excel at complex transactions, high-stakes litigation and world-class advisory services in the technology, life sciences, real estate, private equity, and financial industries. Our unique combination of deep experience serving both the innovators and investors in a rapidly changing, technology-driven economy sets us apart.
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