By George H. Bostick, Adam B. Cohen, Ian A. Herbert, Carol T. McClarnon, Alice Murtos, Robert J. Neis, W. Mark Smith, William J. Walderman, Carol A. Weiser, Brendan M. Wilson & Walter H. Wingfield.
The Department of Labor has finalized revisions to the ERISA class exemption that permits parties-in-interest to participate in investment transactions with a plan managed by a "qualified professional asset manager" (QPAM). The Department has also proposed additional amendments to facilitate the use of the exemption by financial services companies for their own plans.
The amendments adopted by DOL were proposed in 2003 and are generally effective August 23, 2005. The revisions include the following:
- For a registered investment adviser to qualify as a QPAM, it must have (i) more than $85 million of client assets under management as of the last day of its most recent fiscal year (increased from $50 million) and (ii) either alone or together with an affiliate that unconditionally guarantees the QPAM’s liabilities, more than $1 million of shareholders’ or partners’ equity (increased from $750,000). For transition purposes, this change takes effect as of the last day of the first fiscal year of the investment adviser beginning or on after August 23, 2005.
- The exemption as originally adopted was unavailable if the party-in-interest dealing with the plan had the power to appoint or terminate the QPAM, determined under a one-year lookback rule. The amendment eliminates the lookback rule, and makes the exemption unavailable only if the party-in-interest has such power of appointment with respect to the plan assets involved in the transaction at issue.
- Similarly, the exemption is now available for transactions with a party-in-interest to a plan investing in a commingled investment fund if the plan (together with other plans of the employer and its affiliates) owns less than 10% of the fund, even if that party has authority to acquire or redeem units in the fund on behalf of the plan.
- The rules defining "affiliate" and for determining is a party is related to a QPAM were modified.
The DOL also "clarified" the exemption to require that the QPAM be independent of the plan sponsor. Because a number of financial institutions had concluded in good faith under the exemption as originally adopted that they could act as a QPAM for their own plans, the DOL postponed the effective date of that clarification until it issues a final exemption permitting a such an arrangement. The DOL simultaneously proposed a new amendment that would make the exemption available where an otherwise qualified QPAM manages the assets of a plan sponsored by the QPAM or an affiliate (as defined in the exemption) or an investment fund in which such a plan participates, provided that:
- The QPAM adopt written policies and procedures describing the "objective requirements" of the exemption, such as the requirements to qualify as a QPAM and that the QPAM have discretionary control over the plan assets involved in the transaction. In addition, the policies and procedures must describe (i) if the parties are relying on the provisions of the exemption permitting investment transactions managed by the QPAM, the requirements that the party-in-interest dealing with the plan not have power of appointment over the QPAM, or be the QPAM or related to the QPAM, and the transaction not be described in several other, enumerated class exemptions, and (ii) if the parties are relying on the provisions of the exemption permitting the lease of office or commercial space to the QPAM, the limitations on the amount of such space specified in the exemption and the prohibition on commissions or other fees.
- The plan obtain an annual "exemption audit" similar to the audit required under the in-house asset manager (INHAM) class exemption. An independent auditor, trained or experienced and proficient in ERISA’s fiduciary responsibility provisions, must annually (i) determine whether the plan sponsor qualifies as a QPAM, (ii) review the written policies and procedures of the QPAM for consistency with the objective requirements of the exemption, (iii) test a representative sample of investment transactions for operational compliance, and (iv) issue a report to the plan detailing these findings.
Comments on the proposed amendment are due October 7, 2005.
© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.