Akey prohibited transaction exemption on which registered investment advisers and other discretionary asset managers of plans and accounts covered by the fiduciary provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA) or Section 4975 of the Internal Revenue Code of 1986, as amended (Code) rely, is the Qualified Professional Asset Manager Exemption (QPAM Exemption) issued by the Department of Labor (Department or DOL).1 The QPAM Exemption addresses prohibited transactions that occur during some of the most common transactions between a plan account or individual retirement account (IRA) and parties that provide services to the account or have some other relationship to the account. As such, it is an extremely important exemption.
We described in detail the QPAM Exemption in the February 2022 edition of The Investment Lawyer. 2 Since then, the Department made substantial changes to the exemption, which become effective on June 17, 2024 (2024 Amendments). The purpose of this article is to update the 2022 article to reflect the 2024 Amendments so that investment managers, compliance personnel, and others understand (1) the prohibited transaction provisions and the need to utilize prohibited transaction exemptions like the QPAM Exemption to address them, (2) the meaning of the term "qualified professional asset manager" (QPAM), (3) the key conditions of the exemption, (4) the implications of a QPAM's disqualification by reason of certain criminal convictions and other prohibited misconduct, (5) and some issues that may arise when utilizing the QPAM Exemption.
Overview of the Prohibited Transaction Provisions
ERISA requires that asset managers comply with the statute's fiduciary duty requirements, for example, the duty of prudence, with regard to plans and entities covered by the fiduciary provisions of Title I of ERISA. Such plans are "employee benefit plans" as defined in Section 3(3) of ERISA that are sponsored by private sector employers (ERISA Plans). Entities subject to the fiduciary duty provisions include partnerships, limited liability companies, collective investment trusts, collective investment funds, single member and pooled insurance company separate accounts, and other entities the assets of which are deemed to be ERISA Plan assets for purposes of ERISA by reason of ERISA Plans investing in such entities (Plan Asset Entities).3
ERISA also imposes certain prohibited transaction restrictions that are designed to ensure that asset managers and other fiduciaries exclusively act in the interest of the ERISA Plan and its participants and beneficiaries.4 As discussed below, comparable prohibited transaction provisions are found in Section 4975 of the Code. ERISA Plans and Plan Asset Entities also are subject to the fiduciary duty provisions and the prohibited transaction provisions in the Code.
Tax-favored savings vehicles described in Section 4975, for example, most individual retirement accounts (Non-ERISA Plans), are not subject to ERISA's fiduciary duty or prohibited transaction provisions because such accounts are not provided by an employer. However, such accounts are subject to the prohibited transaction provisions in the Code. Additionally, an entity in which Non-ERISA Plans invest their assets may still be deemed a Plan Asset Entity and subject to the prohibited transaction provisions in the Code despite the fact that no ERISA Plans invested in such entity.
Pursuant to Section 406(a), a fiduciary may not cause an ERISA Plan or a Plan Asset Entity to engage in the following transactions:5
- A direct or indirect sale or exchange of property between the ERISA Plan (or Plan Asset Entity) and a party in interest;6
- A direct or indirect lending of money or other extension of credit between the ERISA Plan (or Plan Asset Entity) and a party in interest;7
- A direct or indirect furnishing of goods, services, or facilities between the ERISA Plan (or Plan Asset Entity) and a party in interest;8
- A direct or indirect transfer to, or for the use by or for the benefit of, a party in interest of plan assets;9 and
- A purchase of employer securities or employer property.10
A "party in interest" is defined broadly to include, among others, another fiduciary, a plan service provider and its affiliates, and an employer whose employees participate in the plan and their affiliates.11 The Code mirrors these prohibited transactions of ERISA. However, the Code uses the term "disqualified person" rather than "party in interest." The term "disqualified person" is defined slightly different than the term "party in interest." A disqualified person includes the aforementioned parties and, among other things, a provider of services to an IRA, the IRA owner, and the IRA's beneficiaries.12 References to the term "party in interest" throughout this article should be read to include the term "disqualified person" unless otherwise noted.
ERISA contains additional prohibited transaction restrictions that prohibit fiduciaries from engaging in transactions in the face of a conflict.13 More specifically, ERISA prohibits a fiduciary from engaging in the following transactions:
- Dealing with assets of the ERISA Plan (or Plan Asset Entity) in his or her own interest or his or her own account (or in the interest of a person in which the fiduciary has an interest that could affect his or her judgment as a fiduciary), that is, no self-dealing;14
- Acting in any transaction involving the ERISA Plan (or Plan Asset Entity) on behalf of a party whose interests are adverse to the interests of the ERISA Plan (or Plan Asset Entity) or the ERISA Plan's (or Plan Asset Entity's) participants and beneficiaries, that is, the fiduciary or its affiliate cannot be on both sides of a transaction;15 and
- Receiving any consideration for his or her own personal account from any party dealing with the ERISA Plan (or Plan Asset Entity) in connection with a transaction involving plan assets, that is, no kick-backs.16
The Code mirrors the aforementioned restrictions as they relate to self-dealing and kick-backs.17 Thus, these fiduciary prohibited transaction provisions apply to fiduciaries of ERISA Plans, Plan Asset Entities, and IRAs.
For purposes of this article, we cite the ERISA prohibited transaction provisions, but unless otherwise noted, the reader should assume that there is a corresponding provision under the Code. As discussed, the Code's prohibited transaction provisions apply to ERISA Plans, Non-ERISA Plans (IRAs), and Plan Asset Entities
The prohibited transaction provisions in Section 406(a) of ERISA are commonly known as per se prohibited transactions. In other words, the intent of the fiduciary who engages in the transaction is not at all relevant. Therefore, in the absence of compliance with a prohibited transaction exemption, a non-exempt prohibited transaction occurs. The law is less clear on whether an act contrary to the terms of Section 406(b) is a per se violation of such provisions. However, regardless of the intent requirement under Section 406(b), asset managers should try to avoid engaging in such transactions. Failure to comply with the ERISA prohibited transaction provisions or failure to meet the conditions of an applicable prohibited transaction exemption, like the QPAM Exemption, will result in fiduciary breaches, while violation of the Code's prohibited transaction provisions without meeting the conditions of an exemption may result in the assessment of excises taxes.18
Importantly, an asset manager could unknowingly cause an ERISA Plan, Non-ERISA Plan, or Plan Asset Entity to engage in a per se prohibited transaction simply by receiving services or entering into other transactions in the normal course of business. For example, an ERISA Plan utilizes the custodial services of Bank A for the ERISA Plan. Bank A has a broker-dealer affiliate (Broker Dealer). The ERISA Plan fiduciary hires Manager X to manage a portion of the ERISA Plan's assets. Manager X, which is not affiliated with Bank A or Broker Dealer, executes trades through Broker Dealer. Such transaction would result in a prohibited transaction under Section 406(a) because Broker Dealer is a party in interest to the ERISA Plan by reason of its affiliation with Bank A, which is a party in interest to the ERISA Plan by reason of being a service provider, that is, custodian, to the ERISA Plan. This is a very basic example, but it illustrates how easily the asset manager can cause a prohibited transaction. In the case of an investment fund that has dozens of ERISA Plan investors and the assets of the investment fund are deemed to include the assets of the ERISA Plan investors, making it a Plan Asset Entity, it would be very difficult for the manager of the investment fund to identify every party in interest to each and every ERISA Plan investor.
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