Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption), 23090-23144 [2024-06059]
Download as PDF
<![CDATA[
23090
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2550
[Application No. D–12022]
Z–RIN 1210 ZA07
Amendment to Prohibited Transaction
Class Exemption 84–14 for
Transactions Determined by
Independent Qualified Professional
Asset Managers (the QPAM
Exemption)
Employee Benefits Security
Administration, U.S. Department of
Labor.
ACTION: Final amendment to class
exemption.
AGENCY:
This document gives notice of
a granted amendment to prohibited
transaction class exemption 84–14 (the
QPAM Exemption). The QPAM
Exemption provides relief from certain
prohibited transaction restrictions of
Title I of the Employee Retirement
Income Security Act of 1974, as
amended (ERISA) and Title II of ERISA,
as codified in the Internal Revenue Code
of 1986, as amended (the Code).
DATES: The amendment is effective June
17, 2024.
FOR FURTHER INFORMATION CONTACT:
Brian Mica, telephone (202) 693–8540,
Office of Exemption Determinations,
Employee Benefits Security
Administration, U.S. Department of
Labor (this is not a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:
Background
lotter on DSK11XQN23PROD with RULES2
Title I of ERISA broadly prohibits
transactions between plans and any
‘‘party in interest’’—who, in general, are
people or entities closely connected to
ERISA-covered employee benefit plans
as defined in ERISA section 3(3). Title
II of ERISA, codified in the Code,
includes parallel prohibitions
applicable to ‘‘disqualified persons’’ 1
who, in general, are persons or entities
closely connected to plans 2 as defined
in Code section 4975(e)(1).
1 The term ‘‘disqualified person’’ is defined in
Code Section 4975(e)(2) and is similar to definition
of the term ‘‘party in interest’’ codified in ERISA
section 3(14). All references to ‘‘party in interest’’
in this Preamble and the QPAM exemption include
‘‘disqualified person.’’
2 For purposes of the exemption that term ‘‘Plans’’
includes plans and Individual Retirement Accounts
(IRAs) described in Code section 4975(e)(1) and
ERISA-covered employee benefit plans described in
ERISA section 3(3) (referred to as ‘‘Plans,’’ and
‘‘IRAs’’ herein). Although the Department is using
the same definition of ‘‘plan’’ in the final
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Absent an exemption, ERISA section
406(a)(1)(A) through (D) and Code
section 4975(c)(1)(A) through (D)
prohibit, among other things, sales,
leases, loans, and the provision of
services between these parties. Congress
enacted these prohibitions to protect
plans, their participants and
beneficiaries, and IRA owners 3 from the
potential for abuse that arises when
plans and IRAs engage in transactions
with closely connected parties.
The Department grants this
exemption, which was proposed on its
own motion, pursuant to its authority
under ERISA section 408(a) and Code
section 4975(c)(2).4 As required by
ERISA section 408(a) and Code section
4975(c)(2), the Department finds that the
exemption is administratively feasible,
in the interests of Plans and their
participants and beneficiaries and
protective of the rights of participants
and beneficiaries of Plans and IRA
owners.
The QPAM Exemption permits an
investment fund 5 holding assets of
Plans and IRAs that is managed by a
‘‘qualified professional asset manager’’
(QPAM) to engage in transactions with
a ‘‘party in interest’’ or ‘‘disqualified
person’’ to Plans or an IRAs, subject to
protective conditions.6 This amendment
modifies Section I(g) of the exemption,
a provision under which a QPAM may
become ineligible to rely on the QPAM
Exemption for a period of 10 years if the
QPAM, various affiliates, or certain
owners of the QPAM are convicted of
certain crimes. As discussed in detail
amendment that previously existed in the QPAM
Exemption, the Department is finalizing a
ministerial change which will capitalize this term
when referring to plans impacted by the
amendment.
3 For purposes of this Final Amendment, the term
‘‘IRA owner’’ refers to the individual for whom an
IRA (as defined in the Final Amendment) is
established.
4 The exemption also is granted in accordance
with procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637 (October 27, 2011)). Please
note that effective December 31, 1978, section 102
of Reorganization Plan No. 4 of 1978, 5 U.S.C. App.
(2018), transferred the authority of the Secretary of
the Treasury to issue exemptions to the Secretary
of Labor. Therefore, this notice of amendment to the
QPAM Exemption is issued solely by the
Department.
5 For purposes of the QPAM Exemption, an
investment fund includes single customer and
pooled separate accounts maintained by an
insurance company, individual trusts, and
common, collective, or group trusts maintained by
a bank, and any other account or fund subject to
the discretionary authority of the QPAM. See
Section VI(b) of the QPAM Exemption.
6 Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional
Asset Managers, 49 FR 9494 (Mar. 13, 1984) as
corrected at 50 FR 41430 (Oct. 10, 1985), as
amended at 66 FR 54541 (Oct. 29, 2001), 70 FR
49305 (Aug. 23, 2005), and 75 FR 38837 (July 6,
2010).
PO 00000
Frm 00002
Fmt 4701
Sfmt 4700
below, this amendment: (1) requires a
QPAM to provide a one-time notice to
the Department that the QPAM is
relying upon the exemption; (2) updates
the list of crimes enumerated in the
prior version of Section I(g) to explicitly
include foreign crimes that are
substantially equivalent to the listed
crimes; (3) expands the circumstances
that may lead to ineligibility; and (4)
provides a one-year winding down
(transition) period to help Plans and
IRAs avoid or minimize possible
negative impacts of terminating or
switching QPAMs or adjusting asset
management arrangements when a
QPAM becomes ineligible pursuant to
Section I(g), and gives QPAMs a
reasonable period to seek an individual
exemption, if appropriate.7
This amendment also: (1) provides
clarifying updates to Section I(c)
regarding a QPAM’s authority over
investment decisions; (2) adjusts the
asset management and equity thresholds
in the QPAM definition in Section VI(a);
and (3) adds a new recordkeeping
provision in Section VI(u). The
amendment will affect participants and
beneficiaries of Plans, IRA owners, the
sponsoring employers of such Plans or
IRAs (if applicable) and other plan
sponsors, QPAMs, and counterparties
engaging in transactions covered under
the QPAM Exemption.
Background of the QPAM Exemption
In 1984, the Department published
the QPAM Exemption, which permits
an investment fund managed by a
QPAM to engage in a broad range of
transactions with parties in interest with
respect to a Plan, subject to protective
conditions. The Department developed
and granted the QPAM Exemption
based on the premise that it could
provide broad exemptive relief from the
prohibitions of ERISA section
406(a)(1)(A) through (D) and Code
section 4975(c)(1)(A) through (D) for
transactions in which a Plan engages
with a Party in Interest only if the
commitments and investments of Plan
assets and the negotiations leading
thereto are the sole responsibility of an
independent investment manager.
Section I of the QPAM Exemption (the
General Exemption) 8 provides broad
7 As further discussed below, the Department has
substituted the term ‘‘transition period’’ for the term
‘‘winding-down period’’ that it used in the
proposed amendment. The terms have the same
meaning.
8 The Department proposed a ministerial change
to replace ‘‘Part’’ with ‘‘Section’’ in the QPAM
Exemption. For consistency, the Department is
using only the term ‘‘Section’’ throughout this
preamble. The Department also proposed a
ministerial change to capitalize defined terms in the
QPAM Exemption and is using those capitalized
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
prohibited transaction relief for a
QPAM-managed Investment Fund to
engage in transactions with a Party in
Interest, but it does not include relief for
the QPAM to engage in any transactions
involving its own self-dealing or
conflicts of interest or kickbacks, which
are prohibited under ERISA section
406(b)(1) through (3) and 4975(c)(1)(E)
and (F). This important limitation on
the relief in the QPAM Exemption
serves as a key protection for Plans that
are affected by the exemption. The
QPAM Exemption also includes
conditions designed to ensure that the
QPAM does not engage in transactions
with a Party in Interest that has the
power to influence the QPAM’s
decision-making processes.
Additionally, QPAMs remain subject to
the fiduciary duties of prudence and
undivided loyalty set forth in ERISA
section 404 with respect to their client
Plans.
The General Exemption covers many
different types of transactions. For
example, the exemption provides relief
for a QPAM to use fund assets to
purchase an asset from certain Parties in
Interest 9 to a Plan that is invested in the
fund. The General Exemption also
facilitates much more complex
transactions, such as when a QPAM
designs a fund to replicate the return of
certain commodities indices by
investing in futures, structured notes,
total return swaps, and other derivatives
where a Party in Interest to a Plan that
invested in the fund is involved in the
transaction.10 In addition to the General
Exemption, the QPAM Exemption also
contains ‘‘Specific Exemptions’’ in
Sections II, III, and IV, which the
Department is not modifying in this
amendment.
When it proposed the QPAM
Exemption in 1982, the Department
expressly indicated that any entity
acting as a QPAM, and those who are in
a position to influence the QPAM’s
policies, are expected to maintain a high
standard of integrity.11 Accordingly, the
exemption includes Section I(g), which
provides that a QPAM is ineligible to
rely on the exemption for a period of 10
years if the QPAM, various affiliates, or
owners of a five (5) percent or more
interest in the QPAM are convicted of
terms throughout this preamble as they are being
finalized in this amendment.
9 The plural form has the same meaning as the
singular defined term ‘‘Party in Interest.’’
10 See e.g., Notice of Proposed Exemption
involving Credit Suisse AG, 79 FR 52365, 52367
(Sept. 3, 2014).
11 Proposed Class Exemption for Plan Asset
Transactions Determined by Independent Qualified
Professional Asset Managers, 47 FR 56945, 56947
(Dec. 21, 1982).
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
certain crimes. Ineligibility begins as of
the date of the judgment of the trial
court, regardless of whether the
judgment remains under appeal.
The Qualified Professional Asset
Manager
A QPAM is defined as a bank, savings
and loan association, insurance
company, or registered investment
adviser that meets specified asset and
equity thresholds set forth in the
exemption and acknowledges in a
Written Management Agreement that it
is a fiduciary with respect to each of its
client Plans. The Department noted in
the 1982 proposed exemption that these
categories of asset managers are subject
to regulation by federal or state agencies
and expressed the view that large
financial services institutions would be
able to withstand improper influence
from Parties in Interest (i.e., maintain
independence).12 As a general matter,
the Department’s position continues to
be that transactions entered into on
behalf of Plans with a Party in Interest
are most likely to conform to ERISA’s
general fiduciary standards when the
decision to enter into the transaction is
made by an independent fiduciary.
The QPAM’s independence and
discretionary control over asset
management decisions protect Plans
from the danger that a Party in Interest
will exercise improper influence over
decision-making regarding Plan assets.
The QPAM acts as a fundamental
protection against the possibility that
Parties in Interest could otherwise favor
their own competing financial interests
at the expense of Plans, their
participants and beneficiaries, and IRA
owners. Because the Department relies
upon the QPAM as a key protection
against such improper conduct and the
threat posed by conflicts of interest, it
is critically important that the QPAM,
and those who are in a position to
influence its policies, maintain a high
standard of integrity. QPAMs must have
the authority to make decisions on a
discretionary basis without direct
oversight for each transaction by other
Plan fiduciaries. Given the scope of
their discretion, it is imperative that the
QPAM, its Affiliates, and certain owners
avoid engaging in criminal conduct and
other serious misconduct that would
jeopardize Plan assets or call into
question the Department’s reliance on
the QPAM’s oversight as a key safeguard
for Plan participants and beneficiaries
and IRA owners.
12 Id.
PO 00000
at 56947.
Frm 00003
Fmt 4701
Sfmt 4700
23091
Purpose and Approach for the Final
Amendment
Substantial changes have occurred in
the financial services industry since the
Department granted the QPAM
Exemption in 1984. These changes
include industry consolidation and an
increasingly global reach for financial
services institutions, both in their
affiliations and their investment
strategies, including those for Plan
assets. In the years since 1984, the
Department has repeatedly considered
applications for individual exemptions
in connection with convictions for
crimes causing ineligibility under
Section I(g). Through processing these
applications, the Department has gained
extensive experience analyzing QPAMs’
failures to comply with Section I(g) of
the QPAM Exemption as a result of
corporate convictions in domestic and
foreign jurisdictions. This experience
has affirmed the Department’s position
that an ineligibility condition tied to
criminal convictions provides necessary
protection to Plans, their participants
and beneficiaries, and IRA owners.
In practice, Section I(g) has effectively
required QPAMs that become ineligible
to seek an individual exemption to
continue their reliance on the QPAM
Exemption. Since 2013, the Department
has received an increasing number of
individual exemption requests
involving Section I(g) ineligibility due
to criminal convictions occurring within
the corporate family of large financial
institutions. To ensure that these
exemptions are protective of Plans and
participants and beneficiaries and in
their interests as required by ERISA
section 408(a) and Code section
4975(c)(2), the Department has required
applicants to fully and accurately
disclose: (1) the criminal conduct that
led to their ineligibility, including
whether the QPAM was involved; (2)
the specific reasons they should be
permitted to continue acting as a QPAM
notwithstanding the criminal conduct;
(3) the efforts they have undertaken to
promote a culture of compliance in their
corporate family; and (4) the steps they
will take in the future to ensure Plans,
their participants and beneficiaries, and
IRA owners are protected. In these
individual QPAM exemptions, the
Department included additional
protections, such as a comprehensive
independent compliance audit and
allowing client Plans to withdraw from
their asset management arrangements
with the ineligible QPAM without
penalty. These exemptions have also
required the QPAM to indemnify or
hold their client Plans harmless in the
event that the QPAM, or an Affiliate, or
E:\FR\FM\03APR2.SGM
03APR2
23092
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
owner of a five (5) percent or more
interest engages in future misconduct.
Exemption applicants have
consistently represented to the
Department that Plan investors would
be harmed if a QPAM abruptly loses
exemptive relief as of the conviction
date, as dictated by Section I(g).
Although Section I(g) ineligibility does
not bar a QPAM from acting as a
discretionary asset manager for Plan
assets after a conviction, applicants
have informed the Department that the
loss of exemptive relief under the
QPAM Exemption has the potential to
disrupt Plan investments and
investment strategies, especially for
transactions involving Plan
counterparties that also are relying upon
the relief provided in the QPAM
Exemption.13 According to these
applicants, Plans may also experience
transition costs if a Plan fiduciary needs
to find an alternative asset manager on
short notice after a QPAM becomes
ineligible.
To protect Plans against the
immediate disruption and costs caused
by their QPAMs losing eligibility
immediately upon conviction, the
Department has granted several one-year
temporary individual exemptions to
QPAMs facing ineligibility. These
individual exemptions provided the
Department with sufficient time to
engage in a more intensive review of
information submitted by the applicants
to determine whether a longer-term
individual exemption was warranted to
provide extended relief at the end of the
one-year period.14 Moreover, since
2013, both the one-year and longer-term
exemptions have provided Plans with
the important opportunity to exit from
their asset management arrangements
with a QPAM without the imposition of
certain fees, penalties, or charges.
lotter on DSK11XQN23PROD with RULES2
Regulatory Administrative Record for
the Proposed Amendment
The developments discussed above
prompted the Department to propose
the amendment to the QPAM
Exemption on July 27, 2022, with an
initial 60-day comment period that was
set to expire on September 26, 2022 (the
Proposed Amendment).15 After the
Department published the Proposed
Amendment, it received two letters
requesting an extension of the comment
13 See e.g., Notice of Proposed Exemption
involving JP Morgan Chase & Co., 81 FR 83372,
83363 (Nov. 21, 2016).
14 In such cases, the Department requires
prominent notice be provided to client Plans along
with additional protective conditions to ensure Plan
assets are protected while longer-term prohibited
transaction relief is considered.
15 87 FR 45204.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
period.16 The Department responded to
the requests by extending the initial
comment period for an additional 15
days until October 11, 2022, in a
Federal Register Notice published on
September 7, 2022,17 and received 31
comment letters during this initial
extended comment period.
Pursuant to section 605(b) of the
Regulatory Flexibility Act (RFA), the
Acting Assistant Secretary of the
Employee Benefits Security
Administration (EBSA) certified that the
Proposed Amendment would not have a
significant economic impact on a
substantial number of small entities.
After consulting with the Small
Business Administration’s Office of
Advocacy (SBA), however, the
Department decided to publish a
Supplementary Initial Regulatory
Flexibility Analysis (IRFA) that
explained the Proposed Amendment’s
potential impact on small entities.18 The
Department requested comments on the
IRFA by October 11, 2022, the same
deadline as the extended comment
period for the Proposed Amendment.
In the September 7, 2022, Federal
Register notice, the Department
announced that it would hold a virtual
public hearing on its own motion on
November 17, 2022 (and if necessary, on
November 18, 2022), to provide an
opportunity for all interested parties to
testify on material information and
issues regarding the Proposed
Amendment.19 The Department
received 13 requests to testify at the
hearing. The notice also indicated the
Department would: (1) reopen the
public comment period from the hearing
date until approximately 14 days after
the Department publishes the hearing
transcript on EBSA’s website; and (2)
publish a Federal Register notice
announcing that the Department posted
the hearing transcript to EBSA’s website
and providing the closing date for the
reopened comment period.
The Department held the virtual
public hearing on November 17, 2022,
and reopened the comment period on
the hearing date.20 The reopened
comment period closed on January 6,
16 See Public Comment #1 from American
Bankers Association et al. and Public Comment #2
from American Retirement Association. The
extension requests can be accessed here: https://
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/publiccomments/1210-ZA07/.
17 87 FR 54715.
18 87 FR 56912 (Sep. 16, 2022).
19 87 FR 54715.
20 The hearing did not continue on November 18,
2022, because the Department was able to schedule
all witnesses that requested to testify on one day.
PO 00000
Frm 00004
Fmt 4701
Sfmt 4700
2023, and the Department received 150
additional comments.21
On March 23, 2023, the Department
reopened the Proposed Amendment’s
comment period again because it
understood that at least one interested
party may have had additional
information to provide the Department
that was not submitted by the January
6, 2023 comment period deadline.22 The
reopened comment period provided an
opportunity for all interested parties to
submit additional information until
April 6, 2023, and the Department
received seven comments during this
reopened comment period.23
The rulemaking process has provided
the Department with a robust
administrative record. After careful
consideration of the approximately 200
comments received during the public
comment periods and testimony
presented at the public hearing, the
Department is finalizing the Proposed
Amendment (the Final Amendment),
with the revisions discussed below.
Section I(g)—Reporting to the
Department, Written Management
Agreement, and Ineligibility
Reporting to the Department—Note:
This Requirement has been moved from
Subsection I(g)(1) of the Proposed
Amendment to Section I(k) of this Final
Amendment.
The Proposed Amendment would
have required each QPAM that relies
upon the exemption to report its legal
name (and any name the QPAM may be
operating under) by email to the
Department at QPAM@dol.gov.24 The
Department proposed that the QPAM
would need to provide this notification
to the Department only once unless the
legal or operating name(s) of the QPAM
relying upon the exemption was
changed. The Department also indicated
its intent to maintain a current list of
entities relying upon the QPAM
Exemption on its publicly available
website.
21 See https://www.dol.gov/agencies/ebsa/lawsand-regulations/rules-and-regulations/publiccomments/1210-ZA07.
22 88 FR 17466.
23 See https://www.dol.gov/agencies/ebsa/lawsand-regulations/rules-and-regulations/publiccomments/1210-ZA07.
24 For instance, assume a corporate family is
comprised of legal entities named: Corporate Parent
A, Investment Manager B, Broker-Dealer C, Retail
Bank D, and Institutional Bank E (doing business
as InstiBank). Investment Manager B and
Institutional Bank E are the only entities acting as
QPAMs. Investment Manager B would notify the
Department that it is acting as a QPAM and its legal
name is Investment Manager B. Institutional Bank
E would notify the Department that it is acting as
a QPAM and its legal name is Institutional Bank E,
but it is doing business as InstiBank.
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
The Department received a variety of
comments on this proposed reporting
requirement. Some commenters
opposed the requirement in part
because no other prohibited transaction
exemption requires ‘‘registration’’ or a
listing on a publicly available website.
Commenters also indicated that the
publication of a list of QPAMs on the
Department’s website has the potential
to mislead Plan participants and
beneficiaries and IRA owners into
thinking that a manager’s inclusion or
exclusion signifies whether the
Department has endorsed its eligibility
to rely on the exemption.
After considering these comments, the
Department is finalizing the notice
provision with the modifications
discussed below. The notice
requirement provides the Department
with knowledge of the investment
managers that are relying on the
exemption and will serve as an
important reminder to investment
managers relying on the QPAM
Exemption that the ‘‘QPAM’’ title and
status are tied to an administrative
prohibited transaction exemption that
requires compliance with the
exemption’s conditions.
With respect to publishing the list on
its website, the Department has
significant experience publicly posting
information in a manner that is not
misleading. Additionally, the
Department notes that a wide variety of
information regarding investment
advisers, including disciplinary
violations, currently is publicly
available through BrokerCheck.25 The
importance of having this information
publicly available to provide Plan
fiduciaries and participants and
beneficiaries, and IRA owners with the
ability to know whether their
investment managers (or potential
managers) are relying on the QPAM
Exemption outweighs any harm that
could occur if the information were
misleading.
Commenters also noted that it is
important for the Department to ensure
that it has appropriate resources to
maintain the list of QPAMs and keep it
current. The Department appreciates
this concern. Although there will likely
be an initial wave of QPAMs reporting
to the Department, the Department
anticipates that minimal resources will
be necessary to keep an updated list
over the long-term.
Commenters also expressed concern
that a QPAM could easily overlook the
25 BrokerCheck is an online tool provided by
FINRA that provides information regarding brokers
and investment advisers such as employment
history, certifications, licenses, and any violations.
https://brokercheck.finra.org/.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
requirement to update the Department
when it changes its legal or trade name,
which could lead it to commit a series
of inadvertent prohibited transactions
that would only end when the QPAM
reports its updated name to the
Department. Related to this concern,
commenters also requested the
Department clarify that an inadvertent
failure to report would not be
considered Prohibited Misconduct 26 or
otherwise jeopardize a manager’s ability
to rely on the QPAM Exemption.
The Department did not intend for the
reporting requirement to create
compliance issues for QPAMs that
could jeopardize the availability of the
prohibited transaction relief in the
QPAM Exemption. Therefore, to avoid
inadvertent failures during the period
immediately after an entity begins
relying on the QPAM Exemption or
changes its name, the Department has
revised the proposed provision to
provide QPAMs with an initial 90-day
period to report to the Department and
an additional 90-day period to cure
inadvertent failures to report. If the
QPAM fails to report within the initial
90-day period, it must submit an
explanation during the 90-day cure
period for why it failed to provide
timely notice. If, at the end of the 180
days, a QPAM still has failed to report,
or has not provided the required
explanation, the exemption will not be
available for transactions that occur
until the failure is fully cured.
Furthermore, the Department confirms
that an isolated instance of failing to
report generally would not be
considered Prohibited Misconduct that
would result in ineligibility under
Section I(g)(1)(B).
Several commenters also indicated
that the Proposed Amendment did not
appear to provide any mechanism for an
entity to ‘‘de-register’’ after it initially
reports to the Department. In response
to this comment, the Department added
new language to the end of Section I(k)
(Subsection I(g)(1) of the Proposed
Amendment) to allow an entity that
reported to the Department to notify the
Department that it no longer is relying
on the exemption. After the Department
receives this notice, it will remove the
entity from its list of QPAMs that are
relying on the QPAM Exemption.
Another commenter recommended
that if the Department is seeking a list
of entities operating as QPAMs, the
Department could assign a new separate
identifying code to QPAMs that would
26 Prohibited Misconduct was defined in
proposed Section VI(s). See below for additional
discussion of comments regarding the Proposed and
Final Amendment definition.
PO 00000
Frm 00005
Fmt 4701
Sfmt 4700
23093
be used to report the QPAMs’ services
to a Plan on Schedule C of the Form
5500. While the Department appreciates
this comment and suggestion, modifying
the Form 5500 is not part of this
amendment, and the Department’s
objective would not be met using the
current Form 5500 for this purpose.
Finally, a proponent of the
requirement noted that the Department
cannot effectively monitor QPAM
compliance if it cannot even identify
QPAMs or estimate the number and
amount of assets managed by QPAMs.
The Department notes that in addition
to assisting the Department in
monitoring compliance, the reporting
requirement will ensure the Department
has better information regarding the
number of QPAMs that are relying on
the exemption, which will provide
important data the Department can use
to estimate impacts if it considers future
amendments to the exemption.
Therefore, the Department has retained
this requirement in the Final
Amendment because it is important for
firms that are relying on the exemption
to provide identifying information to the
Department and for such firms to
establish a compliance framework that
is sufficient to ensure that they can
always satisfy the exemption’s
conditions.
Written Management Agreement
(WMA)—Proposed Subsection I(g)(2) 27
As previously stated in this preamble,
the fundamental premise of Section I(g)
has always been for a QPAM and those
in a position to control or influence its
policies to act with integrity. The
Proposed Amendment included a new
requirement for all QPAMs to update
their WMAs to include a provision that
in the event the QPAM, its Affiliate, or
five percent or more owners engage in
conduct resulting in a Criminal
Conviction or Participation In
Prohibited Misconduct, the QPAM
would not restrict its client Plans’
ability to terminate or withdraw from
their arrangement with the QPAM.28
The proposed requirement also would
have prevented QPAMs from imposing
certain fees, penalties, or charges on
client Plans in connection with
terminating or withdrawing from a
QPAM-managed Investment Fund.29
27 Subsection I(g) of the Proposed Amendment
has been renumbered and the requirements in
Proposed Section I(g)(2) are now contained in
Section I(i) in this Final Amendment.
28 The terms ‘‘Criminal Conviction’’ and
‘‘Prohibited Misconduct’’ are discussed in more
detail below.
29 This would not apply to reasonable fees,
appropriately disclosed in advance, that are
E:\FR\FM\03APR2.SGM
Continued
03APR2
23094
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
Finally, the Proposed Amendment
would have required QPAMs to include
a provision in their WMAs that they
would 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 failure of such QPAM
to remain eligible for relief under the
QPAM Exemption as a result of conduct
that leads to a Criminal Conviction or
Participation in Prohibited Misconduct.
Many commenters expressed
concerns with these proposed WMA
provisions. They were particularly
opposed to the WMA condition being
imposed on all QPAMs immediately
upon the effective date of the provision,
and not only those QPAMs who become
ineligible under Section I(g).30 Other
commenters indicated that these WMA
provisions should simply be imposed as
conditions that are not required to be
included in contracts or as contractual
guarantees.
Many commenters indicated that the
process to update WMAs is difficult and
complicated and would take much
longer to comply with than the
Department’s proposed 60-day effective
date. Some commenters indicated that
at least 18 months would be required to
come into compliance, and that the
amendment process would be very
costly. These commenters noted that
even if a manager made only the
required amendments to its WMA, such
amendments typically would require
investor consent, including consent by
non-Plan investors who might be
adversely affected by the changes.
Additionally, if QPAMs were required
to include a new indemnification clause
in their WMA, commenters indicated
that QPAMs would likely also need to
update and revise their agreements with
many other parties to address the same
contingencies that necessitate the new
indemnifications and other required
changes for their client Plans. Finally,
specifically designed to prevent generally
recognized abusive investment practices or
specifically designed 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 would be
excepted. If such fees, penalties, or charges occur,
they must be applied consistently and in a like
manner to all such investors.
30 Many commenters used terms such as
‘‘disqualified’’ or ‘‘disqualification’’ in their
comment letters to describe ineligibility under
Section I(g). The Department has used the terms
‘‘ineligibility’’ and ‘‘ineligible’’ throughout this
preamble for consistency with the heading for
Section I(g) in this Final Amendment and to avoid
confusion that the term ‘‘disqualified’’ indicates
that the definition of ‘‘qualified professional asset
manager’’ is not satisfied.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
some commenters suggested that if the
Department requires QPAMs to include
these provisions in their WMAs, the
requirement should apply only to
contracts that are executed or materially
modified after the effective date of the
Final Amendment.
After carefully considering these
comments, the Department has decided
to remove the requirement for all
QPAMs to revise their WMAs. Instead,
the Department has moved the
condition into the Transition Period
provision of this Final Amendment.
This modification means that after the
effective date of the Final Amendment,
only QPAMs that become ineligible to
rely on the exemption will have to
comply with the indemnification and
penalty-free withdrawal provisions. As
a result, the Final Amendment’s
Transition Period provision will operate
in a similar manner to recent Section
I(g) individual exemptions granted by
the Department, which have imposed
indemnification and penalty-free
withdrawal requirements on QPAMs
only after they become ineligible under
Section I(g).
The Final Amendment indicates that
any QPAM that experiences a Section
I(g) triggering event must provide client
Plans with a One-Year Transition Period
and comply with the associated
conditions that are discussed below. In
this Final Amendment, the Department
made some minor non-substantive
adjustments to the language in the
Proposed Amendment regarding the
prohibited transaction relief available
and obligations of the QPAM during the
Transition Period. The Final
Amendment indicates that relief under
the exemption during the Transition
Period is available for a maximum
period of one year after the Ineligibility
Date if the QPAM complies with each
condition of the exemption throughout
the one-year period. No relief will be
available for any transactions (including
past transactions) effected during the
One-Year Transition Period unless the
QPAM complies with each condition of
the exemption during such one-year
period.
A few commenters opined that the
requirement that the QPAM agree not to
restrict a Plan’s ability to withdraw from
an Investment Fund that invests in
illiquid assets such as a private equity
or real estate fund, may present
additional challenges and harm Plans’
investment returns. The Department
understands the additional challenges
associated with funds that are less
liquid. However, as noted in the
Proposed Amendment, a QPAM that
PO 00000
Frm 00006
Fmt 4701
Sfmt 4700
faces ineligibility may seek
supplemental individual exemption
relief from the Department. As also
noted in the Proposed Amendment, an
applicant may request a more limited
scope of relief for a supplemental
individual exemption that captures only
those transactions that present liquidity
problems. The individual exemption
process is best suited for addressing
those concerns and the Department
stresses the importance of submitting an
individual exemption application as
soon as possible after a QPAM learns
that a Section I(g) triggering event is
expected to occur. Applying promptly is
not only consistent with the QPAM’s
fiduciary obligations, but also helps
ensure that the Department has
sufficient time to review the exemption
application before the end of the OneYear Transition Period.
Some commenters maintained that
QPAMs should not have to indemnify
and restore losses beyond what is
already required under ERISA because
ERISA already provides sufficient
protections for Plans to recover losses.
The Department disagrees. Until now,
the exemption lacked additional
safeguards to ensure Plans and IRA
owners are not exposed to substantial
collateral costs that result from criminal
or other misconduct that is beyond their
control. When QPAMs breached their
obligations and faced the loss of QPAM
status, they commonly argued that the
Department should grant relief,
notwithstanding their misconduct, lest
the Plans and IRA owners sustained the
collateral costs and injury associated
with the loss of QPAM status. The
express obligation to indemnify and
restore losses caused by the QPAM’s
own misconduct mitigates this danger
and prevents Plans from being locked
into disadvantageous relationships with
firms that have proved unable or
unwilling to meet the exemption’s
conditions.
Commenters also indicated that client
Plans and QPAMs should be allowed to
negotiate indemnification because
liability and indemnification provisions
are often already in place, which are
intended to protect Plans if a nonexempt prohibited transaction or breach
of fiduciary duty occurs. The
Department is concerned that all client
Plans do not have the same bargaining
leverage to negotiate the type of
indemnification provisions included in
the Final Amendment. Moreover, such
commenters did not provide any
specific examples of the types of
indemnification provisions that may
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
already be included in their agreements
with Plan customers. Nevertheless, the
Department’s modification in the Final
Amendment to limit the WMA
requirements to the Transition Period
should mitigate this concern because
the requirement will only be imposed
upon entities experiencing an event that
triggers Section I(g).
Some commenters focused on the
term ‘‘actual losses’’ and argued that
this standard should not include the
costs for Plans to transition to an
alternative asset manager because such
costs are not normally paid for by a
terminated manager. The Department
believes that this argument is
misplaced. Whether a cost is normally
paid for by a terminated manager is not
determinative of whether the
Department should include a provision
in the Final Amendment to protect
Plans as mandated by ERISA section
408(a) and Code section 4975(c)(2).
When an asset manager becomes
ineligible to rely upon the relief
provided in the QPAM Exemption due
to a violation of Section I(g), which is
outside the control of the client Plan, it
is appropriate for the wrongdoer to bear
the associated costs.
Commenters also noted the ambiguity
regarding the full range of costs that are
required to be indemnified. Relatedly,
commenters indicated that asset
managers will be unable to insure
against such losses. They argued that it
is very difficult, if not impossible, to
quantify ‘‘investment losses resulting
from foregone investment
opportunities’’ for a variety of reasons,
including the type of investment
manager, the ebbs and flows of
investment needs and opportunities,
and the costs or needs of a replacement
manager.
The Department acknowledges that
there is uncertainty regarding the full
range of such costs, but notes that it has
consistently imposed these
indemnification and loss restoration
obligations in recent individual
exemptions following violations of
Section I(g), and that the affected firms
have nevertheless chosen to continue
acting as QPAMs after receiving relief
from the Department. Commenters have
provided no evidence that the condition
has resulted in the imposition of
unwarranted costs upon Plans or
QPAMs, or that there had been any
significant adverse impacts stemming
from imposition of the condition in the
context of individual exemptions. Nor
have they provided any compelling
evidence suggesting that the costs
caused by further breaches after felony
convictions, or the associated
uncertainties, are better borne by the
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
affected Plans than by the QPAMs. In
the Department’s view, it is wholly
appropriate that the QPAM, rather than
the Plan, sustain the costs stemming
from the QPAM’s failure to meet the
exemption’s conditions or violations of
the law. Moreover, by limiting the WMA
requirements to the Transition Period
provisions in the Final Amendment, the
Department sharply reduces the scope
of the QPAM’s potential liability and
the need to determine possible costs up
front. As noted above, this Final
Amendment simply adopts the same
overall approach to Section I(g)
ineligibility that has been a core
component of the Department’s recently
granted Section I(g) individual
exemptions.31
One commenter also noted that the
WMA requirement in subsection
I(g)(2)(C) of the Proposed Amendment
referenced Code section 4975 excise
taxes. The commenter indicated that
since the indemnification runs to the
Plan and a Plan is not liable for excise
taxes, this provision does not make
sense. After considering this comment,
the Department has retained the
reference to the excise taxes. This
provision is intended to ensure that a
QPAM does not impose costs or fees on
a Plan in connection with excise taxes
incurred by the QPAM.
Finally, a commenter argued that the
provision should not cover nonprosecution agreements (NPAs),
deferred prosecution agreements
(DPAs), or any other ineligibility trigger
captured within the definition of
Prohibited Misconduct. As discussed
below, the Department has modified the
scope of NPAs and DPAs captured
within the definition of Prohibited
Misconduct. The Department believes
that conduct severe enough to warrant
an NPA or DPA should trigger the same
conditions as Criminal Convictions.
Therefore, while the Final Amendment
reflects the modified scope of the NPAs
and DPAs that are affected, the
Department declines to remove this
protection as it applies to NPAs and
DPAs covered under the Final
Amendment.
31 See e.g., Exemption From Certain Prohibited
Transaction Restrictions Involving Pacific
Investment Management Company LLC, 88 FR
42953 (July, 5, 2023); Exemption for Certain
Prohibited Transaction Restrictions Involving
Citigroup, Inc., 88 FR 4023 (Jan. 23, 2023);
Exemption for Certain Prohibited Transaction
Restrictions Involving DWS Investment
Management Americas, Inc. (DIMA or the
Applicant) and Certain Current and Future Asset
Management Affiliates of Deutsche Bank AG, 86 FR
20410 (April 18, 2021).
PO 00000
Frm 00007
Fmt 4701
Sfmt 4700
23095
Types of Misconduct and Entities That
Cause Ineligibility—Proposed
Subsection I(g)(3) 32 and Sections VI(r)
and VI(s)
Criminal Convictions
Since 1984 when the QPAM
Exemption was initially granted,
Section I(g) ineligibility has captured
convictions of QPAMs, their Affiliates,
and five percent or more owners of the
QPAM. As noted above, because the
Department relies upon the QPAM as a
key protection in the exemption, it is
critically important that the QPAM, and
those who are positioned to influence
its policies, maintain a high standard of
integrity. QPAMs, affiliates, and related
parties that engage in serious criminal
misconduct do not display the requisite
standard of integrity expected of such
entities under the exemption.
While the Department did not
propose any changes to the scope of
entities captured by Section I(g),33 some
comments focused on the breadth of
Section I(g), including the proposed
expansion of Section I(g) to capture the
Participation In Prohibited Misconduct
by a QPAM, its Affiliates, or its owners
of a five (5) percent or more interest.
Some commenters noted that the
financial services industry has
experienced significant consolidation in
the decades since the QPAM Exemption
was granted, with the result that a
QPAM may be a small part of a very
large organization. One commenter also
suggested that the Department’s
proposed expansion of the ineligibility
provision to include Prohibited
Misconduct would impose an
unjustified penalty based on the size
and complexity of firms relying on the
exemption.
Some commenters contended that
existing Section I(g) of the QPAM
Exemption results in unjust application
of automatic ineligibility. Commenters
suggested that Section I(g) should focus
on crimes committed by affiliates that
are positioned to influence the QPAM’s
policies or have power or influence to
compromise the QPAM’s ERISA
compliance, or crimes that involve the
QPAM itself. According to one
commenter, there should be a direct
relationship between the crime and the
services provided by the QPAM. A
32 Subsection I(g)(3) of the Proposed Amendment
has been renumbered as Subsection I(g)(1) of the
Final Amendment.
33 The Department recognizes that the proposed
inclusion of Prohibited Misconduct may seem to
broaden the scope of entities captured, but the
Department characterizes that as broadening the
scope of misconduct. The Proposed Amendment
did not change the five percent ownership
threshold or definition of Affiliate that is applicable
to Section I(g).
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23096
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
variety of commenters expressed
disagreement with what they perceived
to be the Department’s position, i.e., that
remote convictions call a QPAM’s
integrity into question. These
commenters asserted that Section I(g)
imposes ineligibility in circumstances
where the entities or individuals
engaging in criminal conduct are not, in
fact, in a position to influence the
QPAM’s policies. One commenter also
opined that remote convictions resulting
in ineligibility run counter to the
purposes of ERISA section 408(a).
Another commenter suggested that the
Department should reserve ineligibility
only for the most egregious convictions
of the QPAM involving ERISA assets.
Others preferred the Department’s
narrow approach in PTE 2020–02
because it limits ineligibility to the
entity providing investment advice or
other affiliates engaged in the business
of providing investment advice to Plans.
At the same time, some of these
commenters indicated that inclusion of
criminal convictions as an ineligibility
trigger at the QPAM entity level could
be appropriate. Similarly, some
commenters agreed that crimes
committed by a parent entity that can
exercise management and control over
the QPAM’s day-to-day business and
decision-making could be relevant for
an ineligibility provision based on
criminal convictions. A few commenters
suggested that the Department rely on
the ‘‘controlled group of corporations’’
or ‘‘under common control’’ standards
as defined in Code section 414(b) and
(c) if it decides to retain the current
breadth of Section I(g).
The Department disagrees with the
suggestion that disqualification is
appropriate only when the QPAM itself
was directly involved in the crime or
only when the crime specifically
involves plan assets or services to
ERISA-covered plans. Serious crimes of
the sort enumerated in Section I(g) are
directly relevant to a corporate family’s
culture of compliance. When a company
with multiple affiliated entities has
engaged in such conduct or ignored
criminal misconduct when it is
occurring (or possibly even endorsed
the misconduct), the likelihood that the
same or similar conduct will be ignored
when engaged in at the QPAM entity
increases. This is particularly true
where the bad actor is the corporate
parent of the QPAM, but also rings true
when it is an affiliated company that is
controlled by the same corporate parent
as the QPAM.
Affiliated and related companies
commonly hold themselves out as an
integrated entity, have common or
overlapping supervisory and control
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
structures, and share a common
corporate culture. Accordingly, serious
criminal misconduct is a red flag
indicating potential compliance
problems that extend beyond the
specific actors that directly engaged in
the misconduct. Similarly, the
commission of any of the enumerated
criminal offenses is relevant to the
assessment of likely future misconduct
beyond the narrow confines of the
particular customers and service
providers directly affected by the
conduct that resulted in a conviction. If,
for example, a company engaged in
embezzlement or price-fixing with
respect to non-plan customers, there is
little basis for plan customers to be
sanguine about the improbability of
such conduct with respect to plan
customers and plan assets.
Moreover, the practical impact of the
exemption’s disqualification provisions
is not that QPAMs are precluded from
making their case to the Department that
the criminal conviction should not
result in a lengthy bar from reliance on
the exemption. Rather, the consequence
is that the disqualified QPAM would
have to apply for an individual
exemption if it wishes to rely on the
class exemption for a period that
extends beyond the Transition Period.
In the context of such an individual
exemption application, the QPAM
would be in a better position to present
evidence on the scope of its
involvement in the criminal conduct, its
independence from any bad actors,
current corporate culture and
compliance structures, and other
information relevant to assessing
whether it should be permitted to
continue relying on this exemption,
notwithstanding the conviction.
Similarly, the Department would have
the time and ability to consider such
issues on a case-specific and contextsensitive basis that takes into account
the evidence submitted as part of a
formal record. Also, based on the
Department’s experience processing
individual exemption applications,
many of the convictions and criminal
misconduct the Department has dealt
with over the past decade have not
involved conduct that is isolated to
remotely related affiliates within the
QPAM’s corporate ownership
structure.34
Financial Industry Consolidation
The Department recognizes that the
legal landscape for the financial services
34 Even in situations where the convicted entity
appeared remote, the Department has seen
pervasive compliance failures at various other
entities within the corporate family, including at
parent entities.
PO 00000
Frm 00008
Fmt 4701
Sfmt 4700
industry has changed since 1984. When
the QPAM Exemption was originally
granted, there were established legal
and regulatory barriers in the U.S. that
prevented banking, securities, and
insurance companies from
consolidating. However, the passage of
the Graham-Leach-Bliley Act in 1999 35
removed these barriers, which led many
commercial banks, investment banks,
securities firms, and insurance
companies to consolidate. The
Department understands that significant
consolidation has occurred since 1999
and that the scope of entities captured
by Section I(g) has not been revisited
since those and other changes occurred
in the financial services industry. The
Department continues to stand by the
original premise for Section I(g), which
largely is focused on entities who are in
control-based relationships with a
QPAM, can influence the activities of a
QPAM or are likely to share a common
corporate culture.
The Department reminds QPAMs, as
it did in the Proposed Amendment, that
control-based relationships remain
directly relevant for triggering
ineligibility under Section I(g) because
of the Affiliate definition.36 Meaningful
control can exist even when entities that
have small ownership interests in a
QPAM are positioned to influence the
QPAM’s decision to engage or refrain
from engaging in conduct that can form
the basis for a Criminal Conviction or
Participation In Prohibited Misconduct.
The Department continues to believe
that corporate malfeasance at entities
that control, are under common control
with, or are controlled by the QPAM
indicates the possibility of increased
risk of harm to client Plans and IRA
owners . The Department notes that a
controlling relationship exists when one
entity directly or indirectly has or
exercises a significant influence over the
management or policies of another
entity. Control in this context does not
require that the first entity has the
ability to exercise complete domination
or absolute authority over all aspects of
the management or policies of the
second entity.
Foreign Criminal Convictions
The Department has a longstanding
practice of considering individual
exemption applications from QPAMs in
connection with foreign convictions.37
35 Public
Law 106–102; 113 Stat. 1338.
Affiliate definition continues to include
‘‘[a]ny person directly or indirectly through one or
more intermediaries, controlling, controlled by, or
under common control with’’ the QPAM. See
Section VI(d) for a complete definition.
37 See, e.g., Prohibited Transaction Exemption
(PTE) 2020–01, 85 FR 8020 (Feb. 12, 2020); PTE
36 The
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
The Proposed Amendment would have
added a definition of Criminal
Conviction that was intended to remove
any doubt that Section I(g) applies to
foreign convictions that are
substantially equivalent to the listed
U.S. federal or state crimes. In the
Proposed Amendment, the Department
specifically requested comments on this
section, including whether there are
certain types or aspects of criminal
behavior that deserve additional focus.
The Department also indicated that
QPAMs should interpret the scope of
this provision broadly with respect to
foreign convictions and consistent with
the Department’s statutorily mandated
focus on the protection of Plans in
ERISA section 408(a) and Code section
4975(c)(2).
The Department stated that in
situations where a crime raises
particularly unique issues related to the
substantial equivalence of the foreign
Criminal Conviction, the QPAM may
seek the Department’s views regarding
whether the foreign crime, conviction,
or misconduct is substantially
equivalent to a U.S. federal or state
crime. However, the Department
cautioned that any QPAM submitting a
request for review should do so
promptly, and whenever possible,
before a judgment is entered in a foreign
conviction so the QPAM has sufficient
time to complete the notice obligations
under the One-Year Transition Period.
The Department also requested
comment on whether there should be an
additional process for requesting the
Department’s determination regarding
whether a foreign conviction is
substantially equivalent to a domestic
conviction. The Department asked
whether particular factors, such as the
elements of the crime and the nature of
the tribunal or investigating entity,
should be considered in making such a
determination.
Many commenters provided input
regarding the explicit inclusion of
foreign crimes in the Proposed
Amendment. At least one commenter
indicated that it did not agree that the
status of foreign convictions under
Section I(g) (as it has existed since 1984)
has been a settled matter. As amended,
Section I(g) will remove all doubt
regarding the coverage of foreign
criminal convictions, which are now
2019–01, 84 FR 6163 (Feb. 26, 2019); PTE 2016–11,
81 FR 75150 (Oct. 28, 2016); PTE 2016–10, 81 FR
75147 (Oct. 28, 2016); PTE 2012–08, 77 FR 19344
(March 30, 2012); PTE 2004–13, 69 FR 54812 (Sept.
10, 2004); and PTE 96–62 (‘‘EXPRO’’) Final
Authorization Numbers 2003–10E, 2001–02E, and
2000–30E, available at https://www.dol.gov/
agencies/ebsa/laws-and-regulations/rules-andregulations/exemptions/expro-exemptions-underpte-96-62.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
specifically referenced in the
exemption’s text.
Some commenters indicated that the
Proposed Amendment did not provide
the intended certainty regarding foreign
convictions because there could be
difficulty determining whether any
given foreign crime is a felony, or
whether it is substantially equivalent to
a felony under U.S. law.38 Some
commenters also expressed skepticism
that the Department has the competence
and jurisdiction to interpret foreign law
fairly and accurately for these purposes.
A variety of commenters also raised
questions regarding the proposed
‘‘substantially equivalent’’ standard, and
expressed concern that foreign
jurisdictions may not adhere to basic
due process protections. Multiple
commenters suggested that the
Department should establish a formal
process by which a QPAM may request
a determination from the Department
regarding whether a foreign conviction
is substantially equivalent to a domestic
conviction before it results in
ineligibility. One commenter
recommended that this should include
an opportunity for the QPAM to present
its position as to why a foreign
conviction may not be substantially
equivalent to a domestic conviction.
Another commenter suggested the
‘‘substantially equivalent’’ standard for
foreign criminal convictions should
apply only where the factual record of
such conviction, when applied to
United States federal criminal law,
would likely lead to a criminal
conviction in the United States. Other
commenters expressed further concerns
that the Proposed Amendment would
inappropriately equate criminal
convictions levied in countries that
have less robust or reliable legal systems
with those convictions handed down by
U.S. courts. One commenter suggested
that the Proposed Amendment has the
potential to play into the hands of
foreign nations that intend to harm
investment managers having substantial
operations in the United States or its
allies. The Department notes that
although the crimes listed explicitly in
Section I(g) use the term ‘‘felony,’’ the
crimes adopted by reference from ERISA
section 411 are not, nor have they ever
been, limited to felonies.
To add clarity and ensure consistency
between Section (r)(1) and (r)(2), the
Department added the phrase ‘‘or
released from imprisonment, whichever
38 One commenter also noted that several
jurisdictions such as the United Kingdom, Canada,
Ireland, Australia, and New Zealand do not rely on
a legal category of ‘‘felony’’ which could compound
issues for making a substantially equivalent
determination in such cases.
PO 00000
Frm 00009
Fmt 4701
Sfmt 4700
23097
is later’’ to the sentence, ‘‘(r) ‘Criminal
Conviction’ means the person or entity
that: (2) is convicted by a foreign court
of competent jurisdiction or released
from imprisonment, whichever is later,
as a result of a crime, however
denominated by the laws of the relevant
foreign government, that is substantially
equivalent to an offense described in
(r)(1), above. . . .’’
With respect to the ‘‘substantially
equivalent’’ standard for foreign crimes,
the Department did not add a formal
process to the Final Amendment to
make such determinations. The
Department does not expect that
questions of this nature will arise
frequently, but when they do, impacted
entities may contact the Office of
Exemption Determinations for guidance,
as they have done for many years. In
general, the Department has not had
difficulty determining whether the
foreign crimes were substantially
equivalent to domestic crimes and does
not expect to have any difficulty with
these determinations in the future.
Additionally, the One-Year Transition
Period, and the ability to apply for an
individual exemption, provide parties
with the time and the opportunity to
address any issues about the import of
any specific foreign conviction and its
relevance to ongoing relief from full
application of the prohibited transaction
provisions. The Department is not aware
that any convictions have occurred in
foreign nations with the intent to harm
U.S.-based investment managers and
believes there is a low likelihood that
this has occurred. Further, the types of
foreign crimes that the Department has
seen in recent QPAM individual
exemption requests have consistently
related to the subject financial
institution’s management of financial
transactions and/or culture of
compliance. These underlying foreign
crimes have included the following:
• attempting to peg, fix, or stabilize
the price of an equity in anticipation of
a block offering in Japan (PTE 2023–13,
88 FR 26336 (April 28, 2023));
• illicit solicitation and money
laundering for the purposes aiding tax
evasion in France (PTE 2019–01, 84 FR
6163 (February 26, 2019)); and
• spot/futures-linked market price
manipulation in South Korea (PTE
2015–15, 80 FR 53574 (September 4,
2015)).
Nevertheless, to address the concern
expressed in the public comments that
convictions have occurred in foreign
nations with the intent to harm U.S.based investment managers, the
Department has revised the definition
Criminal Conviction in Section VI(r)(2)
of this Final Amendment to exclude
E:\FR\FM\03APR2.SGM
03APR2
23098
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
foreign convictions and imprisonments
that occur within foreign jurisdictions
that are included on the Department of
Commerce’s list of ‘‘foreign
adversaries.’’ 39
A few commenters also indicated that
the proposed changes to Section I(g) are
unnecessarily broad in application and
will impose unnecessary costs and
burdens on Plans. The Department’s
experience, however, is that the overall
number of QPAMs and client Plans that
have been impacted by Section I(g)
violations has been small compared to
the total number of QPAMs and client
Plans,40 and the Department believes
that this will continue to be the case.
Thus, there should not be a significant
change to the costs or burdens imposed
on Plans as a result of explicitly
including foreign convictions in Section
I(g). In any event, when misconduct
rises to the level that it results in
ineligibility under Section I(g), the
resultant costs and burdens are
appropriate to ensure that a QPAM’s
client Plans are adequately protected
when a QPAM becomes ineligible.
Some commenters recognized that
when the foreign affiliate itself is
providing investment management
services to a Plan, the integrity of the
foreign affiliate may be relevant.
Commenters indicated that if the
Department includes foreign
convictions, ineligibility should be
limited at least to entities that fall into
the tax code definition of ‘‘Controlled
Group’’ with respect to a QPAM. The
Department appreciates the recognition
by these commenters that at least some
misconduct in foreign jurisdictions is
39 15 CFR 7.4. The list of foreign adversaries
currently includes the following foreign
governments and non-government persons: The
People’s Republic of China, including the Hong
Kong Special Administrative Region (China); the
Republic of Cuba (Cuba); the Islamic Republic of
Iran (Iran); the Democratic People’s Republic of
Korea (North Korea); the Russian Federation
(Russia); and Venezuelan politician Nicola´s Maduro
(Maduro Regime). The Secretary of Commerce’s
determination is based on multiple sources,
including the National Security Strategy of the
United States, the Office of the Director of National
Intelligence’s 2016–2019 Worldwide Threat
Assessments of the U.S. Intelligence Community,
and the 2018 National Cyber Strategy of the United
States of America, as well as other reports and
assessments from the U.S. Intelligence Community,
the U.S. Departments of Justice, State and
Homeland Security, and other relevant sources. The
Secretary of Commerce periodically reviews this list
in consultation with appropriate agency heads and
may add to, subtract from, supplement, or
otherwise amend the list. Section VI(r)(2) of the
Final Amendment will automatically adjust to
reflect amendments the Secretary of Commerce
makes to the list.
40 This belief is based on the number of QPAMs
suggested by commenters and represented in an
updated estimate in this Final Amendment versus
the number of QPAMs and client Plans identified
in individual exemption applications.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
relevant to the QPAM’s integrity.
However, the Department disagrees that
the correct standard for determining
when misconduct could be relevant
should be limited to the ‘‘Controlled
Group’’ definition. The Department
believes that the approach taken in the
exemption with regards to the scope of
entities captured by Section I(g) in the
ownership test and definition of
Affiliate provides significant protections
for Plans and participants and the
commenter has not provided a reasoned
basis why altering this scope would
provide additional protections.
Therefore, the Department has not
altered the scope of entities captured by
Section I(g) with respect to Criminal
Convictions.
Proponents of the Proposed
Amendment’s addition of foreign crimes
to Section I(g) indicated that large
financial institutions that engage in
financial crimes usually do so across
multiple jurisdictions, arbitraging
regulatory loopholes and pressuring
weaker jurisdictions to curtail
regulation. They urged the Department
not to ignore foreign activity due to the
modern realities of multinational
financial institutions.
The Department agrees that criminal
convictions for the types of crimes
identified in the QPAM Exemption are
relevant to a QPAM’s willingness and
ability to manage Plan assets with
integrity, care, and undivided loyalty,
regardless of whether the crime occurs
in a domestic or foreign jurisdiction.
Foreign crimes of the sort described in
the Final Amendment call into question
a firm’s culture of compliance just as
much as domestic crimes. Fraud,
embezzlement, tax evasion, and the
other listed crimes are signs of potential
serious compliance and integrity
failures, whether prosecuted
domestically or in foreign jurisdictions.
In the modern era of increased
globalization and multinational
companies, corporate parents and
affiliates may reside in jurisdictions
other than the United States. Their
criminal misconduct in other
jurisdictions is no less concerning to the
Department than when such misconduct
occurs in the United States. In fact, if
foreign convictions were not included
in Section I(g), the exemption would
potentially impose more lenient
conditions on foreign-based
conglomerates than it does on U.S.based entities, which is not the
Department’s intention, because it is not
sufficiently protective of Plans.
A few commenters suggested
alternatives to the Department’s
approach to foreign convictions in the
Proposed Amendment. One commenter
PO 00000
Frm 00010
Fmt 4701
Sfmt 4700
suggested that the Department should
adopt an approach modeled after the
Security and Exchange Commission’s
(SEC’s) consideration of foreign crimes
when determining whether to disqualify
persons from serving in various
capacities at an Investment Company
under the Investment Company Act of
1940. It is the Department’s
understanding that, under the
Investment Company Act of 1940,
disqualification is automatic for
specified domestic crimes, but that the
SEC provides notice and a hearing
before disqualification for foreign
crimes.41
After consideration of the comment
and the differences in statutory text and
purposes at issue under ERISA, the
Code, and the Investment Company Act
of 1940, the Department has decided not
to adopt the commenter’s suggestion.
The QPAM Exemption permits entities
to enter into transactions that ERISA
and the Code otherwise prohibit
because of the danger they pose to
Plans, their plan participants and
beneficiaries, and IRA Owners. Before
the Department grants an exemption
from the law’s strict prohibitions, it has
an obligation to find that the exemption
is in the interest of participants and
protective of their rights. Under the
QPAM Exemption, these findings
crucially turn on the financial
institution’s culture of compliance.
Misconduct that results in a criminal
conviction of an entity under Section
I(g) of the QPAM Exemption, whether
domestic or foreign, calls into serious
question whether the QPAM has the
integrity and culture of compliance on
which the exemption is premised.
Accordingly, after conviction of a
serious crime, a financial institution, its
affiliates, and related parties should not
expect to have the automatic right to
continue to engage in transactions that
are otherwise illegal, but for the
exemption. Nevertheless, the firm may
always apply to the Department for an
individual exemption based on a full
and fair consideration of the firm’s
criminal conduct and the relevant facts,
circumstances, and context, if the firm
believes that it should still receive a
dispensation from application of the
otherwise generally applicable
prohibited transaction provisions, as
companies have done over the years.
Relatedly, a commenter suggested the
QPAM could be required to certify that
its failure to meet the requirements of
the QPAM Exemption arose solely from
the foreign affiliate’s criminal conduct
and that no entities holding Plan assets
41 See Investment Company Act of 1940, 15
U.S.C. 80a–9.
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
actively Participated In the criminal
conduct that is the subject of the
conviction. Based on the certification,
the Department could inquire further
and make its decision based on the facts
of the specific situation. Another
alternative offered by a commenter was
simply to require a QPAM to notify a
Plan of the conviction, and then allow
the Plan sponsor to decide whether to
continue its arrangement with the
QPAM.
The Department’s focus is on the
protection of Plans and their
participants and beneficiaries, as it
decides whether to give QPAMs relief
from the requirements of otherwise
applicable law (i.e., the categorical
prohibitions of ERISA Section 406(a)
and Code section 4975(c)(1)). The
Department declines to take the other
recommended approaches because as
explained in other parts of this
preamble, the Department is not merely
concerned about crimes that have
already impacted Plan assets, but
compliance frameworks that have an
increased potential to place Plan assets
at risk. Criminal Convictions, even in
foreign jurisdictions, for the types of
crimes and by the entities captured by
Section I(g) raise significant concerns.
The Department disagrees with the
suggestion that it would be sufficiently
protective of Plans, their participants,
and beneficiaries simply to require
notice of the QPAM’s criminal
conviction and leave it to the fiduciaries
to decide whether to engage in
otherwise prohibited transactions with
the QPAM. When Congress enacted
ERISA, it chose not to broadly empower
plan fiduciaries to opt out of the
prohibited transaction provisions on a
voluntary basis, but rather charged the
Department with the responsibility to
craft protective conditions that meet the
statutory standards set forth in ERISA
section 408(a).
The crimes enumerated in Section I(g)
are serious violations that call into
question the willingness and ability of
the QPAM to adhere consistently to the
fiduciary norms and standards that are
critical to entrusting them with license
to engage in otherwise illegal
transactions. To the extent a QPAM
believes that it should be permitted to
engage in such transactions after the
expiration of the Transition Period,
notwithstanding its conviction, the
Department has concluded that the
interests of Plan participants and
beneficiaries and IRA Owners are best
protected by the procedural protections,
public record, and notice and comment
process associated with individual
exemption applications. In the context
of an individual exemption application,
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
the Department has unique authority to
efficiently gather evidence, consider the
issues, and craft protective conditions
that meet the statutory standard. If the
Department concludes, consistent with
the statutory standards set forth in
ERISA 408(a) and Code section
4975(c)(2), that an individual exemption
is appropriate, Plan fiduciaries remain
free to make their own independent
determinations whether to engage in
transactions with the QPAM. In the first
instance, however, the Department must
consider the unique facts and
circumstances surrounding the
conviction based on its statutory role
and obligations, and craft appropriate
conditions if it appears that an
exemption is proper. The Department
has a critical role in providing
appropriate regulatory protections, even
in situations where a Plan fiduciary has
some authority, discretion, and
obligations of its own.
Prohibited Misconduct
The Department proposed to add a
new category of misconduct that could
lead to ineligibility under Section I(g),
described as ‘‘participating in
Prohibited Misconduct.’’ 42 Proposed
Section VI(s) defined Prohibited
Misconduct as:
(1) any conduct that forms the basis for a
non-prosecution or deferred prosecution
agreement that, if successfully prosecuted,
would have constituted a crime described in
Section VI(r);
(2) 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 nonprosecution agreement or deferred
prosecution agreement described in
subsection VI(s)(1);
(3) engaging in a systematic pattern or
practice of violating the conditions of this
exemption in connection with otherwise
non-exempt prohibited transactions;
(4) intentionally violating the conditions of
this exemption in connection with otherwise
non-exempt prohibited transactions; or
(5) providing materially misleading
information to the Department in connection
with the conditions of the exemption.
The Department explained in the
preamble of the Proposed Amendment
that the term ‘‘participating in’’ referred
not only to actively participating in the
Prohibited Misconduct but also to
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
42 As proposed, this definition applied to
Participation In Prohibited Misconduct by the
QPAM or its five percent or more owners and
Affiliates.
PO 00000
Frm 00011
Fmt 4701
Sfmt 4700
23099
personnel. The Department proposed
that, where a QPAM’s ineligibility is
linked to Prohibited Misconduct under
any portion of Section VI(s), the
Department would provide affected
entities with a written warning and an
opportunity to be heard.
The Department requested comments
on the extent to which Proposed Section
VI(s) was appropriately tailored to target
non-criminal activity by the QPAM (or
its owners of a five (5) percent or more
interest, or Affiliates) that raised
integrity issues that had the potential to
harm Plans and whether additional or
alternative elements were warranted.
The Department also requested
comments regarding whether to add any
conduct as Prohibited Misconduct, and
if so, to include an explanation for how
such actions would implicate a QPAM’s
integrity. The Department also
requested comments as to whether any
of the proposed Prohibited Misconduct
should be removed and an explanation
of why such conduct does not affect the
QPAM’s integrity.
With respect to these provisions, the
Department explained in the Proposed
Amendment that it intended to rely on
its enforcement authority and program
to detect a QPAM’s Participation In the
types of Prohibited Misconduct
included in proposed subsections
VI(s)(3) through (5).43 In the Proposed
Amendment, the Department built in
due process components so that
ineligibility would occur only in limited
circumstances, and even in those
circumstances, the process to make the
QPAM ineligible would have begun
only after two initial steps: (1) an
investigation by the appropriate field
office, and (2) receipt by the QPAM
thereafter of a written warning that the
Department was contemplating issuing a
Written Ineligibility Notice. The
Proposed Amendment’s Written
Ineligibility Notice process would have
allowed the QPAM the opportunity to
be heard before the Department were to
issue an actual notice, which would
have made the QPAM ineligible to use
the exemption from the date the
Department issued the notice, except
that the mandatory One-Year Transition
Period would have been applicable in
the same manner as with ineligibility
caused by a Criminal Conviction.
General Comments on Proposed
Prohibited Misconduct Provision
One supporter of the Proposed
Amendment indicated that inclusion of
additional categories of misconduct was
appropriate because the commenter
43 Section VI(s) has been renumbered in the Final
Amendment as section VI(s)(1), (2)(A), (B), and (C).
E:\FR\FM\03APR2.SGM
03APR2
23100
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
believed that Section I(g)’s limited focus
on crimes that resulted in a conviction
had contributed to serial misconduct by
corporate wrongdoers. The commenter
expressed concern that some corporate
wrongdoers could take advantage of
loopholes to avoid a conviction when
the conduct was ultimately serious
enough to warrant a conviction.
Many opponents of the amendment
recommended that the ‘‘Prohibited
Misconduct’’ standard and provisions
be deleted entirely. They stated that the
expansion of Section I(g) to include
Prohibited Misconduct erodes certainty
that the QPAM Exemption provides
regarding eligibility.
Specific Comments Regarding Including
Non-Prosecution Agreements (NPAs)
and Deferred Prosecution Agreements
(DPAs) as Prohibited Misconduct
Some commenters recommended that
the Department consult with the
Department of Justice (DOJ) and the SEC
to get a better sense of how the proposed
inclusion of NPAs and DPAs as
Prohibited Misconduct would impact
their enforcement abilities. Some
commenters also noted that financial
institutions may agree to a NPA or DPA
for reasons that are unrelated to ERISA.
These commenters opined that the
Department seemed to be
mischaracterizing the nature and use of
NPAs and DPAs, as well as their
objectives (such as avoiding the
collateral consequences of penalizing
innocent parties). According to some
commenters, prosecutors do not enter
into these agreements lightly or with the
intention of allowing financial
institutions to ‘‘sidestep’’ the
consequences of their actions. Some
commenters also asserted that even
where an institution believes it has not
engaged in wrongdoing and would
prevail on the merits in a court of law,
they may prefer to enter into a NPA or
DPA for a variety of reasons. For
example, one commenter indicated that
even where an institution believes it has
not engaged in wrongdoing and would
prevail on the merits in a court of law,
it may prefer to enter into a NPA or DPA
if it is concerned with its reputation on
unrelated matters (that do not rise to the
level of covered convictions) that could
be introduced during a protracted trial.
Some commenters also offered
alternatives to ineligibility in
connection with NPAs or DPAs. For
instance, one commenter suggested that
the Department could require a QPAM
that enters into one of these agreements
to notify each Plan it manages that: (1)
the QPAM has entered such an
agreement; and (2) the Plan can
terminate its relationship with the
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
QPAM if it chooses to do so, without
penalty.
Some commenters expressed
additional concern that financial
institutions will be less willing to enter
into NPAs or DPAs if doing so would
result in ineligibility under the QPAM
Exemption. These commenters
indicated that they believed this
outcome may not be in the public
interest. For instance, one commenter
suggested that if entering into a DPA or
NPA would effectively end a firm’s
ERISA investment management
business, the firm may not be able to
enter into the agreement, even when
doing so is the best resolution for the
government prosecutor involved.
A proponent of the Department’s
Proposed Amendment to include NPAs
and DPAs as ineligibility triggers noted
that since the exemption was proposed
in 1982, the use of NPAs and DPAs has
skyrocketed, with many companies
avoiding prosecution for serious
misconduct due to factors unrelated to
their culpability. The commenter
opined that to fully protect Plans from
unscrupulous behavior by asset
managers, the Department must, as
proposed, include NPAs and DPAs
within the definition of Prohibited
Misconduct that triggers QPAM
ineligibility when the conduct at issue
involves a listed crime.
Another commenter identified a lack
of clarity as to whether an NPA or DPA
would have to involve the manager’s
parent or whether it could involve the
manager’s most remote affiliate or an
entity with only a five percent
ownership interest in the manager.
Several commenters also expressed
specific concerns over expanding
QPAM ineligibility to agreements with
foreign governments that are
substantially equivalent to domestic
NPAs and DPA. These commenters
expressed concern that the proposal
provided the Department with
unfettered discretion to determine
whether a foreign NPA or DPA entered
into by the QPAM or an Affiliate was
substantially equivalent to a domestic
NPA or DPA, and they questioned
whether the Department has the
necessary proficiency in criminal justice
and international law, or jurisdictional
authority to make such determinations.
Other commenters also suggested that
it would be difficult for the Department
to apply the substantially equivalent
standard in the context of foreign NPAs
and DPAs due to the claimed vagaries
of foreign laws and prosecutorial
practices and the effect of expanding the
reach of Section I(g) in this manner on
law enforcement efforts by other U.S.
agencies and the possible extraterritorial
PO 00000
Frm 00012
Fmt 4701
Sfmt 4700
impact on non-U.S. law enforcement
and U.S. relations with foreign
governments.
One commenter stated that
Department should not treat the conduct
of an affiliate which has no or little
nexus or relationship to the QPAM as
disqualifying and pointed out the
practical considerations that are
necessary to identifying foreign
equivalents of these agreements as well
as the significant risk that these
agreements may be imposed in foreign
jurisdictions that do not provide due
process protections. Another commenter
asserted that the connection of foreign
agreements to a QPAM’s compliance
culture is speculative and tenuous and
does not provide any meaningful
protection to participants and
beneficiaries.
One commenter claimed that
including foreign equivalents of NPAs
and DPAs has the potential to play into
the hands of foreign nations that wish
to harm the operations of U.S.-based
investment managers. For example, the
commenter suggested that rogue foreign
nations could bring dubious claims
against a U.S.-based investment
manager and force them to execute a
DPA or NPA with that government in
order to continue operations in that
foreign country.
Another commenter questioned how
the Department would know if
something would be ‘‘successfully’’
prosecuted for purposes of the
requirement in Section VI(s) that the
NPA or DPA be based on allegations
that, if successfully prosecuted, would
have constituted a crime described in
Section VI(r) of the exemption.
The Department’s Response to
Comments and Treatment of DPAs and
NPAs Under the Final Amendment
In response to these comments, the
Department consulted with the DOJ and
the SEC to affirm its understanding of
NPAs and DPAs, particularly the level
of culpability on the part of the QPAM
that would accompany such an
agreement. Based on these
consultations, the Department
understands that, as a matter of course,
these domestic NPAs and DPAs are
accompanied by Statements of Fact that
establish the basis for criminal liability.
In most cases, the offending party
avoids prosecution for the crime on the
basis of the party’s agreement to enter
into, and comply with, the terms of the
agreement.
After considering comments on the
Proposed Amendment’s inclusion of
NPAs and DPAs as Prohibited
Misconduct in the Proposed
Amendment, the Department has
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
determined to include this provision in
the Final Amendment with a
modification discussed below.
In cases where the QPAM, any
Affiliate thereof (as defined in Section
VI(d)), or any owner, direct or indirect,
of a five (5) percent or more interest in
the QPAM has executed an NPA or
DPA, the Department has precisely the
same concerns about the QPAM’s
compliance culture, and its ability and
willingness to adhere to its fiduciary
obligations and the exemption
conditions, as it does when any of these
parties have been formally convicted of
the crime. The cause for concern about
the QPAM is not the conviction per se,
but rather the serious misconduct that
underlies the conviction. In these cases,
responsible federal or state officials
have resolved serious claims of
misconduct against parties through the
execution of a formal agreement
voluntarily entered into with the
parties. In these circumstances, if the
alleged misconduct is sufficient to form
the basis for an NPA or DPA that is
entered into by the QPAM, any Affiliate
thereof (as defined in Section VI(d)), or
any owner, direct or indirect, of a five
(5) percent or more interest in the
QPAM, it is appropriate to treat the
agreement as cause for ineligibility
under Section I(g), subject to the parties’
ability to apply for an individual
exemption before, during, or after the
One-Year Transition Period provided for
in this exemption.
Moreover, any due process concerns
with including NPAs and DPAs as
Prohibited Misconduct are addressed by
the change to the Prohibited Misconduct
provision in the Final Amendment
providing that ineligibility does not
occur until after a QPAM, any Affiliate
thereof (as defined in Section VI(d)), or
any owner, direct or indirect, of a five
(5) percent or more interest in the
QPAM has executed an NPA or DPA.
Those agreements result from criminal
investigations and are voluntarily
entered into by the parties. QPAMs and
other affected entities that enter into an
NPA or DPA generally will be afforded
the numerous due process protections
that are associated with criminal
investigations and negotiating these
agreements.
Under the revised provision in the
Final Amendment, QPAMs, their
Affiliates, or five (5) percent or more
owners that enter into an NPA or DPA
should have sufficient time to prepare
for the implications of becoming
ineligible under this Final Amendment
as a result of the process surrounding
the negotiation and execution of the
agreement. In either case, the QPAM
must commence the One-Year
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Transition Period and submit an
individual exemption application for
extended relief a soon as possible if it
wants to continue using the QPAM
exemption after the One-Year Transition
Period expires.
After considering comments on the
Proposed Amendment’s inclusion of
foreign-equivalent NPAs and DPAs in
the Proposed Prohibited Misconduct
definition, the Department has decided
to remove foreign equivalent agreements
from the definition of Prohibited
Misconduct in Section VI(s) of the Final
Amendment. While the Department is
confident in its ability to apply the
foreign equivalence standard to NPAs
and DPAs entered into by the QPAM or
its Affiliates, and although the
Department has concerns about conduct
that might give rise to a foreign
equivalent NPA or DPA, it has
concluded that it has insufficient
information on those agreements to treat
them as a cause for ineligibility under
Section I(g). In this context, the
Department notes that it has not
received individual exemption requests
from QPAMs or their Affiliates in which
a foreign equivalent agreement was
implicated.
The Department also is not aware of
any instances where foreign
governments have used agreements that
are substantially equivalent to domestic
NPAs and DPAs to harm U.S.-based
investment managers and, as with
foreign criminal convictions, we believe
there is a low likelihood that this
activity has occurred. However, in light
of the comments, the Department has
concluded that it does not have
sufficient certainty about the use of
these agreements outside the U.S., and
about the procedural protections
associated with the agreements in
foreign jurisdictions, to justify finalizing
this particular part of the proposed
Prohibited Misconduct provision at this
time. Therefore, the Department’s
position is that the uncertainties
surrounding foreign agreements raised
by some commenters outweigh the
protective benefits that would accrue to
Plans and their participants and
beneficiaries by including foreign
agreements in the Prohibited
Misconduct provision.
Although the Department is removing
the foreign equivalent of NPAs or DPAs
as an ineligibility trigger, the Final
Amendment to Section I(g)(2) requires
the QPAM to notify the Department
when the QPAM, any Affiliate thereof
(as defined in Section VI(d)), or any
owner, direct or indirect, of a five (5)
percent or more interest in the QPAM
executes a domestic or foreign
equivalent NPA or DPA. This notice
PO 00000
Frm 00013
Fmt 4701
Sfmt 4700
23101
will give the Department the ability to
take appropriate additional action in
specific cases and will provide the
Department with broader information
about these practices as the QPAM
exemption continues to be relied upon
by parties in the future. The Department
notes that QPAMs should err on the side
of caution when determining whether
an agreement with a foreign government
entity is the substantial equivalent of a
domestic NPA or DPA that must be
reported to the Department pursuant to
amended Section I(g)(2).
After reviewing and considering the
comments offering alternatives to
ineligibility in connection with NPAs or
DPAs, in particular only requiring
QPAMs to provide a notice to Plans, the
Department’s position is that mere
notice to the Plans is not sufficiently
protective to address circumstances
where a NPA or DPA with a U.S. federal
or state prosecutor’s office or regulatory
agency reflects serious misconduct by
the QPAM. Further, solely relying on a
QPAM’s notification to Plans that the
QPAM committed serious misconduct
would not be an appropriate
justification for the Department to
ignore such serious misconduct and to
forego taking appropriate action.
In response to the comment asserting
that a lack of clarity exists regarding
whether an NPA or DPA would have to
involve the QPAM’s parent or whether
it could involve the QPAM’s most
remote affiliate or an entity with only a
five (5) percent ownership interest in
the manager, the Department has
clarified in the Final Amendment that
the Prohibited Misconduct provision in
Section VI(s)(1) includes NPAs and
DPAs entered into by the QPAM, or any
Affiliates, or owners of five (5) percent
or more of the QPAM, with a U.S.
federal or state prosecutor’s office or
regulatory agency.
In response to comments that
questioned how the Department would
know if something would be
‘‘successfully’’ prosecuted, the
Department notes that the focus of the
provision is not on whether a criminal
prosecution would have been successful
if the case had not been settled, but
rather whether the allegations by state
or federal officials that resulted in the
NPA or DPA described one of the
disqualifying crimes set forth in VI(r).
The provision does not require the
Department to know if something would
be successfully prosecuted. Instead, it
requires the Department to determine
whether the conduct associated with the
NPA or DPA would ‘‘if successfully
prosecuted’’ constitute Prohibited
Misconduct as defined in paragraph
VI(s)(1). In such cases, the parties have
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23102
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
voluntarily entered into a settlement
based on allegations of disqualifying
misconduct. There is sufficient cause for
concern in all such cases about the
entities’ culture of compliance to trigger
ineligibility, start the One-Year
Transition Period, and require the
parties to seek an individual exemption
if they would like to continue to receive
an exemption permitting them to engage
in conduct that is otherwise prohibited
by ERISA and the Code. Moreover, as
noted above, NPAs and DPAs are
commonly supported by Statements of
Fact that establish the basis for criminal
liability by the parties entering into the
agreements.
While the Department is removing
foreign equivalents of NPAs and DPAs
as Section I(g) ineligibility events in the
Final Amendment, as discussed above it
is adding a notice requirement that
applies when the QPAM, its owners of
a five (5) percent or more interest, or
Affiliates enter into a foreign equivalent
of an NPA or DPA or Participate In
Prohibited Misconduct as defined in
Section VI(s). Specifically, Section
I(g)(2) requires the QPAM to submit a
notice to QPAM@dol.gov within 30
calendar days after the Ineligibility Date
for the Prohibited Misconduct as
determined under Section (I)(h)(2) or
the execution date of the substantiallyequivalent foreign NPA or DPA, if the
QPAM, any Affiliate thereof (as defined
in Section VI(d)), or any owner, direct
or indirect, of a five (5) percent or more
interest in the QPAM, Participates In
any Prohibited Misconduct as defined
in Section VI(s) or enters into an
agreement with a foreign government
that is substantially equivalent to a NPA
or DPA described in section VI(s)(1).
The QPAM must include a description
of the Prohibited Misconduct in the
notice and provide the name of and
contact information for the person or
entity that is responsible for handling
this matter to the Department.
The Department clarifies that the
Prohibited Misconduct conditions in
Section VI(s)(1), regarding entering into
an NPA or DPA with a U.S. federal or
state prosecutor’s office or regulatory
agency, and the corresponding
notification requirement in Section
I(g)(2), are prospective only, and
therefore only apply to QPAMs, their
Affiliates, and owners of a five (5)
percent or more interest who have
executed NPAs or DPAs on or after June
17, 2024 based on facts that, if
successfully prosecuted, would have
constituted a crime specified in VI(r) of
the Final Amendment.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Specific Comments Regarding
Prohibited Misconduct Under the
Written Warning Letter and Ineligibility
Notice Process
Additionally, some commenters
expressed concern that proposed
definition of the phrase ‘‘participating
in’’ was vague and overbroad.
In the Proposed Amendment, the
Department specifically requested
comments on the sufficiency of the due
process protections provided in
connection with the Prohibited
Misconduct provision. Several
commenters expressed concern that the
due process protections of the written
warning letter and Written Ineligibility
Notice provisions were insufficient. For
example, some commenters stated that:
• the proposed standards were
inadequate to protect the due process
rights of QPAMs, because the process
provided the Department with
potentially unlimited discretion to
decide what types of misconduct would
trigger ineligibility to be made by an
independent, disinterested decisionmaker;
• the Department’s ineligibility
process lacks sufficient due process and
a final determination by a neutral thirdparty judge, and therefore, provides the
Department with unilateral discretion;
• due process requires an adversarial
process that is adjudicated by an
independent third party;
• if the ineligibility process for
Prohibited Misconduct is retained, the
Department should develop a process
that includes: (1) rules for establishing
a factual record, including adequate
time and opportunity for the accused
institution to review, challenge, and
supplement the record; (2) formal rules
for soliciting input from federal, state,
and/or foreign prosecutors involved in
the negotiated agreement at issue, if any;
(3) procedures for selecting an
independent decision-maker
responsible for making factual and legal
determinations; (4) procedural
guardrails to ensure that Department
officials involved in alleging Prohibited
Misconduct are not able to engage in
conduct that would bias the decisionmaker (e.g., prohibiting ex parte
communications); and (5) an automatic
stay of any agency determinations
during the pendency of federal litigation
challenging the determination;
• If the Department does not remove
the written warning letter and Written
Ineligibility Notice process from the
final exemption, the final exemption
must provide an opportunity for review
by an administrative law judge, court, or
similar truly independent decision
maker with the authority to decide
whether a QPAM will be disqualified, as
opposed to providing that authority to
itself.
The Department’s Response to Specific
Comments Regarding the Written
Warning Letter and Written Ineligibility
Notice
After considering the due process
concerns expressed in comments
regarding the Proposed Amendment, the
Department is removing from the Final
Amendment the written warning letter
and Written Ineligibility Notice process
that was associated with Prohibited
Misconduct. The Department now is
requiring the requisite factual
determinations for Prohibited
Misconduct defined in Section V(s)(2) to
have been made in specified judicial
proceedings.
Specifically, under the Final
Amendment, a QPAM will become
ineligible under Section I(g) as a result
of Prohibited Misconduct as defined in
Section VI(s)(2) if the QPAM, any
Affiliates thereof (as defined in Section
VI(d)), or any owner, direct or indirect,
of a five (5) percent or more interest in
the QPAM is found or determined in a
final judgment, or court-approved
settlement by a federal or state criminal
or civil court in a proceeding brought by
the Department, the Department of
Treasury, the Internal Revenue Service,
the Securities and Exchange
Commission, the Department of Justice,
the Federal Reserve Bank, the Office of
the Comptroller of the Currency, the
Federal Depository Insurance
Corporation, the Commodities Futures
Trading Commission, a state regulator,
or state attorney general to have
Participated In one or more of the
following categories of conduct
irrespective of whether the court
specifically considers this exemption or
its terms:
(A) engaging in a systematic pattern or
practice of conduct that violates the
conditions of this exemption in
connection with otherwise non-exempt
prohibited transactions;
(B) intentionally engaging in conduct
violates the conditions of this
exemption in connection with otherwise
non-exempt prohibited transactions; or
(C) providing materially misleading
information to the Department or the
Department of Treasury, the Internal
Revenue Service, the Securities and
Exchange Commission, the Department
of Justice, the Federal Reserve Bank, the
Office of the Comptroller of the
Currency, the Federal Depository
Insurance Corporation, the Commodities
Futures Trading Commission, a state
regulator or a state attorney general in
PO 00000
Frm 00014
Fmt 4701
Sfmt 4700
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
connection with this exemption’s
conditions.
By removing the warning letter and
Written Ineligibility Notice process and
instead providing for ineligibility only
after a Conviction, a court’s final
judgment, or a court-approved
settlement, QPAMs, their Affiliates,
and/or owners of a five (5) percent or
more interest thereby are disqualified
only after the culpable entity was
afforded full due process in a legal
proceeding overseen by a court. Section
V(s)(2) is much narrower than the
proposal inasmuch as it covers the types
of misconduct specified in the proposal
only when the misconduct is
established in court proceedings
brought by state or federal regulators. It
ensures that the finding of misconduct
was subject to the robust procedural
protections provided by such
proceedings.
Furthermore, by removing the
warning letter and Written Ineligibility
Notice process, and redefining
Prohibited Misconduct in Section
VI(s)(2) to be based on legal process that
results in a court’s final judgment or
court-approved settlement, the QPAM
will have been provided with sufficient
notice that the conduct at issue is
Prohibited Misconduct that causes
ineligibility. This will give QPAMs
sufficient time to apply for an
individual exemption during the OneYear Transition Period.
More generally, the Department notes
that the modification in the Final
Amendment removes the Department
from the process of making a factual
determination that Prohibited
Misconduct has occurred. Instead, for
purposes of ineligibility due to
Prohibited Misconduct in Section
VI(s)(2), the court’s final judgment (or
approved settlement) must resolve the
factual issue of whether any of these
parties Participated In the conduct that
constitutes Prohibited Misconduct as
defined in Section VI(s)(2). Under the
provision, the court does not have to
make a specific legal finding regarding
whether such conduct constitutes
Prohibited Misconduct as defined in
Section VI(s)(2) of the exemption, but
rather whether, as a factual matter, the
parties engaged in the specific conduct
defined as Prohibited Misconduct in
Section VI(s)(2). The Department has
made changes to Section VI(s)(2) to
make this distinction clear. The
Department cautions QPAMs, their
Affiliates, and owners of a five (5)
percent or more interest that final
judgments and court-approved
settlements that include a finding that
such conduct has occurred will cause
immediate ineligibility under Section
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
I(g). In these situations, a QPAM that
intends to continue to rely on the
QPAM exemption following the OneYear Transition Period that begins on
the Ineligibility Date should submit an
exemption application to the
Department as soon as possible.
As mentioned above, some
commenters expressed concern that the
proposed definition of the phrase
‘‘participating in’’ was vague and
overbroad. The Department disagrees
with this concern. The parameters of the
definition are similar to other
definitions and conditions the
Department has included in
administrative exemptions it has issued
since ERISA’s enactment almost fifty
years ago. Additionally, the commonly
accepted definition of what it means to
‘‘participate in’’ conduct is well
understood. The Proposed Amendment
specifically provided additional
guidance in the text of Proposed Section
I(g)(3)(B) regarding what the Department
meant by using the term ‘‘participating
in.’’ 44 Therefore, the Department has
not changed the definition of
‘‘Participating In’’ in the Final
Amendment but has included in the
definition the defined terms ‘‘Participate
In,’’ ‘‘Participates In,’’ ‘‘Participated In,’’
and ‘‘Participation In’’ for clarity and
accuracy and has moved the definition
to the Definitions and General Rules in
Section VI(t).45
Costs Associated With Ineligibility
Based on Participating In Prohibited
Misconduct
Several commenters also noted that
regardless of the reason for ineligibility,
Plans would be exposed to substantial
costs if a QPAM becomes ineligible.
These commenters recommended that
the Department exercise extreme
caution before causing more QPAMs to
face ineligibility. Some commenters also
expressed concerns that the imposition
of ineligibility is harmful to the Plans
and their participants and beneficiaries
and prevents appointing fiduciaries
from exercising discretion to determine
the best course of action for the Plan by
placing constraints on the Plan’s choice
of QPAMs.
The Department notes that the
Proposed Amendment and this Final
44 The preamble also specifically stated, ‘‘For
purposes of proposed Section VI(s), the term
‘participating in’ refers not only to actively
participating in the Prohibited Misconduct but also
to 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.’’ 87
FR at 45209.
45 Due to this change, the Recordkeeping
provision is redesignated as Section VI(u).
PO 00000
Frm 00015
Fmt 4701
Sfmt 4700
23103
Amendment appropriately place the
burden associated with the costs of
ineligibility on the QPAM. In response
to the comment, the Department
included the One-Year Transition
Period in the Final Amendment to
reduce the costs and burdens associated
with the possibility of ineligibility, and
to provide affected QPAMs with an
opportunity to apply for individual
exemptions with appropriate
conditions. Therefore, the Department
disagrees that the ineligibility provision
unduly prevents fiduciaries from
exercising their discretion.
In crafting the amendments, the
Department was also mindful that the
conduct that constitutes Prohibited
Misconduct under the terms of the
exemption is quite serious and that
engaging in such conduct calls into
question the QPAM’s culture of
compliance. The grant of an exemption
involves a discretionary determination
by the Department to permit parties to
engage in conduct that is otherwise
categorically prohibited by ERISA and
the Code and it requires specific
findings aimed at ensuring that the
exemption is appropriately protective of
the Plan and participant interests at
stake in the regulation of tax-preferred
retirement plans. While the prohibited
transaction provisions constrain
fiduciary choice, those constraints are
expressly imposed by the statute for the
protection of plan participants and
beneficiaries. An exemption is not
justified merely by pointing to a
constraint expressly imposed by law
and noting that it interferes with
fiduciary discretion; all prohibited
transaction provisions constrain
fiduciary choice. The conditions of the
QPAM Exemption are publicly and
widely available, and the possibility
that a QPAM could become ineligible if
it participates in serious misconduct is
clear. Moreover, if a fiduciary does not
want to provide the additional
protections included in this Final
Amendment, it may pursue other
options to receive prohibited transaction
relief, such as using another relevant
class prohibited transaction exemption
or seeking an individual prohibited
transaction exemption. Additionally,
the sophistication of fiduciaries varies
dramatically based on a variety of
factors. The Department has an
obligation to protect Plans and their
participants and beneficiaries, even if an
individual Plan fiduciary views such
protections as unnecessary.
However, as noted above, the
Department modified the scope of the
Prohibited Misconduct provision in the
Final Amendment; first, by removing
foreign agreements that are equivalent to
E:\FR\FM\03APR2.SGM
03APR2
23104
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
NPAs and DPAs from the definition of
Prohibited Misconduct in Section
VI(s)(1) and second, by basing
ineligibility as a result of Prohibited
Misconduct defined in Section VI(s)(2)
on a factual finding or determination by
a court that the conduct described in
Section VI(s)(2)(A) through (C) occurred,
which should reduce the number of
QPAMs that become ineligible.
Moreover, the indemnification
provision will ensure that Plans are not
bearing the costs of ineligibility for
QPAMs that become ineligible.
lotter on DSK11XQN23PROD with RULES2
Both Categories of Prohibited
Misconduct Only Will Apply
Prospectively
Finally, several commenters requested
clarification that the Prohibited
Misconduct provisions of Section
VI(s)(1) and (2) will result in
ineligibility of a QPAM only on a
prospective basis. In response, the
Department confirms that ineligibility
tied to Prohibited Misconduct related to
executing NPAs and DPAs in Section
VI(s)(1) of the Final Amendment will be
applied only on a prospective basis that
commences on the execution date of
NPAs or DPAs with a U.S. federal or
state prosecutor’s office or regulatory
agency that falls on or after June 17,
2024.
Similarly, under the Final
Amendment, Section VI(s)(2)
determinations of Prohibited
Misconduct will apply prospectively as
of the date of a court’s final judgment or
court-approved settlements that fall on
or after June 17, 2024.
Violations of the Exemption and
Misleading Statements
One commenter requested that the
Department provide examples of
Prohibited Misconduct for violations of
the exemption or misleading statements
so that firms are not caught off guard for
Participating In Prohibited Misconduct.
Another commenter requested
clarification that inadvertent technical
errors, such as failure to timely notify
the Department of a legal name change,
should not be deemed to be providing
materially misleading information to the
Department. As a general matter, the
Department’s position is that such
inadvertent technical errors do not
result in Prohibited Misconduct,
particularly when such errors are
corrected consistent with ERISA and
Code standards, as applicable. Similar
to Convictions, the exemption’s
Prohibited Misconduct provisions are
aimed at protecting Plans and IRA
owners from conduct that calls into
question a QPAMs integrity and
compliance culture and inadvertent
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
technical errors, especially such errors
that are promptly corrected, should not
amount to such conduct.
With respect to mistakes in timely
reporting a legal name change, the
Department modified the reporting
requirement in this Final Amendment to
address such issues, as discussed above
in connection with the reporting
requirement. As discussed in detail
above, the modifications in the Final
Amendment to the definition of
Prohibited Misconduct in Section
V(s)(2) whereby requisite factual
determinations are made through a
judicial proceeding will put a QPAM
and its Affiliates on notice regarding
conduct that is defined as Prohibited
Misconduct in Section V(s)(2)(A)
through (C).
Section I(h)—Timing of Ineligibility
The Proposed Amendment did not
include any direct changes to the tenyear ineligibility period under current
Section I(g).46 The Department added a
new provision, Section I(h), that
specified the timing of ineligibility. In
the Proposed Amendment, for
Prohibited Misconduct, the ineligibility
period would have begun as of the date
of a Written Ineligibility Notice,
whereas, for a Criminal Conviction, it
would have begun on the date the trial
court enters its judgment.47 The
Proposed Amendment clearly stated
that for a foreign conviction,
ineligibility would begin on ‘‘the date of
the judgment of any court in a foreign
jurisdiction that is the equivalent of a
U.S. federal or state trial court. . . .’’
This refers to a trial court of original or
primary jurisdiction, such as a court of
first instance.48 The period of
ineligibility would have begun on the
conviction date, regardless of whether
the judgment is appealed or the appeal
has suspensive effect. Only upon a
subsequent final judgment reversing the
conviction would a person no longer be
considered ‘‘convicted’’ for purposes of
this exemption.
This Final Amendment retains the
ineligibility start date for a Criminal
Conviction as the date the trial court
enters its judgment. However, because
the Final Amendment does not include
the proposed warning and Written
Ineligibility Notice process, the timing
46 The One-Year Transition Period, however, has
an impact on how a QPAM approaches the first year
after experiencing an ineligibility trigger.
47 For convictions that also result in
imprisonment of a person, the end of the ten-year
period is counted from the date of release from
imprisonment.
48 This is generally considered to be the lowest
level court in a particular jurisdiction that has the
power to render a judgment of conviction.
PO 00000
Frm 00016
Fmt 4701
Sfmt 4700
for Prohibited Misconduct in Section
I(h)(2) of the Final Amendment has been
modified. In the Final Amendment, the
ineligibility period for Participating In
Prohibited Misconduct begins on the
date, on or after June 17, 2024 that the
QPAM, any Affiliate thereof (as defined
in Section VI(d)), or any owner, direct
or indirect, of a five (5) percent or more
interest in the QPAM:
(A) executes an NPA or DPA
described in Section VI(s)(1)); or
(B) is found or determined in a final
judgment in certain federal or state
court proceedings (regardless of whether
the judgment is appealed) or a courtapproved settlement to have
Participated In the conduct that meets
the definition of Prohibited Misconduct
in Section VI(s)(2).
In the Proposed Amendment the
Department specifically sought
comments on the timing of ineligibility.
One commenter suggested that the
Winding-Down (Transition) Period
should be restructured into two distinct
periods: the first to allow a QPAM to
apply for an individual exemption, and
the second period to prevent disruption
and assist Plans in the event a transition
is needed to a new QPAM. The
Department believes it has functionally
provided this structure in the Final
Amendment. The One-Year Transition
Period provides time for transition that
was not previously included in the
exemption. As noted earlier in this
preamble, an ineligible QPAM should
initiate an individual exemption request
as soon as it reasonably believes its Plan
clients likely will be harmed without
additional prohibited transaction relief
after the Transition Period ends. The
Department notes that it will continue
to consider individual exemption
requests for ineligible QPAMs to be able
to continue providing services, as well
as requests for additional transitional
relief to allow their client Plans to
search for and hire a new asset manager.
Proposed Section I(i) 49—Warning and
Opportunity to be Heard in Connection
With Prohibited Misconduct—Written
Ineligibility Notice
The Department proposed an
additional process that would be tied to
a determination that a QPAM had
participated in Prohibited Misconduct.
In the proposal, before issuing a Written
Ineligibility Notice in connection with
Prohibited Misconduct to the QPAM,
the Department indicated it would have
issued a written warning, identified the
Prohibited Misconduct, and provided 20
49 Certain sections of the Final Amendment have
been renumbered and Section I(i) in the Final
Amendment has been redesignated as the One-Year
Transition Period Due to Ineligibility.
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
days for the QPAM to respond. The
Proposed Amendment also indicated
that if the QPAM failed to respond to
the written warning within 20 days, the
Department would have issued the
Written Ineligibility Notice. However, if
the QPAM responded within the 20-day
timeframe, the Department would have
provided the QPAM with the
opportunity to be heard either in person
(including by phone or a
videoconference) or in writing, or a
combination of both, before the
Department decided whether it would
have issued the Written Ineligibility
Notice.
As discussed under the Specific
Comments Regarding Prohibited
Misconduct under the Written
Ineligibility Notice Process heading
above, some commenters questioned the
sufficiency of the process leading to a
warning letter and Written Ineligibility
Notice, citing due process concerns and
specifically, the lack of an adversarial
process adjudicated by an independent
third party (such as review by an
administrative law judge or federal
court). Relatedly, another commenter
indicated that these provisions within
the Proposed Amendment would have
provided the Department with too much
discretion to cause a QPAM’s
ineligibility. One commenter
specifically noted the additional due
process protections provided through
the court system for Criminal
Convictions are not present for a QPAM
that Participates In Prohibited
Misconduct. Another commenter noted
that the lack of an appeals process as
part of the proposed Written
Ineligibility Notice process could
provide the Department with unchecked
power.
As more fully discussed above under
the Specific Comments Regarding
Prohibited Misconduct under the
Written Ineligibility Notice Process
heading, in response to the process
concerns expressed by commenters, the
Department has removed the proposed
warning letter and Written Ineligibility
Notice process and modified the
definition of Prohibited Misconduct
under Section VI(s). Removing the
proposed warning letter and Written
Ineligibility Notice process from this
Final Amendment, and instead
providing that a QPAM’s ineligibility
under Section VI(s)(2) only occurs after
a Conviction, a court’s final judgment,
or a court-approved settlement, will
afford QPAMs, their Affiliates, and
owners of a five (5) percent or more
interest with substantial due process in
a legal proceeding that is overseen by a
court, not the Department. Also, this
Final Amendment provides that
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
ineligibility occurs under Section
VI(s)(1) when a QPAM, any Affiliate
thereof (as defined in Section VI(d)), or
any owner, direct or indirect, of a five
(5) percent or more interest in the
QPAM executes an NPA or DPA with a
U.S. federal or state prosecutor’s office
or regulatory agency, which generally
will afford QPAMs and their Affiliate(s)
and owner(s) with the due process
protections that are associated with
related criminal investigations.
Section I(i)—Mandatory One-Year
Transition Period
Certain sections of the Final
Amendment have been renumbered and
Proposed Section I(j) is now Section I(i)
in the Final Amendment. As part of the
Proposed Amendment, the Department
included a mandatory one-year
Winding-Down Period that would have
begun on the Ineligibility Date. The
Winding-Down Period was designed to
provide Plans with the ability to wind
down their relationships with a QPAM
immediately after the QPAM becomes
ineligible to rely on the exemption.
Satisfaction of the conditions of the
Winding-Down Period would affect the
availability of relief for all transactions
covered by this exemption. As
proposed, the Department intended to
include relief for past transactions and
any transaction continued during a oneyear Winding-Down Period.
One commenter indicated that the
term ‘‘winding-down’’ was pejorative
and should be replaced with more
neutral nomenclature such as a term
indicating it is a transition period. The
Department did not intend for the term
to be pejorative. Therefore, the
Department has substituted the word
‘‘Transition’’ for ‘‘Winding-Down’’ to
avoid the possible unintended
implication that the Department
intended the term ‘‘Winding-Down’’ to
mean that the QPAM was necessarily
going out of business as a QPAM on the
Ineligibility Date. The Department
stresses, however, that future relief
based on an individual exemption
application is not guaranteed, and the
new term should not be read to suggest
otherwise.
As noted above, the QPAM is free to
apply for an individual exemption that
would enable it to continue its
eligibility to act as a QPAM and engage
in transactions that would otherwise be
prohibited after the expiration of the
Transition Period, although there is no
guarantee that the Department will grant
such an exemption. Prohibited
transaction relief during the Transition
period would be subject to compliance
with all conditions of the exemption
except Section I(g)(3), which is
PO 00000
Frm 00017
Fmt 4701
Sfmt 4700
23105
renumbered Section I(g)(1) in this Final
Amendment.
The Proposed Amendment provided
that once the Transition Period begins,
relief under the QPAM Exemption
would only be available for transactions
undertaken for the QPAM’s existing
clients—i.e., the QPAM’s client Plans
that had a pre-existing Written
Management Agreement (as required
under Section VI(a)) on the Ineligibility
Date for transactions entered into before
the Ineligibility Date. Thus, after the
Ineligibility Date, the QPAM would be
prohibited from engaging in new
transactions in reliance on the QPAM
Exemption for existing client Plans.
Additionally, if the QPAM obtained
new client Plans during the Transition
Period, the Proposed Amendment
would not provide relief under the
QPAM Exemption for any transactions
the QPAM entered into on their behalf,
unless such relief was granted in a
separate individual exemption.
The Department designed the
proposed Transition Period to mitigate
the cost and disruption to Plans, their
participants and beneficiaries, and IRA
owners that can occur when a QPAM
becomes ineligible for relief. The
proposed One-Year Transition Period
was intended to give a QPAM’s client
Plans time to decide whether to hire an
alternative discretionary asset manager
that is eligible to operate as a QPAM or
continue their relationship with the
ineligible QPAM. The Department
believed that a One-Year Transition
Period would be necessary to ensure
that Plans have sufficient time to engage
in a search for an alternative QPAM or
discretionary asset manager if they
decide it is in the Plan’s best interest to
do so.
The proposed Transition Period
conditions required the QPAM to
provide notice of its ineligibility to its
existing client Plans and the Department
(via QPAM@dol.gov) within 30 days
after the Ineligibility Date. The proposed
notice was required to: (1) include an
objective description of the facts and
circumstances upon which the Criminal
Conviction or Written Ineligibility
Notice 50 is based; (2) be written with
sufficient detail, consistent with the
QPAM’s duties of prudence and
undivided loyalty under ERISA, to fully
inform a Plan fiduciary of the nature
and severity of the criminal conduct or
Prohibited Misconduct; and (3) be
sufficient enough to enable such Plan
fiduciary to satisfy its fiduciary duties of
50 The Written Ineligibility Notice has been
removed from this Final Amendment therefore, the
term ‘‘Written Ineligibility Notice’’ in Section I(i)
has been replaced with the term ‘‘Prohibited
Misconduct’’ in the Final Exemption.
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23106
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
prudence and loyalty under Title I of
ERISA when hiring, monitoring,
evaluating, and retaining the QPAM.
The Proposed Amendment required
that within 30 days after the Ineligibility
Date, the QPAM would have to notify its
client Plans that, as required by the
proposed WMA provisions, the QPAM
will not restrict the client’s ability to
terminate or withdraw from its
arrangement with the QPAM. Thus, the
QPAM would not be permitted to
impose any fees, penalties, or charges
on client Plans in connection with the
process of terminating or withdrawing
from a QPAM-managed Investment
Fund except for reasonable fees,
appropriately disclosed in advance, that
are specifically designed to prevent
generally recognized abusive investment
practices or specifically designed 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. If such fees, penalties, or
charges occur, they must be applied
consistently and in a like manner to all
such investors.
The Proposed Amendment also
required the QPAM to indemnify, hold
harmless, and promptly restore losses to
each client Plan for any damages
resulting from a violation of applicable
laws, a breach of contract, or any claim
arising out the QPAM’s ineligibility. For
purposes of this provision, the Proposed
Amendment indicated that actual losses
specifically include losses and costs
arising from unwinding transactions
with third parties and from transitioning
Plan assets to an alternative
discretionary asset manager.
Additionally, to ensure Plans were
protected from bad actors, the Proposed
Amendment required the QPAM not to
employ or knowingly engage any
individual that Participated In conduct
that is the subject of a Criminal
Conviction or Prohibited Misconduct.
For Criminal Convictions, this would
apply regardless of whether the
individual is separately convicted in
connection with the criminal conduct.
The Proposed Amendment indicated
that the QPAM must adhere to this
requirement no later than the
Ineligibility Date.
Finally, the Proposed Amendment
prohibited the QPAM from relying on
the relief provided in the QPAM
Exemption after the One-Year
Transition Period unless the Department
granted the QPAM an individual
exemption allowing it to continue
relying upon the exemption. The
Proposed Amendment provided that the
Transition Period would not be
suspended while an individual
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
exemption application is pending with
the Department.
The Department requested comments
on the Transition Period, including
whether one year is the appropriate
length of time and whether there are
additional protections for Plan
participants and beneficiaries and IRA
owners that the Department should
consider.
Many commenters argued that the
proposed prohibition on the QPAM
engaging in any new transactions during
the Transition Period, even for existing
clients, should be removed. These
commenters indicated that QPAMs who
become ineligible should be permitted
to make new investments during the
Transition Period on behalf of their
client Plans that conform to investment
guidelines approved by a Plan fiduciary
during the Transition Period. In support
of this position, commenters indicated
that when QPAMs have been engaged to
carry out an investment strategy that
requires them to continually make new
investments, the proposed prohibition
on engaging in new transactions for
existing clients could be particularly
detrimental. For instance, there could be
a series of transactions that require
ongoing adjustments (such as in the case
of swaps and other derivatives), and an
inability to adjust these transactions
could detrimentally impact the QPAM’s
client Plans and counterparties alike.
After considering these comments, the
Department agrees that to avoid the
potential harm that QPAMs’ client Plans
could suffer if their investments are
effectively frozen, it is appropriate to
remove the prohibition on QPAMs
entering into new transactions for
existing client Plans during the
Transition Period. The Department
reminds QPAMs that they must meet
their fiduciary obligations of prudence
and loyalty set forth in ERISA section
404 when making investment decisions
on behalf of their ERISA-covered Plan
clients and IRA clients (to the extent
that ERISA section 404 is applicable)
during the Transition Period.
One commenter suggested that the
Department included the Transition
Period provisions in the Proposed
Amendment because it clearly assumed
that QPAMs’ client Plans would want to
fire their asset manager. The Department
did not intend to convey this view in
the Proposed Amendment. The
Department included this provision in
the Proposed Amendment to provide an
ineligible QPAM’s client Plans with an
off-ramp if they choose to terminate
their relationship with the asset
manager. The Department’s sole reason
for including the Transition Period
provisions is to protect the affected
PO 00000
Frm 00018
Fmt 4701
Sfmt 4700
Plans. Thus, for example, if a Plan
chooses to retain its relationship with a
QPAM that becomes ineligible, it may
do so, but the Department’s intention is
to prevent Plans from being locked into
a contractual arrangement with an
ineligible QPAM.
Multiple commenters indicated that
the process for replacing a larger Plan’s
investment manager typically takes
more than one year and suggested
alternative timeframes for the Transition
Period. For example, commenters
suggested the Department extend the
Transition Period to at least 18 months
or two years, and another commenter
offered the alternative of having the
Transition Period last at least until after
the Department makes a final
determination regarding whether to
grant or deny the QPAM’s individual
exemption application.
After considering these comments, the
Department decided not to change the
timeframe for the Transition Period in
the Final Amendment. The Department
recognizes that in some cases a longer
Transition Period could be necessary
but determined the best way to address
this circumstance is through the
individual exemption process on a caseby-case basis. Performing the necessary
analysis during the individual
exemption process will ensure the
Department has sufficient information
to appropriately consider whether
additional protections are necessary for
impacted Plans based on the QPAM’s
particular facts and circumstances. The
Department does not believe it is
appropriate to extend the Transition
Period until a formal decision on an
individual exemption has been made as
the Department processes individual
exemption applications on a case-bycase basis and the timeframes for each
case vary. Therefore, the duration of the
Transition Period would be uncertain.
One commenter noted that the
Department’s participant disclosure
regulation requires any change to a
defined contributions plan’s designated
investment alternatives to be disclosed
to participants at least 30 days (but not
more than 90 days) in advance. The
commenter indicated that it appeared
that the Department has not considered
the practical limitations of such notices
on the duration of the Transition Period.
The one-year duration of the Transition
Period, however, provides more than
sufficient time to accommodate the
requirements of the participant
disclosure regulation. If additional relief
is needed beyond the one-year period,
the QPAM may request a supplemental
individual exemption to ensure that
such a change is made accordingly.
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
One commenter asserted that the
Proposed Amendment did not clearly
indicate the QPAM’s obligations to nonERISA investors in a pooled fund or
how these investors would be treated.
Another commenter suggested that the
Department should focus on the issue of
pooled funds, where QPAMs will need
to balance the interests of Plans leaving
the fund with those Plans remaining in
the fund. The Proposed Amendment
and this Final Amendment treat nonERISA and Plan investors in a similar
manner to the way the Department has
addressed this issue in individual
exemptions related to Section I(g)
ineligibility. Specifically, the provision
prohibiting a QPAM from imposing fees,
penalties, or charges in the Proposed
Amendment includes an explicit
exception for ‘‘reasonable fees,
appropriately disclosed in advance, that
are specifically designed to: (a) prevent
generally recognized abusive investment
practices or (b) 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 that such fees are applied
consistently and in a like manner to all
such investors.’’ The Department has
retained this exception in this Final
Amendment, which addresses the
commenter’s concern.
Some commenters indicated that
Plans should be given more control over
the decision to continue relying on the
QPAMs. The commenters suggested that
the Department give Plans the ability to
decide whether to terminate or
withdraw from their relationship with a
QPAM and the flexibility to determine
a timeline for withdrawal. One
commenter asserted that Plans choose
asset managers based on their reputation
and expertise in specific areas of asset
management. The commenter added
that the Plan is in the best position to
determine whether it is in the Plan’s
best interests to terminate or withdraw
from their relationship with the QPAM.
As discussed above, however,
ultimately the decision on whether to
grant relief from ERISA and the Code’s
prohibited transaction provisions rests
with the Department. In the
Department’s view, the individual
exemption process provides a full, fair,
and open process for the Department to
determine whether a QPAM should be
permitted to engage in otherwise
prohibited transactions post-conviction,
and if so, the conditions which should
be placed on such relief. To the extent
QPAMs obtain such individual
exemptions, Plans remain free to rely
upon them to engage in transactions that
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
would otherwise be prohibited if the
QPAMs meet the conditions that are
specified in the exemptions.
Finally, one commenter noted that to
fully effectuate the intent of the
Transition Period provisions for stable
value investment contracts, the length of
the period should be based on the
duration of the underlying investment
portfolio or as otherwise provided under
the terms of the contract for an extended
or amortized termination. The
Department declines to give preferential
treatment to QPAMs responsible for
such investment contracts in this
manner. Here too, the individual
exemption process is best suited to
address any specific issues or concerns
based on the nature of the QPAM’s
investments or investment practices.
Finally, the Department made a few
additional ministerial changes to the
Transition Period provisions in the
Final Amendment. First, the
Department capitalized the term
‘‘Transition Period.’’ 51 Second, the
Department modified the first sentence
of the Transition Period provision to
clarify its focus on client Plans, by
replacing the phrase ‘‘engage in’’ with
‘‘provide,’’ and by dividing the first
sentence into two sentences to improve
readability. Third, the Department
replaced the Proposed Amendment’s
reference to subsection I(g)(2) (regarding
the WMA) with a reference to
subsection I(i) because the Department
moved the WMA requirements to this
subsection. Finally, as noted above,
since the Written Ineligibility Notice
provisions have been removed from the
Final Amendment, the term ‘‘Written
Ineligibility Notice’’ as used in this
Section in the Proposed Amendment,
now has been replaced with the term
‘‘Prohibited Misconduct.’’
23107
Section I(j)—Requesting an Individual
Exemption
The Proposed Amendment included a
new Section I(k),52 which provided that
a QPAM that is ineligible or anticipates
becoming ineligible may apply for
supplemental individual exemption
relief. The Proposed Amendment’s
Section I(k) instructed an applicant, as
part of such a request, to review the
Department’s most recently granted
individual exemptions involving
Section I(g) ineligibility with the
expectation that similar conditions will
be required if an exemption is proposed
and granted. Proposed Section I(k) also
indicated that if an applicant wished to
exclude any term or condition from its
exemption, the applicant would need to
accompany such request with a detailed
explanation of the reason such change is
necessary and in the interest of and
protective of the Plan, its participants
and beneficiaries, and IRA owners.
Proposed Section I(k) indicated that the
Department would review such requests
consistent with the requirements of
ERISA section 408(a) and Code section
4975(c)(2).
To facilitate the processing of an
individual exemption application,
proposed Section I(k) also instructed
applicants to provide detailed
information in their applications
quantifying the specific cost or harms in
dollar amounts, if any, that Plans would
suffer if a QPAM could not rely on the
exemption after the Transition Period,
including the specific dollar amounts of
investment losses resulting from
foregone investment opportunities and
any evidence supporting the proposition
that investment opportunities would
only be available to Plans on less
advantageous terms.
Proposed Section I(k) also indicated
that an applicant should not construe
the Department’s acceptance of an
individual exemption application as a
guarantee that the Department will grant
an individual exemption. Therefore, a
QPAM that submits an individual
exemption application must ensure that
it manages Plan assets prudently and
loyally during the Transition Period
with the understanding that final
approval of an individual exemption is
not guaranteed.
The Proposed Amendment reinforced
that for the Department to make the
necessary statutory findings under
ERISA section 408(a) and Code section
4975(c)(2), applicants also should
anticipate that the Department may
condition individual exemptive relief
on a certification by a senior executive
officer of the QPAM (or comparable
person) that: (1) all of the conditions of
the Transition Period were met, and (2)
an independent audit reviewing the
QPAM’s compliance with the
conditions of the Transition Period has
been completed.53 QPAMs affected by a
conviction also should not wait until
late in the Transition Period to apply for
an individual exemption.
The Department received a few
comments on this new provision. One
commenter noted that the conditions
that have been incorporated into the
most recent individual exemption that
51 The Department capitalized the term in other
Sections of the Final Amendment as well.
52 Section I(k) of the Proposed Amendment has
been renumbered in the Final Amendment as
Section I(j).
53 The Department additionally clarifies that the
certification of the independent audit would come
at some point after an individual exemption is
granted and the One-Year Transition Period has
ended.
PO 00000
Frm 00019
Fmt 4701
Sfmt 4700
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23108
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
apply to a particular QPAM may not be
appropriately tailored to a subsequent
application and fact pattern. Another
commenter indicated that the
Department is increasingly adopting
onerous conditions for granting
individual exemptions and seems even
less likely to grant them. Yet another
commenter opined that an ineligible
QPAM may be unlikely to receive an
individual exemption that is usable.
Considering the serious corporate
criminal misconduct the Department
has seen in Section I(g) individual
exemption applications and audits
submitted to the Department as required
by granted individual exemptions, the
Department remains convinced that the
proper starting point for individual
exemption conditions should be the
Department’s most recently-issued
individual exemptions. This procedural
standpoint is neither new nor
undisclosed. For decades, the
Department has generally crafted
proposed exemptions for similarly
situated applicants that contain similar
conditions, subject to the Department’s
periodic reevaluation of the exemption
conditions to ensure that they remain
appropriately protective for the
Department to make the findings
required by ERISA section 408(a) and
Code section 4975(c)(2).
The Department will consider the
individual facts and circumstances of
each application, but Section I(j)
(formerly section I(k) in the Proposed
Amendment) is intended to clearly
provide the appropriate starting point
for applicants that are preparing an
exemption application in connection
with Section I(g) ineligibility. Regarding
the commenter’s reference to the
Department’s onerous conditions, over
the past decade, the Department’s
experience indicates that QPAM
ineligibility under Section I(g) has
occurred in most cases due to serious
corporate criminal misconduct. The
Department believes that it has tailored
the conditions of the most recent
Section I(g) individual exemptions to
appropriately address the potential for
significant financial harm to Plans,
while providing workable relief.
Moreover, if a QPAM is concerned
about the usability of a Section I(g)
individual exemption, then the QPAM,
its Affiliates, and owners of a five (5)
percent or more interest may structure
their conduct to avoid engaging in
transactions that are otherwise legally
prohibited or rely on exemptions other
than the QPAM Exemption to avoid the
consequences that result from Section
I(g) ineligibility.
The Department also notes that
applicants may request more limited
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
relief than the QPAM Exemption
otherwise provides. For example, a
QPAM may only need prohibited
transaction relief for a particular limited
category of transactions, such as an ongoing lease that was entered into on
behalf of an Investment Fund which is
expected to continue past the One-Year
Transition Period. In such
circumstances, due to the limited nature
of the transaction(s) for which relief is
sought, applicants should discuss the
terms and conditions of prior individual
exemptions involving Section I(g) in
connection with a request for more
limited prohibited transaction relief.
The applicant also should include a
detailed explanation in its application
regarding how Plans will be otherwise
protected and why the transaction
cannot be unwound before the end of
the Transition Period without harm or
losses to such Plans.
Finally, the Department reminds any
applicant anticipating that it will need
relief beyond the end of the One-Year
Transition Period to apply to the
Department for an individual exemption
as soon as practicable. As a fiduciary,
the QPAM has obligations with respect
to Plans beyond those required by the
QPAM Exemption and should approach
the Department at the earliest point it
appears a conviction will occur, such as
when a plea agreement has been entered
into—even if the conviction date has not
yet been set—to ensure that appropriate
steps can be taken by or on behalf of its
client Plans ultimately impacted by the
QPAM’s loss of exemptive relief.
Section I(c)—Involvement in
Investment Decisions by a Party in
Interest
The Proposed Amendment included
modifications to Section I(c) of the
QPAM exemption that are consistent
with the Department’s original intent
when granting the exemption. In the
1984 grant notice, the Department stated
that an essential premise of the
exemption is that broad prohibited
transaction relief can be afforded only if
the negotiations leading to, and the
commitments and investments of, plan
assets are the sole responsibility of an
independent investment manager. The
Department reasoned in the 1984 grant
notice that the potential for decision
making with regard to plan assets that
would inure to the benefit of a party in
interest would be increased if exemptive
relief were provide in circumstances
where the QPAM has less than ultimate
discretion over acquisitions for an
investment fund that it manages.54
The proposed new language in
Section I(c) was intended to make clear
that a QPAM must not permit a Party in
Interest to make decisions regarding
Plan investments under the QPAM’s
control. The Proposed Amendment
included in the opening of Section I(c)
a statement providing that the terms of
the transaction, ‘‘commitments,
investment of fund assets, and any
corresponding negotiations on behalf of
the Investment Fund are the sole
responsibility of the QPAM. . . .’’ 55
The Department also proposed to add
language at the end of Section I(c)
stating that the prohibited transaction
relief in the exemption applies ‘‘only in
connection with an Investment Fund
that is established primarily for
investment purposes’’ and that ‘‘[n]o
relief is provided under this exemption
for any transaction that has been
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 the
transaction as required by this section
I(c).’’ 56 For example, as stated in 1982
proposal for the QPAM Exemption, a
plan sponsor that negotiates a
transaction and then presents it to a
QPAM for approval would not qualify
for the relief in the class exemption. The
1982 proposal further states that the
relief in the proposed exemption would
be available even though the transfer of
assets by a plan to a QPAM is subject
to general investment guidelines, so
long as there is no arrangement, direct
or indirect, for the QPAM to negotiate,
or engage in, any specific transaction or
to benefit any specific person.57
The Department received numerous
comments regarding the proposed
changes to the wording of Section I(c).
Some of these commenters indicated
their understanding of the Department’s
view that a QPAM should not act as a
rubber stamp to approve transactions
designed by the Party in Interest who
appointed the QPAM. Similarly,
commenters indicated they shared the
goal of preventing the QPAM Exemption
from being abused, i.e., a QPAM being
used to ‘‘sanitize’’ a transaction where
there is an underlying goal to avoid the
restrictions of the prohibited transaction
rules. One commenter also indicated
that it understood the Department has
long maintained that QPAMs should not
simply act as ‘‘mere independent
approvers’’ but should be intimately
involved in the negotiation and
approval of the transaction. The
55 87
FR at 45227.
56 Id.
54 49
PO 00000
FR at 9497.
Frm 00020
Fmt 4701
57 47
Sfmt 4700
E:\FR\FM\03APR2.SGM
FR at 56947.
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
commenter believed that this
interpretation is widespread in the
market and needs no clarification.
Another commenter also indicated that
the original QPAM Exemption was clear
and understood by practitioners—a
named fiduciary could not appoint a
QPAM to approve a pre-negotiated
transaction nor could the appointing
fiduciary retain a veto or approval right
over any transaction.
Commenters also raised a variety of
other general issues and concerns with
the proposed changes to Section I(c).
One commenter noted that the
Department has not identified any
evidence of harm necessitating changes
to the language of Section I(c). Another
commenter suggested that any proposal
to make changes to the way various Plan
fiduciaries interact with QPAMs should
be the subject of a separate, carefully
crafted proposal with stakeholder input
and regulatory cost analysis. A
commenter also asked whether the
Department’s clarifications were meant
to refer to Plan sponsors instead of a
Party in Interest with no ability to
meaningfully influence a transaction.
The Department has an ongoing
interest and responsibility under ERISA
section 408(a) and Code section
4975(c)(2) to revisit and update
exemptions on an ongoing basis to
ensure that that they maintain their
protective purpose. Although Section
I(a) of the exemption directly addresses
Plan sponsors, Section I(c) provides
additional protections that also apply to
the Plan sponsor. These conditions are
intended to work together, not
separately, to prevent a Plan sponsor
from attempting to influence a
transaction. To the extent QPAMs are
already fully complying with the
Department’s expectation of
independent judgment, and not acting
as mere rubber stamps, appropriate
clarifying language should impose no
additional burden. It is essential to the
achievement of the exemption’s aims,
however, that the Department’s
expectations be clear in this regard.
Modifications to Section I(c) are
appropriate to ensure the Department’s
intent is understood by practitioners,
QPAMs, and their client Plans. It is also
important for QPAMs to be mindful of
the requirements of the exemption
rather than simply deriving the benefits
of calling themselves QPAMs while
ignoring the QPAM Exemption’s core
requirements and protective intent.
Moreover, the Department notes that
Section I(c) requires the asset manager
to act independently, as a general
matter, from Plan sponsors and Parties
in Interest. Without an overarching
compliance-focused approach to its
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
asset management arrangement and
Section I(c), the protective purpose of
ensuring the QPAM’s independence is
undermined.
Commenters raised a variety of other
topics, such as: (1) the amount of
permitted involvement by a Party in
Interest/Plan sponsor in investment
decisions, including voting proxies; (2)
arrangements that involve multiple
investment managers; (3) transactions
initiated or negotiated by a Party in
Interest; (4) sub-advisers and collective
investment trusts; (5) pension risk
transfers; (6) an Investment Fund
established primarily for investment
purposes; (7) eliminating all the changes
in the Proposed Amendment; and (8)
alternatives to the changes in the
Proposed Amendment. The Department
revised the wording of Section I(c) in
this Final Amendment in response to
some of these comments, as discussed
below. However, the Department
reemphasizes that the role of the QPAM
under the terms of the exemption is not
to act as a mere independent approver
of transactions. Rather, the QPAM must
have and exercise sole discretion over
the commitments and investments of
Plan assets and the related negotiations
on behalf of the Plan with respect to an
Investment Fund that is established
primarily for investment purposes for
the relief provided under the exemption
to apply.
Involvement in Investment Decisions
One commenter opined that Plan
sponsors and Plan fiduciaries should be
able to have meaningful involvement in
the process of negotiating an investment
contract’s investment guidelines
without affecting the ability of the
investment manager to rely on the
QPAM Exemption. Another commenter
requested that the Department clarify
that routine monitoring meetings and
inquiries by Plan fiduciaries with
respect to a manager’s trading strategies
do not constitute ‘‘planning.’’ One
commenter also requested clarification
that nothing in the Proposed
Amendment would prevent the trustees
of multiemployer plans from retaining
or delegating the right to vote proxies
held by the QPAM, or to exercise other
similar shareholder rights, even if such
proxies or rights relate to investments in
a Party in Interest.
The Department notes that routine
monitoring of meetings and inquiries by
Plan fiduciaries would not be
considered ‘‘planning’’ for purposes of
Section I(c). This type of involvement is
consistent with a fiduciary’s obligations
under ERISA section 404 and the
Department’s prior guidance regarding
investment guidelines that may be
PO 00000
Frm 00021
Fmt 4701
Sfmt 4700
23109
provided to the QPAM. For clarity, the
Department is changing the word
‘‘because’’ to ‘‘to the extent’’ in the
proposed sentence:
No relief is provided under this
exemption for any transaction that has
been 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 the
transaction as required by this Section
I(c).
That sentence now reads:
No relief is provided under this
exemption for any transaction that has
been planned, negotiated, or initiated by
a Party in Interest, in whole or in part,
and presented to a QPAM for approval
to the extent the QPAM would not have
sole responsibility with respect to the
transaction as required by this Section
I(c).
With respect to proxies and exercising
other shareholder rights, the Department
notes that the QPAM Exemption was
never intended to cover transactions in
which a Party in Interest is making the
decisions pertaining to specific
transactions. The possibility that Plan
fiduciaries have been relying upon the
QPAM Exemption for such transactions
highlights one of the reasons the
Department proposed changes to
Section I(c). The Department would
generally consider reliance on the
QPAM Exemption in these cases to be
an abuse or misuse of the QPAM
Exemption.58 Importantly, as the
Department stated in the preamble of
the original granted exemption in 1984,
the Department ‘‘does not interpret
Section I(c) as exempting a subsidiary
transaction unless such transaction is
itself subject to relief under the class
exemption and the applicable
conditions are met.’’ 59
Multiple Investment Managers
Commenters indicated that Plan
sponsors often hire multiple investment
managers to execute the Plan’s overall
investment strategy with each manager
being given certain assets to manage in
a particular manner. And since only the
Plan sponsor knows the overall strategy,
it is natural and beneficial for the Plan
sponsor to be able to have ongoing
dialogues with their managers without
those dialogues disqualifying the
manager from serving as a QPAM.
The Department notes that the
proposed changes to Section I(c) were
not intended to prevent Plan sponsors
58 Any parties that require more detailed guidance
on the applicability of the QPAM Exemption to
certain transactions may submit an advisory
opinion request to the Department.
59 49 FR at 9497.
E:\FR\FM\03APR2.SGM
03APR2
23110
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
from having ongoing dialogue with an
investment manager. The Department’s
intent and additional clarification
regarding the proposed changes reemphasize that a Plan sponsor can
provide investment guidelines to a
QPAM. The natural corollary would be
for Plan sponsors to revisit those
investment guidelines at appropriate
intervals. One of the Department’s key
points with the proposed changes to
Section I(c) is that any direction from a
Plan sponsor or other Party in Interest
for a QPAM to engage in a particular
transaction would be contrary to the
intent of Section I(c). A Plan sponsor
that utilizes multiple QPAMs, however,
may interact with each manager as part
of a larger overall investment strategy as
long as the QPAMs retain the sole
authority to engage in transactions in
accordance with the strategy, and there
is no direct or indirect arrangement for
any QPAM to negotiate, or engage in,
any specific transaction or to benefit any
specific person.
lotter on DSK11XQN23PROD with RULES2
Initiating, Planning, and Negotiation
Transactions
Many commenters raised concerns
regarding the use of the word ‘‘initiate’’
in the Department’s proposed changes
to Section I(c). Some commenters
expressed concern because Investment
Fund transactions in derivatives or
other investment products that are
developed and pitched to a QPAM by a
financial institution acting as a service
provider to the QPAM—a common
scenario in the derivatives market—
could be interpreted as initiated by a
Party in Interest. Commenters also
indicated that even if a transaction is
not of a type that is customarily
negotiated, the counterparty Party in
Interest would still be involved. A few
commenters opined that the reference to
a transaction being ‘‘negotiated’’ by the
Party in Interest and then ‘‘presented to
a QPAM for approval’’ is sufficient to
achieve the Department’s objective.
Further, a commenter indicated that the
proposed amendments mischaracterize
the actual application of a QPAM’s
discretionary authority. This commenter
indicated that if not eliminated, the
terms ‘‘planned,’’ ‘‘negotiated,’’ and
‘‘initiated’’ should be clarified to
address the Department’s concerns more
directly. For example, if the Department
is concerned about the practice of hiring
a QPAM for the sole purpose of
approving a particular transaction
already contemplated and/or negotiated
by another Plan fiduciary, the
Department should craft language more
narrowly aimed at preventing this
situation.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
The Department notes that whether a
particular sales pitch or an offer of an
investment product from a Party in
Interest would run afoul of the intent of
Section I(c), including the proposed
changes, depends on the associated facts
and circumstances. It would be
inappropriate for the Department to
embed these facts and circumstances
into an exemption condition, because
the exemption would become unduly
complex and unworkable. As a general
matter in this regard, QPAMs should
interpret the protective nature of
Section I(c) expansively and avoid
responding to any sales pitch or offer
with respect to a proposed transaction
that would call into question whether
the QPAM is ultimately solely
responsible for planning, negotiating,
and initiating the transaction.
In order to further clarify this concept,
the Department has added the following
sentences to Section I(c): ‘‘In exercising
its authority, the QPAM must ensure
that any transaction, commitment, or
investment of fund assets for which it is
responsible are based on its own
independent exercise of fiduciary
judgment and free from any bias in favor
of the interests of the Plan sponsor or
other parties in interest. The QPAM may
not be appointed or relied upon to
uncritically approve transactions,
commitments, or investments
negotiated, proposed, or approved by
the Plan sponsor, or other parties in
interest.’’
Sub-Advisers and Collective Investment
Trusts
A few commenters indicated that the
Department’s proposed language could
be interpreted to restrict the use of subadvisers by a QPAM, including in the
context of collective investment trusts
(CITs). Commenters indicated that
utilizing sub-advisers to make
recommendations for certain
investments in which they specialize or
possess expertise is important because a
QPAM may otherwise be compelled to
do its own research before investing
Plan assets, even when the QPAM can
more readily rely upon a sub-adviser
with specialized expertise regarding
certain types of assets. Commenters
noted that QPAMs regularly delegate
certain investment responsibilities to a
sub-adviser but retain authority to
approve transactions. With respect to
CITs, commenters indicated that in
order to comply with securities and
banking laws, the sponsoring trust
company generally retains ultimate
investment authority, but typically
appoints a sub-adviser who invests the
CIT’s assets on a day-to-day basis.
Commenters felt the proposed revision
PO 00000
Frm 00022
Fmt 4701
Sfmt 4700
to Section I(c) would present a
structural conundrum for CITs and their
providers given the standards imposed
by the federal securities laws and OCC
regulations. According to commenters,
the proposed language requires that the
QPAM have the ‘‘sole authority’’ over
the transaction. Commenters indicated
that neither the sponsoring trust
company nor sub-adviser have the sole
authority, although both are fiduciaries
under ERISA and may need to rely on
the QPAM Exemption.
The Department expects that a QPAM
may rely on the specific expertise of a
prudently selected and monitored entity
to assist the QPAM in prudently
managing Plan assets. Therefore, a
QPAM’s delegation of certain
investment-related responsibilities to a
sub-adviser does not, by itself, violate
Section I(c), as long as the QPAM
retains sole authority with respect to
planning, negotiating, and initiating the
transactions covered by the QPAM
Exemption. A QPAM should not ‘‘more
readily’’ rely on a sub-adviser that has
specialized expertise, in order to engage
in a particular transaction, if the
reliance means that the QPAM would
not have sole authority with respect to
planning, negotiating, and initiating the
transaction.
Furthermore, parties that participate
in arrangements that do not clearly
identify which party has the ultimate
responsibility and authority to engage in
a particular transaction should not
assume that the transaction is permitted
by the QPAM Exemption. The
Department recommends that affected
parties involved in such transactions
seek an advisory opinion or request
other guidance from the Department
regarding whether the QPAM
Exemption is available for such
transactions.
Pension Risk Transfers
One commenter suggested the
proposed changes to Section I(c) could
render the QPAM Exemption
unavailable for pension risk transfers
where a Plan purchases an annuity from
an insurance company in connection
with the termination of the Plan or to
annuitize a subset of the Plan’s
participant population. The commenter
did not provide specific details as to
what aspects of proposed Section I(c)
would potentially create problems for
this type of transaction, however. The
QPAM Exemption is designed to
accommodate a broad range of prudent
investment transactions, and the
Department does not believe that the
exemption poses any special
impediment to such transactions as they
may relate to pension risk transfers. If
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
the commenter’s concerns remain after
it considers the Department’s
modifications to Section I(c) in the Final
Amendment, the affected parties may
seek an advisory opinion or request
other guidance from the Department
regarding whether the QPAM
Exemption is available for such
transactions.
lotter on DSK11XQN23PROD with RULES2
Fund Established Primarily for
Investment Purposes
In connection with the Department’s
proposed language that the Investment
Fund must be established primarily for
investment purposes, one commenter
requested the Department clarify that
this includes a fund that is established
for mixed-use purposes that contains an
investment component. The commenter
indicated the fund may have certain
non-investment purposes, such as the
payment of benefits and Plan expenses.
Another commenter indicated that the
QPAM Exemption long has been used
by Plans to hire managers, as well as
trustees, custodians, and recordkeepers,
regardless of the type of Plan (pension,
savings, or welfare).
The Department notes that a fund that
contains only a minor investment
component would not be eligible for the
relief provided by the QPAM
Exemption. This is true regardless of the
Plan type. If a Plan has mixed-use
purposes, the Plan sponsor should
establish a separate account for any
investments held directly by the Plan in
order to rely upon the QPAM
Exemption for that portion of the Plan’s
assets. Relatedly, a fund or other pool of
Plan assets that contains no investment
assets would not be able to rely upon
the QPAM Exemption. However, as
provided in Section I(c) of this Final
Amendment, an Investment Fund that
makes distributions and/or engages in
other activities that are ancillary to the
fund’s primary investment purpose will
not fail to be an Investment Fund
established primarily for investment
purposes. The Department provides this
additional clarification in the Final
Amendment because distributions and
other ancillary services are generally
necessary in order for investment funds
to operate.
Recommended Alternatives
One commenter made a specific
recommendation regarding the wording
of Section I(c) that would specify that
the QPAM ‘‘represents the interest of
the Investment Fund.’’ The Department
accepts this suggested modification in
addition to the other modifications
discussed above.
Another commenter suggested the
Department should issue separate
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
guidance on Section I(c) that makes
clear that a QPAM is expected to act
prudently on behalf of its Plan clients
for any investment opportunity that the
QPAM may become aware of and where
the QPAM is not conflicted—regardless
of how it became aware of the
opportunity. The commenter added that
as long as the QPAM has the ultimate
discretionary authority and
responsibility for deciding whether to
enter into a given transaction, the
QPAM should not be prohibited from
transactions merely because such
transaction is planned, negotiated, or
initiated by a Party in Interest.
The Department believes many of the
revisions to Section I(c) in this Final
Amendment and related preamble
discussion provide the requested
guidance. If questions remain regarding
the source of investment opportunities
in relation to the QPAM’s discretionary
authority, the Department encourages
interested parties to submit an advisory
opinion request that details the
particular facts and circumstances that
raise issues under Section I(c).
Section VI(a)—Asset Management and
Equity Thresholds
The QPAM Exemption was originally
granted, in part, on the premise that
large financial services institutions
would be able to withstand improper
influence from Parties in Interest. The
Department included the asset
management and equity thresholds in
the exemption to set minimum size
thresholds that would help ensure a
QPAM would be able to withstand such
influence. In 2005, the Department
finalized an amendment to the QPAM
Exemption that updated the asset
management and shareholders’ and
partners’ equity thresholds for registered
investment advisers in the QPAM
definition in subsection VI(a)(4).60 In
connection with that amendment, the
Department indicated that the original
thresholds ‘‘may no longer provide
significant protections for Plans in the
current financial marketplace’’ and
adjusted the figures based on changes in
the Consumer Price Index.61
The Department has determined that
the same rationale necessitates further
updates to the registered investment
adviser thresholds and those of other
types of QPAMs, such as banks and
insurance companies, because they have
not been updated since 1984. Therefore,
the Department is adjusting all of the
thresholds in Section VI(a) based on the
original published figures in the 1984
60 70
FR 49305.
Amendment to PTE 84–14, 68 FR
52419, 52423 (Sept. 3, 2003).
61 Proposed
PO 00000
Frm 00023
Fmt 4701
Sfmt 4700
23111
grant notice. This will ensure that
changes to the thresholds for all types
of financial institutions reflect the same
baseline change to the Consumer Price
Index (i.e., 1984 vs. 2021).62
The Proposed Amendment would
have adjusted the $1,000,000 threshold
in subsection VI(a)(1) through (3) to
$2,720,000 and the assets under
management threshold of $85,000,000
and the shareholders’ and partners’
equity and the broker-dealer net worth
thresholds of $1,000,000 in subsection
VI(a)(4) to $135,870,000 and $2,000,000,
respectively. In this Final Amendment,
the Department decided to increase the
thresholds in three-year increments
beginning in the year 2024 and ending
in 2030. The final incremental
adjustment will raise the thresholds to
the amounts included in the Proposed
Amendment. The incrementally
adjusted threshold amounts are
provided in subsection VI(a)(1) through
(4) of the Final Amendment. By
publication through notice in the
Federal Register no later than January
31st every year, the Department will
make subsequent annual adjustments
for inflation to the Equity Capital, Net
Worth, and asset management
thresholds in subsection VI(a)(1)
through (4) that are rounded to the
nearest $10,000.
As a minor ministerial change, the
Department proposed to replace the
reference to ‘‘Federal Savings and Loan
Insurance Corporation’’ with ‘‘Federal
Deposit Insurance Corporation’’ in
subsection VI(a)(2), because the Federal
Savings and Loan Insurance Corporation
was abolished by Congress in 1989, and
its responsibilities were transferred to
the Federal Deposit Insurance
Corporation.63 The Department received
no comments on this ministerial change
and retains it in this Final Amendment.
The Department received several
comments regarding the proposed asset
management and equity thresholds. One
commenter noted that the proposed
increases may have a material impact on
the market for both small and large
managers. The commenters stated the
sudden increase in the thresholds could
force small organizations out of the
market, which would prevent small
managers and start-up managers from
utilizing the QPAM Exemption and put
them at a competitive disadvantage.
62 For purposes of these changes, the Department
used March 1984 and December 2021 as the
relevant dates in the U.S. Bureau of Labor Statistics
CPI Inflation Calculator available at: https://
www.bls.gov/data/inflation_calculator.htm.
63 See Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, Public Law 101–73
(1989).
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23112
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
As the Department previously stated,
the QPAM Exemption was never
intended for small investment
managers, and the exemption’s
minimum asset and equity thresholds
are intended to ensure that the
fiduciaries managing Plan assets are
established institutions that are large
enough not to be unduly influenced in
their discretionary decision-making
process by Parties in Interest. By
spreading out the proposed increases
occurring with this Final Amendment
incrementally from 2024 through 2030,
the impact of a sudden increase in the
threshold will be greatly reduced. This
longer implementation period will
provide ample opportunity for QPAMs
to prepare and be on notice that the
thresholds are increasing in this manner
and on an annual basis thereafter. The
Department notes that small asset
managers or start-ups can apply for
individual exemptive relief to use the
QPAM Exemption if they are
detrimentally impacted by the Final
Amendment’s increase to the equity and
asset thresholds, and the Department
will consider those requests on a caseby-case basis. An individual exemption,
if granted, would allow the Department
to develop conditions for this
circumstance that would ensure the
QPAM retains the appropriate
independence and the means to provide
remedies to harmed Plans.
Another commenter stated that
changes of such significance should not
be undertaken in the absence of an
identifiable harm or evidence
supporting such harm to Plans,
participants, and/or beneficiaries. The
Department disagrees and notes that the
original intent and protection of the
exemption will erode if the asset and
equity thresholds are allowed to become
irrelevant with the passage of time.
What was considered a large institution
that could serve the protective purposes
of the exemption in 1984 would not be
considered sufficiently large by current
standards. For the protective nature of
the QPAM Exemption to remain
effective and relevant, the Department
must update the asset and equity
thresholds to ensure that they keep pace
with financial and economic growth in
the marketplace.
A commenter suggested the
Department should conduct a survey or
issue a request for information designed
to gather data necessary to make an
informed decision as to whether the
thresholds should be increased and, if
so, to what extent. It is clear, however,
that the asset and equity thresholds
have not kept pace with the economic
and financial growth of the marketplace,
and the Department has undertaken a
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
robust and thorough rulemaking process
for this Final Amendment.
Another commenter recommended
that at the least, the Department should
grandfather QPAMs that met the preexisting requirements and allow them to
continue to rely on the QPAM
Exemption. The Department declines to
make this modification because
allowing entities that fail to meet the
thresholds to avail themselves of the
relief in the QPAM Exemption would
undermine the exemption’s core
purpose.
The Department received a comment
stating that annual indexing of the
equity and asset thresholds will create
situations where an entity is a QPAM on
one day, and not thereafter, leaving its
client Plans in a precarious position if
the Plans are invested in continuing
transactions dependent on the QPAM
Exemption. By incrementally increasing
the asset and equity thresholds, the
Department is effectively putting
QPAMs on notice that the thresholds
will increase according to a predictable
metric (the CPI), which will provide an
opportunity to prepare and manage their
ERISA assets accordingly before the
increases are fully implemented.64
Another comment stated that the
indexing should only happen once
every five years, with a one-year
effective date transition. The
Department declines to adopt this
approach to the indexing. Five-year
indexing periods could lead to
substantial deficiencies with respect to
QPAMs’ compliance with the equity
and threshold requirements of this
exemption. As a general matter, asset
managers seeking to rely on this
exemption should be constantly aware
of all the requirements of this
exemption, including the equity and
threshold requirements, and take
appropriate action in response to the
risk of non-compliance, including by
not engaging in prohibited transactions
or by relying on and complying with
alternative exemptions. Further, the
current asset and equity thresholds are
very outdated, and their ineffectiveness
would be exacerbated by waiting an
additional five years to increase them.
Finally, a commenter recommended
that the Department clarify that the new
dollar thresholds published by January
31st annually in the Federal Register
will not be applicable until January 1st
of the following year. The Department
has made this clarification in the Final
Amendment by providing that each
increase in the thresholds will be
effective as of the last day of the
64 This includes possibly seeking individual
exemption relief in such circumstances.
PO 00000
Frm 00024
Fmt 4701
Sfmt 4700
QPAM’s fiscal year in which the
increase takes effect. The Department
also will include the annual notice of
increases on the class exemption section
of EBSA’s website.65
Section VI(u)—Recordkeeping
The Proposed Amendment also
included a new recordkeeping
requirement in Section VI(t), which
would require QPAMs to maintain
records for six years demonstrating
compliance with this exemption. The
Recordkeeping requirement has been
redesignated as Section VI(u) in this
Final Amendment.66 The Department
proposed this addition to make the
QPAM Exemption consistent with other
exemptions that generally impose a
recordkeeping requirement on parties
relying on an exemption and to ensure
they will be able to demonstrate, and
that the Department will be able to
verify, compliance with the exemption
conditions.
The Recordkeeping requirement of the
Proposed Amendment would require
that the records be kept in a manner that
is reasonably accessible for
examination. The records must be made
available, to the extent permitted by
law, to any authorized employee of the
Department or the Internal Revenue
Service or another federal or state
regulator; any fiduciary of a Plan
invested in an Investment Fund
managed by the QPAM; any
contributing employer and any
employee organization whose members
are covered by a Plan invested in an
Investment Fund managed by the
QPAM; and any participant or
beneficiary of a Plan and an IRA Owner
invested in an Investment Fund
managed by the QPAM.
QPAMs also would be required to
make such records reasonably available
for examination at their customary
location during normal business hours.
Participants and beneficiaries of a Plan,
IRA owners, Plan fiduciaries, and
contributing employers/employee
organizations would be able to request
only information applicable to their
own transactions and not a QPAM’s
privileged trade secrets or privileged
commercial or financial information, or
confidential information regarding other
individuals. If the QPAM refuses to
disclose information to a party other
than the Department on the basis that
65 Available at: https://www.dol.gov/agencies/
ebsa/laws-and-regulations/rules-and-regulations/
exemptions/class.
66 The Department moved the definition of
‘‘Participating In’’ that appeared in Section I(g)(3)
of the Proposed Amendment into the Definitions
and General Rules at Section VI(t) of this Final
Amendment.
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
the information is exempt from
disclosure, the Department would
require the QPAM to provide a written
notice, within 30 days, advising the
requestor of the reasons for the refusal
and that the Department may request
such information. The requestor would
then be able to contact the Department
if it believes it would be useful for the
Department to request the information.
Any failure to maintain the records
necessary to determine whether the
conditions of the exemption have been
met would result in the loss of the relief
provided under the exemption only for
the transaction or transactions for which
such records are missing or have not
been maintained. Such failure would
not affect the relief for other
transactions if the QPAM maintains
required records for such transactions.
The Department received several
comments opposing the Proposed
Amendment’s recordkeeping
requirement. Some commenters
indicated that the specific
recordkeeping requirements are
unnecessary given the existing
recordkeeping requirements under
ERISA section 107. Other commenters
added that the requirement does not add
materially to the protective provisions
already in place in the exemption and
unnecessarily increases regulatory
compliance costs. Commenters also
pointed to other status-based
exemptions that do not impose any
recordkeeping requirement on a
transaction-by-transaction basis, while
others, like the insurance company
general account exemption (PTE 95–
60) 67 and INHAM exemption (PTE 96–
23) 68 do not have a recordkeeping
requirement at all.
Some commenters noted that only the
Department (with respect to ERISA Title
I plans) and the IRS (with respect to
ERISA Title II plans, including IRAs)
have the authority to enforce the terms
of the QPAM Exemption. Therefore,
those commenters argued that requiring
that records be made available to
employers, unions, and participants,
beneficiaries, and IRA owners, raises the
risk of unnecessary litigation and could
cause QPAMs to increase the fees they
charge to Plans as a result. One
commenter added that there are
practical reasons why having to retain
records sufficient for a determination of
compliance is unworkable or otherwise
not cost effective. For example, a
commenter argued that despite the
Department’s expectation that the
67 As amended and restated at 87 FR 12985,
12996 (Mar. 8, 2022).
68 As amended and restated at 76 FR 18255 (Apr.
1, 2011).
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
recordkeeping requirements would
impose a negligible burden, this
requirement will, in fact, prove
burdensome and costly because QPAMs
will need to be able to demonstrate
compliance for every transaction and, in
some cases, to prove a negative. Another
commenter asked for a simplified
recordkeeping requirement that would
require QPAMs to undertake prudent
efforts to maintain accurate records
reflecting their QPAM duties and
responsibilities while another
commenter suggested the Department
should modify the Proposed
Amendment to require process-based
records of compliance rather than
transactional records. Another
commenter asked for clarification that
the six-year recordkeeping requirement
does not create any new obligation to
document the basis for satisfaction of
the exemption conditions. One
commenter indicated it is unclear what
it means to ‘‘verify’’ compliance with
the conditions of the QPAM Exemption.
The Department’s response to these
comments is that these concerns are
overstated and inconsistent with how
recordkeeping requirements operate in
prohibited transaction exemptions. The
extent to which transaction-bytransaction records are necessary
depends on the facts and circumstances.
The Department often includes a
recordkeeping requirement in its
administrative prohibited transaction
exemptions to ensure that the parties
relying on an exemption can
demonstrate, and the Department can
verify, compliance with the exemption’s
conditions. Given the broad relief
provided by this exemption, including a
specific recordkeeping requirement is
necessary for the Department to verify
that the exemption conditions are being
satisfied rather than relying on ERISA’s
general recordkeeping requirement to
maintain records. Given the large
number and variety of transactions
entered into in reliance on the QPAM
Exemption, the Department did not
intend for this provision to require
transaction-by-transaction
recordkeeping. Rather, the condition is
focused on requiring the QPAM to
retain records satisfactory to prove
compliance with the applicable
conditions for any section of the
exemption the QPAM relied upon, such
as satisfying the definition of QPAM,
and records supporting the limitation on
the involvement of Parties in Interest in
investment transactions. The QPAM’s
reliance on specific transactions covered
by Sections II through V of the
exemption will require it to maintain
more detailed records such as, but not
PO 00000
Frm 00025
Fmt 4701
Sfmt 4700
23113
limited to, copies of leases, sales
agreements, service contracts, audit
reports, policies and procedures, and
detailed descriptions of real estate.
Financial institutions are accustomed to
keeping records of their transactions as
a part of their regular business practices
and generally have recordkeeping
systems already in place.
Additionally, a commenter noted that
the National Bank visitorial powers
provision and the Office of the
Comptroller of the Currency (OCC)
regulations would prevent Plan
investors from accessing the records of
national banks and federal savings
associations. The commenter asserted
that this could lead to an unintended
discriminatory effect between these
banks and state-chartered banks, which
may not have the same available
safeguards on the release of a QPAM
bank’s records. The Department notes
that if the OCC regulations, in fact, bar
Plan investors from accessing this
information, that is no reason to bar
others from accessing the records. If the
commenter’s purported restriction on
access to national bank records is
meaningful to Plan sponsor fiduciaries,
then they are free to choose a QPAM
that is not restricted from providing
access to such records.
One commenter asked the Department
to withdraw the recordkeeping
requirement entirely, or if not, to modify
it to be consistent with the
recordkeeping requirement in PTE
2020–02. As stated above, the
Department often includes a
recordkeeping condition in
administrative prohibited transaction
exemptions to ensure compliance with
the exemption. The recordkeeping
requirement in PTE 2020–02 was
developed specifically for that
exemption and the specific relief for
investment advice provided pursuant to
certain conditions.
A commenter also requested that the
30-day window for producing records
should be expanded to at least 90 days
and a QPAM should have 90 days to
provide notice of grounds for nonproduction. The Department notes that
because QPAMs are fiduciaries, the
Department is unpersuaded that
additional time is necessary or
consistent with the QPAM’s fiduciary
status. The Department believes a longer
period would be required only if a
QPAM is not already maintaining the
records necessary to demonstrate
compliance with this condition. To
allow a QPAM additional time to
produce, or indicate that it is not
producing, records would be directly
contrary to the purpose of the
recordkeeping condition.
E:\FR\FM\03APR2.SGM
03APR2
23114
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
Other Ministerial Changes
The Department did not receive any
comments regarding the ministerial
changes in the Proposed Amendment.
Therefore, the Department is finalizing
the proposed ministerial changes as
proposed, which include: (1) changing
the headings of each portion of the
exemption from ‘‘Part’’ to ‘‘Section,’’ (2)
removing many internal cross-references
to definitional provisions and instead
capitalizing the terms used in those
definitional provisions throughout the
exemption,69 and (3) adding internal
references to ‘‘above’’ and ‘‘below’’
throughout to direct readers where to
find certain cross-referenced provisions.
The Department corrected two minor
typographical errors by changing: (1)
‘‘assure’’ to ‘‘ensure’’ in Section V and
the related audit provision in Section
VI(q), and (2) ‘‘INHAM’’ to ‘‘QPAM’’ in
Section VI(p). All references to ‘‘ERISA’’
and the ‘‘Code’’ have been updated so
that they come before the sections
referenced, and references to the term
‘‘employee benefit plan’’ have been
removed so that the exemption only
uses the term ‘‘Plan.’’ Finally, the
Department has amended the definition
of the term ‘‘Control’’ in Section VI(e) so
that it specifically refers to variations of
the word ‘‘control’’ used throughout the
exemption. Therefore, Section VI(e) now
defines the terms ‘‘Controlling,’’
‘‘Controlled by,’’ ‘‘under Common
Control,’’ and ‘‘Controls’’ in the same
manner as the prior single term
‘‘Control.’’
Regulatory Impact Analysis
lotter on DSK11XQN23PROD with RULES2
The Department has examined the
effects of the Final Amendment as
required by Executive Order 12866,70
Executive Order 13563,71 the
Congressional Review Act,72 the
Paperwork Reduction Act of 1995,73 the
Regulatory Flexibility Act,74 section 202
of the Unfunded Mandates Reform Act
of 1995,75 and Executive Order 13132.76
69 However, for the sake of clarity, crossreferences have been retained for the term
‘‘Affiliate’’ because it is defined in different ways
under Section VI(c) and (d) of the exemption.
70 Regulatory Planning and Review, 58 FR 51735
(Oct. 4, 1993).
71 Improving Regulation and Regulatory Review,
76 FR 3821 (Jan. 21, 2011).
72 5 U.S.C. 804(2) (1996).
73 44 U.S.C. 3506(c)(2)(A) (1995).
74 5 U.S.C. 601 et seq. (1980).
75 2 U.S.C. 1501 et seq. (1995).
76 Federalism, 64 FR 43255 (Aug. 10, 1999).
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Executive Order 12866 (Regulatory
Planning and Review), Executive Order
14094 (Modernizing Regulatory
Review), and 13563 (Improving
Regulation and Regulatory Review)
Under Executive Order 12866 (as
amended by Executive Order 14094),
the Office of Management and Budget
(OMB)’s Office of Information and
Regulatory Affairs determines whether a
regulatory action is significant and,
therefore, subject to the requirements of
the executive review by OMB. As
amended by Executive Order 14094,
section 3(f) of Executive Order 12866
defines a ‘‘significant regulatory action’’
as a regulatory action that is likely to
result in a rule that may: (1) have an
annual effect on the economy of $200
million or more; or adversely affect in
a material way the economy, a sector of
the economy, productivity, competition,
jobs, the environment, public health or
safety, or state, local, territorial, or tribal
governments or communities; (2) create
a serious inconsistency or otherwise
interfere with an action taken or
planned by another agency; (3)
materially alter the budgetary impact of
entitlements, grants, user fees or loan
programs or the rights and obligations of
recipients thereof; or (4) raise legal or
policy issues for which centralized
review would meaningfully further the
President’s priorities or the principles
set forth in the Executive Order. OMB
has determined that the Final
Amendment is a significant regulatory
action under Section 3(f)(1) of Executive
Order 12866.
Executive Order 13563 directs
agencies to propose or adopt a
regulation only upon a reasoned
determination that its benefits justify its
costs; the regulation is tailored to
impose the least burden on society,
consistent with achieving the regulatory
objectives; and in choosing among
alternative regulatory approaches, the
agency has selected those approaches
that maximize net benefits. Executive
Order 13563 recognizes that some
benefits are difficult to quantify and
provides that, where appropriate and
permitted by law, agencies may
consider and discuss qualitative values
that are difficult or impossible to
quantify, including equity, human
dignity, fairness, and distributive
impacts.
The Department has quantified the
impact of the Final Amendment based
on the best available data and provides
an assessment of its benefits, costs, and
transfers below. Based on this
assessment, the Department concludes
that the Final Amendment’s benefits
would justify its costs. Pursuant to the
PO 00000
Frm 00026
Fmt 4701
Sfmt 4700
Congressional Review Act, OMB has
designated the Final Amendment a
‘‘major rule,’’ as defined by 5 U.S.C.
804(2).
Need for Regulation
Substantial changes have occurred in
the financial services industry since the
Department granted the QPAM
Exemption in 1984. Today’s asset
management industry has been marked
by industry consolidation and an
increasingly global reach. As a result,
QPAM affiliations and investment
strategies, including those involving
Plan assets, have changed significantly
since 1984. This Final Amendment
updates some of the key elements of the
QPAM Exemption to ensure that Plans
affected by the exemption remain
protected in light of the changes in the
industry, and that the QPAM Exemption
remains consistent with the original
intent.
The Final Amendment addresses
ambiguity as to whether foreign
convictions are included in the scope of
the ineligibility provision under Section
I(g). QPAMs today often have corporate
or relationship ties to a broad range of
entities, some of which are located
internationally. Additionally, some
global financial service institutions may
be headquartered, or have parent
entities, in foreign jurisdictions. These
entities may have significant control
and influence over the operation of all
entities within its organizational
structure, including those operating as
QPAMs. Moreover, the international ties
of QPAMs extend to their investment
strategies, including those involving
Plan assets.
The Final Amendment also expands
ineligibility to include QPAMs (and as
applicable, an Affiliate or owner of a
five (5) percent or more interest) that
Participate In Prohibited Misconduct,
such as conduct that has resulted in
QPAMs entering into an NPA or DPA
with a U.S. federal or state prosecutor’s
office or regulatory agency; a systematic
pattern or practice of violating the
exemption’s conditions; intentionally
violating the exemption’s conditions in
connection with otherwise non-exempt
prohibited transactions; or providing
materially misleading information to the
Department and other regulators in
connection with the exemption
conditions. The Final Amendment
ensures that QPAMs are not able to
avoid the conditions related to integrity
and ineligibility that are central to the
QPAM Exemption by entering into
NPAs and DPAs with prosecutors to
side-step the consequences that
otherwise would result from a Criminal
Conviction. Plans may suffer significant
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
harm if they are exposed to serious
misconduct committed by unscrupulous
firms or individuals that ultimately
results in an NPA or DPA rather than
Criminal Conviction and consequent
ineligibility under Section I(g).
Likewise, intentionally or systematically
violating the exemption conditions
exposes Plans to significant potential
harm caused by the misconduct of those
with influence or control over managing
the investment of their assets. In the
Department’s view, QPAMs, and those
in a position to influence or control a
QPAM’s policies, that repeatedly engage
in serious misconduct do not display
the requisite standards of integrity
necessary to provide the protection
intended for Plans that they are
responsible for under the exemption.
Through its administration of the
individual exemption program, the
Department also determined that certain
aspects of the QPAM Exemption would
benefit from a focus on mitigating
potential costs and disruption to Plans
that occurs when a QPAM becomes
ineligible for the exemptive relief
because of ineligibility under Section
I(g). The Final Amendment requires
QPAMs to provide a One-Year
Transition Period to its client Plans to
avoid unnecessary disruptions to Plans
that could occur upon a Criminal
Conviction or for Participating In
Prohibited Misconduct. The Transition
Period will help bridge the gap between
the QPAM Exemption and the
Department’s administration of its
individual exemption program in
connection with Section I(g)
ineligibility.
The Department believes the changes
to Section I(c) in the Final Amendment
are needed to clarify and remind
QPAMs and Parties in Interest of the
level of involvement Parties in Interest
may have in investment decisions and
prevent possible abuses of the
exemption.
The Final Amendment is also needed
to update asset management and equity
thresholds to current values in the
definition of a ‘‘QPAM’’ in Section
VI(a). Some of the thresholds that
establish the requisite independence
upon which the QPAM Exemption is
based have not been updated since
1984, and the thresholds for registered
investment advisers have not been
updated since 2005. The amendment
will standardize all the thresholds to
current values using the Bureau of Labor
Statistics Consumer Price Index (CPI).
Finally, the Final Amendment adds a
recordkeeping requirement to ensure
QPAMs will be able to demonstrate, and
the Department will be able to verify,
compliance with the exemption
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
conditions. This requirement is similar
to a recordkeeping requirement the
Department generally includes in its
individual Section I(g) exemptions.
Together, the Department believes the
Final Amendment is necessary to ensure
the QPAM Exemption remains in the
interest of and protective of the rights of
Plans and their participants and
beneficiaries and IRA owners as
required by ERISA section 408(a) and
Code section 4975(c)(2).
Affected Entities
The Final Amendment affects
financial institutions acting as a QPAM,
and client Plans of QPAMs, including
their participants and beneficiaries.
Qualified Professional Asset Managers
(QPAMs)
As discussed above in this preamble,
to qualify as a QPAM, the financial
institution must be a bank, savings and
loan association, insurance company, or
a registered investment adviser that
meets specified standards regarding
financial size. The financial institution
must also acknowledge in a Written
Management Agreement (WMA) that it
is a fiduciary with respect to each Plan
that retains it as a QPAM. Before this
Final Amendment, the following
entities were able to act as a QPAM
under the terms of the exemption:
(1) Banks—as defined in section
202(a)(2) of the Investment Advisers Act
of 1940, with equity capital in excess of
$1,000,000.
(2) Savings and loan associations—
the accounts of which are insured by the
Federal Deposit Insurance Corporation,
with equity capital or net worth in
excess of $1,000,000;
(3) Insurance companies—subject to
supervision under state law, with net
worth in excess of $1,000,000; and
(4) Investment advisers—registered
under the Investment Advisers Act of
1940 with total client assets under
management in excess of $85,000,000
and either (1) shareholders’ or partners’
equity in excess of $1,000,000 or (2)
payment of liabilities guaranteed by an
affiliate, another entity that could
qualify as a QPAM, or a broker-dealer
with net worth of more than $1,000,000.
As amended, the thresholds in
Section VI(a) will be indexed to the CPI,
rounded to the nearest $10,000. The
amendment will update these
thresholds based on the price inflation
since 1984. The increases in thresholds
will be phased-in incrementally
between 2024 and 2030. This Final
Amendment increases the thresholds as
follows:
(1) Banks—as defined in section
202(a)(2) of the Investment Advisers Act
PO 00000
Frm 00027
Fmt 4701
Sfmt 4700
23115
of 1940, with equity capital in excess of
$1,570,300 effective as of the last day of
the fiscal year ending no later than
December 31, 2024, $2,140,600 effective
as of the last day of the fiscal year
ending no later than December 31, 2027,
and $2,720,000 effective as of the last
day of the fiscal year ending no later
than December 31, 2030.
(2) Savings and loan associations—
the accounts of which are insured by the
Federal Deposit Insurance Corporation,
with equity capital or net worth in
excess of $1,570,300 as of the last day
of the fiscal year ending no later than
December 31, 2024, $2,140,600 effective
as of the last day of the fiscal year
ending no later than December 31, 2027,
and $2,720,000 effective as of the last
day of the fiscal year ending no later
than December 31, 2030.
(3) Insurance companies—subject to
supervision under state law, with net
worth in excess of $1,570,300 effective
as of the last day of the fiscal year
ending no later than December 31, 2024,
$2,140,600 effective as of the last day of
the fiscal year ending no later than
December 31, 2027, and $2,720,000
effective as of the last day of the fiscal
year ending no later than December 31,
2030.
(4) Investment advisers—registered
under the Investment Advisers Act of
1940 with total client assets under
management in excess of $101,956,000
effective as of the last day of the fiscal
year ending no later than December 31,
2004, $118,912,000 effective as of the
last day of the fiscal year ending no later
than December 31, 2027, and
$135,868,000 effective as of the last day
of the fiscal year ending no later than
December 31, 2030. In addition, the
investment adviser must either have
shareholders’ or partners’ equity—or
payment of liabilities guaranteed by an
affiliate, another entity that could
qualify as a QPAM, or a broker-dealer
with net worth—in excess of $1,570,300
effective as of the last day of the fiscal
year ending no later than December 31,
2024, $2,140,600 effective as of the last
day of the fiscal year ending no later
than December 31, 2027, and $2,720,000
effective as of the last day of the fiscal
year ending no later than December 31,
2030.
The Department will make
subsequent annual adjustments for
inflation to the equity capital, net worth,
and asset management thresholds,
rounded to the nearest $10,000, no later
than January 31st of each year by
publication of a notice in the Federal
Register.
QPAMs that met the prior thresholds,
but that otherwise will not meet the new
threshold requirements, will also be
E:\FR\FM\03APR2.SGM
03APR2
23116
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
affected by the Final Amendment,
because they no longer will be able to
rely on the QPAM Exemption.77 The
Department proposed introducing the
entire increase at the end of the first
year after granting the amendment.
However, after considering comments
received in response to the Proposed
Amendment, the Department decided to
implement the increase incrementally
over three-year periods, which provides
Plans and QPAMs with significantly
more time to adjust and prepare if the
QPAM is unable to continue meeting
the updated thresholds.
Several comments on the Proposed
Amendment stated that the Department
underestimated the number of QPAMs
in the economic analysis for the
Proposed Amendment, with one
commenter remarking that the actual
number of QPAMs was likely 10 to 20
times larger than the Department’s
original estimate of 616 QPAMs.78
Another commenter estimated that more
than 90 percent of investment managers
investing Plan assets rely on the QPAM
Exemption. They recommended an
alternative estimation methodology that
involved multiplying the number of
investment managers reported on the
Form 5500 Schedule C by 90 percent.79
This results in an estimate of 3,876
QPAMs.80 After considering these
comments, the Department has revised
its estimates as described below.
Multiple QPAMs can exist within the
same organizational hierarchy.
Accordingly, when estimating the effect
of this exemption, the Department
focused not on the firm level, but rather
at each distinct entity within the
organizational hierarchy providing
services as a QPAM. For example,
multiple subsidiaries under a parent
company may act as QPAMs in addition
to the parent company itself. The
methodology suggested by the
commenter would count each
subsidiary and the parent company
77 As noted earlier in this preamble, such QPAMs
may submit an individual exemption application
requesting relief to continue relying upon the
QPAM Exemption.
78 Comment submitted by SIFMA on 11 October
2022. (See https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
public-comments/1210-ZA07/00009.pdf).
79 Comment submitted by the Seward and Kissel.
(See https://www.dol.gov/sites/dolgov/files/EBSA/
laws-and-regulations/rules-and-regulations/publiccomments/1210-ZA07/00025.pdf).
80 In the 2020 Form 5500, the Department
identified 4,307 unique investment managers
providing services under service code 28
(investment management) to Plans. This is
estimated as: 4,307 × 90% = 3,876. As discussed
later in this section, small Plans do not file the
Form 5500 Schedule C, so relying solely on the
Form 5500 Schedule C will likely underestimate the
number of QPAMs.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
itself as if each were acting as separate
QPAMs. Therefore, to estimate the
number of QPAMs, the Department
identified the number of unique entities
that provided investment management
services in the 2020 Form 5500
Schedule C dataset.81 This analysis
yielded 5,702 unique investment
managers.
Small Plans are not required to file a
Schedule C; therefore, in order to
account for asset managers used by
small Plans, the Department looked at
the Form 5500 Schedule C that were
voluntarily filed by small Plans. Among
the 1,267 small Plans that filed a
Schedule C, the Department found 10
unique asset managers that were not
used by large Plans. Applying this ratio
to the universe of small Plans, the
Department estimates that 5,153
additional unique QPAMs may be used
by small Plans.82 The Department
believes that this adjustment likely
overstates the number of unique asset
managers servicing the universe of small
Plans because it assumes unique asset
managers would continue to be found at
the same rate for the entire universe, but
the Department is using this estimate to
derive a conservative estimate for
purposes of this analysis. Therefore,
based on the foregoing, the Department
estimates that 10,855 unique QPAMs
could be affected by the Final
Amendment.83
Several comments expressed concern
that the proposal would decrease the
number of entities acting as QPAMs due
to the costs and risks associated with
the proposed requirements to add
penalty-free withdrawal and
indemnification provisions for QPAMs
that become ineligible due to a Section
I(g) triggering event. In response, the
Department moved these conditions
into the transition provision of the Final
Amendment so that only QPAMs that
experience an ineligibility trigger will
be required to agree to these provisions
with their client Plans. Based on this
revision, the Department expects that
the Final Amendment will not have a
significant effect on the number of
entities acting as QPAMs.
81 The Department included service providers
that were listed under service codes 28 (investment
management), 51 (investment management fees
paid directly by the plan), or 52 (investment
management fees paid indirectly by the plan).
82 If the ratio of 10 unique providers for 1,267
small Plans is held constant for the whole universe
of small plans, then that would indicate a further
(10/1,267) × 652,934 = 5,153 additional unique
QPAMs used exclusively by small Plans.
83 The number of unique QPAMs is calculated as:
5,702 QPAMs found on the 2020 Form 5500
Schedule C + 5,153 QPAMs estimated as servicing
exclusively small Plans = 10,855 QPAMs.
PO 00000
Frm 00028
Fmt 4701
Sfmt 4700
Plans, Participants, Beneficiaries, and
IRA Owners
The Final Amendment will affect
Plans whose assets are held by an
Investment Fund that is managed by a
QPAM. The Department does not collect
data on Plans that use QPAMs to
manage their assets. In the proposal, the
Department estimated that a single
QPAM would service, on average, 32
client Plans.84 A few commenters stated
that the Department underestimated the
number of Plans that have hired a
QPAM. Commenters remarked that
investment managers may manage assets
for hundreds to thousands of Plans,
while one commenter stated that the
largest investment managers manage
assets for between 2,000 and 4,000
client Plans.85 Another commenter
estimated that the average number of
contracts per QPAM is 14,180 with a
median of 14,500 based on the number
of QPAMs that are members of its
association.86
In response to these comments, the
Department conducted further analysis
on QPAM-Plan relationships. In its
analysis of the 2020 Form 5500, the
Department found that the largest
QPAMs can have thousands of client
Plans, with the largest having 3,158
clients. However, the average number of
client Plans per QPAM was significantly
lower. Examining the number of unique
QPAM-Plan relationships within the
Form 5500 universe, the Department
estimates that there are 547,546 client
Plans with QPAM relationships,
resulting in an average of 50 client Plans
per QPAM.87 Additionally, the
Department estimates that 215,135
unique Plans have a relationship with a
QPAM.88
84 87
FR at 45220.
submitted by SIFMA on 11 October
2022. (See https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
public-comments/1210-ZA07/00009.pdf).
86 Comment submitted by the American Bankers
Association on 6 January 2023. (See https://
www.dol.gov/sites/dolgov/files/ebsa/laws-andregulations/rules-and-regulations/publiccomments/1210-ZA07-2/00142.pdf).
87 In the 2020 Form 5500, the Department found
64,216 QPAM relationships amongst a total of
87,559 Plans that filed the Form 5500 Schedule C.
To estimate the number of total Plans with QPAM
relationships, the Department applies this ratio to
the entire Plan universe. This assumption implies
that small plans have the same number of
relationships with QPAMs as the larger plans that
file Schedule C. The number of total Plans with
QPAM relationships is estimated as: (64,216/
87,559) × 746,610 = 547,566 Plan client
relationships. This equates to an average of 50
clients per QPAM, calculated as: 547,566 Plan
client relationships/10,855 unique QPAMs = 50.44
Plan clients per QPAM, rounded to 50.
88 In the 2020 Form 5500, the Department found
25,230 unique plans using QPAMs among amongst
a total of 87,559 Plans that filed the Form 5500
85 Comment
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
While this estimate is larger than the
Department’s estimate for the Proposed
Amendment, it is substantially smaller
than the estimates provided by the
commenters. The Department believes
variance in the estimates is likely due to
the definition of Investment Fund in the
exemption and the various ways Plans
may invest through those funds,
including as individual investment
options for participant-directed plans.
The Department does not have sufficient
data to differentiate between single and
pooled customer funds and/or whether
those funds are provided to different
types of plans, such as defined benefit
plans or defined contribution plans
(including individual account plans).
The Department reiterates that the
scope of this exemption, and the unit of
analysis, is each distinct legal entity. A
firm can have multiple distinct legal
entities that all act as QPAMs. The
number of clients per entity would be
expected to be lower than the number
of client Plans per firm. The
commenters did not clarify the types of
Plans or arrangements they were
considering in connection with the
estimates they provided.
The definition of ‘‘Plan’’ also includes
IRAs, and therefore, the Final
Amendment also affects IRA owners
who hire a discretionary asset manager
that is a QPAM or invest in a pooled
fund that relies upon a QPAM. In 2020,
nearly 65 million U.S. taxpayers had an
IRA.89 A survey of U.S. households
conducted by the Investment Company
Institute found that approximately half
of the households with a traditional IRA
consulted a professional financial
adviser on how to manage income and
assets in retirement.90 The Department
does not have data on the proportion of
IRAs that rely on a discretionary asset
manager; however, the Department
assumes that such relationships are rare
or that the involvement of a QPAM is
through a pooled investment fund
managed on a discretionary basis. The
Department did not receive any
comments concerning the number of
IRA owners that would be affected.
23117
Accounting Table
In accordance with OMB Circular A–
4, Table 1 summarizing the
Departments’ assessment of the benefits,
costs, and transfers associated with this
regulatory action in an accounting
statement. The Department is unable to
quantify all benefits, costs, and transfers
of this Final Amendment but has
sought, where possible, to describe
qualitatively all non-quantified impacts.
Many of the expected benefits to
Plans and their participants and
beneficiaries stem from provisions in
the Final Amendment that will impose
minimal or no costs on QPAMs but will
benefit them by providing more
certainty, protection, and transitional
support, such as the provision clarifying
that foreign convictions are included in
Section I(g), clarification that QPAMs
must not permit other Parties in Interest
to make decisions regarding Plan
investments under the QPAM’s control,
and the addition of a One-Year
Transition Period for Plans after an
ineligibility trigger under Section I(g)
has occurred.
TABLE 1—ACCOUNTING STATEMENT
Benefits:
Non-Quantified:
• Ensure the QPAM’s integrity is enhanced compared to the regulatory baseline before the Final Amendment, which will protect Plans affected by the exemption
better than prior Section I(g).
• Provide more clarity, certainty, protection, and transitional support for client Plans of an ineligible QPAM.
• Update the asset management and equity thresholds to ensure that QPAMs are sufficiently large to be able to withstand improper influence from Parties in Interest.
Costs
Estimate
Annualized Monetized ($Million/year) ...................................................................................................................
Year
dollar
$1.56
1.44
2023
2023
Discount
rate (%)
7
3
Period covered
2024–2033
2024–2033
Quantified Costs:
• Quantified costs include rule familiarization, the QPAM’s adoption of additional protections after an ineligibility trigger occurs, satisfying the exemption’s recordkeeping requirements, and individual exemption application costs for entities losing eligibility due to Participating In Prohibited Misconduct.
Non-Quantified Costs:
• QPAMs that become ineligible for Participating In Prohibited Misconduct may incur costs associated with indemnifying their client Plans for ‘‘actual’’ losses if
they move to a new asset manager.
• Some Plans may incur costs if they conduct a request for proposal sooner than they otherwise would have if their asset manager no longer qualified as a
QPAM due to the updated equity and asset thresholds in the Final Amendment.
Transfers:
lotter on DSK11XQN23PROD with RULES2
Non-Quantified:
• Client Plans of ineligible QPAMs may choose to transfer assets and revenue away from the ineligible asset managers to its competitors when a QPAM becomes ineligible due to occurrence of a Section I(g) triggering event.
Benefits
The new and amended conditions
will benefit Plans and their participants
and beneficiaries by providing more
clarity, certainty, protection, and
transitional support. The heightened
standards in this Final Amendment may
result in entities being more careful
about ensuring that their compliance
programs are sufficiently robust to
prevent Prohibited Misconduct or
Criminal Convictions from occurring. In
this respect, the exemption would
provide clear guardrails that would
make the costs associated with QPAMs
Schedule C. To estimate the number of total Plans
with QPAM relationships, the Department applies
this ratio to the entire Plan universe. This
assumption implies that small plans use QPAMs at
the same rate as the larger plans that file Schedule
C. the number of unique plans using QPAMs is
estimated as (25,230/87,559) × 746,610 = 215,135.
89 Internal Revenue Service. ‘‘SOI Tax Stats—
Accumulation and distribution of Individual
Retirement Arrangements (IRA).’’ Table 1. (2020).
https://www.irs.gov/statistics/soi-tax-statsaccumulation-and-distribution-of-individualretirement-arrangements.
90 The study found that 67 percent of traditional
IRA-owning households have a strategy for
managing income and asset in retirement and that
77 percent of those households consulted with a
professional financial advisor on how to manage
income and assets. The percent of IRA-owning
households that consulted with a professional
financial advisor is estimated as: 67% × 77% =
52%. (See Investment Company Institute. ‘‘The Role
of IRAs in US Households’ Saving for Retirement,
2022.’’ ICI Research Perspective: Vol. 29, No. 1.
(February 2023). https://www.ici.org/system/files/
2023-02/per29-01_0.pdf.)
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
PO 00000
Frm 00029
Fmt 4701
Sfmt 4700
E:\FR\FM\03APR2.SGM
03APR2
23118
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
becoming ineligible clearly avoidable.
The specific benefits expected to result
from the rulemaking are discussed
below.
Ineligibility Due to Foreign Criminal
Convictions—Subsection I(g)(1)(A) and
Subsection VI(r)(2)
One of the primary underlying
principles of the QPAM Exemption is
that any entity acting as a QPAM, or that
is in a position to influence a QPAM’s
policies, should maintain a high
standard of integrity.91 This principle is
called into question when a QPAM, or
an entity that may be in a position to
influence its policies, is convicted of
certain crimes. With this concern in
mind, the Department makes entities
ineligible for the prohibited transaction
relief in the QPAM Exemption as of the
date of the trial court judgment for any
of the crimes listed in Section VI(r).92
The baseline version of the exemption
did not explicitly address foreign
convictions. Since the initial grant of
the QPAM Exemption, the Department
has granted ten individual exemption
requests from QPAM applicants in
connection with a foreign conviction,
the first being in 2000.93 The amended
exemption directly references foreignequivalent crimes, clarifying that a
conviction ‘‘by a foreign court of
competent jurisdiction or released from
imprisonment, whichever is later, as a
result of a crime, however denominated
by the laws of the relevant foreign
government’’ will be considered a
Criminal Conviction for purposes of
ineligibility under Section I(g).
The Department believes this
clarification in the Final Amendment
aligns the QPAM Exemption with the
realities of modern investment practices
engaged in by many Plans. Further, it
removes all doubt that foreignequivalent crimes are a basis for
ineligibility, providing necessary
protections for Plans as required by
ERISA section 408(a) and Code section
4975(c)(2). This ultimately provides a
benefit to a QPAM’s client Plans and
their participants and beneficiaries that
rely upon QPAMs that are owned by or
91 47
FR at 56947.
Conviction as defined in Section VI(r)
of this Final Amendment.
93 See Prohibited Transaction Exemption (PTE)
2023–13, 88 FR 26336 (Apr. 28, 2023); PTE 2020–
01, 85 FR 8020 (Feb. 12, 2020); PTE 2019–01, 84
FR 6163 (Feb. 26, 2019); PTE 2016–11, 81 FR 75150
(Oct. 28, 2016); PTE 2016–10, 81 FR 75147 (Oct. 28,
2016); PTE 2012–08, 77 FR 19344 (March 30, 2012);
PTE 2004–13, 69 FR 54812 (Sept. 10, 2004); and
PTE 96–62 (‘‘EXPRO’’) Final Authorization
Numbers 2003–10E, 2001–02E, and 2000–30E, See
https://www.dol.gov/agencies/ebsa/laws-andregulations/rules-and-regulations/exemptions/
expro-exemptions-under-pte-96-62.
lotter on DSK11XQN23PROD with RULES2
92 Criminal
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
affiliated with entities operating in
foreign jurisdictions by not depriving
them of the protection provided by the
amendment to this exemption,
particularly including the
indemnification and penalty-free
withdrawal conditions in the Transition
Period provisions.
Ineligibility Due to Participating In
Prohibited Misconduct—Subsection
I(g)(1)(B) and Section VI(s) 94
To reinforce the Department’s premise
regarding the integrity standard, the
Department is expanding the
circumstances that lead to ineligibility.
The Final Amendment extends
ineligibility under Section I(g)(1)(B) to
include QPAMs and their Affiliates and
owners of a five (5) percent or more
interest that ‘‘Participate In’’ Prohibited
Misconduct. A more in-depth
discussion on how the Department
narrowed the scope of entities whose
‘‘Prohibited Misconduct’’ could lead to
ineligibility in the Final Amendment is
provided in an earlier section of this
preamble.
This extension of Section I(g)
ineligibility will strengthen the
protections to Plans and their
participants and beneficiaries that rely
upon QPAMs. The unamended
exemption leaves Plans and their
participants and beneficiaries
vulnerable to the activities of corporate
families with significant compliance
failures that pose equal risk of loss to
Plan assets. Additionally, the
Department expects that this Final
Amendment will prevent unfair and
unequal treatment of entities and
corporate families that have a record of
engaging in malfeasance that ultimately
may not result in a Criminal Conviction.
Mandatory One-Year Transition
Period—Section I(i)
Under the previous and amended text
of Section I(g), the immediate
ineligibility of a QPAM upon a
judgment of conviction may expose
Plans to potential costs and losses
without the necessary time to make
alternative investment arrangements.
Before this Final Amendment, the only
way to avoid immediate ineligibility
after a conviction was for the QPAM to
submit an individual exemption
application to the Department
requesting relief to continue relying
upon the QPAM Exemption. The
QPAM’s client Plans had no additional
protections under the baseline version
of the exemption to address the
94 Subsection I(g)(1) was proposed as subsection
I(g)(3).
PO 00000
Frm 00030
Fmt 4701
Sfmt 4700
immediate loss of the QPAM
Exemption.
The Transition Period included in the
Final Amendment is designed to benefit
client Plans by guarantying transitional
relief and protections if they decide to
wind-down their arrangements with a
QPAM that becomes ineligible. The
Transition Period ensures that
responsible Plan fiduciaries have the
time and ability to choose an alternative
discretionary asset manager or
investment strategy without incurring
undue costs. If Plan fiduciaries decide
to retain an ineligible QPAM as a
discretionary asset manager, the OneYear Transition Period will provide
Plan fiduciaries with time to determine
and prepare for any changes that may
become necessary for Plan investments.
Additionally, the Transition Period
benefits QPAMs by providing additional
time for them to request an individual
exemption from the Department. This
will allow QPAMs to communicate with
and assist their client Plans in
determining an appropriate path
forward for the management of Plan
assets consistent with their applicable
fiduciary obligations.
Requesting an Individual Exemption—
Section I(j)
In addition to providing more
certainty to QPAMs and Plans, the Final
Amendment also requires QPAMs that
seek individual exemption relief to
review the Department’s most recently
granted individual exemptions with the
expectation that similar conditions will
be required if an exemption is proposed
and granted. If an applicant requests the
Department to exclude any term or
condition from its exemption that is
included in a recently issued similar
individual exemption, the applicant
must accompany such request with a
detailed explanation of the reason such
change is necessary, in the interest of,
and protective of the Plans and their
participants and beneficiaries.
Applicants also should provide detailed
information in their applications
quantifying the specific cost in dollar
amounts, if any, of the harms Plans
would suffer if a QPAM could not rely
on the exemption after the Transition
Period.
Currently, the Department requests
such information from an applicant if it
does not include such information in its
exemption application requesting
extended relief under the QPAM
Exemption when the QPAM becomes
ineligible. Therefore, this provision will
streamline the application process and
reduce costs because there will be fewer
back-and-forth discussions between the
Department and the applicant.
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
Involvement in Investment Decisions by
Parties in Interest—Section I(c)
The modification to the language in
Section I(c) will benefit Plans and their
participants and beneficiaries by
ensuring that the Plan is not engaging in
harmful prohibited transactions that are
orchestrated by a Party in Interest. The
Department understands that some Plan
fiduciaries, in conjunction with hiring a
QPAM, may be engaging in abuses of
the exemption. The amended language
will help ensure that Plans, their
participants and beneficiaries, and IRA
owners are not exposed to conflicts of
interest that the QPAM Exemption was
not designed to address and for which
the Department should not provide
prohibited transaction relief.
lotter on DSK11XQN23PROD with RULES2
Asset Management and Equity
Thresholds—Section VI(a)
As discussed earlier in this document,
the Final Amendment updates the asset
management and equity thresholds in
the exemption’s definition of the
entities that are eligible to act as a
QPAM to account for inflation as
measured by the CPI. After an initial
phase-in, the thresholds will be updated
on an annual basis according to the CPI.
A few commenters expressed concern
that the Department did not provide
evidence in the Proposed Amendment
to support the increase in size
thresholds and that the increased
thresholds may create a high barrier to
entry for financial institutions providing
QPAM services. In proposing this
update, the Department considered its
original intent when granting the QPAM
Exemption. The exemption was based
on the premise that an asset manager of
a certain size would be large enough to
withstand improper influence from
Parties in Interest (i.e., maintain
independence). Between March 1984,
when the exemption was published, and
April 2023, the CPI increased by 194.4
percent. During this period, the
Department did not increase the equity
thresholds for banks, savings and loan
associations, and insurance companies.
The asset management and equity
thresholds for registered investment
advisers were increased only once
during this period.
The Department maintains that while
some entities may no longer be able to
satisfy the updated asset management
and/or equity thresholds, this Final
Amendment is necessary for the
Department to continue to ensure that
QPAMs are indeed large enough to
maintain their independence. This
change will enhance the protections to
Plans and their participants and
beneficiaries relying on a QPAM.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Costs
This analysis estimates the additional
cost incurred by affected entities
because of the Final Amendment. The
Department recognizes that financial
institutions providing QPAM services
are already required to comply with
certain regulatory requirements in
addition to the conditions to qualify for
exemptive relief under the QPAM
Exemption, such as those outlined by
ERISA’s fiduciary duty requirements to
the extent applicable, or an individual
exemption granted in connection with
Section I(g) ineligibility. The
Department considers these
requirements to be the regulatory
baseline. The following analysis
considers only the additional costs
imposed by the Final Amendment.
The Department estimates that the
Final Amendment will impose total
costs of $6.8 million in the first year and
$0.8 million in each subsequent year.
Over 10 years, the costs associated with
the amendment will total approximately
$11.0 million, annualized to $1.6
million per year (using a seven percent
discount rate).95
Preliminary Assumptions and Cost
Estimate Inputs
The Department assumes that
different types of personnel will be
responsible for satisfying the
requirements in the Final Amendment.
To account for the labor costs associated
with different types of personnel, the
Department estimates the hourly labor
costs for each type of personnel. In the
analysis below the Department applies
the hourly labor costs of $63.45 for
clerical personnel, $159.34 for internal
legal professionals, $190.63 for financial
managers, and $535.85 for outside legal
professionals.96
The Final Amendment requires
QPAMs to distribute various notices to
client Plans after an ineligibility trigger,
as described below. The Department
does not have sufficient data to estimate
95 The costs would be $12.3 million over a 10year period, annualized to $1.4 million per year
using a three percent discount rate.
96 Labor costs for clerical personnel, accountants
or auditors, internal legal professionals, and
financial managers are based off internal
Department of Labor calculations based on 2023
labor cost data. For a description of the
Department’s methodology for calculating wage
rates, see https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
technical-appendices/labor-cost-inputs-used-inebsa-opr-ria-and-pra-burden-calculations-june2019.pdf. Labor costs for outside legal professionals
is calculated as a composite weighted average based
on the Laffey Matrix for Wage Rates for the time
period 6/01/2022–5/31/2023, see https://
www.laffeymatrix.com/see.html. The labor cost is
estimated as: (40% × $413) + (35% × $508) + (15%
× $733) + (10% × $829) = $535.85.
PO 00000
Frm 00031
Fmt 4701
Sfmt 4700
23119
how many QPAMs will elect to send
such notices electronically or by mail.
For the purposes of this analysis, the
Department estimates that 80 percent of
these notices will be delivered by firstclass mail at a first-class mail postage
rate of $0.68.97
Costs Incurred by All QPAMs
The following analysis considers the
marginal costs of the amendments on all
financial institutions acting as QPAMs.
As discussed in the Affected Entities
section, the Department estimates that
10,855 financial institutions act as
QPAMs and rely on the QPAM
Exemption.
Rule Familiarization Costs
The Department expects that QPAMs
are likely to rely on outside specialized
legal counsel to ensure compliance with
the Final Amendment. The specialized
legal counsel likely will review the
amendment and present updates to
multiple clients. On average, the
Department estimates that each QPAM
will incur a cost equivalent to the cost
of consulting with an outside legal
professional for one hour. This results
in an equivalent cost estimate of $5.82
million in the first year.98
Reporting Reliance on the QPAM
Exemption—Section I(k)
Section I(k) of the Final Amendment
will require QPAMs to report their
reliance on the QPAM Exemption by
emailing the Department at QPAM@
dol.gov. The email must include the
legal name of the entity and any name
the QPAM may be operating under. This
one-time cost is expected to result in a
minor clerical cost for QPAMs. The
Department estimates drafting and
sending the email will take a clerical
worker employed by each QPAM 15
minutes, on average, resulting in an
estimated cost of $0.17 million in the
first year.99 In subsequent years, new
QPAMs or QPAMs that change their
name will be required to send the
notification. The Department does not
have data on how many QPAMs will be
required to send this notification in
subsequent years. For the purposes of
this analysis, the Department assumes
97 USPS. ‘‘Mailing & Shipping Prices.’’ (2024).
https://www.usps.com/business/prices.htm.
98 The hour burden is estimated as: 10,855
QPAMs × 1 hour = 10,855 hours. The labor cost of
$535.85 is applied for an external legal professional.
The equivalent cost is estimated as: 10,855 hours
× $535.85 = $5,816,652, rounded to $5.82 million.
99 The hour burden is estimated as: 10,855
QPAMs × 15 minutes = 2,713.75 hours. The labor
cost of $63.45 is applied for a clerical worker. The
equivalent cost is estimated as: 10,855 QPAMs × 15
minutes × $63.45 = $172,187, rounded to $0.17
million.
E:\FR\FM\03APR2.SGM
03APR2
23120
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
that one percent of QPAMs, or 109
QPAMs, will either be new or have a
name change.100 Accordingly, the
reporting requirement is estimated to
total 27.3 hours with an equivalent cost
of $1,729.101
If a QPAM fails to report its reliance
on the exemption within 90 days, the
QPAM must send a notice to the
Department within an additional 90
days that includes its reliance on the
exemption or name change and explains
the reason(s) for its failure to provide
notice. The Department does not have
sufficient information to determine the
percentage of QPAMs that are likely to
fail to report reliance. For the purposes
of this analysis, the Department
estimates that two percent of QPAMs, or
217 QPAMs in the first year and two
QPAMs in subsequent years will fail to
report reliance.102 The Department
estimates that preparing the notice will
require a legal professional to spend 30
minutes. Based on the foregoing, the
Department estimates that the burden is
108.5 hours with an equivalent cost of
approximately $17,288 in the first
year 103 and one hour with an equivalent
cost of approximately $159 in
subsequent years.104 The cost for a
clerical professional to draft and send
an email notifying the Department of its
reliance or name change is included in
the cost estimate of sending notice of
reliance above.
lotter on DSK11XQN23PROD with RULES2
Recordkeeping—Section VI(u)
Under this new provision, QPAMs
will be required to maintain records
sufficient to determine whether the
conditions of the exemption have been
met for a given transaction. QPAMs also
will be required to make those records
available to the persons identified in
Subsection VI(u)(2) for six years. If a
QPAM refuses to disclose information to
any of the parties listed in Section VI(u)
on the basis that information is exempt
from disclosure, the QPAM must
100 The number of QPAMs is estimated as: 10,855
QPAMs × 1% = 108.6, rounded to 109.
101 The hour burden is estimated as: 109 QPAMs
× 15 minutes = 27.3 hours. The labor cost of $63.45
is applied for a clerical worker. The equivalent cost
is estimated as: 109 QPAMs × 15 minutes × $63.45
= $1,729.
102 The number of QPAMs in the first year is
estimated as: 10,855 × 2% = 217.1, rounded to 217.
The number of QPAMs in subsequent years is
estimated as: 109 QPAMs × 2% = 2.2, rounded to
2.
103 The number of QPAMs in the first year is 217.
The labor cost of $159.34 is applied for an internal
legal professional. The equivalent cost is estimated
as: 217 QPAMs × 0.5 hours × $159.34 = $17,288,
rounded to $17,000.
104 The hour burden is estimated as: 2 QPAMs ×
0.5 hour = 1 hour. The labor cost of $159.34 is
applied for an internal legal professional. The
equivalent cost is estimated as: 1 hour × $159.34 =
$159.34, rounded to $159.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
provide a written notice advising the
requestor of the reason for the refusal
and that the Department may request
such information.
In the Proposed Amendment, the
Department posited that QPAMs, as
fiduciaries, already maintain records as
part of their regular business practices
consistent with this requirement.
Further, the Department stated that the
recordkeeping requirement corresponds
to the six-year retention requirement in
ERISA section 107. Therefore, the
Department estimated that the
recordkeeping requirement would
impose a negligible burden, because
most QPAMs already are maintaining
records in accordance with the
proposed amendment’s recordkeeping
requirement.105
The Department received several
comments that the Department
underestimated the cost associated with
the recordkeeping requirement in the
economic analysis for the Proposed
Amendment. Several commenters
expressed concern that the requirements
in the Proposed Amendment were vague
or confusing. In response to these
comments, the Department has provided
additional guidance on recordkeeping
earlier in this preamble to alleviate
potential confusion. The additional
guidance clarifies that recordkeeping
should be based on a ‘‘facts and
circumstances’’ test. After further
consideration, the Department
maintains that these requirements are
consistent with common business
practices for entities relying on the
QPAM Exemption.
The Department recognizes that some
QPAMs may not be maintaining records
that satisfy the requirements of the Final
Amendment and accordingly will
experience higher marginal costs to
comply with this requirement. However,
the Department expects that most
QPAMs are already fully compliant. The
Department estimates that, on average,
the additional recordkeeping
requirement will require clerical
personnel at a QPAM to spend one hour
annually resulting in an estimated
equivalent cost of approximately
$689,000.106
The Department does not have data
on how often a QPAM might refuse to
disclose information to any of the
parties listed in Section VI(u); however,
the Department believes such instances
will be rare. The Department did not
receive comments on the frequency or
105 87
FR at 45224.
hour burden is estimated as: 10,855
QPAMs × 1 hour = 688,750 hours. The labor cost
of $63.45 is applied for clerical personnel. The
equivalent cost is estimated as: 10,855 QPAMs × 1
hour × $63.45 = $688,750, rounded to $689,000.
106 The
PO 00000
Frm 00032
Fmt 4701
Sfmt 4700
the costs. For the purposes of this
analysis, the Department estimates that
two percent of QPAMs, or 217 QPAMs,
will refuse to disclose requested
information annually. The Department
estimates that drafting a written notice
advising the requestor of the reason for
the refusal and that the Department may
request such information will require an
internal legal professional to spend one
hour, which results in an estimated
equivalent cost of approximately
$35,000.107
Additionally, some commenters
expressed concern that this requirement
would lead to heightened litigation risk
from those who request the records,
which would further increase costs for
QPAMs. This concern fails to account
for the fact that a QPAM is a fiduciary
with obligations to its client Plans,
including their participants and
beneficiaries. The Department has
included a similar recordkeeping
requirement in many administrative
prohibited transaction exemptions and
is not aware that such requirements
have resulted in increased litigation for
those entities subject to the
requirements. Commenters did not
provide data or estimates of the direct
cost that might be associated with the
purported increased litigation risk.
Therefore, the Department believes that
such cost will be minimal or
nonexistent when compared to the
baseline litigation risk associated with
being a fiduciary asset manager.
Involvement in Investment Decisions by
Parties in Interest—Section I(c)
The Department anticipates that the
modifications to Section I(c) will not
change the costs of the exemption
compared to cost of the baseline QPAM
Exemption because the types of
transactions that were intended to be
excluded by previous Section I(c) are
the same types of transactions intended
to be excluded by modified Section I(c).
Costs Incurred by QPAMs Losing
Eligibility for the Exemption for a
Criminal Conviction or Prohibited
Misconduct
According to past QPAM Section I(g)
individual exemption applicants, the
QPAM Exemption serves as one of the
most advantageous exemptions for
financial institutions that are involved
with discretionary asset management.
Even if other exemptions are available,
financial institutions may seek QPAM
107 The number of QPAMs is estimated as 10,855
× 2% = 217 QPAMs. The hour burden is estimated
as: 217 QPAMs × 1 hour = 217 hours. The labor cost
of $159.34 is applied for a legal professional. The
equivalent cost is estimated as: 217 QPAMs × 1
hour × $159.34 = $34,577, rounded to $35,000.
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
status to mitigate risk of exposure to
excise taxes under Code sections
4975(a) and (b) for engaging in nonexempt prohibited transactions if they
fail to meet the conditions of those
exemptions.
Financial Institutions also use QPAM
status to attract and maintain client
Plans. Although a QPAM that fails to
satisfy Section I(g) may continue to
operate as an asset manager for Plans,
the Department understands that some
entities use QPAM status as an indicator
of size and/or sophistication to potential
client Plans. According to past
individual exemption applicants, if an
entity is no longer able to represent that
it is a QPAM, Plans are less likely to
retain the QPAM as their manager, even
in situations where the client
technically does not need the relief
provided by the exemption.
The loss of eligibility for the QPAM
Exemption may create perceived or
actual costs in the form of lost
opportunities for the financial
institution. The costs associated with
the loss of reliance on the QPAM
Exemption are not added costs imposed
by this Final Amendment, but rather
costs attributable to the criminal
behavior of a QPAM or its Affiliate or
owner of a five (5) percent or more
interest. Such costs are not considered
as part of this analysis, which only
considers costs that are directly
imposed by this amendment.
Estimate of the Number of Financial
Institutions Experiencing Ineligibility
Due to a Criminal Conviction or
Prohibited Misconduct
The Department believes the
individual exemptions granted in the
past provide the best basis for
estimating how many QPAMs will
experience an ineligibility trigger in the
future. The Department only has data on
the number of QPAMs covered by each
individual exemption since 2013. As
23121
shown in Table 2 below, the Department
granted individual exemptions to 65
QPAMs facing ineligibility under
current Section I(g) in connection with
14 separate convictions or possible
convictions.108
The number of QPAMs affected in any
given year is a function of the number
of convictions covered by Section I(g)
and the number of entities within a
corporate family operating as QPAMs.
As shown by past experience, this
number is likely to fluctuate between
years. Based on the experience shown in
Table 2, the Department estimates that,
on average, eight QPAMs each year will
lose eligibility due to a Criminal
Conviction.109 As this is an average, the
number of affected QPAMs impacted by
ineligibility due to a Criminal
Conviction could be higher than eight in
some years and lower than eight in
others.
TABLE 2—PAST CONVICTIONS AND AFFECTED QPAMS *
Number of
convictions
Number of
affected
QPAMs
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
.........................................................................................................................................................................
1
1
1
6
........................
........................
........................
........................
1
4
3
20
25
........................
........................
........................
........................
13
Total ..................................................................................................................................................................
Average ............................................................................................................................................................
Estimated Yearly Average ** (rounded) ............................................................................................................
10
1.1
2
65
7.2
8
2013
2014
2015
2016
2017
2018
2019
2020
2021
lotter on DSK11XQN23PROD with RULES2
* The average number of affected QPAMs includes zeros for years without convictions, 2017 through 2020.
** The corresponding calculated averages include decimals; therefore, to err on the side of caution and inclusion the estimated yearly average
is rounded to the upper integer.
The Department’s expansion of the
ineligibility provision to include
Prohibited Misconduct under
Subsection I(g)(1)(B) and Section VI(s)
will likely increase the number of
QPAMs that become ineligible under
Section I(g). For the Proposed
Amendment, the Department estimated
that eight additional QPAMs each year
would experience ineligibility due to
the Prohibited Misconduct provisions,
which equals the average annual
number of QPAMs that have
experienced ineligibility due to a
Criminal Conviction. The Final
Amendment reduced the scope of
entities whose Prohibited Misconduct
could cause ineligibility for a QPAM as
compared to the Proposed Amendment
and as discussed in more detail in an
earlier section of the preamble. The
Department does not have sufficient
data to determine the exact number of
QPAMs that will become ineligible due
to this change. For the purposes of this
analysis, the Department assumes four
additional QPAMs will become
ineligible.110
The Final Amendment also clarifies
that Section I(g) applies to foreign
108 Ineligible QPAMs that request individual
exemptions generally request relief for the entire
ten-year ineligibility period. However, to engage in
a thorough fact-finding process and to verify
compliance with certain audit provisions in the
individual exemptions, the Department has granted
exemptions that include less than ten years of relief
in many situations. Ineligible QPAMs then typically
apply for an extension of relief even though no
additional conviction has occurred. Additionally, in
situations where an ineligible QPAM is impacted by
a subsequent conviction before the expiration of the
ten-year ineligibility period for the initial
conviction, the Transition Period would also not be
implicated, so there is no additional cost burden
associated with subsequent convictions. There was
a total of three subsequent convictions after an
initial conviction for some entities in 2017, 2018,
and 2019.
109 The Department did not include in this
estimate any of the possible QPAMs that have
remote relationships with a convicted entity that
are identified in the individual exemptions as
‘‘Related QPAMs.’’ The Department has never
received comments, questions, requests for
guidance, or separate individual exemption
applications from any entities that would fall into
that definition, and therefore, assumes such entities
are not operating as QPAMs.
110 Due to the reduced scope of entities captured
by Participating In Prohibited Misconduct, the
Department lowered the estimate to four as
compared to the estimate of eight in the Proposed
Amendment.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
PO 00000
Frm 00033
Fmt 4701
Sfmt 4700
E:\FR\FM\03APR2.SGM
03APR2
23122
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
convictions that are substantially
equivalent to U.S. federal or state crimes
that are enumerated in Section I(g) of
the exemption. The Department and
QPAMs have treated foreign convictions
as causing ineligibility under Section
I(g) since at least 2000.111 Therefore, the
Department believes that the clarifying
reference that includes foreign
convictions within the scope of Section
I(g) will not change the number of
financial institutions losing eligibility.
In total, the Department estimates that
12 QPAMs, on average, will become
ineligible due to a Criminal Conviction
or Prohibited Misconduct annually. The
Department received a few comments
confirming that the expansion of
ineligibility would increase the number
of financial institutions that would lose
eligibility; however, the comments did
not provide data that directly address
the Department’s estimates.
Notice to the Department of Prohibited
Misconduct or Foreign NPA or DPA of
the QPAM and Its Affiliates or Owners
The Department is including a
requirement in this Final Amendment
that whenever a QPAM, its Affiliates, or
owners of a five (5) percent or more
interest Participates In Prohibited
Misconduct or executes a foreign NPA
or DPA, they must notify the
Department at QPAM@dol.gov. The
Department does not have sufficient
data to estimate how frequently such
Prohibited Misconduct would occur, but
the Department assumes it will occur
infrequently. For the purposes of this
analysis, the Department assumes that
four instances of Prohibited Misconduct
each year will require such a notice, at
a cost of approximately $300.112
lotter on DSK11XQN23PROD with RULES2
Mandatory One-Year Transition
Period—Section I(i)
The amendment includes a
mandatory One-Year Transition Period
111 See Prohibited Transaction Exemption (PTE)
2023–13, 88 FR 26336 (Apr. 28, 2023); PTE 2020–
01, 85 FR 8020 (Feb. 12, 2020); PTE 2019–01, 84
FR 6163 (Feb. 26, 2019); PTE 2016–11, 81 FR 75150
(Oct. 28, 2016); PTE 2016–10, 81 FR 75147 (Oct. 28,
2016); PTE 2012–08, 77 FR 19344 (March 30, 2012);
PTE 2004–13, 69 FR 54812 (Sept. 10, 2004); and
PTE 96–62 (‘‘EXPRO’’) Final Authorization
Numbers 2003–10E, 2001–02E, and 2000–30E, See
https://www.dol.gov/agencies/ebsa/laws-andregulations/rules-and-regulations/exemptions/
expro-exemptions-under-pte-96-62.
112 The Department estimates that preparing and
sending each notice will require an in-house legal
professional 30 minutes and a clerical staff 5
minutes. The hour burden is estimated as: 4 notices
× (30 minutes + 5 minutes) = 2 hour and 20
minutes. The labor cost of $159.34 is applied for an
in-house legal professional, and a labor cost of
$63.45 is applied for clerical staff. The equivalent
cost is estimated as: 4 notices × [(30 minutes ×
$159.34) + (5 minutes × $63.45)] = $324, rounded
to $300.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
that the QPAM must provide to its
client Plans that begins on the
Ineligibility Date. During this period,
relief under the QPAM Exemption
would only be available for existing
client Plans of the QPAM. The
Department modeled the Transition
Period provisions from the conditions
included in the Department’s recent
individual Section I(g) exemptions.
This Final Amendment does not
include the provisions from the
Proposed Amendment that would have
prevented QPAMs from engaging in new
transactions on behalf of existing client
Plans during the Transition Period. The
Department has not included a similar
requirement in past one-year QPAM
individual exemptions it has issued,
and several commenters expressed
concern that this provision would be
harmful to Plans that rely on QPAMs.
After considering these comments, the
Department has removed this restriction
in the Final Amendment.
As amended, the Department expects
that QPAMs will not incur increased
costs as a result of a Criminal
Conviction due to the Transition Period
provisions because these costs would be
equivalent to the costs incurred by
QPAMs who have obtained an
individual exemption that includes
similar conditions. However, an
increased cost will be associated with
the expansion of the ineligibility
provisions. As discussed above, the
Department estimates that four
additional QPAMs will become
ineligible each year due to Participating
In Prohibited Misconduct.
Notice to Plans—Subsection I(i)(1)
Within 30 days of the Ineligibility
Date, the QPAM must provide notice to
the Department and each of its client
Plans. The preamble provides more
detail regarding the information the
QPAM is required to include in this
notice.
QPAMs that experience ineligibility
and apply for individual exemption
relief already are required to provide
this type of notice, therefore, the
Department is not attributing an
incremental burden to this requirement.
However, due to the expanded scope of
ineligibility, QPAMs that become
ineligible due to Participating In
Prohibited Misconduct will incur the
cost of sending notices to their client
Plans.
As discussed in the Affected Entities
section above, the Department estimates
that each QPAM provides discretionary
asset management services to an average
of 50 Plans. The Department estimates
that a legal professional at each QPAM
will spend, on average, 30 minutes
PO 00000
Frm 00034
Fmt 4701
Sfmt 4700
preparing the notice, and clerical
personnel will spend two minutes
preparing each notice to be sent to a
Plan by mail, resulting in an equivalent
labor cost of approximately $700.113
Additionally, the Department assumes
that notices sent by mail will require
two pages of paper each, resulting in a
material and postage cost of
approximately $100.114
The Department believes the cost of
sending this notice to the Department
will be negligible because the QPAM
will have already prepared and sent the
notice to client Plans, and the notice to
the Department is required to be
submitted electronically.
Indemnification
As discussed above, QPAMs will be
required to indemnify, hold harmless,
and promptly restore actual losses to
each client Plan for any damages
directly resulting from a QPAM losing
eligibility for the exemption due to a
Criminal Conviction or Prohibited
Misconduct. Damages may include
losses and related costs arising from
unwinding transactions with third
parties and transitioning Plan assets to
an alternative asset manager.
When the Department has granted
individual exemptions for Section I(g)
ineligibility, it has included these
additional protections and required
QPAMs to ensure that Plans are
permitted to withdraw from their asset
management arrangement with an
ineligible QPAM without penalty and be
indemnified and held harmless in the
event of future misconduct.
Accordingly, the Department has not
attributed any incremental burden to
this requirement.
However, due to the expanded scope
of ineligibility, QPAMs that become
ineligible as a result of Participating In
Prohibited Misconduct may incur costs
associated with indemnifying their
client Plans for losses that would occur
if they moved to a new asset manager.
In the proposal, the Department
requested comments on the cost of the
indemnification provision. The
Department received several comments
asserting that the indemnity obligation
113 The hour burden is estimated as: (4 QPAMs
× 0.5 hours of professional legal time) + (4 QPAMs
× 50 Plans × 80% of notices being mailed × 2/60
hours of clerical personnel time) = 7.3 hours. The
labor cost of $159.34 is applied for a legal
professional, and the labor cost of $63.45 is applied
for clerical personnel. The equivalent cost is
estimated as: (4 QPAMs × 0.5 hours of professional
legal time × $159.34) + (4 QPAMs × 50 Plans × 80%
of notices being mailed × 2/60 hours of clerical
personnel time × $63.45) = $657, rounded to $700.
114 The material and postage cost are estimated as:
(4 QPAMs × 50 Plans × 80% of notices being
mailed) × [(2 pages × $0.05 per page) + $0.68] =
$124, rounded to $100.
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
will increase the risk and cost
associated with being a QPAM, and that
these costs will be passed onto Plans in
the form of higher fees. The Department
did not receive any comments providing
data directly addressing the amount of
the cost for indemnification.115
Costs Incurred by QPAMs Requesting an
Individual Exemption—Section I(j)
The Final Amendment retains Section
I(j) 116 from the Proposed Amendment,
which provides that a QPAM that is
ineligible or anticipates that it will
become ineligible may apply for an
individual exemption from the
Department. This individual exemption
would allow the QPAM to continue
relying on the relief provided in the
QPAM Exemption for a longer period
than the One-Year Transition Period.
Costs for all QPAMs Seeking an
Individual Exemption
lotter on DSK11XQN23PROD with RULES2
The Department estimates that, on
average, three individual exemption
applications will be submitted to the
Department each year. The Department
estimates that four QPAMs annually
will be covered by each exemption
application (12 QPAMs total; with four
losing eligibility due to Prohibited
Misconduct and eight losing eligibility
due to a Criminal Conviction). The Final
Amendment instructs applicants that
apply for an individual exemption to
provide the Department with detailed
information quantifying the cost of the
harm, if any, its client Plans would
suffer if a QPAM could not rely on the
QPAM Exemption after the Transition
Period. Section I(j) also instructs all
applicants to include in their exemption
applications the specific dollar amounts
of investment losses resulting from
foregone investment opportunities that
would result from ineligibility and any
evidence supporting the proposition
that investment opportunities will only
be available to client Plans on less
advantageous terms. For this
requirement, the Department assumes a
financial professional will spend four
hours preparing this supporting
information. Therefore, the Department
estimates that for the three applications
115 The Department received several comments
addressing the specific costs associated with
amending WMAs, as required under the Proposed
Amendment. These costs did not directly address
indemnification costs but rather contract
negotiation and updating the WMAs. The
Department moved the proposed requirements for
the WMA into the Transition Period provisions in
response to commenters and believes the cost to
ineligible QPAMs regarding this will generally be
captured within the required notices to client Plans
after an ineligibility trigger.
116 Proposed Section I(k) has been redesignated as
Section I(j) in the Final Amendment.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
covering the estimated 12 QPAMs losing
eligibility annually, the cost associated
with the additional requirement will be
approximately $2,300.117
Finally, Section I(j) of the Final
Amendment provides that if an
applicant would like to request the
Department to exclude any term or
condition from its individual exemption
that is included in a recently granted
individual exemption, the applicant
must provide a detailed statement
explaining why the variation is
necessary and in the interest of and
protective of affected Plans, their
participants and beneficiaries, and IRA
owners. The Department expects
QPAMs that become ineligible due to a
Criminal Conviction already will
conduct this analysis and thus would
not incur incremental costs.
Alternatively, if this information is not
included in an application, the
Department will generally require it
before proceeding with a final
determination regarding the exemption
request.
The Department assumes the four
QPAMs that are estimated to become
ineligible due to Participating In
Prohibited Misconduct would incur
incremental costs due to the
requirement to review the Department’s
most recently granted individual
exemptions involving Section I(g)
ineligibility. To satisfy the requirement,
the Department estimates that an
outside legal professional will spend
three hours drafting this addition to the
individual exemption application.
Preparing an individual exemption
application is specialized work, and the
Department assumes that most legal
professionals that are retained by
QPAMs will have prior experience.
Based on the foregoing, the Department
estimates that the costs associated with
the additional requirement totals
approximately $1,600 for the
application covering the four ineligible
QPAMs due to Participating In
Prohibited Misconduct.118
Costs for QPAMs That Become Ineligible
Due to Prohibited Misconduct
In the Final Amendment, the
Department expanded the scope of
ineligibility to include Participating In
117 The hour burden is estimated as: 3
applications × 4 hours = 12 hours. At an hourly rate
of $190.63 is applied for financial professional. The
equivalent cost is estimated as: (3 applications × 4
hours × $190.63 financial professional rate) =
$2,288, rounded to $2,300.
118 The hour burden is estimated as: (1
application × 3 hours) = 3 hours. A labor cost of
$535.85 is applied for an outside legal professional.
The equivalent cost is estimated as: (1 application
× 3 hours × $535.85 outside legal professional labor)
= $1,608 rounded to $1,600.
PO 00000
Frm 00035
Fmt 4701
Sfmt 4700
23123
Prohibited Misconduct. This provision
could cause additional financial
institutions to lose eligibility for the
QPAM Exemption and may require
them to incur the additional costs
associated with preparing and filing an
exemption application with the
Department.
In the Proposed Amendment, the
Department estimated that two
additional applicants each year would
apply for an individual exemption, each
covering four ineligible QPAMs,
resulting in a total cost of approximately
$30,000,119 or a per-application cost of
approximately $15,000. The Department
received one comment stating that the
Department underestimated this cost,
and that provided an alternative
estimate that the cost for filing an
individual exemption will total between
$250,000 and $500,000.120 This
commenter did not support its estimates
with specific information detailing how
the cost estimate was derived. However,
after considering the comment, the
Department has revised its estimate as
discussed below.
The Department has limited
information on the process for preparing
an exemption application. Based on the
applications received, the Department
believes that each QPAM affected may
need to dedicate clerical and in-house
legal time to gather information for the
application. For this Final Amendment,
the Department estimates that gathering
the information for the application will
require, on average, an in-house legal
professional and clerical personnel each
to spend 20 hours gathering and
preparing information for the
application. The Department assumes
that the formal exemption application
will be prepared by an outside legal
professional specializing in such
matters who will spend 15 hours, on
average, preparing the application. For
the four QPAMs becoming ineligible
due to Participating In Prohibited
Misconduct, the Department estimates
that this provision will result in an
estimated cost of approximately
$26,000.121
119 87
FR 45204, pp. 45220.
submitted by SIFMA on 11 October
2022. (See https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
public-comments/1210-ZA07/00009.pdf).
121 The hour burden is estimated as: [4 QPAMs
× (20 hours from an in-house legal professional +
20 hours for clerical personnel)] + (1 application ×
15 hours from an external legal professional) = 175
hours. The labor cost of $159.34 is applied for an
in-house legal professional, a labor cost of $63.45
is applied for clerical personnel, and a labor cost
of $535.85 is applied for an outside legal
professional. The equivalent cost is estimated as: (4
QPAMs × 20 hours × $159.34) + (4 QPAMs × 20
120 Comment
E:\FR\FM\03APR2.SGM
Continued
03APR2
23124
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
While this estimate is higher than the
Department’s estimate in the Proposed
Amendment, it is significantly lower
than the estimate provided by the
commenter. As previously stated, the
commenter did not elaborate on the
methodology it used to derive its cost
estimate. The Department’s analysis
only includes the costs directly
associated with preparing
documentation for the application and
preparing the application itself.122
Additionally, the commenter did not
elaborate on the type of entity that
would be requesting exemptive relief.
Applications may vary in complexity,
depending on the nature of the
Prohibited Misconduct and the number
of QPAMs affected. The Department
believes that its updated estimate for the
Final Amendment reflects a fair
representation of the cost to prepare an
exemption application in a typical
scenario.
Applicants that receive a final granted
individual exemption must prepare and
distribute a notice to interested parties.
Similarly, each of the four QPAMs will
be required to send an objective
description of the facts and
circumstances upon which the
misconduct is based to each client Plan.
The Department estimates that
approximately 200 notices will be
distributed annually, corresponding to
an average of 50 client Plans for each of
the four QPAMs estimated to be affected
by the application. The Department
estimates that clerical personnel will
spend 10 minutes distributing the
notices and objective descriptions,
resulting in a labor cost of
approximately $2,100.123 In addition,
the Department estimates that material
and mailing costs for these notices will
total approximately $400.124
hours × $63.45) + (1 application × 15 hours ×
$535.85) = $25,861, rounded to $26,000.
122 It is unclear if the commenter was also
considering the ongoing costs associated with
complying with the individual exemption. For
purposes of this portion of the Department’s
analysis, ongoing costs associated with complying
with a granted individual exemption are not
included as a cost of filing the exemption
application under Section I(j).
123 The hour burden is estimated as: 4 QPAMs ×
50 Plans per QPAM × (10/60) hours = 33.3 hours.
A labor cost of $63.45 is applied for clerical
personnel The equivalent cost is estimated as: 4
QPAMs × 50 Plans per QPAM × (10/60) hours ×
$63.45 = $2,116, rounded to $2,100.
124 The Department further assumes that notices
and the descriptions of facts and circumstances will
be delivered separately, comprising 15 and 5 pages,
respectively. With a printing cost of $0.05 per page
and a mailing cost of $0.66 per notice, the
Department estimates the mailing cost as 4 QPAMs
× 50 Plans per QPAM × 80% of notices mailed ×
{[(15 × $0.05) + $0.68] + [(5 × $0.05) + $0.68]} =
$378, rounded to $400.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Costs Incurred by Plans and
Participants, Beneficiaries
The Department received several
comments stating that the Proposed
Amendment would increase Plan
expenses. Commenters identified the
following as factors that are likely to
increase Plan expenses: (1) increased
resources devoted to avoiding nonexempt prohibited transactions; (2)
disruptions during the Transition
Period; (3) increased fees due to the risk
of ineligibility, and (4) transition costs
associated with replacing an ineligible
QPAM.
The Department also received several
comments stating that the Proposed
Amendment would decrease the
investment options available to Plans,
specifically regarding a counterparty in
a trade who is a Party in Interest.
Several commenters expressed concern
that the proposed modifications to
Section I(c) would limit access to
primary investment markets and could
limit access to asset classes that are not
typically traded on large exchanges,
such as asset-backed securities. In
response to these comments, the
Department did not include many of the
proposed modifications in the Final
Amendment. Therefore, the Department
believes there will be no related costs
incurred by Plans and their participants
and beneficiaries due to the
modifications to Section I(c) in the Final
Amendment.
Asset Management and Equity
Thresholds—Section VI(a)
As a result of the adjustments to the
asset management and equity thresholds
in the QPAM definition in Section VI(a),
the Department acknowledges that some
QPAMs may not meet the new threshold
requirements, and, consequently, would
no longer be able to rely on the QPAM
Exemption. The Department expects
Plans that utilize these QPAMs will
incur costs due to this transition but
does not have sufficient data to estimate
the impact.125
The Department requested similar
data in connection with individual
exemption applications when a QPAM
becomes ineligible due to convictions
covered by Section I(g), but the data
provided, and cost identified by
125 Some QPAMs have suggested in the past that
there could be costs associated with unwinding
transactions that relied on the QPAM Exemption
and reinvesting assets in other ways. The loss of
QPAM status could also require an asset manager
to keep lists of Parties in Interest to its client Plans
to ensure the asset manager does not engage in
prohibited transactions. However, even without the
QPAM Exemption, a wide variety of investments
are available that do not involve non-exempt
prohibited transactions.
PO 00000
Frm 00036
Fmt 4701
Sfmt 4700
applicants has been limited.
Additionally, the Department requested
comments and data in the Proposed
Amendment regarding the number of
QPAMs who will potentially become
unable to rely upon the QPAM
Exemption and the number of Plans and
the value of Plan assets that will be
impacted by the increase in asset
management and equity thresholds.
As discussed in the Benefits section
above, several commenters expressed
concern that the Department did not
provide evidence to support the
increase in the asset and equity
thresholds. Additionally, commenters
noted that the increased thresholds may
create a high barrier to entry for
financial institutions or would
disqualify small financial institutions,
which would impose transition costs for
client Plans that search for a new
investment manager to replace an
ineligible QPAM. One commenter noted
that the inflation increases would
introduce uncertainty regarding a
QPAM’s eligibility.126 One commenter
noted that a Plan transitioning to a new
asset manager would incur costs
associated with searching for a new
asset manager to replace the QPAM
(such as the costs and time required for
a request for proposal process; costs
associated with consultants to assist or
manage the process, legal review and
negotiation of a new management
agreement, and other due diligence
expenses; brokerage and other
transaction costs associated with the
sale of portfolio investments to
accommodate the investment policies
and strategy of the new asset manager;
the opportunity costs of holding cash
pending investment by the new asset
manager; and lost investment
opportunities in connection with a
change of asset manager). Another
commenter estimated that a formal
request for proposal for a new QPAM
would cost between $10,000 and
$50,000 with legal fees ranging between
$10,000 and $20,000 for a typical asset
class or $20,000 to $40,000 for a more
specialized strategy.
However, none of the commenters
directly addressed the number of
QPAMs that will lose eligibility due to
the increased thresholds or relatedly,
the number of client Plans serviced by
those QPAMs. The Department received
one comment stating that an
incremental increase approach would
give smaller investment fiduciaries, who
would be most affected by the threshold
126 Comment submitted by the Spark Institute on
11 October 2022. (See https://www.dol.gov/sites/
dolgov/files/EBSA/laws-and-regulations/rules-andregulations/public-comments/1210-ZA07/
00026.pdf).
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
changes, more time to prepare for and
respond to threshold changes and
minimize the negative impact on these
entities.
As discussed in the preamble and
after considering these comments, the
Department decided to phase in the
initial increase to asset and equity
thresholds incrementally over an
extended period rather than implement
the entire increase in a single year in
order to reduce the immediate impact
on QPAMs and their client Plans.
QPAMs and Plans relying on those
QPAMs that will lose the ability to rely
upon the QPAM Exemption,
particularly in the second and third
portions of the phase-in period will
have time to make needed adjustments.
Although Plans may continue to rely
on asset managers who do not satisfy
the definition of QPAM, the Department
acknowledges that some Plans may
choose to hire a different asset manager
if their current asset manager is not able
to rely on the QPAM Exemption. The
Department understands that it is
common industry practice to conduct a
request for proposal every three to five
years, and some Plans may choose to do
so sooner than they otherwise would
have because of the new threshold
23125
requirements. These Plans will incur
costs with preparing and reviewing
proposals from potential new asset
managers. The Department lacks
sufficient data to estimate the number of
Plans and QPAMs that would be
affected by the increased thresholds in
the definition of QPAM.
Summary of Costs
The total estimated annual costs
associated with the Final Amendment
will be approximately $6.8 million in
the first year and $0.8 million in
subsequent years. Table 3 summarizes
the costs for each requirement.
TABLE 3—COST SUMMARY
Aggregate
cost change
(in dollars)
Requirement
First year
All QPAMs:
Rule Familiarization ..............................................................................................................................
Reporting Reliance on the QPAM Exemption ......................................................................................
Notice of Failure to Report Reliance on the QPAM Exemption ..........................................................
Recordkeeping ......................................................................................................................................
Refusal to Disclose Requested Information .........................................................................................
QPAMs Losing Eligibility:
Notice to Plans .....................................................................................................................................
Notice to the Department of Prohibited Misconduct and Foreign NPA/DPA .......................................
QPAMs Applying for Individual Exemptions:
Quantification of Costs Plans Will Suffer .............................................................................................
Review of Past Exemptions .................................................................................................................
Exemption Application ..........................................................................................................................
Individual Exemption Notices ...............................................................................................................
Total Estimated Annual Cost ........................................................................................................
Subsequent year
$5,816,652
172,187
17,288
688,750
34,577
..............................
$1,729
159
688,750
34,577
782
340
782
340
2,288
1,608
25,861
2,494
2,288
1,608
25,861
2,494
6,762,827
758,588
lotter on DSK11XQN23PROD with RULES2
Note: Only quantifiable costs are displayed.
Transfers
If an asset manager cannot rely on the
relief under the QPAM Exemption (e.g.,
because it is ineligible due to its
Participation In Prohibited Misconduct
or due to the change in asset or equity
thresholds), its client Plans may choose
to transfer assets and revenue away from
the asset manager to its competitors.
From the Plan’s perspective, the
reduction in assets entrusted to the
original asset manager (and associated
revenue reduction) are offset by the
increase in assets managed by another
asset manager or managers (and
associated revenue increase). Even if the
impact of the switch is minimal or
neutral from the point of view of the
Plan, it is nevertheless appropriately
characterized as a transfer from a
societal perspective.127
127 Although a QPAM’s client Plans could be
expected to move some or all of its assets to another
asset manager if the QPAM is convicted of an
enumerated crime, this discussion does not address
these transfers. The Department has long viewed
both domestic and foreign convictions as causing
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Although the Department does not
have sufficient data to quantify the
likely size of such revenue transfers,
they could have an annual effect that
exceeds $200 million due to the
significant pool of Plan assets that
QPAMs manage. To the extent the Final
Amendment results in the movement of
assets from asset managers that cannot
rely on the exemption to other asset
managers, the associated revenue
transfers promote the Department’s
objectives in issuing this amendment to
the QPAM Exemption and enhance the
security of Plan investments.
In the Proposed Amendment, the
Department requested comments on
whether a QPAM’s client Plans would
be likely to move all or some of their
assets to an alternative asset manager
after a QPAM becomes ineligible due to
expansion of the ineligibility provision.
The Department did not receive
ineligibility under the existing exemption.
Consequently, the regulatory baseline already
includes the impact of such convictions.
PO 00000
Frm 00037
Fmt 4701
Sfmt 4700
comments directly addressing this issue.
The cost of conducting a request for
proposal and searching for a new asset
manager are discussed in greater detail
above, in the Cost section.
Regulatory Alternatives
Section 6(a)(3)(C) of Executive Order
12866 requires the Department to assess
the cost and benefits of feasible
alternatives for rules that are
determined to be ‘‘significant’’ under
Section 3(f)(1) of the executive order.
Therefore, the Department considered
several alternatives to the provisions in
the Final Amendment that are discussed
in this section.
Do not amend the QPAM
Exemption—Continue status quo of
addressing ineligibility under current
Section I(g) and only through
administration of the individual
exemption program.
The Department considered not
expanding the scope of Section I(g) and
maintaining its practice of addressing
ineligibility under Section I(g) only
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23126
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
through the individual exemption
process. However, it is the Department’s
understanding that its issuance of a
subsequently revoked opinion caused
uncertainty in the regulated community
regarding whether foreign convictions
are within the scope of Section I(g) of
the QPAM Exemption. This amendment
provides clarity on that point. Further,
immediate ineligibility under Section
I(g) has become a source of uncertainty
and potential disruption to Plans. As the
financial services industry has become
increasingly consolidated, the number
of entities becoming ineligible for relief
under the QPAM Exemption has grown,
prompting more entities to face
ineligibility. Through the individual
exemption process, client Plans would
continue to be exposed to the potential
for immediate disruption and transition
costs that might otherwise be avoided
through this Final Amendment.
The Department decided against this
alternative in favor of this amendment,
relying on its experience processing
individual exemption applications to
create a smoother transition between the
QPAM Exemption and the individual
exemption program so that a QPAM’s
client Plans have certainty regarding
their rights after an ineligibility event
occurs.
Amend the QPAM Exemption to
expressly exclude foreign convictions.
The Department considered expressly
limiting the scope of convictions to only
those in a U.S. federal or state trial
courts. However, given the increasingly
global reach of asset managers and
investment strategies, the Department
determined such a limitation would
leave Plans less protected and be
inconsistent with the ERISA section
408(a) and Code section 4975(c)(2)
required findings. An affiliated entity’s
criminal misconduct in a foreign
jurisdiction is an important indicator of
the integrity of the entire corporate
organization and casts doubt on a
QPAM’s ability to act in a manner that
will properly protect Plans and their
participants and beneficiaries from the
related damages, losses, and other harm
that often result from such criminal
misconduct.
Amend the QPAM Exemption to
require QPAMs to amend Written
Management Agreements with up-front
terms that apply in the event of
ineligibility.
In the proposal, the Department
included a requirement for all QPAMs
to amend their WMAs with client Plans
to include:
(1) A provision providing that in the
event the QPAM, its Affiliates, and five
percent or more owners engage in
conduct resulting in a Criminal
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Conviction or receipt of a Written
Ineligibility Notice, the QPAM would
not restrict its client Plan’s ability to
terminate or withdraw from its
arrangement with the QPAM;
(2) 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 failure of such QPAM
to remain eligible for relief under the
QPAM Exemption as a result of conduct
that leads to a Criminal Conviction or
Prohibited Misconduct; and
(3) A provision requiring the QPAM
to agree not to employ or knowingly
engage any individual that Participated
In the conduct that is the subject of a
Criminal Conviction or Prohibited
Misconduct.
In the Proposed Amendment, the
Department remarked that these
provisions would benefit Plans by
providing them with additional
certainty that the Plan and its assets will
be insulated from losses if a Criminal
Conviction or Prohibited Misconduct
occurs.
The Department estimated that the
cost associated with amending the
WMAs would result in a total
equivalent cost of $135,540,128 resulting
in an average cost of approximately
$220 for each QPAM. Comments on the
Proposed Amendment criticized the
Department’s estimation methods,
stating that the Department had
significantly underestimated the burden
this requirement would impose. For
instance, one commenter estimated that
the Department’s estimate was off at
least by a factor of 100. Another
commenter estimated that it would cost
between $1 billion and $12.3 billion.
In its estimate, the Department
assumed that amendments to WMAs
would be uniform across client Plans,
and accordingly, the Department
estimated that the associated costs
would be relatively small. However,
several commenters disagreed with this
assumption, stating that the necessary
amendments would differ by the type of
relationship and investment strategy.
Some commenters noted that such
amendments would require QPAMs to
open contract negotiations with each
QPAM client Plan, potentially leading
to a time-consuming process. Other
commenters indicated that some
QPAMs would incur costs associated
with consulting outside counsel on
these provisions and contract
negotiations. Further, several of the
commenters stated that amending
128 87
PO 00000
FR 45204, pp. 45218.
Frm 00038
Fmt 4701
Sfmt 4700
necessary contracts would not be
possible within the 60-day effective
period proposed.
The Department believes that these
provisions provide an important
protection to Plans, participants,
beneficiaries, and IRA owners. Namely,
these provisions ensure that Plans and
IRA owners can terminate the
arrangement or withdraw from a QPAMmanaged Investment Fund without
penalty, protecting Plans and IRA
owners from unnecessary costs when
relief under the exemption is lost
through no fault of their own. However,
based on the feedback from
commenters, the Department removed
the requirement to amend WMAs.
Instead, the Final Amendment requires
QPAMs to notify and agree to these
provisions with Plans in the Notice to
Plans required within 30 days of the
Ineligibility Date. The Department
determined the approach in the Final
Amendment provides the same
protection to Plans while significantly
reducing the cost burden.
Asset Management and Equity
Thresholds
The Department considered two
alternatives related to the asset
management and equity thresholds,
described below.
Amend the QPAM Exemption to
remove asset management and equity
thresholds.
As an alternative to updating the asset
management and equity thresholds, the
Department revisited whether such
thresholds could be removed entirely
from the exemption. The Department
determined that this approach would be
inconsistent with one of the core
concepts upon which the QPAM
Exemption was based. In the absence of
an appropriate alternative ensuring that
a QPAM will remain an independent
decision-maker, free from influence of
other Plan fiduciaries, the Department is
unable to justify the removal of the
thresholds.
Update the asset management and
equity thresholds to full CPI-adjusted
values at once.
The proposal included CPI-adjusted
values that would have been fully
updated to 2022 values. The Department
received a variety of comments
regarding the possible unintended
impact to QPAMs and their client Plans
who would not be able to satisfy such
significant increases at once. In
response to those concerns, the
Department determined that a more
appropriate way to update the
thresholds is through a phase-in to the
proposed values, which is included in
this Final Amendment.
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
Amend the QPAM Exemption to
include entering into NPAs or DPAs of
owners and Affiliates of QPAMs as a
possible Section I(g) ineligibility trigger.
In the Proposed Amendment, Section
I(g) would have been implicated if the
QPAM, its owners of a five (5) percent
or more interest, or Affiliates enter into
an NPA or DPA and subsequently
received a Written Ineligibility Notice
from the Department. The approach in
the Proposed Amendment was intended
to ensure QPAMs could not avoid the
consequences that otherwise would
result from a Criminal Conviction under
Section I(g) by entering into NPAs or
DPAs with prosecutors. In this Final
Amendment, the Department limited
the scope of Prohibited Misconduct to
NPAs or DPAs that are entered into with
a U.S. Federal or State prosecutor’s
office or regulatory agency and
Prohibited Misconduct that is found in
or determined by a court or courtapproved settlement.
In the Proposed Amendment, the
Department estimated that eight QPAMs
would be affected by the ineligibility
provisions due to Participating In
Prohibited Misconduct.129 As discussed
in the cost section, due to the narrowing
of the Prohibited Misconduct provision,
the Department estimates that four
QPAMs annually may become ineligible
due to the reduced scope of entities
captured in the Final Amendment rather
than the eight QPAMs that were
estimated in the Proposed Amendment.
Uncertainty Associated With the Final
Amendment
The Department is uncertain
regarding the total number of QPAMs
and examined multiple alternative
estimation methodologies before
utilizing the one outlined in this
amendment.
The first alternative considered was
adding additional service codes from
form 5500 data. The Department looked
at service providers identified under
service code 28 and found that they
were also frequently identified under
service code 50 and 27 (direct payment
from the plan and investment advisory
respectively). However, after examining
these codes in detail, the Department
found them too definitionally dissimilar
from investment management and that
the firms under these codes seemed less
likely to meet the asset and equity
thresholds required by the QPAM
Exemption. Thus, the Department only
included codes 28, 51, and 52.
The Department also examined
completely different methodologies for
generating the number of QPAMs. One
129 87
FR at 45218.
VerDate Sep<11>2014
18:54 Apr 02, 2024
proposed methodology was to use data
from the SEC and FDIC to estimate the
number of QPAMs. The Department
could use the FDIC data to see banks
with defined benefit plan or defined
contribution plan funds in trustee
accounts and could use asset data to
estimate the number of entities above
and below the asset threshold, but that
data was generated at the firm-level.
Since a firm can contain multiple
distinct entities, all acting as QPAMs,
the Department believed that use of this
data would lead to a significant
undercount of QPAMs.
The Department is also uncertain
about the extent to which the changes
in asset management and equity
thresholds would give rise to new costs
because some QPAMs that meet the
current thresholds no longer would be
able to rely on the exemption if they do
not meet the increased thresholds. Some
of these small QPAMs may lose this
portion of their business. However,
there still may be other exemptions that
they could use, or they could seek an
individual exemption that could allow
them to continue offering services.
Avenue NW, Room N–5718,
Washington, DC 20210
By email: ebsa.opr@dol.gov
Prohibited Transaction Exemption
84–14, 49 FR 9494 (March 13, 1984), as
corrected at 50 FR 41430 (October 10,
1985) and amended at 70 FR 49305
(August 23, 2005) and at 75 FR 38837
(July 6, 2010) (the QPAM Exemption)
permits various parties related to Plans
to engage in transactions involving Plan
assets if, among other conditions, the
assets are managed by a QPAM. The
following analysis considers the
paperwork burden associated with the
existing QPAM Exemption as well as
the incremental cost associated with the
Final Amendment.
Paperwork Reduction Act
QPAM-Sponsored Plans—Policies and
Procedures—Section V(b)
The existing information collection
requirements of the QPAM Exemption
require in-house QPAMs to develop
written policies and procedures
designed to ensure compliance with the
conditions of the exemption. Existing
in-house QPAMs will have already
prepared their policies and procedures
in accordance with the QPAM
Exemption. However, some in-house
QPAMs may also update their policies
and procedures in a given year.
The latest Form 5500 estimates from
the year 2020 indicate that there are
approximately 50 in-house QPAMs.132
The Department estimates that the
burden associated with preparing
policies and procedures will affect ten
percent of all in-house QPAMs,
including all new in-house QPAMs and
some existing in-house QPAMs.
Therefore, the Department estimates
that about five QPAMs will need to
In accordance with the Paperwork
Reduction Act of 1995, the Department
solicited comments concerning the
information collection request included
in the Proposed Amendment entitled
‘‘Proposed Amendment to Prohibited
Transaction Class Exemption 84–14 (the
QPAM Exemption).’’ 130 At the same
time, the Department also submitted an
information collection request to the
(OMB), in accordance with 44 U.S.C.
3507(d).
The Department received one
comment addressing the audit cost
estimates in the paperwork burden
analysis of the information collections.
Other comments submitted contained
information relevant to the costs and
administrative burdens attendant to the
Proposed Amendment. The Department
considered these public comments in
connection with making changes to the
Final Amendment, analyzing the
economic impact of the Proposed
Amendment and developing the revised
paperwork burden analysis summarized
below.
ICRs are available at RegInfo.gov
(reginfo.gov/public/do/PRAMain).
Requests for copies of the ICR can be
sent to the PRA addressee:
By mail: James Butikofer, Office of
Research and Analysis, Employee
Benefits Security Administration, U.S.
Department of Labor, 200 Constitution
130 87
Jkt 262001
23127
PO 00000
FR 45204.
Frm 00039
Fmt 4701
Sfmt 4700
Affected Entities
As discussed in the Affected Entities
section of the regulatory impact
analysis, the Department estimates that
there are 10,855 QPAMs. Additionally,
the Department estimates that each
QPAM, on average, provides services to
50 Plans and that there are 215,135 total
Plans with relationships with
QPAMs.131
131 For more information on how the number of
QPAMs, average number of relationships between
QPAMs and Plans, and unique number of Plans was
estimated, refer to the Affected Entities section of
the regulatory impact analysis.
132 The Department estimated the number of inhouse QPAMs by examining Schedule C of the 2020
Form 5500. Small Plans are not required to file the
Schedule C. This estimate could underestimate the
number of in-house QPAMs with small Plans, but
the Department believes that in-house QPAMs with
small Plans would be rare. In order for this to occur,
an investment manager would have to
simultaneously be large enough to qualify as a
QPAM and small enough to qualify as a small plan
for the Form 5500–SF.
E:\FR\FM\03APR2.SGM
03APR2
23128
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
update their policies and procedures
each year.133 The Department estimates
that the burden associated with new
QPAMs meeting the policies and
procedures requirements of the QPAM
Exemption will be five hours with an
equivalent cost of $797.134
QPAM-Sponsored Plans—Independent
Audit—Section V(c)
lotter on DSK11XQN23PROD with RULES2
Additionally, the exemption requires
in-house QPAMs to engage an
independent auditor to conduct an
annual exemption audit and issue an
audit report to the Plan. The Department
estimates that each of the 50 in-house
QPAMs will use in-house legal
professionals, financial managers, and
clerical time to provide documents and
respond to questions from the auditor.
The Department assumes QPAMs use
either a law firm or a consulting firm to
conduct the exemption audits, and the
Department assumes that the average
cost of an exemption audit is
$25,000.135 This results in a total
estimated cost of $1,250,000.136
Additionally, each exemption audit is
assumed to require about 5 hours of a
legal professional’s time, 13 hours of a
financial manager’s time, and six hours
of clerical time for each of the 50
QPAMs to provide needed materials for
the audit. This results in a burden
estimate of 1,200 hours with an
equivalent cost of $182,780.137
This results in a per-entity cost of
$28,656 for each audit. The Department
received one comment on its cost
estimate for the audit, noting that legal
expenses associated with QPAMs would
approach or exceed $100,000. This
commenter did not provide additional
information to support this estimate.
133 This is estimated as: 50 in-house QPAMs ×
10% = 5.
134 The burden is estimated as follows: (5 QPAMs
× 1 hour) = 5 hours. A labor rate of $159.34 is used
for legal counsel and applied in the following
calculation: (5 QPAMs × 1 hour × $159.34) = $797.
135 The Department has received information
from industry representatives that the cost of a
similar annual audit required by PTE 96–23 (the
INHAM Exemption) may range from approximately
$10,000 to $25,000, depending on asset size and
how many years the INHAM has used the auditing
firm. Because of the type of audit required for an
in-house QPAM, the Department has assumed that
the average cost of an exemption audit required by
the QPAM Exemption would be $25,000.
136 Assuming that the average cost of an
exemption audit would be $25,000: 50 in-house
QPAMs × $25,000 = $1,250,000.
137 The burden is estimated as follows: (50 × 5
hours) + (50 × 13 hours) + (50 × 6 hours) = 1,200
hours. A labor rate of $159.34 is used for legal
counsel, a labor rate of $190.63 is used for a
financial professional, and a labor rate of $63.45 is
used for a clerical worker. These labor rates are
applied in the following calculation: (50 × 5 hours
× $159.34) + (50 × 13 hours × $190.63) + (50 × 6
hours × $63.45) = $182,780.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Property Manager Written Guidelines—
Section I(c)
The exemption also contains a
requirement for written guidelines
when, in certain instances, a property
manager acts on behalf of a QPAM. In
this case, the QPAM is required to
establish and administer the guidelines.
Because agreements between an
institution and a property manager are
customary, the Department estimates
that this requirement will impose no
additional burden on QPAMs.
Reporting Reliance on the QPAM
Exemption—Subsection I(k)
QPAMs will have to report their
reliance on the QPAM Exemption via
email to QPAM@dol.gov. This
notification would occur only once for
most QPAMs. The information required
under subsection I(k) is limited to the
legal name of the entity relying upon the
exemption and any name the QPAM
may be operating under. The
Department expects it will take 15
minutes, on average, for each QPAM to
both prepare and send this electronic
notification. This burden is estimated to
amount to 2,713.8 hours with an
equivalent cost of $172,187 in the first
year.138 In subsequent years, new
QPAMs or QPAMs that change their
name will be required to send the
notification. The Department does not
have data on how many QPAMs will be
required to send this notification in
subsequent years. For the purposes of
this analysis, the Department assumes
that one percent of QPAMs, or 109
QPAMs, will either be new or have a
name change.139 Accordingly, this is
estimated to amount to 27.3 hours, with
an equivalent cost of $1,729.140
If a QPAM fails to report its reliance
on the exemption within 90 days, the
QPAM must send a notice to the
Department within an additional 90
days, indicating its reliance on the
exemption or name change, as well as
an explanation for the failure to provide
notice. The Department does not have
information on what percent of QPAMs
are likely to fail to report reliance. For
the purposes of this analysis, the
Department estimates that two percent
of QPAMs required to report will fail to
138 The hour burden is estimated as: 10,855
QPAMs × 15 minutes = 2,713.8 hours. The labor
cost of $63.45 is applied for a clerical worker. The
equivalent cost is estimated as: 10,855 QPAMs × 15
minutes × $63.45 = $172,187.
139 The number of QPAMs is estimated as: 10,855
QPAMs × 1% = 108.6, rounded to 109.
140 The hour burden is estimated as: 109 QPAMs
× 15 minutes = 27.3 hours. The labor cost of $63.45
is applied for a clerical worker. The equivalent cost
is estimated as: 109 QPAMs × 15 minutes x $63.45
= $1,729.
PO 00000
Frm 00040
Fmt 4701
Sfmt 4700
report reliance each year, or 217 QPAMs
in the first year and two QPAMs in
subsequent years.141 The Department
estimates that preparing the notice will
require a legal professional 30 minutes.
The burden is estimated to be 108.5
hours with an equivalent cost of
approximately $17,288 in the first
year 142 and one hour with an equivalent
cost of approximately $159 in
subsequent years.143 The cost for a
clerical professional to draft and send
an email notifying the Department of its
reliance or name change is included in
the cost estimate of sending notice of
reliance above.
Recordkeeping—Section VI(u)
The amendment adds a new
recordkeeping provision that will apply
to all 10,855 QPAMs. Due to the
fiduciary status of QPAMs and the
existing regulatory environment in
which they exist, the Department
assumes that QPAMs already maintain
many of the required records as part of
their regular business practices. In
addition, the recordkeeping
requirements correspond to the six-year
period in ERISA sections 107 and 413.
The Department expects that the
recordkeeping requirement would
impose, on average, a burden of one
hour per QPAM. Therefore, the
Department estimates that the overall
hour burden of this recordkeeping
requirement for all 10,855 QPAMs will
be 10,855 hours with an equivalent cost
of $688,750.144
If a QPAM refuses to disclose
information to any of the parties listed
in Section VI(u) on the basis that such
information is exempt from disclosure,
the QPAM must provide a written
notice advising the requestor of the
reason for the refusal and that the
Department may request such
information. The Department does not
have data on how often such a refusal
is likely to occur. For the purposes of
this illustration, the Department
141 The number of QPAMs in the first year is
estimated as: 10,855 × 2% = 217.1, rounded to 217.
The number of QPAMs in subsequent years is
estimated as: 109 QPAMs × 2% = 2.2, rounded to
2.
142 The hour burden is estimated as: 217 QPAMs
× 0.5 hour = 108.5 hours. The labor cost of $159.34
is applied for an internal legal professional. The
equivalent cost is estimated as: 108.5 hours ×
$159.34 = $17,288, rounded to $17,000.
143 The hour burden is estimated as: 2 QPAMs ×
0.5 hour = 1 hour. The labor cost of $159.34 is
applied for an internal legal professional. The
equivalent cost is estimated as: 1 hour × $159.34 =
$159.34, rounded to $159.
144 The hour burden is estimated as: 10,855
QPAMs × 1 hour = 10,855 hours. The labor cost of
$63.45 is applied for clerical personnel. The
equivalent cost is estimated as: 10,855 QPAMs × 1
hour × $63.45 = $688,750.
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
estimates that two percent of QPAMs, or
217 QPAMs, will refuse to disclose
requested information annually. The
Department estimates that drafting a
written notice advising the requestor of
the reason for the refusal and that the
Department may request such
information will require an internal
legal professional to spend one hour,
resulting in a burden of 217 hours with
an equivalent cost of approximately
$34,577.145
Notice to Plans—Subsection I(i)(1)
lotter on DSK11XQN23PROD with RULES2
Within 30 days after the Ineligibility
Date, the QPAM must provide notice to
the Department and each of its client
Plans. The preamble provides more
detail on what the QPAM is required to
include in this notice. As discussed in
the Cost section of the regulatory impact
analysis, the Department estimates that
12 QPAMs will lose eligibility each
year, eight due to a Criminal Conviction
and four due to Participating In
Prohibited Misconduct.
As discussed in the Affected Entities
section, the Department estimates that
each QPAM provides services to 50
Plans, on average. The Department
estimates that a legal professional at
each ineligible QPAM will spend one
hour preparing the notice and two
minutes for clerical personnel will
spend two minutes preparing each
notice to be sent to a Plan by mail,
resulting in an hour burden of 22 hours
with an equivalent cost of $1,971.146
Additionally, the Department assumes
that notices sent by mail will require
two pages of paper each, resulting in a
material and postage cost of
approximately $374.147
The Department believes the cost of
sending this notice to the Department
will be negligible since the QPAM will
already prepare and send the notice to
their client Plans and the notice is
required to be sent electronically.
145 The number of QPAMs is estimated as 10,855
× 2% = 217 QPAMs. The hour burden is estimated
as: 217 QPAMs × 1 hour = 217 hours. The labor cost
of $159.34 is applied for a legal professional. The
equivalent cost is estimated as: 217 QPAMs × 1
hour × $159.34 = $34,577.
146 The hour burden is estimated as: (12 QPAMs
× 0.5 hours of professional legal time) + (12 QPAMs
× 50 Plans × 80% of notices being mailed × 2/60
hours of clerical personnel time) = 22 hours. The
labor cost of $159.34 is applied for a legal
professional, and the labor cost of $63.45 is applied
for clerical personnel. The equivalent cost is
estimated as: (12 QPAMs × 0.5 hours of professional
legal time × $159.34) + (12 QPAMs x 50 Plans x
80% of notices being mailed x 2/60 hours of clerical
personnel time × $63.45) = $1,971.
147 The material and postage cost are estimated as:
(12 QPAMs x 50 Plans × 80% of notices being
mailed) × [(2 pages × $0.05 per page) + $0.68] =
$374.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Notice to the Department of Prohibited
Misconduct and Foreign NPA or DPA
If a QPAM, an Affiliate, or owner of
a five (5) percent or more interest in a
QPAM Participates in Prohibited
Misconduct or enters into a foreign
equivalent of an NPA or DPA, the
QPAM is required to provide notice to
the Department of the agreement. The
Department does not have data on how
frequently these entities enter into such
agreements but assumes it will be
infrequent. For the purposes of this
analysis, the Department assumes that
four instances each year will require
such a notice. The Department estimates
that this will result in a cost of
approximately $340.148
Requesting an Individual Exemption—
Section I(j)
Participating In Prohibited
Misconduct could lead a QPAM to
request an individual exemption. The
burden for filing an application
requesting an individual exemption is
included in the ICR for the Exemption
Procedure Regulation, which has been
approved under OMB Control Number
1210–0060. Instead of amending that
ICR, the estimated burden for
applications from QPAMs Participating
In Prohibited Misconduct is included
here.149
The Department estimates that there
will, on average, be one application
each year related to Prohibited
Misconduct, affecting four QPAMs. The
Department estimates that gathering and
preparing the information for the
application will take, on average, 20
hours of in-house legal professional
labor and 20 hours of clerical personnel
labor at each QPAM. The Department
assumes that the application will be
prepared by an outside legal
professional specializing in such
matters. The Department estimates that
it will require 15 hours, on average, of
outside legal professional labor to
prepare the application. For the four
QPAMs losing eligibility due to
Prohibited Misconduct, this will result
148 If preparing and sending each notice were to
require an in-house legal professional 30 minutes
and a clerical staff 5 minutes. The hour burden is
estimated as: 4 notices × (30 minutes + 5 minutes)
= 2 hour and 20 minutes. The labor cost of $159.34
is applied for an in-house legal professional, and a
labor cost of $63.45 is applied for clerical staff. The
equivalent cost is estimated as: 4 notices × [(30
minutes × $159.34) + (5 minutes × $63.45)] = $340.
The Department assumes such notices will be sent
electronically and will not create material or
postage costs.
149 In three years when control number 1210–
0060 is extended, the increase in requests for
individual exemptions will be captured in the
historical data used for the renewal and the burden
going forward will be captured there.
PO 00000
Frm 00041
Fmt 4701
Sfmt 4700
23129
in an hour burden of 175 hours with an
equivalent cost of $25,861.150
For applications that reach the stage
of publication of a proposed individual
exemption in the Federal Register, a
notice must be prepared and distributed
to interested parties. Similarly, if the
exemption is ultimately granted, each of
these four QPAMs will be required to
send an objective description of the
facts and circumstances upon which the
misconduct is based to each client Plan.
The Department estimates that
approximately 200 notices will be
distributed annually, corresponding to
an average of 50 client Plans for each of
the four QPAMs estimated to be affected
by the application. The Department
estimates that it will take 10 minutes for
clerical personnel to distribute the
notices and objective descriptions,
resulting in an hour burden of 33.3
hours with an equivalent cost of
approximately $2,116.151 In addition,
material and mailing costs for all of
these notices totals approximately
$378.152 The Department estimates that
approximately 40 (20 percent of the
total number of notices) will be
distributed electronically.
Additional Requirement for QPAMs
Requesting an Individual Exemption
New Section I(j) indicates that a
QPAM that is ineligible or anticipates
that it will become ineligible due to an
actual or possible Criminal Conviction
or Participating In Prohibited
Misconduct may apply for an individual
exemption from the Department to
continue to rely on the relief provided
in this exemption for a longer period
than the One-Year Transition Period. In
such an event, an applicant should
review the Department’s most recently
granted individual exemptions
150 The hour burden is estimated as: [4 QPAMs
× (20 hours from an in-house legal professional +
20 hours for clerical personnel)] + (1 application ×
15 hours from an external legal professional) = 175
hours. The labor cost of $159.34 is applied for an
in-house legal professional, a labor cost of $63.45
is applied for clerical personnel, and a labor cost
of $535.85 is applied for an outside legal
professional. The equivalent cost is estimated as: (4
QPAMs × 20 hours × $159.34) + (4 QPAMs × 20
hours × $63.45) + (1 application × 15 hours ×
$535.85) = $25,861.
151 The hour burden is estimated as: 4 QPAMs ×
50 Plans per QPAM × (10/60) hours = 33.3 hours.
A labor cost of $63.45 is applied for clerical
personnel The equivalent cost is estimated as: 4
QPAMs × 50 Plans per QPAM × (10/60) hours ×
$63.45 = $2,116, rounded to $2,100.
152 The Department further assumes that notices
and the descriptions of facts and circumstances will
be delivered separately, comprising 15 and 5 pages,
respectively. With a printing cost of $0.05 per page
and a mailing cost of $0.66 per notice, the
Department estimates the mailing cost as 4 QPAMs
× 50 Plans per QPAM × 80% of notices mailed ×
{[(15 × $0.05) + $0.68] + [(5 × $0.05) + $0.68]} =
$378.
E:\FR\FM\03APR2.SGM
03APR2
23130
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
involving Section I(g) ineligibility. If an
applicant requests the Department to
exclude any term or condition from its
exemption that is included in a recently
granted individual exemption, the
applicant must include a detailed
statement with its exemption
application explaining the reason(s)
why the variation is necessary and in
the interest and protective of affected
Plans and their participants and
beneficiaries. For the three applications
covering the 12 ineligible QPAMs, the
burden is estimated to be 9 hours with
an equivalent cost of $4,823.153
Such applicants also should provide
detailed information in their
applications quantifying the specific
cost or harms in dollar amounts, if any,
Plans would suffer if a QPAM could not
rely on the exemption after the
Transition Period, including the specific
dollar amounts of investment losses
resulting from foregone investment
opportunities and any evidence
supporting the proposition that
investment opportunities would only be
available to Plans on less advantageous
terms. All three applications will need
to include this information if they
submit an exemption application. The
Department estimates that it will require
four hours of a financial professional’s
time to prepare such information.
Therefore, for the three applications
covering the estimated 12 QPAMs losing
eligibility annually, the cost associated
with the additional requirement results
in an hour burden of 12 hours with an
equivalent cost of $2,288.154
Summary
lotter on DSK11XQN23PROD with RULES2
Based on the foregoing, the PRA
burden associated with the information
collection requirements contained in the
QPAM Exemption are summarized
below:
Agency: DOL–EBSA.
Type of Review: Revision.
Title of Collection: Plan Asset
Transactions Determined by
Independent Qualified Professional
Asset Managers under Prohibited
Transaction Exemption 1984–14.
OMB Control Number: 1210–0128.
Affected Public: Business or other forprofits.
153 The hour burden is estimated as: (3
applications × 3 hours) = 9 hours. A labor cost of
$535.85 is applied for an outside legal professional.
The equivalent cost is estimated as: (3 application
× 3 hours × $535.85 outside legal professional labor)
= $4,823.
154 The hour burden is estimated as: 3
applications × 4 hours = 12 hours. At an hourly rate
of $190.63 is applied for financial professional. The
equivalent cost is estimated as: (3 applications × 4
hours × $190.63 financial professional rate) =
$2,288.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Estimated Number of Respondents:
10,855.
Estimated Number of Annual
Responses: 23,093.
Frequency of Response: Annual or as
needed.
Estimated Total Annual Burden
Hours: 15,353.
Estimated Total Annual Burden Cost:
$1,250,752.
Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 155 imposes certain requirements
with respect to federal rules that are
subject to the notice and comment
requirements of section 553(b) of the
Administrative Procedure Act and are
likely to have a significant economic
impact on a substantial number of small
entities.156 Unless an agency determines
that a regulation or amendment will not
have a significant economic impact on
a substantial number of small entities,
section 604 of the RFA requires the
agency to present a final regulatory
flexibility analysis of the Final
Amendment.
The Department emphasizes that the
QPAM Exemption was always premised
on the QPAM being an entity of
sufficient size to withstand undue
influence from Parties in Interest. The
Department clearly makes this point in
the preamble to 1982 QPAM proposal
where it stated that the minimum
capital and funds-under-management
standards are intended to ensure that
the eligible fiduciaries managing the
accounts or investment funds are
established institutions which are large
enough to discourage the exercise of
undue influence upon their decisionmaking processes by parties in
interest.157
This is consistent with the
Department’s past actions. When the
exemption was granted, the Department
declined to reduce or delete the asset
and equity thresholds as requested by
some commenters.158 Furthermore,
when the Department raised the
thresholds for investment advisers in
2005, it stated that the thresholds had
‘‘not been revised since 1984 and may
no longer provide significant
protections for plans in the current
financial marketplace.’’ 159
As discussed in greater detail below,
the Department lacks data to be able to
identify how many asset managers
providing services to Plans fall below
155 5
U.S.C. 601 et seq. (1980).
156 5 U.S.C. 551 et seq. (1946).
157 47 FR 56945, 56947 (Dec. 21, 1982).
158 See 49 FR at 9502.
159 See Proposed Amendment, 68 FR 52419,
52423 (Sept. 3, 2003).
PO 00000
Frm 00042
Fmt 4701
Sfmt 4700
the SBA size thresholds and above the
QPAM eligibility thresholds. However,
given the nature of the QPAM
Exemption and based on the premise of
the entity being large enough to remain
independent, the requirements of this
Final Amendment are applicable to all
entities, regardless of size.
On September 16, 2022, the
Department published a supplementary
Initial Regulatory Flexibility Analysis
explaining the possible impact on small
entities of the amended exemption.160
The Department has considered the
comments submitted to the Department
as well as the information discussed in
hearings conducted by the Department
to update this analysis. Specifically, the
Department responded to the following
comments in this analysis:
• Several commenters on the
Proposed Amendment stated that the
Department underestimated the number
of QPAMs in the supplementary Initial
Regulatory Flexibility Analysis for the
Proposed Amendment. In response to
these comments, the Department has
revised its methodology to estimate the
number of QPAMs leading to an
increase in the estimate of QPAMs.
• A few commenters stated that the
Department underestimated the number
of Plans that have hired a QPAM. In
response to these comments, the
Department has revised its estimates of
the number of QPAM–Plan
relationships.
• The Department received several
comments that the Department
underestimated the cost associated with
the recordkeeping requirement in the
supplementary Initial Regulatory
Flexibility Analysis for the Proposed
Amendment. In response to these
comments, the Department has provided
additional guidance on recordkeeping
earlier in this preamble to alleviate
potential confusion.
There were no comments filed by the
SBA’s Office of Advocacy.
Despite the importance of a QPAM
being sufficiently large to withstand
undue influence from parties in interest,
the Department has determined that the
Final Amendment could have a
significant impact on a substantial
number of small entities in an
abundance of caution, because it does
not have sufficient information to
determine it would not. Therefore, the
Department presents its Final
Regulatory Flexibility Analysis below.
Need for and Objectives of the
Amendment
Substantial changes have occurred in
the financial services industry since the
160 87
E:\FR\FM\03APR2.SGM
FR 56912.
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
Department granted the QPAM
Exemption in 1984. These changes
include industry consolidation and an
increasingly global reach for financial
services institutions, both in their
affiliations and in their investment
strategies.
The baseline version of the QPAM
Exemption is ambiguous regarding
whether foreign convictions are
included in the scope of the ineligibility
provision under Section I(g). Today,
QPAMs often have corporate or
relationship ties to a broad range of
entities, some of which are located
internationally. Additionally, some
global financial service institutions are
headquartered or have parent entities
that reside in foreign jurisdictions.
These entities may have significant
control and influence over the operation
and management of all entities within a
large financial institution’s
organizational structure, including those
entities operating as QPAMs.
Additionally, the international ties of
QPAMs come not just from their
affiliations and parent entities, but also
their investment strategies, including
those involving Plan assets.
The Department is also concerned
about QPAMs that engage in significant
misconduct of a similar type and nature
as the conduct that might lead to a
Criminal Conviction,161 but ultimately
does not result in a conviction. Under
the baseline version of the exemption, a
QPAM could theoretically avoid the
conditions related to integrity and
ineligibility under Section I(g) by
entering into an NPA or DPA with
prosecutors, which would allow it to
side-step the consequences that
otherwise would result from a Criminal
Conviction. Plans may suffer significant
harm if they are exposed to serious
misconduct committed by a QPAM, its
Affiliates, or owners of a five (5) percent
or more interest that ultimately results
in a an NPA or DPA rather than a
Criminal Conviction and consequent
ineligibility under Section I(g).
Likewise, intentionally or
systematically violating the conditions
of the exemption exposes Plans to
significant potential harm at the hands
of those with influence or control over
their assets. In the Department’s view,
QPAMs that repeatedly engage in these
types of serious misconduct do not
display the requisite standards of
integrity necessary to warrant their
eligibility for the broad relief provided
in the QPAM Exemption.
Through its administration of the
individual exemption program, the
161 The term ‘‘Criminal Conviction’’ is defined in
Section VI(r) of this Final Amendment.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Department also determined that certain
aspects of the QPAM Exemption would
benefit from a focus on mitigating
potential costs and disruption to Plans
when a QPAM becomes ineligible for
the exemptive relief due to Section I(g).
The Final Amendment would reduce
the harmful impact on Plans by
requiring QPAMs that become ineligible
to allow their client Plans to withdraw
from their arrangement with the QPAM
penalty-free and indemnify their client
Plans for certain losses during a OneYear Transition Period to avoid
unnecessary disruptions to Plans when
a QPAM becomes ineligible due to a
Criminal Conviction or Participation In
Prohibited Misconduct. The Transition
Period will help bridge the gap between
the QPAM Exemption and the
Department’s administration of its
individual exemption program in
connection with Section I(g)
ineligibility.
The Final Amendment also is needed
to update asset management and equity
thresholds to current values in the
definition of QPAM in Section VI(a).
Some of the thresholds that establish the
requisite independence upon which the
QPAM Exemption is based have not
been updated since 1984, and the
thresholds for registered investment
advisers have not been updated since
2005. The amendment will standardize
all the thresholds to current values
using the CPI.
Finally, the Final Amendment is
needed to add a standard recordkeeping
requirement to ensure QPAMs will be
able to demonstrate, and the Department
will be able to verify, compliance with
the exemption conditions.
As a whole, the changes to the QPAM
Exemption in this Final Amendment are
necessary to ensure it remains in the
interest of and protective of the rights of
Plans and their participants and
beneficiaries as required by ERISA
section 408(a) and Code section
4975(c)(2).
Affected Small Entities
Qualified Professional Asset Managers
(QPAMs)
To qualify as a QPAM, financial
institutions must meet equity capital,
net worth, and/or asset under
management requirements. The Final
Amendment will update these
thresholds based on the price inflation
since 1984, incrementally phasing in the
thresholds from the Proposed
Amendment over the period between
2024 and 2030. This Final Amendment
increases the thresholds as follows:
(1) Banks—as defined in section
202(a)(2) of the Investment Advisers Act
PO 00000
Frm 00043
Fmt 4701
Sfmt 4700
23131
of 1940, with equity capital in excess of
$1,570,300 as of the last day of the fiscal
year ending no later than December 31,
2024, $2,140,600 effective as of the last
day of the fiscal year ending no later
than December 31, 2027, and $2,720,000
effective as of the last day of the fiscal
year ending no later than December 31,
2030.
(2) Savings and loan associations—
the accounts of which are insured by the
Federal Deposit Insurance Corporation,
with equity capital or net worth in
excess of $1,570,300 effective as of the
last day of the fiscal year ending no later
than December 31, 2024, $2,140,600
effective as of the last day of the fiscal
year ending no later than December 31,
2027, and $2,720,000 effective as of the
last day of the fiscal year ending no later
than December 31, 2030.
(3) Insurance companies—subject to
supervision under state law, with net
worth in excess of $1,570,300 effective
as of the last day of the fiscal year
ending no later than December 31, 2024,
$2,140,600 effective as of the last day of
the fiscal year ending no later than
December 31, 2027, and $2,720,000
effective as of the last day of the fiscal
year ending no later than December 31,
2030.
(4) Investment advisers—registered
under the Investment Advisers Act of
1940 with total client assets under
management in excess of $101,956,000
effective as of the last day of the fiscal
year ending no later than December 31,
2024, $118,912,000 effective as of the
last day of the fiscal year ending no later
than December 31, 2027, and
$135,868,000 effective as of the last day
of the fiscal year ending no later than
December 31, 2030. In addition, the
investment adviser must either have
shareholders’ or partners’ equity— or
payment of liabilities guaranteed by an
affiliate, another entity that could
qualify as a QPAM, or a broker-dealer
with net worth— in excess of
$1,570,300 effective as of the last day of
the fiscal year ending no later than
December 31, 2024, $2,140,600 effective
as of the last day of the fiscal year
ending no later than December 31, 2027,
and $2,720,000 effective as of the last
day of the fiscal year ending no later
than December 31, 2030.
The Department will make
subsequent annual adjustments for
inflation to the equity capital, net worth,
and asset management thresholds,
rounded to the nearest $10,000, no later
than January 31 of each year by
publication in the Federal Register.
As discussed in the Affected Entities
section above, the Department estimates
that there are 10,855 QPAMs. The
Department does not know how many
E:\FR\FM\03APR2.SGM
03APR2
23132
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
QPAMs fit the SBA’s small entity
definition for the finance and insurance
sector. SBA outlines size standards to
determine whether an entity is a small
entity. The size standards and NAICS
codes are summarized in the table
below.
TABLE 4—SBA SIZE THRESHOLDS AND NAICS CODES BY POTENTIAL QPAM TYPE
SBA size threshold
Entity type
NAICS codes
Investment Banks ........................................................................................................................
Commercial Banks .......................................................................................................................
Savings and Loan Associations ..................................................................................................
Insurance Companies ..................................................................................................................
Investment Advisers ....................................................................................................................
lotter on DSK11XQN23PROD with RULES2
The Department lacks sufficient data
to identify how many of the estimated
asset managers providing services to
Plans fall below the SBA size thresholds
and are above the QPAM eligibility
thresholds. However, the Department
believes some small entities that meet
the SBA’s definition could be
significantly impacted by the Final
Amendment to the QPAM Exemption.
For example, some smaller QPAMs
may no longer be able to rely upon the
exemption due to the increases in the
asset and equity thresholds in the
definition of ‘‘QPAM’’ in Section VI(a)
of the Final Amendment. After
considering public comments and
testimony at the public hearing
regarding the Proposed Amendment, the
Department has decided to implement
the proposed increase in thresholds
incrementally between 2024 and 2030 to
reduce the potential impact on small
entities. Additionally, to the extent that
Plans that are small entities are more
likely to hire a QPAM that is a small
entity, the Final Amendment could also
impact them by reducing the market of
available QPAMs.
Plans, Participants, Beneficiaries, and
IRA Owners
The Final Amendment will affect
Plans whose assets are held by an
Investment Fund that is managed by a
QPAM. The Department does not collect
data on Plans that use QPAMs to
manage their assets. As discussed in the
Affected Entities section of the
regulatory impact analysis above, the
Department estimates that a single
QPAM services, on average, 50 client
Plans, resulting in an estimate of
547,566 total client Plan relationships.
The Department estimates that 483,350
of these relationships are with small
Plans.162 Additionally, the Department
162 In the 2020 Form 5500, the Department found
64,216 QPAM relationships amongst a total of
87,559 Plans that filed the Form 5500 Schedule C.
Small Plans are not required to file Schedule C. The
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
estimates that 215,135 unique Plans
have a relationship with a QPAM, of
which 189,905 are assumed to be small
Plans.163
Impacts of the Rule
In analyzing compliance costs
associated with the Final Amendment,
the Department considers the QPAM’s
existing compliance costs as the
regulatory baseline. This includes
ERISA’s fiduciary duty requirements (to
the extent applicable), requirements
under the prior version of the QPAM
Exemption, typical requirements in the
individual exemption process, and
individual exemptions granted in
connection with Section I(g)
ineligibility. The Department does not
expect that the Final Amendment will
lead to more than a modest increase to
the existing costs associated with QPAM
ineligibility and individual exemption
requests related to Criminal
Convictions. The Department is
uncertain, however, regarding the
number of QPAMs that would become
ineligible under the expansion of the
ineligibility provision related to
Participating In Prohibited Misconduct.
The Department also is uncertain about
the extent to which the changes to asset
management and equity thresholds in
the Final Amendment will cause new
costs for a small, unknown number of
QPAMs that would lose their eligibility
to rely on the exemption because they
do not meet the increased thresholds. In
order to mitigate such costs, the
Department has phased-in the increase
in the equity and asset thresholds in
three-year increments beginning in 2024
and ending in 2030.
number of client-Plan relationships for small Plans
is estimated as: 547,566 ¥ 64,216 = 483,350.
163 In the 2020 Form 5500, the Department found
25,230 Plans that used QPAM service providers of
87,559 Plans that filed the Form 5500 Schedule C.
Small Plans are not required to file Schedule C. The
number of client-Plan relationships for small Plans
is estimated as: 215,135 ¥ 25,230 = 189,905.
PO 00000
Frm 00044
Fmt 4701
Sfmt 4700
523150
522110
522180
524113
523940
Receipts in
millions of
dollars
Assets in
millions of
dollars
47.0
........................
........................
47.0
47.0
........................
$850
850
........................
........................
As discussed above, the Department
lacks information and data to estimate
the number of small QPAMs that would
no longer be able to rely upon the
exemption due to the expansion of the
ineligibility provision related to
Participating In Prohibited Misconduct
or due to the increased size thresholds.
The Department expects that small
QPAMs remaining able to rely upon the
amended QPAM Exemption will
experience a similar impact as larger
entities. Accordingly, the following
analysis considers the cost that each
QPAM is estimated to incur, depending
on whether that QPAM loses the ability
to rely upon the QPAM Exemption.
Although the Department has
provided a cost analysis below, the
heightened standards in this Final
Amendment may result in entities being
more diligent in compliance. Further,
the Final Amendment will provide clear
guardrails that would make the costs
associated with QPAMs becoming
ineligible under Section I(g) more
clearly avoidable.
Preliminary Assumptions and Cost
Estimate Inputs
The Department assumes that
different types of personnel will be
responsible for satisfying the
requirements in the Final Amendment.
To account for the labor costs associated
with different types of personnel, the
Department estimates the hourly labor
costs for each type of personnel. In the
analysis below, the Department applies
the hourly labor costs of $63.45 for
clerical personnel, $159.34 for internal
legal professionals, $190.63 for financial
managers, and $535.85 for outside legal
professionals.164
164 Labor costs for clerical personnel, accountants
or auditors, internal legal professionals, and
financial managers are based off internal
Department of Labor calculations based on 2023
labor cost data. For a description of the
Department’s methodology for calculating wage
rates, see https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
The Final Amendment requires
QPAMs to distribute various notices to
client Plans in certain situations, as
described below. The Department does
not have sufficient data to estimate how
often QPAMs will elect to send such
notices electronically or by mail. For the
purposes of this analysis, the
Department estimates that 80 percent of
these notices will be delivered by firstclass mail. The Department assumes the
postage cost associated with sending
notices through first-class mail is
$0.66.165
Costs Incurred by All QPAMs
Rule Familiarization Costs
The Department expects that QPAMs
are likely to rely on outside specialized
legal counsel to ensure compliance with
the Final Amendment. On average, the
Department estimates that each QPAM
will incur a cost equivalent to the cost
of consulting with an outside legal
professional for one hour. This results
in an average cost of $536 per entity in
the first year.166
lotter on DSK11XQN23PROD with RULES2
Reporting Reliance on the QPAM
Exemption—Subsection I(k)
The Department believes that the onetime requirement to report reliance on
the QPAM Exemption via email to
QPAM@dol.gov will result in a minor
additional clerical cost. The information
required under subsection I(k) is limited
to the legal name of the entity relying
upon the exemption and any name the
QPAM may be operating under. This
notification would occur only once for
most QPAMs. In subsequent years, new
QPAMs or QPAMs that change their
name will be required to send the
notification. The Department expects it
will take one hour, on average, for each
QPAM to prepare and send this
electronic notification. This cost is
estimated to be approximately $63 per
entity either upon enactment of the
Final Amendment, origination of a new
QPAM, or a name change.167
If a QPAM fails to report their reliance
on the exemption within 90 days, the
technical-appendices/labor-cost-inputs-used-inebsa-opr-ria-and-pra-burden-calculations-june2019.pdf. Labor costs for outside legal professionals
is calculated as a composite weighted average based
on the Laffey Matrix for Wage Rates for the time
period 6/01/2022–5/31/2023, see https://
www.laffeymatrix.com/see.html. The labor cost is
estimated as: (40% × $413) + (35% × $508) + (15%
× $733) + (10% × $829) = $535.85.
165 See USPS. ‘‘Mailing & Shipping Prices.’’
(2023). https://www.usps.com/business/prices.htm.
166 The labor cost of $535.85 is applied for an
external legal professional. The cost burden is
estimated as: 1 hour × $535.85 = $535.85, rounded
to $536.
167 The labor rate of $63.45 is applied for a
clerical worker. The cost is estimated as: (15/60)
hours × $63.45 = $15.86, rounded to $16.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Final Amendment provides the QPAM
with an additional 90 days to send the
notice to the Department. This notice
must include an explanation for the
QPAM’s failure to provide timely
notice. The Department estimates that
preparing the notice will require a legal
professional to spend 30 minutes on
average resulting in a cost estimate of
$80 per entity upon the effective date of
the Final Amendment, origination of a
new QPAM, or a name change.168 The
Department includes the cost for a
clerical professional to draft and send
an email notifying the Department of its
reliance or name change in the cost
estimate.
Recordkeeping—Section VI(u)
The Final Amendment includes a new
recordkeeping provision that will apply
to all QPAMs. Due to the fiduciary
status of QPAMs and the existing
regulatory environment, the Department
assumes that QPAMs already maintain
such records as part of their regular
business practices. In addition, the
recordkeeping requirements correspond
to the six-year record retention period in
ERISA section 107. The Department
recognizes that some QPAMs may not
be keeping records that satisfy the
requirements and accordingly will
experience a larger marginal cost for this
requirement. However, the Department
expects that most QPAMs are already
fully compliant. The Department
estimates that, on average, the
additional recordkeeping requirements
will require a QPAM’s clerical
personnel to spend one hour, resulting
in a per-QPAM cost of $63.169
If a QPAM refuses to disclose
information to any of the parties listed
in Section VI(u), on the basis that
information is exempt from disclosure,
the QPAM must provide a written
notice advising the requestor of the
reason for the refusal and that the
Department may request such
information. The Department does not
have sufficient data to estimate how
often such a refusal is likely to occur;
however, the Department believes such
instances will be rare. In the case when
a QPAM refuses to disclose the
information, the Department estimates
that an internal legal professional will
spend one hour, resulting in a perQPAM cost of $159.170
168 The
labor rate of $159.34 is applied for an
internal legal professional. The cost is estimated as:
0.5 hour × $159.34 = $79.67, rounded to $80.
169 The labor rate of $63.45 is applied for a
clerical professional. The cost is estimated as: 1
hour × $63.45 = $63.45, rounded to $63.
170 The labor rate of $159.34 is applied for an
internal legal professional. The cost is estimated as:
1 hour × $159.34 = $159.34, rounded to $159.
PO 00000
Frm 00045
Fmt 4701
Sfmt 4700
23133
Costs Incurred by QPAMs Losing
Eligibility for the Exemption for a
Criminal Conviction or Prohibited
Misconduct
In the regulatory impact analysis, the
Department estimated that eight QPAMs
would lose eligibility due to Criminal
Convictions and four QPAMs would
lose eligibility due to Prohibited
Misconduct each year. The Department
does not have sufficient data to estimate
how many QPAMs losing eligibility are
small entities. The following analysis
examines the per-entity cost of a typical
QPAM losing eligibility. The
Department does not expect the cost for
small and large QPAMs losing eligibility
to be significantly different.
Notice to the Department of Prohibited
Misconduct and Foreign NPAs or DPAs
If the QPAM, its Affiliates, or owners
of a five percent or more interest in a
QPAM Participates in Prohibited
Misconduct or enters into a foreign
equivalent of an NPA or DPA, the
QPAM must notify the Department of
the agreement. The Department assumes
that this notice will require a legal
professional to spend 30 minutes
producing the notice and a clerical
worker five minutes to send the notice,
resulting in a per-entity cost of $85.171
Mandatory One-Year Transition
Period—Section I(i)
As amended, the Department expects
that the costs incurred by a QPAM
during the Transition Period would be
equivalent to the costs incurred by a
QPAM obtaining an individual
exemption. However, there will be an
increased cost associated with the
expansion of the ineligibility provisions.
As discussed above, the Department
estimates that four additional QPAMs
will become ineligible each year due to
Prohibited Misconduct.
Notice to Plans—Subsection I(i)(1)
Within 30 days after the Ineligibility
Date, the QPAM must provide notice to
the Department and each of its client
Plans. The preamble provides more
detail on the information the QPAM is
required to include in this notice.
QPAMs that experience ineligibility
and apply for individual exemption
relief are already required to provide
171 If preparing and sending each notice were to
require an in-house legal professional 30 minutes
and a clerical staff 5 minutes. The hour burden is
estimated as: 1 notices × (30 minutes + 5 minutes)
= 35 minutes. The labor cost of $159.34 is applied
for an in-house legal professional, and a labor cost
of $63.45 is applied for clerical staff. The cost is
estimated as: (30 minutes × $159.34) + (5 minutes
× $63.45) = $85. The Department assumes such
notices will be sent electronically and will not
create material or postage costs.
E:\FR\FM\03APR2.SGM
03APR2
23134
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
this type of notice. Therefore, the
Department has attributed no
incremental burden to this requirement
for QPAMs that become ineligible due
to a Criminal Conviction. However due
to the expanded scope of ineligibility,
QPAMs that become ineligible due to
Participating In Prohibited Misconduct
will incur costs to send notices to their
client Plans.
The Department estimates that a legal
professional will spend 30 minutes
preparing the notification for each
QPAM, and clerical staff will spend two
minutes preparing and distributing the
notifications by mail. Additionally, the
Department assumes that each notice
will require two sheets of paper. The
total incremental cost related to
ineligibility for Participating in
Prohibited Misconduct is $196 per
entity, including mailing expenses.172
The cost to send this notice to the
Department will be negligible because it
is required to be sent electronically, and
the QPAM will have already prepared
and sent the notice to its client Plans.
lotter on DSK11XQN23PROD with RULES2
Indemnification
As discussed above, the Final
Amendment requires QPAMs to agree to
indemnify, hold harmless, and promptly
restore actual losses to each client Plan
for any damages directly resulting from
a QPAM losing eligibility for the
exemption due to a Criminal Conviction
or Prohibited Misconduct. Damages may
include losses and related costs arising
from unwinding transactions with third
parties, transitioning Plan assets to an
alternative asset manager, and exposure
to excise taxes under Code section 4975.
When the Department has granted
individual exemptions regarding section
I(g) ineligibility, it has required
applicants to comply with additional
protections for their plan and IRA
clients that allow them to withdraw
from the asset management arrangement
without penalty and indemnify and
hold them harmless in the event future
misconduct occurs. Accordingly, in this
analysis, no incremental burden is
attributed to this requirement for
QPAMs that become ineligible due to a
Criminal Conviction.
However due to the expanded scope
of ineligibility, QPAMs that become
ineligible due to Participating In
Prohibited Misconduct may incur costs
172 The labor cost of $159.34 is applied for a legal
professional, and the labor cost of $63.45 is applied
for clerical personnel. The equivalent cost is
estimated as: (0.5 hours of professional legal time
× $159.34) + (50 Plans × 80% of notices being
mailed × 2/60 hours of clerical personnel time ×
$63.45) = $165. The material and postage cost are
estimated as: (50 Plans × 80% of notices being
mailed) × [(2 pages × $0.05 per page) + $0.68] = $31.
The total cost is estimated to be $196 ($165 + $31).
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
associated with indemnifying their
client Plans for losses that would occur
if they moved to a new asset manager.
In the Proposed Amendment, the
Department requested comments on the
costs of the indemnification provisions.
The Department received several
comments noting that the indemnity
obligation will increase the risk and cost
associated with being a QPAM and that
these costs will be passed onto Plans in
higher fees. The Department, however,
did not receive any comments directly
addressing the amount of the
indemnification costs, and the
Department does not have sufficient
information and data to estimate these
costs.173
Costs Incurred by QPAMs Requesting an
Individual Exemption—Section I(j)
The amendment adds Section I(j),
which states that a QPAM that is
ineligible or anticipates that it will
become ineligible may apply for an
individual exemption from the
Department. This individual exemption
would allow the QPAM to continue
relying on the relief provided in the
QPAM Exemption for a longer period
than the One-Year Transition Period.
Costs for all QPAMs Seeking an
Individual Exemption
The Department estimates that, on
average, QPAMs will submit three
applications annually. In these three
applications, the Department estimates
that 12 QPAMs annually will become
ineligible, with four losing eligibility
due to Prohibited Misconduct and eight
losing eligibility due to a Criminal
Conviction.
The Final Amendment will require all
QPAMs to include in their exemption
applications the specific dollar amounts
of investment losses resulting from
foregone investment opportunities and
any evidence supporting the proposition
that investment opportunities would
only be available to client Plans on less
advantageous terms. For this
requirement, the Department assumes a
financial professional will spend four
hours preparing the report, resulting in
a per-application cost of $763, and a
per-entity cost of $191.174
173 The Department received several comments
addressing the specific costs associated with
amending WMAs, as required under the Proposed
Amendment. These costs did not directly address
indemnification costs but rather contract
negotiation and updating the WMAs. The
Department moved the proposed requirements for
the WMA into the Transition Period provisions in
response to commenters and believes the cost to
ineligible QPAMs regarding this will generally be
captured within the required notices to client Plan
after an ineligibility trigger.
174 An hourly rate of $190.63 is applied for
financial professional. The equivalent cost is
PO 00000
Frm 00046
Fmt 4701
Sfmt 4700
If an applicant requests the
Department to exclude any term or
condition from its exemption that is
included in a recently granted
individual exemption, the applicant
must include a detailed statement with
its exemption application explaining the
reason(s) why the variation is necessary
and in the interest and protective of
affected Plans, their participants and
beneficiaries, and IRA owners. While
the Department is including this
requirement in the Final Amendment, it
expects that applicants who are
ineligible due to Criminal Conduct
already are conducting this analysis and
thus would not incur an incremental
cost.
QPAMs that become ineligible due to
Participating In Prohibited Misconduct
will incur incremental costs due to the
requirement to review the Department’s
most recently granted individual
exemptions involving Section I(g)
ineligibility. The Department estimates
that an outside legal professional would
spend three hours reviewing past
individual exemptions and draft this
addition to the individual exemption
application, resulting in a perapplication cost of $1,600.175 The
Department estimates that each
application would cover four QPAMs,
resulting in a per-entity cost of $402.
Due to the expanded scope of
ineligibility to include Participating In
Prohibited Misconduct, additional
financial institutions may lose eligibility
for the QPAM Exemption and may seek
an individual exemption. These entities
would incur the additional costs of
filing the application.
For this Final Amendment, the
Department estimates that gathering the
information for the application will
require, on average, an in-house legal
professional and clerical personnel to
spend 10 hours each gathering and
preparing information for the
application at each QPAM. The
Department assumes that the
application will be prepared by an
outside legal professional specializing
in such matters. Once it receives
information from the affected QPAMs,
the Department estimates that an
outside legal professional will spend 15
hours preparing the application. For the
four QPAMs losing eligibility due to
Prohibited Misconduct, this will result
estimated as: (4 hours × $190.63 financial
professional rate) = $763.
175 A labor cost of $535.85 is applied for an
outside legal professional. The equivalent cost is
estimated as: (3 hours × $535.85 outside legal
professional labor) = $1,608.
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
in a per-application cost of $26,000 176
or a per-QPAM cost of $6,465.
For applications that are published as
proposed exemptions, the QPAM must
prepare and distribute a notice to
interested persons. Similarly, if the
exemptions are ultimately granted, each
of these four QPAMs will be required to
send an objective description of the
facts and circumstances upon which the
misconduct is based to each client Plan.
The Department estimates four QPAMs
will be required to notify interested
parties and client Plans under these
circumstances, with each QPAM having
an average of 50 client Plans. The
Department estimates that clerical
personnel will spend 10 minutes to
distribute the notices and objective
descriptions, resulting in a per-QPAM
cost of $264 177 In addition, material and
mailing costs for these notices totals
approximately $94.178
Costs Incurred by Plans and Participants
and Beneficiaries
As a result of the adjustments to the
asset management and equity thresholds
to the QPAM definition in Section VI(a),
the Department acknowledges some
QPAMs may not meet the new threshold
requirements, and, consequently, would
no longer be able to rely on the QPAM
Exemption. The Department expects
QPAMs and Plans that utilize these
QPAMs to incur costs due to this
transition, but it lacks sufficient data to
estimate the impact.179 The Department
has requested similar data in connection
with individual exemption applications
following convictions covered by
Section I(g), but the data provided by
applicants and costs identified by them
has been limited. The Department
requested comments on these costs in
the Proposed Amendment but did not
23135
receive comments identifying specific
costs that would be incurred due to a
possible transition to a new QPAM by
small or large entities.
Summary of Costs
The Department estimates that the
total, per-entity, estimated incremental
annual costs associated with the
amendment will range between $854
and $10,282 in the first year and
between $318 and $9,746 in subsequent
years. Table 5 summarizes the per entity
costs for each requirement and the
estimated annual costs associated with
the amendment for QPAMs to comply
with the exemption, QPAMs who trigger
the conditions associated with
Participating In Prohibited Misconduct,
and QPAMs that become ineligible due
to a Criminal Conviction.
TABLE 5—INCREMENTAL COST SUMMARY ASSOCIATED WITH AMENDMENTS, PER ENTITY
Cost for
QPAMs to
comply with
exemption
Requirement
Cost for
QPAMs with
prohibited
misconduct
(estimated 4
per year)
Cost for
QPAMs with a
conviction
(estimated 8
per year)
Rule Familiarization .....................................................................................................................
Reporting Reliance on the QPAM Exemption 1 ...........................................................................
Notice of Failure To Report Reliance 2 ........................................................................................
Recordkeeping .............................................................................................................................
Notice of Refusal To Disclose Requested Information ...............................................................
Notice of Prohibited Misconduct or Foreign NPA/DPA 3 .............................................................
Notice to Plans of Ineligibility ......................................................................................................
Requesting an Individual Exemption Costs: 4
Preparation Labor Cost ........................................................................................................
Notices Distribution ...............................................................................................................
Additional Requirement—Criminal Conviction .....................................................................
Additional Requirement—Prohibited Misconduct .................................................................
$536
$16
$80
$63
$159
........................
........................
$536
$16
$80
$63
$159
$85
$196
$536
$16
$80
$63
$159
........................
........................
........................
........................
........................
........................
$6,465
$622
........................
$593
........................
........................
$191
........................
First Year Total Estimated Annual Cost .......................................................................
Cost as a Percentage of Equity Capital or Net Worth Threshold Effective December 31,
2024 5 .......................................................................................................................................
$854
$8,815
$1,045
0.05%
0.65%
0.07%
$318
$9,746
$509
0.02%
0.62%
0.03%
Subsequent Years Total Estimated Annual Cost 1 .......................................................
Cost as a Percentage of Equity Capital or Net Worth Threshold Effective December 31,
2024 5 .......................................................................................................................................
lotter on DSK11XQN23PROD with RULES2
Notes: Only quantifiable costs are displayed.
1 Most entities will only need to provide this notice once, either upon the effective date of the Final Amendment or when first relying on the
QPAM Exemption. Entities will also need to provide the notice after a name change.
2 Entities will only need to provide this notice after failing to report its reliance on the exemption within the allotted time.
3 Entities will only need to provide such a notice if the QPAM, its Affiliates, or owners of a five (5) percent or more interest Participate In Prohibited Misconduct or execute a foreign equivalent of a non-prosecution or deferred prosecution agreement.
4 One individual exemption application associated with ineligible QPAMs (caused by Prohibited Misconduct) are estimated each year, affecting
4 QPAMs. This cost reflects the total cost of the application divided by the number of QPAMs.
176 The hour burden is estimated as: [4 QPAMs
× (20 hours from an in-house legal professional +
20 hours for clerical personnel)] + (1 application ×
15 hours from an external legal professional) = 175
hours. The labor cost of $159.34 is applied for an
in-house legal professional, a labor cost of $63.45
is applied for clerical personnel, and a labor cost
of $535.85 is applied for an outside legal
professional. The equivalent cost is estimated as: (4
QPAMs × 20 hours × $159.34) + (4 QPAMs × 20
hours × $63.45) + (1 application × 15 hours ×
$535.85) = $25,861, rounded to $26,000.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
177 A labor cost of $63.45 is applied for clerical
personnel The equivalent cost is estimated as: 50
Plans per QPAM × (10/60) hours × $63.45 = $264.
178 The Department further assumes that notices
and the descriptions of facts and circumstances will
be delivered separately, comprising 15 and 5 pages,
respectively. With a printing cost of $0.05 per page
and a mailing cost of $0.68 per notice, the
Department estimates the mailing cost as 50 Plans
per QPAM × 80% of notices mailed × {[(15 × $0.05)
+ $0.68] + [(5 × $0.05) + $0.68]} = $94.
PO 00000
Frm 00047
Fmt 4701
Sfmt 4700
179 Some QPAMs have suggested in the past that
there could be costs associated with unwinding
transactions that relied on the QPAM Exemption
and reinvesting assets in other ways. The loss of
QPAM status could also require an asset manager
to keep lists of Parties in Interest to its client Plans
to ensure the asset manager does not engage in
prohibited transactions. However, even without the
QPAM Exemption, a wide variety of investments
are available that do not involve non-exempt
prohibited transactions.
E:\FR\FM\03APR2.SGM
03APR2
23136
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
5 Banks, savings and loan associations, insurance companies, and investment advisers each have different size threshold requirements, as
discussed in more detail in the Affected Entities Section of the regulatory impact analysis. However, the size threshold requirements for each entity type include either an equity capital or net worth requirement. Effective no later than December 31, 2024, the equity capital and net worth requirements will be $1,570,300. For subsequent years, this estimate does not reflect future increases in equity capital and net worth threshold requirements. As these thresholds increase, the Department expects that the cost as a percentage of equity capital or net worth will decrease.
On January 1, 2025, each entity type
will be required to have either equity
capital or net worth exceeding
$1,570,300. Table 5 shows the per entity
cost as a percent of this equity capital
or net worth threshold. While some
entities face additional size threshold
requirements, this measure can provide
insight into the magnitude of costs faced
by small QPAMs. This demonstrates
that the smallest asset managers able to
qualify for the QPAM Exemption, who
are not facing ineligibility, are estimated
to incur costs amounting to 0.05 percent
of this threshold in the first year and
0.02 percent in subsequent years. The
incremental costs incurred by the few
QPAMs facing ineligibility due to
Prohibited Misconduct or a Criminal
Conviction are higher but remain below
one percent of the threshold.
As discussed in the Affected Entities
section, the Department lacks sufficient
data to identify how many of the
estimated asset managers providing
services to Plans fall below the SBA’s
small business size thresholds and are
above the QPAM eligibility thresholds.
Table 6 shows the estimated cost as a
percent of the SBA size threshold, in
terms of annual receipts for investment
banks, insurance companies and
investment advisers and in terms of
assets under management for
commercial banks and savings and
loans associations. For most QPAMs,
the cost to comply with the Final
Amendment is expected to amount to
less than 0.01 percent of the respective
SBA threshold. The few QPAMs facing
ineligibility due to Prohibited
Misconduct or a Criminal Conviction
may incur costs around 0.02 percent of
the respective SBA threshold. The table
also shows the estimated cost relative to
50 percent and 10 percent of the SBA
threshold for receipts and assets. Even
for entities with receipts or assets
amounting to 10 percent of the SBA
threshold, the costs associated with the
Final Amendment account for less than
0.5 percent of the SBA threshold.
TABLE 6—INCREMENTAL COST ASSOCIATED WITH AMENDMENTS, AS A PERCENT OF THE SBA SIZE STANDARD
SBA threshold
Size standard
$47.0 Million
in receipts 1
(%)
I
50% of SBA threshold
$850 Million in
assets 2
(%)
10% of SBA threshold
$425 Million in
assets 2
(%)
$4.7 Million in
receipts 1
(%)
0.004
0.044
0.004
( 3)
0.002
( 3)
0.018
0.219
0.022
0.001
0.012
0.001
0.001
0.041
0.002
( 3)
0.002
( 3)
0.007
0.207
0.011
( 3)
0.011
0.001
$23.5 Million
in receipts 1
(%)
I
I
$85.0 Million
in assets 2
(%)
First Year Total Estimated Annual Cost
Compliance With the Exemption ...............................................
QPAMs With Prohibited Misconduct .........................................
QPAMs With a Conviction ........................................................
0.002
0.022
0.002
( 3)
0.001
(3)
Subsequent Years Total Estimated Annual
Compliance With the Exemption ...............................................
QPAMs With Prohibited Misconduct .........................................
QPAMs With a Conviction ........................................................
1 The
2 The
0.001
0.021
0.001
( 3)
0.001
(3)
entities subject to this SBA size threshold include investment banks, insurance companies, and investment advisers.
entities subject to this SBA size threshold include commercial banks and savings and loan associations.
than 0.001%.
3 Less
lotter on DSK11XQN23PROD with RULES2
In summary, the Department lacks
data on how QPAMs are distributed
relative to the measures of size used by
the SBA. However, due to the equity
capital and net worth thresholds to
qualify for the QPAM exemption, the
Department expects that most QPAMs
will be on the higher end of the receipts
or assets distribution. Based on the
analysis above, the Department does not
expect the costs associated with the
Final Amendment to represent a
significant percentage of annual receipts
or assets under management of QPAMs.
Regulatory Alternatives
This section of the Final Regulatory
Flexibility Act analysis addresses
alternatives the Department considered
when developing the Final Amendment.
The Department evaluates these
alternatives and discusses how the
alternatives would have affected small
entities qualitatively and quantitatively
where possible. A more in-depth
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
discussion of the regulatory alternatives
is included in the regulatory impact
analysis above.
Do Not Amend the QPAM Exemption
The Department considered not
expanding the scope of Section I(g) and
maintaining its practice of addressing
ineligibility under Section I(g) only
through the individual exemption
process. In considering whether to
amend the QPAM Exemption, the
Department compared the marginal
costs imposed on QPAMs to the
marginal benefits experienced by Plans.
The Department decided against this
alternative in favor of this Final
Amendment, relying on its experience
processing individual exemption
applications to create a smoother
transition between the QPAM
Exemption and the individual
exemption program so that a QPAM’s
client Plans have certainty regarding
PO 00000
Frm 00048
Fmt 4701
Sfmt 4700
their rights after an ineligibility event
occurs.
While QPAMs, including small
QPAMs, will experience increased costs
associated with the Final Amendment,
for most QPAMs, these costs are
expected to be small compared to the
size thresholds required for an
investment manager to qualify as a
QPAM. This is demonstrated in Table 5
above.
Amend the QPAM Exemption to
require QPAMs to amend Written
Management Agreements with up-front
terms that apply in the event of
ineligibility.
In the Proposed Amendment, the
Department included a requirement for
all QPAMs to amend their WMAs with
client Plans to include:
(1) A provision providing that in the
event the QPAM, its Affiliates, and five
percent or more owners engage in
conduct resulting in a Criminal
Conviction or receipt of a Written
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
Ineligibility Notice, the QPAM would
not restrict its client Plan’s ability to
terminate or withdraw from its
arrangement with the QPAM;
(2) 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 failure of such QPAM
to remain eligible for relief under the
QPAM Exemption as a result of conduct
that leads to a Criminal Conviction or
Prohibited Misconduct; and
(3) A provision requiring the QPAM
to agree not to employ or knowingly
engage any individual that Participated
In the conduct that is the subject of a
Criminal Conviction or Prohibited
Misconduct.
As discussed in greater detail above in
the preamble, the Department believes
that these provisions provide an
important protection to Plans,
participants, beneficiaries, and IRA
owners. However, based on the feedback
from commenters, the Department has
removed the requirement to amend
WMAs. Instead, the Final Amendment
requires QPAMs to notify and agree to
these provisions with Plans in the
Notice QPAMs must send to Plans
within 30 days after the Ineligibility
Date. The Department determined the
approach in the Final Amendment
provides the same protection to Plans
while significantly reducing the cost
burden for large and small QPAMs to
amend their WMAs.
lotter on DSK11XQN23PROD with RULES2
Asset Management and Equity
Thresholds
The Department considered two
alternatives related to the asset
management and equity thresholds,
described below.
Amend the QPAM Exemption to
remove asset management and equity
thresholds.
As an alternative to updating the asset
management and equity thresholds, the
Department revisited whether such
thresholds could be removed entirely
from the exemption. Removing
thresholds would allow more small
investment managers to qualify for relief
under the exemption. However, the
Department determined that this
approach would be inconsistent with
one of the core concepts upon which the
QPAM Exemption was based. In the
absence of an appropriate alternative
ensuring that a QPAM will remain an
independent decision-maker, free from
the influence of other Plan fiduciaries,
the Department is unable to justify the
removal of the thresholds.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
Update the asset management and
equity thresholds to full CPI-adjusted
values at once.
The Proposed Amendment included
CPI-adjusted values that would have
been fully updated to 2022 values. The
Department received a variety of
comments regarding the possible
unintended impact to QPAMs and their
client Plans who would not be able to
satisfy such significant increases at
once. This could have resulted in
smaller QPAMs losing relief and caused
significant disruption and cost to those
small QPAMs and their client Plans.
In order to minimize the impact of an
immediate increase in the asset and
equity thresholds on small QPAMs who
may lose QPAMs status, the Department
determined that the most appropriate
method to update the thresholds in the
Final Amendment is to increase them in
three-year increments beginning in 2024
and ending in 2030. This approach will
limit the disruption an uncertain
number of small QPAMs could
experience if they lose their eligibility to
rely on the exemption due to the
increased thresholds by providing them
with an extended period to adjust their
business models.
Steps the Agency Has Taken To
Minimize the Impacts on Small Entities
The Department’s decision to update
the asset management and equity
thresholds could have a significant
impact on some small QPAMs that no
longer qualify to use the exemption. As
discussed in the Regulatory Alternatives
section, to reduce the impact on small
QPAMs, the thresholds were adjusted in
three-year increments to give small
QPAMs time to make decisions and
adjust.
Some small QPAMs may lose the
QPAM portion of their business. Others
may adapt. There still may be other
exemptions that these QPAMs could use
to service their Plan clients, or they
could seek an individual exemption that
could allow them to continue offering
QPAM services, depending upon the
facts and circumstances presented to the
Department in the exemption
application.
Duplicate, Overlapping, or Relevant
Federal Rules
The Department has attempted to
avoid duplication of requirements. The
required policies and procedures and
exemption audit are unique to the
circumstances of the particular
transactions covered by the exemption
and do not replicate any other
requirements by state or federal
regulations. The exemption permits
respondents to satisfy the requirements
PO 00000
Frm 00049
Fmt 4701
Sfmt 4700
23137
for written guidelines between the
QPAM and property manager with
documents that are already in existence
due to ordinary and customary business
practices, provided such documents
contain the required disclosures.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 requires each
federal agency to prepare a written
statement assessing the effects of any
federal mandate in a proposed or final
agency rule that may result in an
expenditure of $100 million or more
(adjusted annually for inflation with the
base year 1995) in any one year by state,
local, and tribal governments, in the
aggregate, or by the private sector.180
For purposes of the Unfunded Mandates
Reform Act, as well as Executive Order
12875, this Final Amendment does not
include any federal mandate that the
Department expects would result in
such expenditures by state, local, or
tribal governments, or the private
sector.181
Federalism Statement
Executive Order 13132 outlines
fundamental principles of federalism,
and requires adherence by federal
agencies to specific criteria in the
process of their formulation and
implementation of policies that have
‘‘substantial direct effects’’ on the states,
the relationship between the national
government and states, or on the
distribution of power and
responsibilities among the various
levels of government.182 Federal
agencies promulgating regulations that
have federalism implications must
consult with state and local officials and
describe the extent of their consultation
and the nature of the concerns of state
and local officials in the preamble to the
final rule.
In the Department’s view, this Final
Amendment will not have federalism
implications because it would not have
direct effects on the states, on the
relationship between the national
government and the states, nor on the
distribution of power and
responsibilities among various levels of
government. The Department welcomed
input from affected states regarding this
assessment in the Proposed Amendment
but received no comments.
General Information
The attention of interested persons is
directed to the following:
180 2
U.S.C. 1501 et seq. (1995).
the Intergovernmental Partnership,
58 FR 58093 (Oct. 28, 1993).
182 Federalism, 64 FR 153 (Aug. 4, 1999).
181 Enhancing
E:\FR\FM\03APR2.SGM
03APR2
23138
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
(1) The fact that a transaction is the
subject of an exemption under ERISA
section 408(a) and/or Code section
4975(c)(2) does not relieve a fiduciary,
or other Party in Interest with respect to
a Plan or IRA, from certain other
provisions of ERISA and the Code,
including but not limited to any
prohibited transaction provisions to
which the exemption does not apply
and the general fiduciary responsibility
provisions of ERISA section 404 which
require, among other things, that a
fiduciary act prudently and discharge
their duties respecting the Plan solely in
the interests of the participants and
beneficiaries of the Plan. Additionally,
the fact that a transaction is the subject
of an exemption does not affect the
requirements of Code section 401(a),
including that the Plan must operate for
the exclusive benefit of the employees
of the employer maintaining the Plan
and their beneficiaries;
(2) In accordance with ERISA section
408(a) and Code section 4975(c)(2), and
based on the entire record, the
Department finds that this exemption is
administratively feasible, in the
interests of Plans, their participants and
beneficiaries, and IRA owners, and
protective of the rights of participants
and beneficiaries of the Plan and IRA
owners;
(3) The Final Amendment to the
QPAM Exemption is applicable to a
particular transaction only if the
transaction satisfies the conditions
specified in the exemption; and
(4) The Final Amendment to the
QPAM Exemption is supplemental to,
and not in derogation of, any other
provisions of ERISA and the Code,
including statutory or administrative
exemptions and transitional rules.
Furthermore, the fact that a transaction
is subject to an administrative or
statutory exemption is not dispositive of
whether the transaction is in fact a
prohibited transaction.
lotter on DSK11XQN23PROD with RULES2
PTE 84–14
PTE 84–14 is amended to read as
follows:
Section I—General Exemption
The restrictions of ERISA section
406(a)(1)(A) through (D) and the taxes
imposed by Code section 4975(a) and
(b), by reason of Code section
4975(c)(1)(A) through (D), shall not
apply to a transaction between a Party
in Interest with respect to a Plan and an
Investment Fund (as defined in Section
VI(b)) in which the Plan has an interest,
and which is managed by a Qualified
Professional Asset Manager (QPAM) (as
defined in Section VI(a)), if the
following conditions are satisfied:
VerDate Sep<11>2014
19:50 Apr 02, 2024
Jkt 262001
(a) At the Time of the Transaction (as
defined in Section VI(i)), the Party in
Interest, or its Affiliate (as defined in
Section VI(c)), does not have the
authority to—
(1) Appoint or terminate the QPAM as
a manager of the Plan assets involved in
the transaction, or
(2) Negotiate on behalf of the Plan the
terms of the management agreement
with the QPAM (including renewals or
modifications thereof) with respect to
the Plan assets involved in the
transaction;
Notwithstanding the foregoing, in the
case of an Investment Fund in which
two or more unrelated Plans have an
interest, a transaction with a Party in
Interest with respect to a Plan will be
deemed to satisfy the requirements of
this Section I(a) if the assets of the Plan
managed by the QPAM in the
Investment Fund, when combined with
the assets of other Plans established or
maintained by the same employer (or
Affiliate thereof described in Section
VI(c)(1) below) or by the same employee
organization, and managed in the same
Investment Fund, represent less than
ten (10) percent of the assets of the
Investment Fund;
(b) The transaction is not described
in—
(1) Prohibited Transaction Exemption
2006–16 (71 FR 63786; October 31,
2006) (relating to securities lending
arrangements) (as amended or
superseded),
(2) Prohibited Transaction Exemption
83–1 (48 FR 895; January 7, 1983)
(relating to acquisitions by plans of
interests in mortgage pools) (as
amended or superseded), or
(3) Prohibited Transaction Exemption
82–87 (47 FR 21331; May 18, 1982)
(relating to certain mortgage financing
arrangements) (as amended or
superseded);
(c) The terms of the transaction,
commitments, and investment of fund
assets, and any associated negotiations
are determined by the QPAM (or under
the authority and direction of the
QPAM) which represents the interests of
the Investment Fund. Either the QPAM,
or (so long as the QPAM retains full
fiduciary responsibility with respect to
the transaction) a property manager
acting in accordance with written
guidelines established and administered
by the QPAM, makes the decision on
behalf of the Investment Fund to enter
into the transaction, provided that the
transaction is not part of an agreement,
arrangement, or understanding designed
to benefit a Party in Interest. In
exercising its authority, the QPAM must
ensure that any transaction,
commitment, or investment of fund
PO 00000
Frm 00050
Fmt 4701
Sfmt 4700
assets for which it is responsible is
based on its own independent exercise
of fiduciary judgment and free from any
bias in favor of the interests of the plan
sponsor or other parties in interest. The
QPAM may not be appointed or relied
upon to uncritically approve
transactions, commitments, or
investments negotiated, proposed, or
approved by the plan sponsor, or other
parties in interest. The prohibited
transaction relief provided under this
exemption applies only in connection
with an Investment Fund that is
established primarily for investment
purposes. No relief is provided under
this exemption for any transaction that
has been planned, negotiated, or
initiated by a Party in Interest, in whole
or in part, and presented to a QPAM for
approval to the extent the QPAM would
not have sole responsibility with respect
to the transaction as required by this
Section I(c);
(d) The Party in Interest dealing with
the Investment Fund is neither the
QPAM nor a person Related to the
QPAM;
(e) The transaction is not entered into
with a Party in Interest with respect to
any Plan whose assets are managed by
the QPAM, when combined with the
assets of other Plans established or
maintained by the same employer (or
Affiliate thereof described in subsection
VI(c)(1) below) or by the same employee
organization, and managed by the
QPAM, represent more than twenty (20)
percent of the total client assets
managed by the QPAM at the time of the
transaction; and
(f) At the Time of the Transaction, and
at the time of any subsequent renewal
or modification thereof that requires the
consent of the QPAM, the terms of the
transaction are at least as favorable to
the Investment Fund as the terms
generally available in arm’s length
transactions between unrelated parties.
(g) Integrity.
(1) Ineligibility due to a Criminal
Conviction or Prohibited Misconduct.
Subject to the Ineligibility Date
provision set forth in Section I(h), a
QPAM is ineligible to rely on this
exemption for 10 years following:
(A) A Criminal Conviction, as defined
in Section VI(r), of the QPAM or any
Affiliate thereof (as defined in Section
VI(d)), or any owner, direct or indirect,
of a five (5) percent or more interest in
the QPAM; or
(B) The QPAM, any Affiliate thereof
(as defined in Section VI(d)), or any
owner, direct or indirect, of a five (5)
percent or more interest in the QPAM
Participates In Prohibited Misconduct as
defined in Section VI(s) and VI(t); or
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
(2) Notice to the Department
regarding Participation In Prohibited
Misconduct. The QPAM must submit a
notice to the Department at QPAM@
dol.gov if the QPAM, any Affiliate (as
defined in Section VI(d)), or any owner,
direct or indirect, of a five (5) percent
or more interest in the QPAM,
Participates In Prohibited Misconduct as
defined in Section VI(s) and VI(t), or
enters into an agreement with a foreign
government, however denominated by
the laws of the relevant foreign
government, that is substantially
equivalent to a non-prosecution
agreement (NPA) or deferred
prosecution agreement (DPA) described
in section VI(s)(1). The notice must be
sent within 30 calendar days after the
Ineligibility Date for the Prohibited
Misconduct as determined pursuant to
Section (I)(h)(2) below or the execution
date of the substantially-equivalent
foreign NPA or DPA, and the notice
must include a description of the
Prohibited Misconduct or the
substantially-equivalent foreign NPA or
DPA and the name of and contact
information for the QPAM.
(h) Ineligibility Date. A QPAM shall
become ineligible:
(1) as of the ‘‘Conviction Date,’’ which
is the date of the judgment of the trial
court (or the date of the judgment of any
court in a foreign jurisdiction that is the
equivalent of a U.S. federal or state trial
court), regardless of whether that
judgment is appealed; or
(2) (A) as of the date on or after June
17, 2024 that the QPAM, any Affiliate
thereof (as defined in Section VI(d)), or
any owner, direct or indirect, of a five
(5) percent or more interest in the
QPAM executes a non-prosecution
agreement, or a deferred prosecution
agreement described in Section VI(s)(1);
or
(B) as of the date on or after June 17,
2024 that a final judgment (regardless of
whether the judgment is appealed) or a
court-approved settlement is ordered by
a Federal or State criminal or civil court
in connection with determining that the
QPAM, any Affiliate thereof (as defined
in Section VI(d)), or any owner, direct
or indirect, of a five (5) percent or more
interest in the QPAM has engaged in
Prohibited Misconduct as defined in
Section VI(s)(2) and VI(t).
A person will become eligible to rely
on this exemption again only upon a
subsequent judgment reversing such
person’s conviction or civil judgment,
the effective date of any individual
prohibited transaction exemption it
receives that expressly permits the relief
in this exemption, or the expiration of
the 10-year ineligibility period.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
(i) One-Year Transition Period Due to
Ineligibility (One-Year Transition Period
or Transition Period). Any QPAM that
becomes ineligible under subsection
I(g)(1) must provide a Transition Period
for its client Plans. Relief is available for
transactions (including past
transactions) under this exemption
during the Transition Period for a
maximum period of one year after the
Ineligibility Date, provided that the
QPAM complies with each condition of
the exemption throughout the one-year
period (including those additional
conditions specified in this subsection
(i)). The relief is available during the
Transition Period under this exemption
only for the QPAM’s client Plans that
had a pre-existing Written Management
Agreement required under subsection
VI(a) with the QPAM on the Ineligibility
Date. A QPAM must ensure that it
manages Plan assets prudently and
loyally during the Transition Period.
During the Transition Period, the QPAM
must comply with the following
additional conditions:
(1) Within 30 days after the
Ineligibility Date, the QPAM must
provide notice to the Department at
QPAM@dol.gov and each of its Client
Plans stating:
(A) Its failure to satisfy subsection
I(g)(1) and the resulting initiation of this
One-Year Transition Period;
(B) That during the Transition Period,
the QPAM:
(i) Agrees not to restrict the ability of
a client Plan to terminate or withdraw
from its arrangement with the QPAM;
(ii) Will not impose any fees,
penalties, or charges on client Plans in
connection with the process of
terminating or withdrawing from an
Investment Fund managed by the
QPAM except for reasonable fees,
appropriately disclosed in advance, that
are specifically designed to: (a) prevent
generally recognized abusive investment
practices, or (b) 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 that such fees are applied
consistently and in a like manner to all
such investors;
(iii) Agrees to indemnify, hold
harmless, and promptly restore actual
losses to the client Plans for any
damages that directly result to them
from a violation of applicable laws, a
breach of contract, or any claim arising
out of the conduct that is the subject of
a Criminal Conviction or Prohibited
Misconduct of the QPAM, an Affiliate
(as defined in Section VI(d)), or an
owner, direct or indirect, of a five (5)
percent or more interest in the QPAM.
PO 00000
Frm 00051
Fmt 4701
Sfmt 4700
23139
Actual losses specifically 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 Code section 4975 as
a result of a QPAM’s inability to rely
upon the relief in the QPAM Exemption;
and
(iv) Will not employ or knowingly
engage any individual that Participated
In the conduct that is the subject of a
Criminal Conviction or Prohibited
Misconduct, regardless of whether the
individual is separately convicted in
connection with the criminal conduct.
(C) An objective description of the
facts and circumstances upon which the
Criminal Conviction or Prohibited
Misconduct is based, written with
sufficient detail to fully inform the
client Plan’s fiduciary of the nature and
severity of the conduct so that the
fiduciary can satisfy its duties of
prudence and loyalty under section 404
of ERISA (29 U.S.C. 1104), as
applicable, with respect to hiring,
monitoring, evaluating, and retaining
the QPAM in a non-QPAM capacity;
(2) As of the Ineligibility Date under
Section I(h), the QPAM must not
employ or knowingly engage any
individual that Participated In the
conduct that is the subject of a Criminal
Conviction or that Participated In
Prohibited Misconduct causing
ineligibility of the QPAM under
subsection I(g)(1); and
(3) After the One-Year Transition
Period expires, and if the Criminal
Conviction is not reversed on appeal,
the entity may not rely on the relief
provided in this exemption until the
expiration of the 10-year ineligibility
period unless it obtains an individual
exemption permitting it to continue
relying upon this exemption.
(j) Requests for an Individual
Exemption. A QPAM that is ineligible or
anticipates that it will become ineligible
due to an actual or possible Criminal
Conviction or Participating In
Prohibited Misconduct as defined in
Sections VI(r) and VI(s) may apply for
an individual exemption from the
Department to continue to rely on the
relief provided in this exemption for a
longer period than the One-Year
Transition Period. An applicant should
review the Department’s most recently
granted individual exemptions
involving Section I(g) ineligibility with
the expectation that similar conditions
will be required of the applicant, if the
Department proposes and grants a
requested exemption. To that end, if an
applicant requests the Department to
exclude any term or condition from its
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23140
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
exemption that is included in a recently
granted individual exemption, the
applicant must include a detailed
statement with its exemption
application explaining the reason(s)
why the proposed variation is necessary
and in the interest and protective of
affected Plans, their participants and
beneficiaries, and individuals for whose
benefit a Plan described in Code section
4975(e)(1)(B) or (C) is established (IRA
owners). The Department will review
such requests consist with the
requirements of ERISA section 408(a)
and Code section 4975(c)(2). Such
applicants also should provide detailed
information in their applications
quantifying the specific cost or harms in
dollar amounts, if any, their client Plans
would suffer if the QPAM could not rely
on the exemption after the Transition
Period, including the specific dollar
amounts of investment losses resulting
from foregone investment opportunities
and any evidence supporting the
proposition that investment
opportunities would be available to
client Plans on less advantageous terms.
An applicant should not construe the
Department’s acceptance of an
individual exemption application as a
guarantee that the Department will grant
an individual exemption. A QPAM that
submits an individual exemption
application must ensure that it manages
Plan assets prudently and loyally during
the Transition Period in accordance
with section 404 of ERISA (29 U.S.C.
1104), as applicable.
(k) Any QPAM that relies upon this
exemption must notify the Department
via email at QPAM@dol.gov. Each
QPAM that relies upon the exemption
must report the legal name of each
business entity relying upon the
exemption in the email to the
Department and any name the QPAM
may be operating under. This
notification needs to be reported only
once unless there is a change to the legal
name or operating name(s) of the QPAM
relying upon the exemption or the
QPAM no longer is relying on the
exemptive relief provided in the
exemption. The QPAM must provide
notice to the Department within ninety
(90) calendar days of its reliance on the
exemption or a change to its legal or
operating name. If the QPAM
inadvertently fails to provide notice to
the Department within the initial 90
calendar day period, it may notify the
Department of its reliance on the
exemption or name change and failure
to report without losing the relief
provided by this exemption. This notice
must be provided within an additional
90 calendar days along with an
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
explanation for the QPAM’s failure to
provide notice. A QPAM may notify the
Department if it is no longer relying
upon this exemption at any time.
Section II—Specific Exemption for
Employers
The restrictions of ERISA sections
406(a), 406(b)(1), and 407(a) and the
taxes imposed by Code section 4975(a)
and (b), by reason of Code section
4975(c)(1)(A) through (E), shall not
apply to:
(a) The sale, leasing, or servicing of
Goods or the furnishing of services, to
an Investment Fund managed by a
QPAM by a Party in Interest with
respect to a Plan having an interest in
the fund, if—
(1) The Party in Interest is an
employer any of whose employees are
covered by the Plan or is a person who
is a Party in Interest by virtue of a
relationship to such an employer
(described in Section VI(c) below),
(2) The transaction is necessary for
the administration or management of
the Investment Fund,
(3) The transaction takes place in the
ordinary course of a business engaged in
by the Party in Interest with the general
public,
(4) The amount attributable in any
taxable year of the Party in Interest to
transactions engaged in with an
Investment Fund pursuant to this
Section II(a) does not exceed one (1)
percent of the gross receipts derived
from all sources for the prior taxable
year of the Party in Interest, and
(5) The requirements of Sections I(c)
through (g) above are satisfied with
respect to the transaction.
(b) The leasing of office or commercial
space by an Investment Fund
maintained by a QPAM to a Party in
Interest with respect to a Plan having an
interest in the Investment Fund, if—
(1) The Party in Interest is an
employer any of whose employees are
covered by the Plan or is a person who
is a Party in Interest by virtue of a
relationship to such an employer
(described in Section VI(c) below);
(2) No commission or other fee is paid
by the Investment Fund to the QPAM or
to the employer, or to an Affiliate of the
QPAM or employer (as defined in
Section VI(c) below), in connection with
the transaction;
(3) Any unit of space leased to the
Party in Interest by the Investment Fund
is suitable (or adaptable without
excessive cost) for use by different
tenants;
(4) The amount of space covered by
the lease does not exceed fifteen (15)
percent of the rentable space of the
office building, integrated office park, or
PO 00000
Frm 00052
Fmt 4701
Sfmt 4700
of the commercial center (if the lease
does not pertain to office space);
(5) In the case of a Plan that is not an
eligible individual account plan (as
defined in ERISA section 407(d)(3)),
immediately after the transaction is
entered into, the aggregate fair market
value of employer real property and
employer securities held by the
Investment Funds of the QPAM in
which the Plan has an interest does not
exceed ten (10) percent of the fair
market value of the assets of the Plan
held in those Investment Funds. In
determining the aggregate fair market
value of employer real property and
employer securities as described herein,
a Plan shall be considered to own the
same proportionate undivided interest
in each asset of the Investment Fund or
funds as its proportionate interest in the
total assets of the Investment Fund(s).
For purposes of this requirement, the
term ‘‘employer real property’’ means
real property leased to, and the term
‘‘employer securities’’ means securities
issued by an employer any of whose
employees are covered by the Plan or a
Party in Interest of the Plan by reason
of a relationship to the employer
described in ERISA section 3(14)(E) or
(G); and
(6) The requirements of Sections I(c)
through (g) above are satisfied with
respect to the transaction.
Section III—Specific Lease Exemption
for QPAMs
The restrictions of ERISA section
406(a)(1)(A) through (D), 406(b)(1) and
(2), and the taxes imposed by Code
section 4975(a) and (b), by reason of
Code section 4975(c)(1)(A) through (E),
shall not apply to the leasing of office
or commercial space by an Investment
Fund managed by a QPAM to the
QPAM, a person who is a Party in
Interest of a Plan by virtue of a
relationship to such QPAM described in
ERISA section 3(14)(G), (H), or (I), or a
person not eligible for the General
Exemption of Section I above by reason
of Section I(a), if—
(a) The amount of space covered by
the lease does not exceed the greater of
7,500 square feet or one (1) percent of
the rentable space of the office building,
integrated office park, or of the
commercial center in which the
Investment Fund has the investment;
(b) The unit of space subject to the
lease is suitable (or adaptable without
excessive cost) for use by different
tenants;
(c) At the Time of the Transaction,
and at the time of any subsequent
renewal or modification thereof that
requires the consent of the QPAM, the
terms of the transaction are not more
E:\FR\FM\03APR2.SGM
03APR2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
favorable to the lessee than the terms
generally available in arm’s length
transactions between unrelated parties;
and
(d) No commission or other fee is paid
by the Investment Fund to the QPAM,
any person possessing the disqualifying
powers described in Section I(a), or any
Affiliate of such persons (as defined in
Section VI(c) below), in connection with
the transaction.
lotter on DSK11XQN23PROD with RULES2
Section IV—Transactions Involving
Places of Public Accommodation
The restrictions of ERISA section
406(a)(1)(A) through (D) and 406(b)(1)
and (2) and the taxes imposed by Code
section 4975(a) and (b), by reason of
Code section 4975(c)(1)(A) through (E),
shall not apply to the furnishing of
services and facilities (and Goods
incidental thereto) by a place of public
accommodation owned by an
Investment Fund managed by a QPAM
to a Party in Interest with respect to a
Plan having an interest in the
Investment Fund, if the services and
facilities (and incidental Goods) are
furnished on a comparable basis to the
general public.
Section V—Specific Exemption
Involving QPAM-Sponsored Plans
The relief in Sections I, III, or IV
above from the applicable restrictions of
ERISA section 406(a), section 406(b)(1)
and (2), and the taxes imposed by Code
section 4975(a) and (b), by reason of
Code section 4975(c)(1)(A) through (E),
shall apply to a transaction involving
the assets of a Plan sponsored by the
QPAM or an Affiliate (as defined in
Section VI(c)) of the QPAM if:
(a) The QPAM has discretionary
authority or control with respect to the
Plan assets involved in the transaction;
(b) The QPAM adopts Written Policies
and Procedures that are designed to
ensure compliance with the conditions
of the exemption;
(c) An independent auditor, who has
appropriate technical training or
experience and proficiency with
ERISA’s fiduciary responsibility
provisions and so represents in writing,
conducts an Exemption Audit on an
annual basis. Following completion of
the Exemption Audit, the auditor shall
issue a written report to the Plan
presenting its specific findings
regarding the level of compliance with:
(1) the Written Policies and Procedures
adopted by the QPAM in accordance
with Section V(b) above, and (2) the
objective requirements of this
exemption. The written report shall also
contain the auditor’s overall opinion
regarding whether the QPAM’s program
complied with: (1) the Written Policies
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
and Procedures adopted by the QPAM,
and (2) the objective requirements of the
exemption. The Exemption Audit and
the written report must be completed
within six months following the end of
the year to which the audit relates; and
(d) The transaction meets the
applicable requirements set forth in
Sections I, III, or IV above.
Section VI—Definitions and General
Rules
For purposes of this exemption:
(a) The term ‘‘Qualified Professional
Asset Manager’’ or ‘‘QPAM’’ means an
Independent Fiduciary which is—
(1) A bank, as defined in section
202(a)(2) of the Investment Advisers Act
of 1940 that has the power to manage,
acquire or dispose of assets of a Plan,
which bank has, as of the last day of its
most recent fiscal year, Equity Capital in
excess of $1,000,000. Effective as of the
last day of the fiscal year ending no later
than December 31, 2024, substitute
$1,570,300 for $1,000,000. Effective as
of the last day of the fiscal year ending
no later than December 31, 2027,
substitute $2,140,600 for $1,000,000.
Effective as of the last day of the fiscal
year ending no later than December 31,
2030, substitute $2,720,000 for
$1,000,000; or
(2) A savings and loan association, the
accounts of which are insured by the
Federal Deposit Insurance Corporation
that has made application for and been
granted trust powers to manage, acquire
or dispose of assets of a Plan by a State
or Federal authority having supervision
over savings and loan associations,
which savings and loan association has,
as of the last day of its most recent fiscal
year, Equity Capital or Net Worth in
excess of $1,000,000. Effective as of the
last day of the fiscal year ending no later
than December 31, 2024, substitute
$1,570,300 for $1,000,000. Effective as
of the last day of the fiscal year ending
no later than December 31, 2027,
substitute $2,140,600 for $1,000,000.
Effective as of the last day of the fiscal
year ending no later than December 31,
2030, substitute $2,720,000 for
$1,000,000; or
(3) An insurance company which is
qualified under the laws of more than
one State to manage, acquire, or dispose
of any assets of a Plan, which company
has, as of the last day of its most recent
fiscal year, Net Worth in excess of
$1,000,000 and which is subject to
supervision and examination by a State
authority having supervision over
insurance companies. Effective as of the
last day of the fiscal year ending no later
than December 31, 2024, substitute
$1,570,300 for $1,000,000. Effective as
of the last day of the fiscal year ending
PO 00000
Frm 00053
Fmt 4701
Sfmt 4700
23141
no later than December 31, 2027,
substitute $2,140,600 for $1,000,000.
Effective as of the last day of the fiscal
year ending no later than December 31,
2030, substitute $2,720,000 for
$1,000,000; or
(4) An investment adviser registered
under the Investment Advisers Act of
1940 that has total client assets under its
management and control in excess of
$85,000,000 as of the last day of its most
recent fiscal year, and either (A)
Shareholders’ or Partners’ Equity in
excess of $1,000,000, or (B) payment of
all of its liabilities including any
liabilities that may arise by reason of a
breach or violation of a duty described
in ERISA sections 404 and 406 is
unconditionally guaranteed by—(i) A
person with a relationship to such
investment adviser described in
subsection VI(c)(1) below if the
investment adviser and such Affiliate
have Shareholders’ or Partners’ Equity,
in the aggregate, in excess of $1,000,000;
or (ii) A person described in (a)(1), (a)(2)
or (a)(3) of Section VI above; or (iii) A
broker-dealer registered under the
Securities Exchange Act of 1934 that
has, as of the last day of its most recent
fiscal year, Net Worth in excess of
$1,000,000. Effective as of the last day
of the fiscal year ending no later than
December 31, 2024, substitute
$101,956,000 for $85,000,000 and
$1,346,000 for $1,000,000. Effective as
of the last day of the fiscal year ending
no later than December 31, 2027,
substitute $118,912,000 for $85,000,000
and $1,694,000 for $1,000,000. Effective
as of the last day of the fiscal year
ending no later than December 31, 2030,
substitute $135,868,000 for $85,000,000
and $2,040,000 for $1,000,000;
Provided that such bank, savings and
loan association, insurance company, or
investment adviser has acknowledged in
a ‘‘Written Management Agreement’’
that it is a fiduciary with respect to each
Plan that has retained the QPAM.
(5) By publication through notice in
the Federal Register, the Department
will make subsequent annual
adjustments for inflation to the Equity
Capital, Net Worth, and asset
management thresholds in subsection
VI(a)(1) through (4), rounded to the
nearest $10,000, no later than January
31 of each year. The adjustments will be
effective as of the last day of the fiscal
year in which the increase takes effect,
ending no later than December 31 of
such fiscal year.
(b) An ‘‘Investment Fund’’ includes
single customer and pooled separate
accounts maintained by an insurance
company, individual trusts and
common, collective or group trusts
maintained by a bank, and any other
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
23142
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
account or fund to the extent that the
disposition of its assets (whether or not
in the custody of the QPAM) is subject
to the discretionary authority of the
QPAM.
(c) For purposes of Section I(a) and
Sections II and V above, an ‘‘Affiliate’’
of a person means—
(1) Any person directly or indirectly,
through one or more intermediaries,
Controlling, Controlled by, or under
Common Control with the person;
(2) Any corporation, partnership, trust
or unincorporated enterprise of which
such person is an officer, director, ten
(10) percent or more partner (except
with respect to Section II this figure
shall be five (5) percent), or highly
compensated employee as defined in
Code section 4975(e)(2)(H) (but only if
the employer of such employee is the
Plan sponsor); and
(3) Any director of the person or any
employee of the person who is a highly
compensated employee, as defined in
Code section 4975(e)(2)(H), or who has
direct or indirect authority,
responsibility or control regarding the
custody, management or disposition of
Plan assets involved in the transaction.
A named fiduciary (within the meaning
of ERISA section 402(a)(2)) of a Plan
with respect to the Plan assets involved
in the transaction and an employer any
of whose employees are covered by the
Plan will also be considered Affiliates
with respect to each other for purposes
of Section I(a) above if such employer or
an Affiliate of such employer has the
authority, alone or shared with others,
to appoint or terminate the named
fiduciary or otherwise negotiate the
terms of the named fiduciary’s
employment agreement.
(d) For purposes of Section I(g) above
an ‘‘Affiliate’’ of a person means—
(1) Any person directly or indirectly
through one or more intermediaries,
Controlling, Controlled by, or under
Common Control with the person;
(2) Any director of, Relative of, or
partner in, any such person;
(3) Any corporation, partnership, trust
or unincorporated enterprise of which
such person is an officer, director, or a
five percent or more partner or owner;
and
(4) Any employee or officer of the
person who—
(A) Is a highly compensated employee
(as defined in Code section
4975(e)(2)(H) or officer (earning ten (10)
percent or more of the yearly wages of
such person); or
(B) Has direct or indirect authority,
responsibility, or control regarding the
custody, management or disposition of
Plan assets.
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
(e) The terms ‘‘Controlling,’’
‘‘Controlled by,’’ ‘‘under Common
Control with,’’ and ‘‘Controls’’ means
the power to exercise a controlling
influence over the management or
policies of a person other than an
individual.
(f) The term ‘‘Party in Interest’’ means
a person described in ERISA section
3(14) and includes a ‘‘disqualified
person,’’ as defined in Code section
4975(e)(2).
(g) The term ‘‘Relative’’ means a
relative as that term is defined in ERISA
section 3(15), or a brother, a sister, or a
spouse of a brother or sister.
(h) A QPAM is ‘‘Related’’ to a Party
in Interest for purposes of Section I(d)
above if, as of the last day of its most
recent calendar quarter: (i) The QPAM
owns a ten (10) percent or more Interest
in the Party in Interest; (ii) a person
Controlling, or Controlled by, the QPAM
owns a twenty (20) percent or more
Interest in the Party in Interest; (iii) the
Party in Interest owns a ten (10) percent
or more Interest in the QPAM; or (iv) a
person Controlling, or Controlled by, the
Party in Interest owns a twenty (20)
percent or more Interest in the QPAM.
Notwithstanding the foregoing, a Party
in Interest is ‘‘Related’’ to a QPAM if: (i)
A person Controlling, or Controlled by,
the Party in Interest has an ownership
Interest that is less than twenty (20)
percent but greater than ten (10) percent
in the QPAM and such person exercises
Control over the management or policies
of the QPAM by reason of its ownership
Interest; (ii) a person Controlling, or
Controlled by, the QPAM has an
ownership Interest that is less than
twenty (20) percent but greater than ten
(10) percent in the Party in Interest and
such person exercises Control over the
management or policies of the Party in
Interest by reason of its ownership
Interest. For purposes of this definition:
(1) The term ‘‘Interest’’ means with
respect to ownership of an entity—
(A) The combined voting power of all
classes of stock entitled to vote or the
total value of the shares of all classes of
stock of the entity if the entity is a
corporation,
(B) The capital interest or the profits
interest of the entity if the entity is a
partnership, or
(C) The beneficial interest of the
entity if the entity is a trust or
unincorporated enterprise; and
(2) A person is considered to own an
‘‘Interest’’ if, other than in a fiduciary
capacity, the person has or shares the
authority—
(A) To exercise any voting rights or to
direct some other person to exercise the
voting rights relating to such interest, or
PO 00000
Frm 00054
Fmt 4701
Sfmt 4700
(B) To dispose or to direct the
disposition of such interest.
(i) ‘‘At the Time of the Transaction’’
means the date upon which the
transaction is entered into. In addition,
in the case of a transaction that is
continuing, the transaction shall be
deemed to occur until it is terminated.
If any transaction is entered into on or
after December 21, 1982, or a renewal
that requires the consent of the QPAM
occurs on or after December 21, 1982,
and the requirements of this exemption
are satisfied at the time the transaction
is entered into or renewed, respectively,
the requirements will continue to be
satisfied thereafter with respect to the
transaction. Notwithstanding the
foregoing, this exemption shall cease to
apply to a transaction exempt by virtue
of Section I or Section II above at such
time as the percentage requirement
contained in Section I(e) is exceeded,
unless no portion of such excess results
from an increase in the assets
transferred for discretionary
management to a QPAM. For this
purpose, assets transferred do not
include the reinvestment of earnings
attributable to those Plan assets already
under the discretionary management of
the QPAM. Nothing in this paragraph
shall be construed as exempting a
transaction entered into by an
Investment Fund which becomes a
transaction described in ERISA section
406 or Code section 4975 while the
transaction is continuing, unless the
conditions of this exemption were met
either at the time the transaction was
entered into or at the time the
transaction would have become
prohibited but for this exemption.
(j) The term ‘‘Goods’’ includes all
things which are movable or which are
fixtures used by an Investment Fund but
does not include securities,
commodities, commodities futures,
money, documents, instruments,
accounts, chattel paper, contract rights,
and any other property, tangible or
intangible, which, under the relevant
facts and circumstances, is held
primarily for investment.
(k) For purposes of subsection VI(a)(1)
and (2) above, the term ‘‘Equity Capital’’
means stock (common and preferred),
surplus, undivided profits, contingency
reserves, and other capital reserves.
(l) For purposes of subsection VI(a)(2),
(3), and (4) above, the term ‘‘Net Worth’’
means capital, paid-in and contributed
surplus, unassigned surplus,
contingency reserves, group
contingency reserves, and special
reserves.
(m) For purposes of subsection
VI(a)(4) above, the term ‘‘Shareholders’
or Partners’ Equity’’ means the equity
E:\FR\FM\03APR2.SGM
03APR2
lotter on DSK11XQN23PROD with RULES2
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
shown in the most recent balance sheet
prepared within the two years
immediately preceding a transaction
undertaken pursuant to this exemption,
in accordance with generally accepted
accounting principles.
(n) The term ‘‘Plan’’ refers to an
employee benefit plan described in
ERISA section 3(3) and/or a plan
described in Code section 4975(e)(1).
(o) For purposes of Section VI(a)
above, the term ‘‘Independent
Fiduciary’’ means a fiduciary managing
the assets of a Plan in an Investment
Fund that is independent of and
unrelated to the employer sponsoring
such Plan. For purposes of this
exemption, the fiduciary will not be
deemed to be independent of and
unrelated to the employer sponsoring
the Plan if such fiduciary directly or
indirectly Controls, is Controlled by, or
is under Common Control with the
employer sponsoring the Plan.
Notwithstanding the foregoing: (1) for
the period from December 21, 1982,
through November 3, 2010, a QPAM
managing the assets of a Plan in an
Investment Fund will not fail to satisfy
the requirements of this section solely
because such fiduciary is the employer
sponsoring the Plan or directly or
indirectly Controls, is Controlled by, or
is under Common Control with the
employer sponsoring the Plan; and (2)
effective after November 3, 2010 a
QPAM acting as a manager for its own
Plan or the Plan of an Affiliate (as
defined in subsection VI(c)(1) above)
will be deemed to satisfy the
requirements of this section if the
requirements of Section V above are
met.
(p) An ‘‘Exemption Audit’’ of a Plan
must consist of the following:
(1) A review of the Written Policies
and Procedures adopted by the QPAM
pursuant to Section V(b) above for
consistency with each of the objective
requirements of this exemption (as
described in Section VI(q) below);
(2) A test of a representative sample
of the Plan’s transactions during the
audit period that is sufficient in size and
nature to afford the auditor a reasonable
basis:
(A) To make specific findings
regarding whether the QPAM is in
compliance with (i) the Written Policies
and Procedures adopted by the QPAM
pursuant to Section VI(q) below and (ii)
the objective requirements of this
exemption, and
(B) To render an overall opinion
regarding the level of compliance of the
QPAM’s program with subsection
VI(p)(2)(A)(i) and (ii) above;
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
(3) A determination as to whether the
QPAM has satisfied the definition of a
QPAM under the exemption; and
(4) Issuance of a written report
describing the steps performed by the
auditor during the course of its review
and the auditor’s findings.
(q) For purposes of Section VI(p), the
Written Policies and Procedures must
describe the following objective
requirements of this exemption and the
steps adopted by the QPAM to ensure
compliance with each of these
requirements:
(1) The definition of a QPAM in
Section VI(a);
(2) The requirement of Sections V(a)
and I(c) regarding the discretionary
authority or control of the QPAM with
respect to the Plan assets involved in
the transaction, in negotiating the terms
of the transaction and with respect to
the decision on behalf of the Investment
Fund to enter into the transaction;
(3) For a transaction described in
Section I above:
(A) That the transaction is not entered
into with any person who is excluded
from relief under Section I(a), Section
I(d), or Section I(e) above;
(B) That the transaction is not
described in any of the class exemptions
listed in Section I(b) above;
(4) If the transaction is described in
Section III above:
(A) That the amount of space covered
by the lease does not exceed the
limitations described in Section III(a)
above, and
(B) That no commission or other fee
is paid by the Investment Fund as
described in Section III(d) above.
(r) ‘‘Criminal Conviction’’ occurs
when a QPAM, any Affiliate thereof (as
defined in Section VI(d)), or any owner,
direct or indirect, of a five (5) percent
or more interest in the QPAM:
(1) is convicted in a U.S. federal or
state court or released from
imprisonment, whichever is later, as a
result of any felony involving abuse or
misuse of such person’s Plan position or
employment, or position or employment
with a labor organization; any felony
arising out of the conduct of the
business of a broker, dealer, investment
adviser, bank, insurance company or
fiduciary; income tax evasion; any
felony involving the larceny, theft,
robbery, extortion, forgery,
counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion,
or misappropriation of funds or
securities; conspiracy or attempt to
commit any such crimes or a crime in
which any of the foregoing crimes is an
element; or any crime that is identified
or described in ERISA section 411; or
PO 00000
Frm 00055
Fmt 4701
Sfmt 4700
23143
(2) is convicted by a foreign court of
competent jurisdiction or released from
imprisonment, whichever is later, as a
result of a crime, however denominated
by the laws of the relevant foreign
government, that is substantially
equivalent to an offense described
in(r)(1) above (excluding convictions
and imprisonment that occur within a
foreign country that is included on the
Department of Commerce’s list of
‘‘foreign adversaries’’ that is codified in
15 CFR 7.4, as amended).
(s) ‘‘Prohibited Misconduct’’ means
when a QPAM, any Affiliate thereof (as
defined in Section VI(d)), or any owner,
direct or indirect, of a five (5) percent
or more interest in the QPAM:
(1) Enters into a non-prosecution
(NPA) or deferred prosecution
agreement (DPA) on or after June 17,
2024 with a U.S. federal or state
prosecutor’s office or regulatory agency,
where the factual allegations that form
the basis for the NPA or DPA would
have constituted a crime described in
Section VI(r) if they were successfully
prosecuted; or
(2) Is found or determined in a final
judgment, or court-approved settlement
by a Federal or State criminal or civil
court that is entered on or after June 17,
2024 in a proceeding brought by the
Department, the Department of
Treasury, the Internal Revenue Service,
the Securities and Exchange
Commission, the Department of Justice,
the Federal Reserve Bank, the Office of
the Comptroller of the Currency, the
Federal Depository Insurance
Corporation, the Commodities Futures
Trading Commission, a state regulator,
or state attorney general to have
Participated In one or more of the
following categories of conduct
irrespective of whether the court
specifically considers this exemption or
its terms:
(A) engaging in a systematic pattern or
practice of conduct that violates the
conditions of this exemption in
connection with otherwise non-exempt
prohibited transactions;
(B) intentionally engaging in conduct
that violates the conditions of this
exemption in connection with otherwise
non-exempt prohibited transactions; or
(C) providing materially misleading
information to the Department, the
Department of Treasury, the Internal
Revenue Service, the Securities and
Exchange Commission, the Department
of Justice, the Federal Reserve Bank, the
Office of the Comptroller of the
Currency, the Federal Depository
Insurance Corporation, the Commodities
Futures Trading Commission, a state
regulator or a state attorney general in
E:\FR\FM\03APR2.SGM
03APR2
23144
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES2
connection with the conditions of the
exemption.
(t) ‘‘Participate In,’’ ‘‘Participates In,’’
‘‘Participating In,’’ ‘‘Participated In,’’
and ‘‘Participation In’’ all refer not only
to active participation in Prohibited
Misconduct, but also to knowing
approval of the conduct, or knowledge
of such conduct without taking active
steps to prohibit such conduct,
including reporting the conduct to the
appropriate compliance personnel.
(u) The QPAM maintains the records
necessary to enable the persons
described in subsection (u)(2) below to
determine whether the conditions of
this exemption have been met with
respect to a transaction for a period of
six years from the date of the transaction
in a manner that is reasonably
accessible for examination. No
prohibited transaction will be
considered to have occurred solely due
to the unavailability of such records if
they are lost or destroyed due to
circumstances beyond the control of the
QPAM before the end of the six-year
period.
(1) No party, other than the QPAM
responsible for complying with this
Section VI(u), will be subject to the civil
penalty that may be assessed under
ERISA section 502(i) or the excise tax
imposed by Code section 4975(a) and
VerDate Sep<11>2014
18:54 Apr 02, 2024
Jkt 262001
(b), if applicable, if the records are not
maintained or available for examination
as required by this Section VI(u) below.
(2) Except as provided in subsection
(3) or precluded by 12 U.S.C. 484
(regarding limitations on visitorial
powers for national banks), and
notwithstanding any provisions of
ERISA section 504(a)(2) and (b), the
records are reasonably available at their
customary location during normal
business hours for examination by:
(A) Any authorized employee of the
Department or the Internal Revenue
Service or another state or federal
regulator,
(B) Any fiduciary of a Plan invested
in an Investment Fund managed by the
QPAM,
(C) Any contributing employer and
any employee organization whose
members are covered by a Plan invested
in an Investment Fund managed by the
QPAM, or
(D) Any participant or beneficiary of
a Plan invested in an Investment Fund
managed by the QPAM.
(3) None of the persons described in
subsection (2)(B) through (D) above are
authorized to examine records regarding
an Investment Fund that they are not
invested in, privileged trade secrets or
privileged commercial or financial
information of the QPAM, or
PO 00000
Frm 00056
Fmt 4701
Sfmt 9990
information identifying other
individuals.
(4) Should the QPAM refuse to
disclose information to a person
described in subsection (2)(A) through
(D) above on the basis that the
information is exempt from disclosure,
the QPAM must provide a written
notice advising the requestor of the
reasons for the refusal and that the
Department may request such
information by the close of the thirtieth
(30th) day following the request.
(5) A QPAM’s failure to maintain the
records necessary to determine whether
the conditions of this exemption have
been met will result in the loss of the
relief provided under this exemption
only for the transaction or transactions
for which such records are missing or
have not been maintained. Such failure
does not affect the relief for other
transactions if the QPAM maintains
required records for such transactions in
compliance with this Section VI(u).
Signed at Washington, DC, this 18th day of
March, 2024.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits
Security Administration, U.S. Department of
Labor.
[FR Doc. 2024–06059 Filed 4–2–24; 8:45 am]
BILLING CODE 4510–29–P
E:\FR\FM\03APR2.SGM
03APR2
]]>Agencies
[Federal Register Volume 89, Number 65 (Wednesday, April 3, 2024)]
[Rules and Regulations]
[Pages 23090-23144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06059]
[[Page 23089]]
Vol. 89
Wednesday,
No. 65
April 3, 2024
Part II
Department of Labor
-----------------------------------------------------------------------
Employee Benefits Security Administration
-----------------------------------------------------------------------
29 CFR Part 2550
Amendment to Prohibited Transaction Class Exemption 84-14 for
Transactions Determined by Independent Qualified Professional Asset
Managers (the QPAM Exemption); Final Rule
Federal Register / Vol. 89, No. 65 / Wednesday, April 3, 2024 / Rules
and Regulations
[[Page 23090]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12022]
Z-RIN 1210 ZA07
Amendment to Prohibited Transaction Class Exemption 84-14 for
Transactions Determined by Independent Qualified Professional Asset
Managers (the QPAM Exemption)
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Final amendment to class exemption.
-----------------------------------------------------------------------
SUMMARY: This document gives notice of a granted amendment to
prohibited transaction class exemption 84-14 (the QPAM Exemption). The
QPAM Exemption provides relief from certain prohibited transaction
restrictions of Title I of the Employee Retirement Income Security Act
of 1974, as amended (ERISA) and Title II of ERISA, as codified in the
Internal Revenue Code of 1986, as amended (the Code).
DATES: The amendment is effective June 17, 2024.
FOR FURTHER INFORMATION CONTACT: Brian Mica, telephone (202) 693-8540,
Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor (this is not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
Title I of ERISA broadly prohibits transactions between plans and
any ``party in interest''--who, in general, are people or entities
closely connected to ERISA-covered employee benefit plans as defined in
ERISA section 3(3). Title II of ERISA, codified in the Code, includes
parallel prohibitions applicable to ``disqualified persons'' \1\ who,
in general, are persons or entities closely connected to plans \2\ as
defined in Code section 4975(e)(1).
---------------------------------------------------------------------------
\1\ The term ``disqualified person'' is defined in Code Section
4975(e)(2) and is similar to definition of the term ``party in
interest'' codified in ERISA section 3(14). All references to
``party in interest'' in this Preamble and the QPAM exemption
include ``disqualified person.''
\2\ For purposes of the exemption that term ``Plans'' includes
plans and Individual Retirement Accounts (IRAs) described in Code
section 4975(e)(1) and ERISA-covered employee benefit plans
described in ERISA section 3(3) (referred to as ``Plans,'' and
``IRAs'' herein). Although the Department is using the same
definition of ``plan'' in the final amendment that previously
existed in the QPAM Exemption, the Department is finalizing a
ministerial change which will capitalize this term when referring to
plans impacted by the amendment.
---------------------------------------------------------------------------
Absent an exemption, ERISA section 406(a)(1)(A) through (D) and
Code section 4975(c)(1)(A) through (D) prohibit, among other things,
sales, leases, loans, and the provision of services between these
parties. Congress enacted these prohibitions to protect plans, their
participants and beneficiaries, and IRA owners \3\ from the potential
for abuse that arises when plans and IRAs engage in transactions with
closely connected parties.
---------------------------------------------------------------------------
\3\ For purposes of this Final Amendment, the term ``IRA owner''
refers to the individual for whom an IRA (as defined in the Final
Amendment) is established.
---------------------------------------------------------------------------
The Department grants this exemption, which was proposed on its own
motion, pursuant to its authority under ERISA section 408(a) and Code
section 4975(c)(2).\4\ As required by ERISA section 408(a) and Code
section 4975(c)(2), the Department finds that the exemption is
administratively feasible, in the interests of Plans and their
participants and beneficiaries and protective of the rights of
participants and beneficiaries of Plans and IRA owners.
---------------------------------------------------------------------------
\4\ The exemption also is granted in accordance with procedures
set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27,
2011)). Please note that effective December 31, 1978, section 102 of
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2018), transferred
the authority of the Secretary of the Treasury to issue exemptions
to the Secretary of Labor. Therefore, this notice of amendment to
the QPAM Exemption is issued solely by the Department.
---------------------------------------------------------------------------
The QPAM Exemption permits an investment fund \5\ holding assets of
Plans and IRAs that is managed by a ``qualified professional asset
manager'' (QPAM) to engage in transactions with a ``party in interest''
or ``disqualified person'' to Plans or an IRAs, subject to protective
conditions.\6\ This amendment modifies Section I(g) of the exemption, a
provision under which a QPAM may become ineligible to rely on the QPAM
Exemption for a period of 10 years if the QPAM, various affiliates, or
certain owners of the QPAM are convicted of certain crimes. As
discussed in detail below, this amendment: (1) requires a QPAM to
provide a one-time notice to the Department that the QPAM is relying
upon the exemption; (2) updates the list of crimes enumerated in the
prior version of Section I(g) to explicitly include foreign crimes that
are substantially equivalent to the listed crimes; (3) expands the
circumstances that may lead to ineligibility; and (4) provides a one-
year winding down (transition) period to help Plans and IRAs avoid or
minimize possible negative impacts of terminating or switching QPAMs or
adjusting asset management arrangements when a QPAM becomes ineligible
pursuant to Section I(g), and gives QPAMs a reasonable period to seek
an individual exemption, if appropriate.\7\
---------------------------------------------------------------------------
\5\ For purposes of the QPAM Exemption, an investment fund
includes single customer and pooled separate accounts maintained by
an insurance company, individual trusts, and common, collective, or
group trusts maintained by a bank, and any other account or fund
subject to the discretionary authority of the QPAM. See Section
VI(b) of the QPAM Exemption.
\6\ Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers, 49 FR 9494 (Mar.
13, 1984) as corrected at 50 FR 41430 (Oct. 10, 1985), as amended at
66 FR 54541 (Oct. 29, 2001), 70 FR 49305 (Aug. 23, 2005), and 75 FR
38837 (July 6, 2010).
\7\ As further discussed below, the Department has substituted
the term ``transition period'' for the term ``winding-down period''
that it used in the proposed amendment. The terms have the same
meaning.
---------------------------------------------------------------------------
This amendment also: (1) provides clarifying updates to Section
I(c) regarding a QPAM's authority over investment decisions; (2)
adjusts the asset management and equity thresholds in the QPAM
definition in Section VI(a); and (3) adds a new recordkeeping provision
in Section VI(u). The amendment will affect participants and
beneficiaries of Plans, IRA owners, the sponsoring employers of such
Plans or IRAs (if applicable) and other plan sponsors, QPAMs, and
counterparties engaging in transactions covered under the QPAM
Exemption.
Background of the QPAM Exemption
In 1984, the Department published the QPAM Exemption, which permits
an investment fund managed by a QPAM to engage in a broad range of
transactions with parties in interest with respect to a Plan, subject
to protective conditions. The Department developed and granted the QPAM
Exemption based on the premise that it could provide broad exemptive
relief from the prohibitions of ERISA section 406(a)(1)(A) through (D)
and Code section 4975(c)(1)(A) through (D) for transactions in which a
Plan engages with a Party in Interest only if the commitments and
investments of Plan assets and the negotiations leading thereto are the
sole responsibility of an independent investment manager.
Section I of the QPAM Exemption (the General Exemption) \8\
provides broad
[[Page 23091]]
prohibited transaction relief for a QPAM-managed Investment Fund to
engage in transactions with a Party in Interest, but it does not
include relief for the QPAM to engage in any transactions involving its
own self-dealing or conflicts of interest or kickbacks, which are
prohibited under ERISA section 406(b)(1) through (3) and 4975(c)(1)(E)
and (F). This important limitation on the relief in the QPAM Exemption
serves as a key protection for Plans that are affected by the
exemption. The QPAM Exemption also includes conditions designed to
ensure that the QPAM does not engage in transactions with a Party in
Interest that has the power to influence the QPAM's decision-making
processes. Additionally, QPAMs remain subject to the fiduciary duties
of prudence and undivided loyalty set forth in ERISA section 404 with
respect to their client Plans.
---------------------------------------------------------------------------
\8\ The Department proposed a ministerial change to replace
``Part'' with ``Section'' in the QPAM Exemption. For consistency,
the Department is using only the term ``Section'' throughout this
preamble. The Department also proposed a ministerial change to
capitalize defined terms in the QPAM Exemption and is using those
capitalized terms throughout this preamble as they are being
finalized in this amendment.
---------------------------------------------------------------------------
The General Exemption covers many different types of transactions.
For example, the exemption provides relief for a QPAM to use fund
assets to purchase an asset from certain Parties in Interest \9\ to a
Plan that is invested in the fund. The General Exemption also
facilitates much more complex transactions, such as when a QPAM designs
a fund to replicate the return of certain commodities indices by
investing in futures, structured notes, total return swaps, and other
derivatives where a Party in Interest to a Plan that invested in the
fund is involved in the transaction.\10\ In addition to the General
Exemption, the QPAM Exemption also contains ``Specific Exemptions'' in
Sections II, III, and IV, which the Department is not modifying in this
amendment.
---------------------------------------------------------------------------
\9\ The plural form has the same meaning as the singular defined
term ``Party in Interest.''
\10\ See e.g., Notice of Proposed Exemption involving Credit
Suisse AG, 79 FR 52365, 52367 (Sept. 3, 2014).
---------------------------------------------------------------------------
When it proposed the QPAM Exemption in 1982, the Department
expressly indicated that any entity acting as a QPAM, and those who are
in a position to influence the QPAM's policies, are expected to
maintain a high standard of integrity.\11\ Accordingly, the exemption
includes Section I(g), which provides that a QPAM is ineligible to rely
on the exemption for a period of 10 years if the QPAM, various
affiliates, or owners of a five (5) percent or more interest in the
QPAM are convicted of certain crimes. Ineligibility begins as of the
date of the judgment of the trial court, regardless of whether the
judgment remains under appeal.
---------------------------------------------------------------------------
\11\ Proposed Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers, 47
FR 56945, 56947 (Dec. 21, 1982).
---------------------------------------------------------------------------
The Qualified Professional Asset Manager
A QPAM is defined as a bank, savings and loan association,
insurance company, or registered investment adviser that meets
specified asset and equity thresholds set forth in the exemption and
acknowledges in a Written Management Agreement that it is a fiduciary
with respect to each of its client Plans. The Department noted in the
1982 proposed exemption that these categories of asset managers are
subject to regulation by federal or state agencies and expressed the
view that large financial services institutions would be able to
withstand improper influence from Parties in Interest (i.e., maintain
independence).\12\ As a general matter, the Department's position
continues to be that transactions entered into on behalf of Plans with
a Party in Interest are most likely to conform to ERISA's general
fiduciary standards when the decision to enter into the transaction is
made by an independent fiduciary.
---------------------------------------------------------------------------
\12\ Id. at 56947.
---------------------------------------------------------------------------
The QPAM's independence and discretionary control over asset
management decisions protect Plans from the danger that a Party in
Interest will exercise improper influence over decision-making
regarding Plan assets. The QPAM acts as a fundamental protection
against the possibility that Parties in Interest could otherwise favor
their own competing financial interests at the expense of Plans, their
participants and beneficiaries, and IRA owners. Because the Department
relies upon the QPAM as a key protection against such improper conduct
and the threat posed by conflicts of interest, it is critically
important that the QPAM, and those who are in a position to influence
its policies, maintain a high standard of integrity. QPAMs must have
the authority to make decisions on a discretionary basis without direct
oversight for each transaction by other Plan fiduciaries. Given the
scope of their discretion, it is imperative that the QPAM, its
Affiliates, and certain owners avoid engaging in criminal conduct and
other serious misconduct that would jeopardize Plan assets or call into
question the Department's reliance on the QPAM's oversight as a key
safeguard for Plan participants and beneficiaries and IRA owners.
Purpose and Approach for the Final Amendment
Substantial changes have occurred in the financial services
industry since the Department granted the QPAM Exemption in 1984. These
changes include industry consolidation and an increasingly global reach
for financial services institutions, both in their affiliations and
their investment strategies, including those for Plan assets. In the
years since 1984, the Department has repeatedly considered applications
for individual exemptions in connection with convictions for crimes
causing ineligibility under Section I(g). Through processing these
applications, the Department has gained extensive experience analyzing
QPAMs' failures to comply with Section I(g) of the QPAM Exemption as a
result of corporate convictions in domestic and foreign jurisdictions.
This experience has affirmed the Department's position that an
ineligibility condition tied to criminal convictions provides necessary
protection to Plans, their participants and beneficiaries, and IRA
owners.
In practice, Section I(g) has effectively required QPAMs that
become ineligible to seek an individual exemption to continue their
reliance on the QPAM Exemption. Since 2013, the Department has received
an increasing number of individual exemption requests involving Section
I(g) ineligibility due to criminal convictions occurring within the
corporate family of large financial institutions. To ensure that these
exemptions are protective of Plans and participants and beneficiaries
and in their interests as required by ERISA section 408(a) and Code
section 4975(c)(2), the Department has required applicants to fully and
accurately disclose: (1) the criminal conduct that led to their
ineligibility, including whether the QPAM was involved; (2) the
specific reasons they should be permitted to continue acting as a QPAM
notwithstanding the criminal conduct; (3) the efforts they have
undertaken to promote a culture of compliance in their corporate
family; and (4) the steps they will take in the future to ensure Plans,
their participants and beneficiaries, and IRA owners are protected. In
these individual QPAM exemptions, the Department included additional
protections, such as a comprehensive independent compliance audit and
allowing client Plans to withdraw from their asset management
arrangements with the ineligible QPAM without penalty. These exemptions
have also required the QPAM to indemnify or hold their client Plans
harmless in the event that the QPAM, or an Affiliate, or
[[Page 23092]]
owner of a five (5) percent or more interest engages in future
misconduct.
Exemption applicants have consistently represented to the
Department that Plan investors would be harmed if a QPAM abruptly loses
exemptive relief as of the conviction date, as dictated by Section
I(g). Although Section I(g) ineligibility does not bar a QPAM from
acting as a discretionary asset manager for Plan assets after a
conviction, applicants have informed the Department that the loss of
exemptive relief under the QPAM Exemption has the potential to disrupt
Plan investments and investment strategies, especially for transactions
involving Plan counterparties that also are relying upon the relief
provided in the QPAM Exemption.\13\ According to these applicants,
Plans may also experience transition costs if a Plan fiduciary needs to
find an alternative asset manager on short notice after a QPAM becomes
ineligible.
---------------------------------------------------------------------------
\13\ See e.g., Notice of Proposed Exemption involving JP Morgan
Chase & Co., 81 FR 83372, 83363 (Nov. 21, 2016).
---------------------------------------------------------------------------
To protect Plans against the immediate disruption and costs caused
by their QPAMs losing eligibility immediately upon conviction, the
Department has granted several one-year temporary individual exemptions
to QPAMs facing ineligibility. These individual exemptions provided the
Department with sufficient time to engage in a more intensive review of
information submitted by the applicants to determine whether a longer-
term individual exemption was warranted to provide extended relief at
the end of the one-year period.\14\ Moreover, since 2013, both the one-
year and longer-term exemptions have provided Plans with the important
opportunity to exit from their asset management arrangements with a
QPAM without the imposition of certain fees, penalties, or charges.
---------------------------------------------------------------------------
\14\ In such cases, the Department requires prominent notice be
provided to client Plans along with additional protective conditions
to ensure Plan assets are protected while longer-term prohibited
transaction relief is considered.
---------------------------------------------------------------------------
Regulatory Administrative Record for the Proposed Amendment
The developments discussed above prompted the Department to propose
the amendment to the QPAM Exemption on July 27, 2022, with an initial
60-day comment period that was set to expire on September 26, 2022 (the
Proposed Amendment).\15\ After the Department published the Proposed
Amendment, it received two letters requesting an extension of the
comment period.\16\ The Department responded to the requests by
extending the initial comment period for an additional 15 days until
October 11, 2022, in a Federal Register Notice published on September
7, 2022,\17\ and received 31 comment letters during this initial
extended comment period.
---------------------------------------------------------------------------
\15\ 87 FR 45204.
\16\ See Public Comment #1 from American Bankers Association et
al. and Public Comment #2 from American Retirement Association. The
extension requests can be accessed here: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/.
\17\ 87 FR 54715.
---------------------------------------------------------------------------
Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA),
the Acting Assistant Secretary of the Employee Benefits Security
Administration (EBSA) certified that the Proposed Amendment would not
have a significant economic impact on a substantial number of small
entities. After consulting with the Small Business Administration's
Office of Advocacy (SBA), however, the Department decided to publish a
Supplementary Initial Regulatory Flexibility Analysis (IRFA) that
explained the Proposed Amendment's potential impact on small
entities.\18\ The Department requested comments on the IRFA by October
11, 2022, the same deadline as the extended comment period for the
Proposed Amendment.
---------------------------------------------------------------------------
\18\ 87 FR 56912 (Sep. 16, 2022).
---------------------------------------------------------------------------
In the September 7, 2022, Federal Register notice, the Department
announced that it would hold a virtual public hearing on its own motion
on November 17, 2022 (and if necessary, on November 18, 2022), to
provide an opportunity for all interested parties to testify on
material information and issues regarding the Proposed Amendment.\19\
The Department received 13 requests to testify at the hearing. The
notice also indicated the Department would: (1) reopen the public
comment period from the hearing date until approximately 14 days after
the Department publishes the hearing transcript on EBSA's website; and
(2) publish a Federal Register notice announcing that the Department
posted the hearing transcript to EBSA's website and providing the
closing date for the reopened comment period.
---------------------------------------------------------------------------
\19\ 87 FR 54715.
---------------------------------------------------------------------------
The Department held the virtual public hearing on November 17,
2022, and reopened the comment period on the hearing date.\20\ The
reopened comment period closed on January 6, 2023, and the Department
received 150 additional comments.\21\
---------------------------------------------------------------------------
\20\ The hearing did not continue on November 18, 2022, because
the Department was able to schedule all witnesses that requested to
testify on one day.
\21\ See https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07.
---------------------------------------------------------------------------
On March 23, 2023, the Department reopened the Proposed Amendment's
comment period again because it understood that at least one interested
party may have had additional information to provide the Department
that was not submitted by the January 6, 2023 comment period
deadline.\22\ The reopened comment period provided an opportunity for
all interested parties to submit additional information until April 6,
2023, and the Department received seven comments during this reopened
comment period.\23\
---------------------------------------------------------------------------
\22\ 88 FR 17466.
\23\ See https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07.
---------------------------------------------------------------------------
The rulemaking process has provided the Department with a robust
administrative record. After careful consideration of the approximately
200 comments received during the public comment periods and testimony
presented at the public hearing, the Department is finalizing the
Proposed Amendment (the Final Amendment), with the revisions discussed
below.
Section I(g)--Reporting to the Department, Written Management
Agreement, and Ineligibility
Reporting to the Department--Note: This Requirement has been moved
from Subsection I(g)(1) of the Proposed Amendment to Section I(k) of
this Final Amendment.
The Proposed Amendment would have required each QPAM that relies
upon the exemption to report its legal name (and any name the QPAM may
be operating under) by email to the Department at [email protected].\24\ The
Department proposed that the QPAM would need to provide this
notification to the Department only once unless the legal or operating
name(s) of the QPAM relying upon the exemption was changed. The
Department also indicated its intent to maintain a current list of
entities relying upon the QPAM Exemption on its publicly available
website.
---------------------------------------------------------------------------
\24\ For instance, assume a corporate family is comprised of
legal entities named: Corporate Parent A, Investment Manager B,
Broker-Dealer C, Retail Bank D, and Institutional Bank E (doing
business as InstiBank). Investment Manager B and Institutional Bank
E are the only entities acting as QPAMs. Investment Manager B would
notify the Department that it is acting as a QPAM and its legal name
is Investment Manager B. Institutional Bank E would notify the
Department that it is acting as a QPAM and its legal name is
Institutional Bank E, but it is doing business as InstiBank.
---------------------------------------------------------------------------
[[Page 23093]]
The Department received a variety of comments on this proposed
reporting requirement. Some commenters opposed the requirement in part
because no other prohibited transaction exemption requires
``registration'' or a listing on a publicly available website.
Commenters also indicated that the publication of a list of QPAMs on
the Department's website has the potential to mislead Plan participants
and beneficiaries and IRA owners into thinking that a manager's
inclusion or exclusion signifies whether the Department has endorsed
its eligibility to rely on the exemption.
After considering these comments, the Department is finalizing the
notice provision with the modifications discussed below. The notice
requirement provides the Department with knowledge of the investment
managers that are relying on the exemption and will serve as an
important reminder to investment managers relying on the QPAM Exemption
that the ``QPAM'' title and status are tied to an administrative
prohibited transaction exemption that requires compliance with the
exemption's conditions.
With respect to publishing the list on its website, the Department
has significant experience publicly posting information in a manner
that is not misleading. Additionally, the Department notes that a wide
variety of information regarding investment advisers, including
disciplinary violations, currently is publicly available through
BrokerCheck.\25\ The importance of having this information publicly
available to provide Plan fiduciaries and participants and
beneficiaries, and IRA owners with the ability to know whether their
investment managers (or potential managers) are relying on the QPAM
Exemption outweighs any harm that could occur if the information were
misleading.
---------------------------------------------------------------------------
\25\ BrokerCheck is an online tool provided by FINRA that
provides information regarding brokers and investment advisers such
as employment history, certifications, licenses, and any violations.
https://brokercheck.finra.org/.
---------------------------------------------------------------------------
Commenters also noted that it is important for the Department to
ensure that it has appropriate resources to maintain the list of QPAMs
and keep it current. The Department appreciates this concern. Although
there will likely be an initial wave of QPAMs reporting to the
Department, the Department anticipates that minimal resources will be
necessary to keep an updated list over the long-term.
Commenters also expressed concern that a QPAM could easily overlook
the requirement to update the Department when it changes its legal or
trade name, which could lead it to commit a series of inadvertent
prohibited transactions that would only end when the QPAM reports its
updated name to the Department. Related to this concern, commenters
also requested the Department clarify that an inadvertent failure to
report would not be considered Prohibited Misconduct \26\ or otherwise
jeopardize a manager's ability to rely on the QPAM Exemption.
---------------------------------------------------------------------------
\26\ Prohibited Misconduct was defined in proposed Section
VI(s). See below for additional discussion of comments regarding the
Proposed and Final Amendment definition.
---------------------------------------------------------------------------
The Department did not intend for the reporting requirement to
create compliance issues for QPAMs that could jeopardize the
availability of the prohibited transaction relief in the QPAM
Exemption. Therefore, to avoid inadvertent failures during the period
immediately after an entity begins relying on the QPAM Exemption or
changes its name, the Department has revised the proposed provision to
provide QPAMs with an initial 90-day period to report to the Department
and an additional 90-day period to cure inadvertent failures to report.
If the QPAM fails to report within the initial 90-day period, it must
submit an explanation during the 90-day cure period for why it failed
to provide timely notice. If, at the end of the 180 days, a QPAM still
has failed to report, or has not provided the required explanation, the
exemption will not be available for transactions that occur until the
failure is fully cured. Furthermore, the Department confirms that an
isolated instance of failing to report generally would not be
considered Prohibited Misconduct that would result in ineligibility
under Section I(g)(1)(B).
Several commenters also indicated that the Proposed Amendment did
not appear to provide any mechanism for an entity to ``de-register''
after it initially reports to the Department. In response to this
comment, the Department added new language to the end of Section I(k)
(Subsection I(g)(1) of the Proposed Amendment) to allow an entity that
reported to the Department to notify the Department that it no longer
is relying on the exemption. After the Department receives this notice,
it will remove the entity from its list of QPAMs that are relying on
the QPAM Exemption.
Another commenter recommended that if the Department is seeking a
list of entities operating as QPAMs, the Department could assign a new
separate identifying code to QPAMs that would be used to report the
QPAMs' services to a Plan on Schedule C of the Form 5500. While the
Department appreciates this comment and suggestion, modifying the Form
5500 is not part of this amendment, and the Department's objective
would not be met using the current Form 5500 for this purpose.
Finally, a proponent of the requirement noted that the Department
cannot effectively monitor QPAM compliance if it cannot even identify
QPAMs or estimate the number and amount of assets managed by QPAMs. The
Department notes that in addition to assisting the Department in
monitoring compliance, the reporting requirement will ensure the
Department has better information regarding the number of QPAMs that
are relying on the exemption, which will provide important data the
Department can use to estimate impacts if it considers future
amendments to the exemption. Therefore, the Department has retained
this requirement in the Final Amendment because it is important for
firms that are relying on the exemption to provide identifying
information to the Department and for such firms to establish a
compliance framework that is sufficient to ensure that they can always
satisfy the exemption's conditions.
Written Management Agreement (WMA)--Proposed Subsection I(g)(2)
27
---------------------------------------------------------------------------
\27\ Subsection I(g) of the Proposed Amendment has been
renumbered and the requirements in Proposed Section I(g)(2) are now
contained in Section I(i) in this Final Amendment.
---------------------------------------------------------------------------
As previously stated in this preamble, the fundamental premise of
Section I(g) has always been for a QPAM and those in a position to
control or influence its policies to act with integrity. The Proposed
Amendment included a new requirement for all QPAMs to update their WMAs
to include a provision that in the event the QPAM, its Affiliate, or
five percent or more owners engage in conduct resulting in a Criminal
Conviction or Participation In Prohibited Misconduct, the QPAM would
not restrict its client Plans' ability to terminate or withdraw from
their arrangement with the QPAM.\28\ The proposed requirement also
would have prevented QPAMs from imposing certain fees, penalties, or
charges on client Plans in connection with terminating or withdrawing
from a QPAM-managed Investment Fund.\29\
[[Page 23094]]
Finally, the Proposed Amendment would have required QPAMs to include a
provision in their WMAs that they would 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 failure of such QPAM to
remain eligible for relief under the QPAM Exemption as a result of
conduct that leads to a Criminal Conviction or Participation in
Prohibited Misconduct.
---------------------------------------------------------------------------
\28\ The terms ``Criminal Conviction'' and ``Prohibited
Misconduct'' are discussed in more detail below.
\29\ This would not apply to reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practices or specifically
designed 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 would be excepted. If such
fees, penalties, or charges occur, they must be applied consistently
and in a like manner to all such investors.
---------------------------------------------------------------------------
Many commenters expressed concerns with these proposed WMA
provisions. They were particularly opposed to the WMA condition being
imposed on all QPAMs immediately upon the effective date of the
provision, and not only those QPAMs who become ineligible under Section
I(g).\30\ Other commenters indicated that these WMA provisions should
simply be imposed as conditions that are not required to be included in
contracts or as contractual guarantees.
---------------------------------------------------------------------------
\30\ Many commenters used terms such as ``disqualified'' or
``disqualification'' in their comment letters to describe
ineligibility under Section I(g). The Department has used the terms
``ineligibility'' and ``ineligible'' throughout this preamble for
consistency with the heading for Section I(g) in this Final
Amendment and to avoid confusion that the term ``disqualified''
indicates that the definition of ``qualified professional asset
manager'' is not satisfied.
---------------------------------------------------------------------------
Many commenters indicated that the process to update WMAs is
difficult and complicated and would take much longer to comply with
than the Department's proposed 60-day effective date. Some commenters
indicated that at least 18 months would be required to come into
compliance, and that the amendment process would be very costly. These
commenters noted that even if a manager made only the required
amendments to its WMA, such amendments typically would require investor
consent, including consent by non-Plan investors who might be adversely
affected by the changes. Additionally, if QPAMs were required to
include a new indemnification clause in their WMA, commenters indicated
that QPAMs would likely also need to update and revise their agreements
with many other parties to address the same contingencies that
necessitate the new indemnifications and other required changes for
their client Plans. Finally, some commenters suggested that if the
Department requires QPAMs to include these provisions in their WMAs,
the requirement should apply only to contracts that are executed or
materially modified after the effective date of the Final Amendment.
After carefully considering these comments, the Department has
decided to remove the requirement for all QPAMs to revise their WMAs.
Instead, the Department has moved the condition into the Transition
Period provision of this Final Amendment. This modification means that
after the effective date of the Final Amendment, only QPAMs that become
ineligible to rely on the exemption will have to comply with the
indemnification and penalty-free withdrawal provisions. As a result,
the Final Amendment's Transition Period provision will operate in a
similar manner to recent Section I(g) individual exemptions granted by
the Department, which have imposed indemnification and penalty-free
withdrawal requirements on QPAMs only after they become ineligible
under Section I(g).
The Final Amendment indicates that any QPAM that experiences a
Section I(g) triggering event must provide client Plans with a One-Year
Transition Period and comply with the associated conditions that are
discussed below. In this Final Amendment, the Department made some
minor non-substantive adjustments to the language in the Proposed
Amendment regarding the prohibited transaction relief available and
obligations of the QPAM during the Transition Period. The Final
Amendment indicates that relief under the exemption during the
Transition Period is available for a maximum period of one year after
the Ineligibility Date if the QPAM complies with each condition of the
exemption throughout the one-year period. No relief will be available
for any transactions (including past transactions) effected during the
One-Year Transition Period unless the QPAM complies with each condition
of the exemption during such one-year period.
A few commenters opined that the requirement that the QPAM agree
not to restrict a Plan's ability to withdraw from an Investment Fund
that invests in illiquid assets such as a private equity or real estate
fund, may present additional challenges and harm Plans' investment
returns. The Department understands the additional challenges
associated with funds that are less liquid. However, as noted in the
Proposed Amendment, a QPAM that faces ineligibility may seek
supplemental individual exemption relief from the Department. As also
noted in the Proposed Amendment, an applicant may request a more
limited scope of relief for a supplemental individual exemption that
captures only those transactions that present liquidity problems. The
individual exemption process is best suited for addressing those
concerns and the Department stresses the importance of submitting an
individual exemption application as soon as possible after a QPAM
learns that a Section I(g) triggering event is expected to occur.
Applying promptly is not only consistent with the QPAM's fiduciary
obligations, but also helps ensure that the Department has sufficient
time to review the exemption application before the end of the One-Year
Transition Period.
Some commenters maintained that QPAMs should not have to indemnify
and restore losses beyond what is already required under ERISA because
ERISA already provides sufficient protections for Plans to recover
losses. The Department disagrees. Until now, the exemption lacked
additional safeguards to ensure Plans and IRA owners are not exposed to
substantial collateral costs that result from criminal or other
misconduct that is beyond their control. When QPAMs breached their
obligations and faced the loss of QPAM status, they commonly argued
that the Department should grant relief, notwithstanding their
misconduct, lest the Plans and IRA owners sustained the collateral
costs and injury associated with the loss of QPAM status. The express
obligation to indemnify and restore losses caused by the QPAM's own
misconduct mitigates this danger and prevents Plans from being locked
into disadvantageous relationships with firms that have proved unable
or unwilling to meet the exemption's conditions.
Commenters also indicated that client Plans and QPAMs should be
allowed to negotiate indemnification because liability and
indemnification provisions are often already in place, which are
intended to protect Plans if a non-exempt prohibited transaction or
breach of fiduciary duty occurs. The Department is concerned that all
client Plans do not have the same bargaining leverage to negotiate the
type of indemnification provisions included in the Final Amendment.
Moreover, such commenters did not provide any specific examples of the
types of indemnification provisions that may
[[Page 23095]]
already be included in their agreements with Plan customers.
Nevertheless, the Department's modification in the Final Amendment to
limit the WMA requirements to the Transition Period should mitigate
this concern because the requirement will only be imposed upon entities
experiencing an event that triggers Section I(g).
Some commenters focused on the term ``actual losses'' and argued
that this standard should not include the costs for Plans to transition
to an alternative asset manager because such costs are not normally
paid for by a terminated manager. The Department believes that this
argument is misplaced. Whether a cost is normally paid for by a
terminated manager is not determinative of whether the Department
should include a provision in the Final Amendment to protect Plans as
mandated by ERISA section 408(a) and Code section 4975(c)(2). When an
asset manager becomes ineligible to rely upon the relief provided in
the QPAM Exemption due to a violation of Section I(g), which is outside
the control of the client Plan, it is appropriate for the wrongdoer to
bear the associated costs.
Commenters also noted the ambiguity regarding the full range of
costs that are required to be indemnified. Relatedly, commenters
indicated that asset managers will be unable to insure against such
losses. They argued that it is very difficult, if not impossible, to
quantify ``investment losses resulting from foregone investment
opportunities'' for a variety of reasons, including the type of
investment manager, the ebbs and flows of investment needs and
opportunities, and the costs or needs of a replacement manager.
The Department acknowledges that there is uncertainty regarding the
full range of such costs, but notes that it has consistently imposed
these indemnification and loss restoration obligations in recent
individual exemptions following violations of Section I(g), and that
the affected firms have nevertheless chosen to continue acting as QPAMs
after receiving relief from the Department. Commenters have provided no
evidence that the condition has resulted in the imposition of
unwarranted costs upon Plans or QPAMs, or that there had been any
significant adverse impacts stemming from imposition of the condition
in the context of individual exemptions. Nor have they provided any
compelling evidence suggesting that the costs caused by further
breaches after felony convictions, or the associated uncertainties, are
better borne by the affected Plans than by the QPAMs. In the
Department's view, it is wholly appropriate that the QPAM, rather than
the Plan, sustain the costs stemming from the QPAM's failure to meet
the exemption's conditions or violations of the law. Moreover, by
limiting the WMA requirements to the Transition Period provisions in
the Final Amendment, the Department sharply reduces the scope of the
QPAM's potential liability and the need to determine possible costs up
front. As noted above, this Final Amendment simply adopts the same
overall approach to Section I(g) ineligibility that has been a core
component of the Department's recently granted Section I(g) individual
exemptions.\31\
---------------------------------------------------------------------------
\31\ See e.g., Exemption From Certain Prohibited Transaction
Restrictions Involving Pacific Investment Management Company LLC, 88
FR 42953 (July, 5, 2023); Exemption for Certain Prohibited
Transaction Restrictions Involving Citigroup, Inc., 88 FR 4023 (Jan.
23, 2023); Exemption for Certain Prohibited Transaction Restrictions
Involving DWS Investment Management Americas, Inc. (DIMA or the
Applicant) and Certain Current and Future Asset Management
Affiliates of Deutsche Bank AG, 86 FR 20410 (April 18, 2021).
---------------------------------------------------------------------------
One commenter also noted that the WMA requirement in subsection
I(g)(2)(C) of the Proposed Amendment referenced Code section 4975
excise taxes. The commenter indicated that since the indemnification
runs to the Plan and a Plan is not liable for excise taxes, this
provision does not make sense. After considering this comment, the
Department has retained the reference to the excise taxes. This
provision is intended to ensure that a QPAM does not impose costs or
fees on a Plan in connection with excise taxes incurred by the QPAM.
Finally, a commenter argued that the provision should not cover
non-prosecution agreements (NPAs), deferred prosecution agreements
(DPAs), or any other ineligibility trigger captured within the
definition of Prohibited Misconduct. As discussed below, the Department
has modified the scope of NPAs and DPAs captured within the definition
of Prohibited Misconduct. The Department believes that conduct severe
enough to warrant an NPA or DPA should trigger the same conditions as
Criminal Convictions. Therefore, while the Final Amendment reflects the
modified scope of the NPAs and DPAs that are affected, the Department
declines to remove this protection as it applies to NPAs and DPAs
covered under the Final Amendment.
Types of Misconduct and Entities That Cause Ineligibility--Proposed
Subsection I(g)(3) 32 and Sections VI(r) and VI(s)
---------------------------------------------------------------------------
\32\ Subsection I(g)(3) of the Proposed Amendment has been
renumbered as Subsection I(g)(1) of the Final Amendment.
---------------------------------------------------------------------------
Criminal Convictions
Since 1984 when the QPAM Exemption was initially granted, Section
I(g) ineligibility has captured convictions of QPAMs, their Affiliates,
and five percent or more owners of the QPAM. As noted above, because
the Department relies upon the QPAM as a key protection in the
exemption, it is critically important that the QPAM, and those who are
positioned to influence its policies, maintain a high standard of
integrity. QPAMs, affiliates, and related parties that engage in
serious criminal misconduct do not display the requisite standard of
integrity expected of such entities under the exemption.
While the Department did not propose any changes to the scope of
entities captured by Section I(g),\33\ some comments focused on the
breadth of Section I(g), including the proposed expansion of Section
I(g) to capture the Participation In Prohibited Misconduct by a QPAM,
its Affiliates, or its owners of a five (5) percent or more interest.
Some commenters noted that the financial services industry has
experienced significant consolidation in the decades since the QPAM
Exemption was granted, with the result that a QPAM may be a small part
of a very large organization. One commenter also suggested that the
Department's proposed expansion of the ineligibility provision to
include Prohibited Misconduct would impose an unjustified penalty based
on the size and complexity of firms relying on the exemption.
---------------------------------------------------------------------------
\33\ The Department recognizes that the proposed inclusion of
Prohibited Misconduct may seem to broaden the scope of entities
captured, but the Department characterizes that as broadening the
scope of misconduct. The Proposed Amendment did not change the five
percent ownership threshold or definition of Affiliate that is
applicable to Section I(g).
---------------------------------------------------------------------------
Some commenters contended that existing Section I(g) of the QPAM
Exemption results in unjust application of automatic ineligibility.
Commenters suggested that Section I(g) should focus on crimes committed
by affiliates that are positioned to influence the QPAM's policies or
have power or influence to compromise the QPAM's ERISA compliance, or
crimes that involve the QPAM itself. According to one commenter, there
should be a direct relationship between the crime and the services
provided by the QPAM. A
[[Page 23096]]
variety of commenters expressed disagreement with what they perceived
to be the Department's position, i.e., that remote convictions call a
QPAM's integrity into question. These commenters asserted that Section
I(g) imposes ineligibility in circumstances where the entities or
individuals engaging in criminal conduct are not, in fact, in a
position to influence the QPAM's policies. One commenter also opined
that remote convictions resulting in ineligibility run counter to the
purposes of ERISA section 408(a). Another commenter suggested that the
Department should reserve ineligibility only for the most egregious
convictions of the QPAM involving ERISA assets. Others preferred the
Department's narrow approach in PTE 2020-02 because it limits
ineligibility to the entity providing investment advice or other
affiliates engaged in the business of providing investment advice to
Plans.
At the same time, some of these commenters indicated that inclusion
of criminal convictions as an ineligibility trigger at the QPAM entity
level could be appropriate. Similarly, some commenters agreed that
crimes committed by a parent entity that can exercise management and
control over the QPAM's day-to-day business and decision-making could
be relevant for an ineligibility provision based on criminal
convictions. A few commenters suggested that the Department rely on the
``controlled group of corporations'' or ``under common control''
standards as defined in Code section 414(b) and (c) if it decides to
retain the current breadth of Section I(g).
The Department disagrees with the suggestion that disqualification
is appropriate only when the QPAM itself was directly involved in the
crime or only when the crime specifically involves plan assets or
services to ERISA-covered plans. Serious crimes of the sort enumerated
in Section I(g) are directly relevant to a corporate family's culture
of compliance. When a company with multiple affiliated entities has
engaged in such conduct or ignored criminal misconduct when it is
occurring (or possibly even endorsed the misconduct), the likelihood
that the same or similar conduct will be ignored when engaged in at the
QPAM entity increases. This is particularly true where the bad actor is
the corporate parent of the QPAM, but also rings true when it is an
affiliated company that is controlled by the same corporate parent as
the QPAM.
Affiliated and related companies commonly hold themselves out as an
integrated entity, have common or overlapping supervisory and control
structures, and share a common corporate culture. Accordingly, serious
criminal misconduct is a red flag indicating potential compliance
problems that extend beyond the specific actors that directly engaged
in the misconduct. Similarly, the commission of any of the enumerated
criminal offenses is relevant to the assessment of likely future
misconduct beyond the narrow confines of the particular customers and
service providers directly affected by the conduct that resulted in a
conviction. If, for example, a company engaged in embezzlement or
price-fixing with respect to non-plan customers, there is little basis
for plan customers to be sanguine about the improbability of such
conduct with respect to plan customers and plan assets.
Moreover, the practical impact of the exemption's disqualification
provisions is not that QPAMs are precluded from making their case to
the Department that the criminal conviction should not result in a
lengthy bar from reliance on the exemption. Rather, the consequence is
that the disqualified QPAM would have to apply for an individual
exemption if it wishes to rely on the class exemption for a period that
extends beyond the Transition Period. In the context of such an
individual exemption application, the QPAM would be in a better
position to present evidence on the scope of its involvement in the
criminal conduct, its independence from any bad actors, current
corporate culture and compliance structures, and other information
relevant to assessing whether it should be permitted to continue
relying on this exemption, notwithstanding the conviction. Similarly,
the Department would have the time and ability to consider such issues
on a case-specific and context-sensitive basis that takes into account
the evidence submitted as part of a formal record. Also, based on the
Department's experience processing individual exemption applications,
many of the convictions and criminal misconduct the Department has
dealt with over the past decade have not involved conduct that is
isolated to remotely related affiliates within the QPAM's corporate
ownership structure.\34\
---------------------------------------------------------------------------
\34\ Even in situations where the convicted entity appeared
remote, the Department has seen pervasive compliance failures at
various other entities within the corporate family, including at
parent entities.
---------------------------------------------------------------------------
Financial Industry Consolidation
The Department recognizes that the legal landscape for the
financial services industry has changed since 1984. When the QPAM
Exemption was originally granted, there were established legal and
regulatory barriers in the U.S. that prevented banking, securities, and
insurance companies from consolidating. However, the passage of the
Graham-Leach-Bliley Act in 1999 \35\ removed these barriers, which led
many commercial banks, investment banks, securities firms, and
insurance companies to consolidate. The Department understands that
significant consolidation has occurred since 1999 and that the scope of
entities captured by Section I(g) has not been revisited since those
and other changes occurred in the financial services industry. The
Department continues to stand by the original premise for Section I(g),
which largely is focused on entities who are in control-based
relationships with a QPAM, can influence the activities of a QPAM or
are likely to share a common corporate culture.
---------------------------------------------------------------------------
\35\ Public Law 106-102; 113 Stat. 1338.
---------------------------------------------------------------------------
The Department reminds QPAMs, as it did in the Proposed Amendment,
that control-based relationships remain directly relevant for
triggering ineligibility under Section I(g) because of the Affiliate
definition.\36\ Meaningful control can exist even when entities that
have small ownership interests in a QPAM are positioned to influence
the QPAM's decision to engage or refrain from engaging in conduct that
can form the basis for a Criminal Conviction or Participation In
Prohibited Misconduct. The Department continues to believe that
corporate malfeasance at entities that control, are under common
control with, or are controlled by the QPAM indicates the possibility
of increased risk of harm to client Plans and IRA owners . The
Department notes that a controlling relationship exists when one entity
directly or indirectly has or exercises a significant influence over
the management or policies of another entity. Control in this context
does not require that the first entity has the ability to exercise
complete domination or absolute authority over all aspects of the
management or policies of the second entity.
---------------------------------------------------------------------------
\36\ The Affiliate definition continues to include ``[a]ny
person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with'' the QPAM.
See Section VI(d) for a complete definition.
---------------------------------------------------------------------------
Foreign Criminal Convictions
The Department has a longstanding practice of considering
individual exemption applications from QPAMs in connection with foreign
convictions.\37\
[[Page 23097]]
The Proposed Amendment would have added a definition of Criminal
Conviction that was intended to remove any doubt that Section I(g)
applies to foreign convictions that are substantially equivalent to the
listed U.S. federal or state crimes. In the Proposed Amendment, the
Department specifically requested comments on this section, including
whether there are certain types or aspects of criminal behavior that
deserve additional focus. The Department also indicated that QPAMs
should interpret the scope of this provision broadly with respect to
foreign convictions and consistent with the Department's statutorily
mandated focus on the protection of Plans in ERISA section 408(a) and
Code section 4975(c)(2).
---------------------------------------------------------------------------
\37\ See, e.g., Prohibited Transaction Exemption (PTE) 2020-01,
85 FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019);
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE
2004-13, 69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'')
Final Authorization Numbers 2003-10E, 2001-02E, and 2000-30E,
available at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.
---------------------------------------------------------------------------
The Department stated that in situations where a crime raises
particularly unique issues related to the substantial equivalence of
the foreign Criminal Conviction, the QPAM may seek the Department's
views regarding whether the foreign crime, conviction, or misconduct is
substantially equivalent to a U.S. federal or state crime. However, the
Department cautioned that any QPAM submitting a request for review
should do so promptly, and whenever possible, before a judgment is
entered in a foreign conviction so the QPAM has sufficient time to
complete the notice obligations under the One-Year Transition Period.
The Department also requested comment on whether there should be an
additional process for requesting the Department's determination
regarding whether a foreign conviction is substantially equivalent to a
domestic conviction. The Department asked whether particular factors,
such as the elements of the crime and the nature of the tribunal or
investigating entity, should be considered in making such a
determination.
Many commenters provided input regarding the explicit inclusion of
foreign crimes in the Proposed Amendment. At least one commenter
indicated that it did not agree that the status of foreign convictions
under Section I(g) (as it has existed since 1984) has been a settled
matter. As amended, Section I(g) will remove all doubt regarding the
coverage of foreign criminal convictions, which are now specifically
referenced in the exemption's text.
Some commenters indicated that the Proposed Amendment did not
provide the intended certainty regarding foreign convictions because
there could be difficulty determining whether any given foreign crime
is a felony, or whether it is substantially equivalent to a felony
under U.S. law.\38\ Some commenters also expressed skepticism that the
Department has the competence and jurisdiction to interpret foreign law
fairly and accurately for these purposes. A variety of commenters also
raised questions regarding the proposed ``substantially equivalent''
standard, and expressed concern that foreign jurisdictions may not
adhere to basic due process protections. Multiple commenters suggested
that the Department should establish a formal process by which a QPAM
may request a determination from the Department regarding whether a
foreign conviction is substantially equivalent to a domestic conviction
before it results in ineligibility. One commenter recommended that this
should include an opportunity for the QPAM to present its position as
to why a foreign conviction may not be substantially equivalent to a
domestic conviction. Another commenter suggested the ``substantially
equivalent'' standard for foreign criminal convictions should apply
only where the factual record of such conviction, when applied to
United States federal criminal law, would likely lead to a criminal
conviction in the United States. Other commenters expressed further
concerns that the Proposed Amendment would inappropriately equate
criminal convictions levied in countries that have less robust or
reliable legal systems with those convictions handed down by U.S.
courts. One commenter suggested that the Proposed Amendment has the
potential to play into the hands of foreign nations that intend to harm
investment managers having substantial operations in the United States
or its allies. The Department notes that although the crimes listed
explicitly in Section I(g) use the term ``felony,'' the crimes adopted
by reference from ERISA section 411 are not, nor have they ever been,
limited to felonies.
---------------------------------------------------------------------------
\38\ One commenter also noted that several jurisdictions such as
the United Kingdom, Canada, Ireland, Australia, and New Zealand do
not rely on a legal category of ``felony'' which could compound
issues for making a substantially equivalent determination in such
cases.
---------------------------------------------------------------------------
To add clarity and ensure consistency between Section (r)(1) and
(r)(2), the Department added the phrase ``or released from
imprisonment, whichever is later'' to the sentence, ``(r) `Criminal
Conviction' means the person or entity that: (2) is convicted by a
foreign court of competent jurisdiction or released from imprisonment,
whichever is later, as a result of a crime, however denominated by the
laws of the relevant foreign government, that is substantially
equivalent to an offense described in (r)(1), above. . . .''
With respect to the ``substantially equivalent'' standard for
foreign crimes, the Department did not add a formal process to the
Final Amendment to make such determinations. The Department does not
expect that questions of this nature will arise frequently, but when
they do, impacted entities may contact the Office of Exemption
Determinations for guidance, as they have done for many years. In
general, the Department has not had difficulty determining whether the
foreign crimes were substantially equivalent to domestic crimes and
does not expect to have any difficulty with these determinations in the
future. Additionally, the One-Year Transition Period, and the ability
to apply for an individual exemption, provide parties with the time and
the opportunity to address any issues about the import of any specific
foreign conviction and its relevance to ongoing relief from full
application of the prohibited transaction provisions. The Department is
not aware that any convictions have occurred in foreign nations with
the intent to harm U.S.-based investment managers and believes there is
a low likelihood that this has occurred. Further, the types of foreign
crimes that the Department has seen in recent QPAM individual exemption
requests have consistently related to the subject financial
institution's management of financial transactions and/or culture of
compliance. These underlying foreign crimes have included the
following:
attempting to peg, fix, or stabilize the price of an
equity in anticipation of a block offering in Japan (PTE 2023-13, 88 FR
26336 (April 28, 2023));
illicit solicitation and money laundering for the purposes
aiding tax evasion in France (PTE 2019-01, 84 FR 6163 (February 26,
2019)); and
spot/futures-linked market price manipulation in South
Korea (PTE 2015-15, 80 FR 53574 (September 4, 2015)).
Nevertheless, to address the concern expressed in the public
comments that convictions have occurred in foreign nations with the
intent to harm U.S.-based investment managers, the Department has
revised the definition Criminal Conviction in Section VI(r)(2) of this
Final Amendment to exclude
[[Page 23098]]
foreign convictions and imprisonments that occur within foreign
jurisdictions that are included on the Department of Commerce's list of
``foreign adversaries.'' \39\
---------------------------------------------------------------------------
\39\ 15 CFR 7.4. The list of foreign adversaries currently
includes the following foreign governments and non-government
persons: The People's Republic of China, including the Hong Kong
Special Administrative Region (China); the Republic of Cuba (Cuba);
the Islamic Republic of Iran (Iran); the Democratic People's
Republic of Korea (North Korea); the Russian Federation (Russia);
and Venezuelan politician Nicol[aacute]s Maduro (Maduro Regime). The
Secretary of Commerce's determination is based on multiple sources,
including the National Security Strategy of the United States, the
Office of the Director of National Intelligence's 2016-2019
Worldwide Threat Assessments of the U.S. Intelligence Community, and
the 2018 National Cyber Strategy of the United States of America, as
well as other reports and assessments from the U.S. Intelligence
Community, the U.S. Departments of Justice, State and Homeland
Security, and other relevant sources. The Secretary of Commerce
periodically reviews this list in consultation with appropriate
agency heads and may add to, subtract from, supplement, or otherwise
amend the list. Section VI(r)(2) of the Final Amendment will
automatically adjust to reflect amendments the Secretary of Commerce
makes to the list.
---------------------------------------------------------------------------
A few commenters also indicated that the proposed changes to
Section I(g) are unnecessarily broad in application and will impose
unnecessary costs and burdens on Plans. The Department's experience,
however, is that the overall number of QPAMs and client Plans that have
been impacted by Section I(g) violations has been small compared to the
total number of QPAMs and client Plans,\40\ and the Department believes
that this will continue to be the case. Thus, there should not be a
significant change to the costs or burdens imposed on Plans as a result
of explicitly including foreign convictions in Section I(g). In any
event, when misconduct rises to the level that it results in
ineligibility under Section I(g), the resultant costs and burdens are
appropriate to ensure that a QPAM's client Plans are adequately
protected when a QPAM becomes ineligible.
---------------------------------------------------------------------------
\40\ This belief is based on the number of QPAMs suggested by
commenters and represented in an updated estimate in this Final
Amendment versus the number of QPAMs and client Plans identified in
individual exemption applications.
---------------------------------------------------------------------------
Some commenters recognized that when the foreign affiliate itself
is providing investment management services to a Plan, the integrity of
the foreign affiliate may be relevant. Commenters indicated that if the
Department includes foreign convictions, ineligibility should be
limited at least to entities that fall into the tax code definition of
``Controlled Group'' with respect to a QPAM. The Department appreciates
the recognition by these commenters that at least some misconduct in
foreign jurisdictions is relevant to the QPAM's integrity. However, the
Department disagrees that the correct standard for determining when
misconduct could be relevant should be limited to the ``Controlled
Group'' definition. The Department believes that the approach taken in
the exemption with regards to the scope of entities captured by Section
I(g) in the ownership test and definition of Affiliate provides
significant protections for Plans and participants and the commenter
has not provided a reasoned basis why altering this scope would provide
additional protections. Therefore, the Department has not altered the
scope of entities captured by Section I(g) with respect to Criminal
Convictions.
Proponents of the Proposed Amendment's addition of foreign crimes
to Section I(g) indicated that large financial institutions that engage
in financial crimes usually do so across multiple jurisdictions,
arbitraging regulatory loopholes and pressuring weaker jurisdictions to
curtail regulation. They urged the Department not to ignore foreign
activity due to the modern realities of multinational financial
institutions.
The Department agrees that criminal convictions for the types of
crimes identified in the QPAM Exemption are relevant to a QPAM's
willingness and ability to manage Plan assets with integrity, care, and
undivided loyalty, regardless of whether the crime occurs in a domestic
or foreign jurisdiction. Foreign crimes of the sort described in the
Final Amendment call into question a firm's culture of compliance just
as much as domestic crimes. Fraud, embezzlement, tax evasion, and the
other listed crimes are signs of potential serious compliance and
integrity failures, whether prosecuted domestically or in foreign
jurisdictions. In the modern era of increased globalization and
multinational companies, corporate parents and affiliates may reside in
jurisdictions other than the United States. Their criminal misconduct
in other jurisdictions is no less concerning to the Department than
when such misconduct occurs in the United States. In fact, if foreign
convictions were not included in Section I(g), the exemption would
potentially impose more lenient conditions on foreign-based
conglomerates than it does on U.S.-based entities, which is not the
Department's intention, because it is not sufficiently protective of
Plans.
A few commenters suggested alternatives to the Department's
approach to foreign convictions in the Proposed Amendment. One
commenter suggested that the Department should adopt an approach
modeled after the Security and Exchange Commission's (SEC's)
consideration of foreign crimes when determining whether to disqualify
persons from serving in various capacities at an Investment Company
under the Investment Company Act of 1940. It is the Department's
understanding that, under the Investment Company Act of 1940,
disqualification is automatic for specified domestic crimes, but that
the SEC provides notice and a hearing before disqualification for
foreign crimes.\41\
---------------------------------------------------------------------------
\41\ See Investment Company Act of 1940, 15 U.S.C. 80a-9.
---------------------------------------------------------------------------
After consideration of the comment and the differences in statutory
text and purposes at issue under ERISA, the Code, and the Investment
Company Act of 1940, the Department has decided not to adopt the
commenter's suggestion. The QPAM Exemption permits entities to enter
into transactions that ERISA and the Code otherwise prohibit because of
the danger they pose to Plans, their plan participants and
beneficiaries, and IRA Owners. Before the Department grants an
exemption from the law's strict prohibitions, it has an obligation to
find that the exemption is in the interest of participants and
protective of their rights. Under the QPAM Exemption, these findings
crucially turn on the financial institution's culture of compliance.
Misconduct that results in a criminal conviction of an entity under
Section I(g) of the QPAM Exemption, whether domestic or foreign, calls
into serious question whether the QPAM has the integrity and culture of
compliance on which the exemption is premised. Accordingly, after
conviction of a serious crime, a financial institution, its affiliates,
and related parties should not expect to have the automatic right to
continue to engage in transactions that are otherwise illegal, but for
the exemption. Nevertheless, the firm may always apply to the
Department for an individual exemption based on a full and fair
consideration of the firm's criminal conduct and the relevant facts,
circumstances, and context, if the firm believes that it should still
receive a dispensation from application of the otherwise generally
applicable prohibited transaction provisions, as companies have done
over the years.
Relatedly, a commenter suggested the QPAM could be required to
certify that its failure to meet the requirements of the QPAM Exemption
arose solely from the foreign affiliate's criminal conduct and that no
entities holding Plan assets
[[Page 23099]]
actively Participated In the criminal conduct that is the subject of
the conviction. Based on the certification, the Department could
inquire further and make its decision based on the facts of the
specific situation. Another alternative offered by a commenter was
simply to require a QPAM to notify a Plan of the conviction, and then
allow the Plan sponsor to decide whether to continue its arrangement
with the QPAM.
The Department's focus is on the protection of Plans and their
participants and beneficiaries, as it decides whether to give QPAMs
relief from the requirements of otherwise applicable law (i.e., the
categorical prohibitions of ERISA Section 406(a) and Code section
4975(c)(1)). The Department declines to take the other recommended
approaches because as explained in other parts of this preamble, the
Department is not merely concerned about crimes that have already
impacted Plan assets, but compliance frameworks that have an increased
potential to place Plan assets at risk. Criminal Convictions, even in
foreign jurisdictions, for the types of crimes and by the entities
captured by Section I(g) raise significant concerns. The Department
disagrees with the suggestion that it would be sufficiently protective
of Plans, their participants, and beneficiaries simply to require
notice of the QPAM's criminal conviction and leave it to the
fiduciaries to decide whether to engage in otherwise prohibited
transactions with the QPAM. When Congress enacted ERISA, it chose not
to broadly empower plan fiduciaries to opt out of the prohibited
transaction provisions on a voluntary basis, but rather charged the
Department with the responsibility to craft protective conditions that
meet the statutory standards set forth in ERISA section 408(a).
The crimes enumerated in Section I(g) are serious violations that
call into question the willingness and ability of the QPAM to adhere
consistently to the fiduciary norms and standards that are critical to
entrusting them with license to engage in otherwise illegal
transactions. To the extent a QPAM believes that it should be permitted
to engage in such transactions after the expiration of the Transition
Period, notwithstanding its conviction, the Department has concluded
that the interests of Plan participants and beneficiaries and IRA
Owners are best protected by the procedural protections, public record,
and notice and comment process associated with individual exemption
applications. In the context of an individual exemption application,
the Department has unique authority to efficiently gather evidence,
consider the issues, and craft protective conditions that meet the
statutory standard. If the Department concludes, consistent with the
statutory standards set forth in ERISA 408(a) and Code section
4975(c)(2), that an individual exemption is appropriate, Plan
fiduciaries remain free to make their own independent determinations
whether to engage in transactions with the QPAM. In the first instance,
however, the Department must consider the unique facts and
circumstances surrounding the conviction based on its statutory role
and obligations, and craft appropriate conditions if it appears that an
exemption is proper. The Department has a critical role in providing
appropriate regulatory protections, even in situations where a Plan
fiduciary has some authority, discretion, and obligations of its own.
Prohibited Misconduct
The Department proposed to add a new category of misconduct that
could lead to ineligibility under Section I(g), described as
``participating in Prohibited Misconduct.'' \42\ Proposed Section VI(s)
defined Prohibited Misconduct as:
---------------------------------------------------------------------------
\42\ As proposed, this definition applied to Participation In
Prohibited Misconduct by the QPAM or its five percent or more owners
and Affiliates.
(1) any conduct that forms the basis for a non-prosecution or
deferred prosecution agreement that, if successfully prosecuted,
would have constituted a crime described in Section VI(r);
(2) 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 in subsection VI(s)(1);
(3) engaging in a systematic pattern or practice of violating
the conditions of this exemption in connection with otherwise non-
exempt prohibited transactions;
(4) intentionally violating the conditions of this exemption in
connection with otherwise non-exempt prohibited transactions; or
(5) providing materially misleading information to the
Department in connection with the conditions of the exemption.
The Department explained in the preamble of the Proposed Amendment
that the term ``participating in'' referred not only to actively
participating in the Prohibited Misconduct but also to 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. The Department proposed that, where a QPAM's ineligibility
is linked to Prohibited Misconduct under any portion of Section VI(s),
the Department would provide affected entities with a written warning
and an opportunity to be heard.
The Department requested comments on the extent to which Proposed
Section VI(s) was appropriately tailored to target non-criminal
activity by the QPAM (or its owners of a five (5) percent or more
interest, or Affiliates) that raised integrity issues that had the
potential to harm Plans and whether additional or alternative elements
were warranted. The Department also requested comments regarding
whether to add any conduct as Prohibited Misconduct, and if so, to
include an explanation for how such actions would implicate a QPAM's
integrity. The Department also requested comments as to whether any of
the proposed Prohibited Misconduct should be removed and an explanation
of why such conduct does not affect the QPAM's integrity.
With respect to these provisions, the Department explained in the
Proposed Amendment that it intended to rely on its enforcement
authority and program to detect a QPAM's Participation In the types of
Prohibited Misconduct included in proposed subsections VI(s)(3) through
(5).\43\ In the Proposed Amendment, the Department built in due process
components so that ineligibility would occur only in limited
circumstances, and even in those circumstances, the process to make the
QPAM ineligible would have begun only after two initial steps: (1) an
investigation by the appropriate field office, and (2) receipt by the
QPAM thereafter of a written warning that the Department was
contemplating issuing a Written Ineligibility Notice. The Proposed
Amendment's Written Ineligibility Notice process would have allowed the
QPAM the opportunity to be heard before the Department were to issue an
actual notice, which would have made the QPAM ineligible to use the
exemption from the date the Department issued the notice, except that
the mandatory One-Year Transition Period would have been applicable in
the same manner as with ineligibility caused by a Criminal Conviction.
---------------------------------------------------------------------------
\43\ Section VI(s) has been renumbered in the Final Amendment as
section VI(s)(1), (2)(A), (B), and (C).
---------------------------------------------------------------------------
General Comments on Proposed Prohibited Misconduct Provision
One supporter of the Proposed Amendment indicated that inclusion of
additional categories of misconduct was appropriate because the
commenter
[[Page 23100]]
believed that Section I(g)'s limited focus on crimes that resulted in a
conviction had contributed to serial misconduct by corporate
wrongdoers. The commenter expressed concern that some corporate
wrongdoers could take advantage of loopholes to avoid a conviction when
the conduct was ultimately serious enough to warrant a conviction.
Many opponents of the amendment recommended that the ``Prohibited
Misconduct'' standard and provisions be deleted entirely. They stated
that the expansion of Section I(g) to include Prohibited Misconduct
erodes certainty that the QPAM Exemption provides regarding
eligibility.
Specific Comments Regarding Including Non-Prosecution Agreements (NPAs)
and Deferred Prosecution Agreements (DPAs) as Prohibited Misconduct
Some commenters recommended that the Department consult with the
Department of Justice (DOJ) and the SEC to get a better sense of how
the proposed inclusion of NPAs and DPAs as Prohibited Misconduct would
impact their enforcement abilities. Some commenters also noted that
financial institutions may agree to a NPA or DPA for reasons that are
unrelated to ERISA. These commenters opined that the Department seemed
to be mischaracterizing the nature and use of NPAs and DPAs, as well as
their objectives (such as avoiding the collateral consequences of
penalizing innocent parties). According to some commenters, prosecutors
do not enter into these agreements lightly or with the intention of
allowing financial institutions to ``sidestep'' the consequences of
their actions. Some commenters also asserted that even where an
institution believes it has not engaged in wrongdoing and would prevail
on the merits in a court of law, they may prefer to enter into a NPA or
DPA for a variety of reasons. For example, one commenter indicated that
even where an institution believes it has not engaged in wrongdoing and
would prevail on the merits in a court of law, it may prefer to enter
into a NPA or DPA if it is concerned with its reputation on unrelated
matters (that do not rise to the level of covered convictions) that
could be introduced during a protracted trial.
Some commenters also offered alternatives to ineligibility in
connection with NPAs or DPAs. For instance, one commenter suggested
that the Department could require a QPAM that enters into one of these
agreements to notify each Plan it manages that: (1) the QPAM has
entered such an agreement; and (2) the Plan can terminate its
relationship with the QPAM if it chooses to do so, without penalty.
Some commenters expressed additional concern that financial
institutions will be less willing to enter into NPAs or DPAs if doing
so would result in ineligibility under the QPAM Exemption. These
commenters indicated that they believed this outcome may not be in the
public interest. For instance, one commenter suggested that if entering
into a DPA or NPA would effectively end a firm's ERISA investment
management business, the firm may not be able to enter into the
agreement, even when doing so is the best resolution for the government
prosecutor involved.
A proponent of the Department's Proposed Amendment to include NPAs
and DPAs as ineligibility triggers noted that since the exemption was
proposed in 1982, the use of NPAs and DPAs has skyrocketed, with many
companies avoiding prosecution for serious misconduct due to factors
unrelated to their culpability. The commenter opined that to fully
protect Plans from unscrupulous behavior by asset managers, the
Department must, as proposed, include NPAs and DPAs within the
definition of Prohibited Misconduct that triggers QPAM ineligibility
when the conduct at issue involves a listed crime.
Another commenter identified a lack of clarity as to whether an NPA
or DPA would have to involve the manager's parent or whether it could
involve the manager's most remote affiliate or an entity with only a
five percent ownership interest in the manager.
Several commenters also expressed specific concerns over expanding
QPAM ineligibility to agreements with foreign governments that are
substantially equivalent to domestic NPAs and DPA. These commenters
expressed concern that the proposal provided the Department with
unfettered discretion to determine whether a foreign NPA or DPA entered
into by the QPAM or an Affiliate was substantially equivalent to a
domestic NPA or DPA, and they questioned whether the Department has the
necessary proficiency in criminal justice and international law, or
jurisdictional authority to make such determinations.
Other commenters also suggested that it would be difficult for the
Department to apply the substantially equivalent standard in the
context of foreign NPAs and DPAs due to the claimed vagaries of foreign
laws and prosecutorial practices and the effect of expanding the reach
of Section I(g) in this manner on law enforcement efforts by other U.S.
agencies and the possible extraterritorial impact on non-U.S. law
enforcement and U.S. relations with foreign governments.
One commenter stated that Department should not treat the conduct
of an affiliate which has no or little nexus or relationship to the
QPAM as disqualifying and pointed out the practical considerations that
are necessary to identifying foreign equivalents of these agreements as
well as the significant risk that these agreements may be imposed in
foreign jurisdictions that do not provide due process protections.
Another commenter asserted that the connection of foreign agreements to
a QPAM's compliance culture is speculative and tenuous and does not
provide any meaningful protection to participants and beneficiaries.
One commenter claimed that including foreign equivalents of NPAs
and DPAs has the potential to play into the hands of foreign nations
that wish to harm the operations of U.S.-based investment managers. For
example, the commenter suggested that rogue foreign nations could bring
dubious claims against a U.S.-based investment manager and force them
to execute a DPA or NPA with that government in order to continue
operations in that foreign country.
Another commenter questioned how the Department would know if
something would be ``successfully'' prosecuted for purposes of the
requirement in Section VI(s) that the NPA or DPA be based on
allegations that, if successfully prosecuted, would have constituted a
crime described in Section VI(r) of the exemption.
The Department's Response to Comments and Treatment of DPAs and NPAs
Under the Final Amendment
In response to these comments, the Department consulted with the
DOJ and the SEC to affirm its understanding of NPAs and DPAs,
particularly the level of culpability on the part of the QPAM that
would accompany such an agreement. Based on these consultations, the
Department understands that, as a matter of course, these domestic NPAs
and DPAs are accompanied by Statements of Fact that establish the basis
for criminal liability. In most cases, the offending party avoids
prosecution for the crime on the basis of the party's agreement to
enter into, and comply with, the terms of the agreement.
After considering comments on the Proposed Amendment's inclusion of
NPAs and DPAs as Prohibited Misconduct in the Proposed Amendment, the
Department has
[[Page 23101]]
determined to include this provision in the Final Amendment with a
modification discussed below.
In cases where the QPAM, any Affiliate thereof (as defined in
Section VI(d)), or any owner, direct or indirect, of a five (5) percent
or more interest in the QPAM has executed an NPA or DPA, the Department
has precisely the same concerns about the QPAM's compliance culture,
and its ability and willingness to adhere to its fiduciary obligations
and the exemption conditions, as it does when any of these parties have
been formally convicted of the crime. The cause for concern about the
QPAM is not the conviction per se, but rather the serious misconduct
that underlies the conviction. In these cases, responsible federal or
state officials have resolved serious claims of misconduct against
parties through the execution of a formal agreement voluntarily entered
into with the parties. In these circumstances, if the alleged
misconduct is sufficient to form the basis for an NPA or DPA that is
entered into by the QPAM, any Affiliate thereof (as defined in Section
VI(d)), or any owner, direct or indirect, of a five (5) percent or more
interest in the QPAM, it is appropriate to treat the agreement as cause
for ineligibility under Section I(g), subject to the parties' ability
to apply for an individual exemption before, during, or after the One-
Year Transition Period provided for in this exemption.
Moreover, any due process concerns with including NPAs and DPAs as
Prohibited Misconduct are addressed by the change to the Prohibited
Misconduct provision in the Final Amendment providing that
ineligibility does not occur until after a QPAM, any Affiliate thereof
(as defined in Section VI(d)), or any owner, direct or indirect, of a
five (5) percent or more interest in the QPAM has executed an NPA or
DPA. Those agreements result from criminal investigations and are
voluntarily entered into by the parties. QPAMs and other affected
entities that enter into an NPA or DPA generally will be afforded the
numerous due process protections that are associated with criminal
investigations and negotiating these agreements.
Under the revised provision in the Final Amendment, QPAMs, their
Affiliates, or five (5) percent or more owners that enter into an NPA
or DPA should have sufficient time to prepare for the implications of
becoming ineligible under this Final Amendment as a result of the
process surrounding the negotiation and execution of the agreement. In
either case, the QPAM must commence the One-Year Transition Period and
submit an individual exemption application for extended relief a soon
as possible if it wants to continue using the QPAM exemption after the
One-Year Transition Period expires.
After considering comments on the Proposed Amendment's inclusion of
foreign-equivalent NPAs and DPAs in the Proposed Prohibited Misconduct
definition, the Department has decided to remove foreign equivalent
agreements from the definition of Prohibited Misconduct in Section
VI(s) of the Final Amendment. While the Department is confident in its
ability to apply the foreign equivalence standard to NPAs and DPAs
entered into by the QPAM or its Affiliates, and although the Department
has concerns about conduct that might give rise to a foreign equivalent
NPA or DPA, it has concluded that it has insufficient information on
those agreements to treat them as a cause for ineligibility under
Section I(g). In this context, the Department notes that it has not
received individual exemption requests from QPAMs or their Affiliates
in which a foreign equivalent agreement was implicated.
The Department also is not aware of any instances where foreign
governments have used agreements that are substantially equivalent to
domestic NPAs and DPAs to harm U.S.-based investment managers and, as
with foreign criminal convictions, we believe there is a low likelihood
that this activity has occurred. However, in light of the comments, the
Department has concluded that it does not have sufficient certainty
about the use of these agreements outside the U.S., and about the
procedural protections associated with the agreements in foreign
jurisdictions, to justify finalizing this particular part of the
proposed Prohibited Misconduct provision at this time. Therefore, the
Department's position is that the uncertainties surrounding foreign
agreements raised by some commenters outweigh the protective benefits
that would accrue to Plans and their participants and beneficiaries by
including foreign agreements in the Prohibited Misconduct provision.
Although the Department is removing the foreign equivalent of NPAs
or DPAs as an ineligibility trigger, the Final Amendment to Section
I(g)(2) requires the QPAM to notify the Department when the QPAM, any
Affiliate thereof (as defined in Section VI(d)), or any owner, direct
or indirect, of a five (5) percent or more interest in the QPAM
executes a domestic or foreign equivalent NPA or DPA. This notice will
give the Department the ability to take appropriate additional action
in specific cases and will provide the Department with broader
information about these practices as the QPAM exemption continues to be
relied upon by parties in the future. The Department notes that QPAMs
should err on the side of caution when determining whether an agreement
with a foreign government entity is the substantial equivalent of a
domestic NPA or DPA that must be reported to the Department pursuant to
amended Section I(g)(2).
After reviewing and considering the comments offering alternatives
to ineligibility in connection with NPAs or DPAs, in particular only
requiring QPAMs to provide a notice to Plans, the Department's position
is that mere notice to the Plans is not sufficiently protective to
address circumstances where a NPA or DPA with a U.S. federal or state
prosecutor's office or regulatory agency reflects serious misconduct by
the QPAM. Further, solely relying on a QPAM's notification to Plans
that the QPAM committed serious misconduct would not be an appropriate
justification for the Department to ignore such serious misconduct and
to forego taking appropriate action.
In response to the comment asserting that a lack of clarity exists
regarding whether an NPA or DPA would have to involve the QPAM's parent
or whether it could involve the QPAM's most remote affiliate or an
entity with only a five (5) percent ownership interest in the manager,
the Department has clarified in the Final Amendment that the Prohibited
Misconduct provision in Section VI(s)(1) includes NPAs and DPAs entered
into by the QPAM, or any Affiliates, or owners of five (5) percent or
more of the QPAM, with a U.S. federal or state prosecutor's office or
regulatory agency.
In response to comments that questioned how the Department would
know if something would be ``successfully'' prosecuted, the Department
notes that the focus of the provision is not on whether a criminal
prosecution would have been successful if the case had not been
settled, but rather whether the allegations by state or federal
officials that resulted in the NPA or DPA described one of the
disqualifying crimes set forth in VI(r). The provision does not require
the Department to know if something would be successfully prosecuted.
Instead, it requires the Department to determine whether the conduct
associated with the NPA or DPA would ``if successfully prosecuted''
constitute Prohibited Misconduct as defined in paragraph VI(s)(1). In
such cases, the parties have
[[Page 23102]]
voluntarily entered into a settlement based on allegations of
disqualifying misconduct. There is sufficient cause for concern in all
such cases about the entities' culture of compliance to trigger
ineligibility, start the One-Year Transition Period, and require the
parties to seek an individual exemption if they would like to continue
to receive an exemption permitting them to engage in conduct that is
otherwise prohibited by ERISA and the Code. Moreover, as noted above,
NPAs and DPAs are commonly supported by Statements of Fact that
establish the basis for criminal liability by the parties entering into
the agreements.
While the Department is removing foreign equivalents of NPAs and
DPAs as Section I(g) ineligibility events in the Final Amendment, as
discussed above it is adding a notice requirement that applies when the
QPAM, its owners of a five (5) percent or more interest, or Affiliates
enter into a foreign equivalent of an NPA or DPA or Participate In
Prohibited Misconduct as defined in Section VI(s). Specifically,
Section I(g)(2) requires the QPAM to submit a notice to [email protected]
within 30 calendar days after the Ineligibility Date for the Prohibited
Misconduct as determined under Section (I)(h)(2) or the execution date
of the substantially-equivalent foreign NPA or DPA, if the QPAM, any
Affiliate thereof (as defined in Section VI(d)), or any owner, direct
or indirect, of a five (5) percent or more interest in the QPAM,
Participates In any Prohibited Misconduct as defined in Section VI(s)
or enters into an agreement with a foreign government that is
substantially equivalent to a NPA or DPA described in section VI(s)(1).
The QPAM must include a description of the Prohibited Misconduct in the
notice and provide the name of and contact information for the person
or entity that is responsible for handling this matter to the
Department.
The Department clarifies that the Prohibited Misconduct conditions
in Section VI(s)(1), regarding entering into an NPA or DPA with a U.S.
federal or state prosecutor's office or regulatory agency, and the
corresponding notification requirement in Section I(g)(2), are
prospective only, and therefore only apply to QPAMs, their Affiliates,
and owners of a five (5) percent or more interest who have executed
NPAs or DPAs on or after June 17, 2024 based on facts that, if
successfully prosecuted, would have constituted a crime specified in
VI(r) of the Final Amendment.
Specific Comments Regarding Prohibited Misconduct Under the Written
Warning Letter and Ineligibility Notice Process
In the Proposed Amendment, the Department specifically requested
comments on the sufficiency of the due process protections provided in
connection with the Prohibited Misconduct provision. Several commenters
expressed concern that the due process protections of the written
warning letter and Written Ineligibility Notice provisions were
insufficient. For example, some commenters stated that:
the proposed standards were inadequate to protect the due
process rights of QPAMs, because the process provided the Department
with potentially unlimited discretion to decide what types of
misconduct would trigger ineligibility to be made by an independent,
disinterested decision-maker;
the Department's ineligibility process lacks sufficient
due process and a final determination by a neutral third-party judge,
and therefore, provides the Department with unilateral discretion;
due process requires an adversarial process that is
adjudicated by an independent third party;
if the ineligibility process for Prohibited Misconduct is
retained, the Department should develop a process that includes: (1)
rules for establishing a factual record, including adequate time and
opportunity for the accused institution to review, challenge, and
supplement the record; (2) formal rules for soliciting input from
federal, state, and/or foreign prosecutors involved in the negotiated
agreement at issue, if any; (3) procedures for selecting an independent
decision-maker responsible for making factual and legal determinations;
(4) procedural guardrails to ensure that Department officials involved
in alleging Prohibited Misconduct are not able to engage in conduct
that would bias the decision-maker (e.g., prohibiting ex parte
communications); and (5) an automatic stay of any agency determinations
during the pendency of federal litigation challenging the
determination;
If the Department does not remove the written warning
letter and Written Ineligibility Notice process from the final
exemption, the final exemption must provide an opportunity for review
by an administrative law judge, court, or similar truly independent
decision maker with the authority to decide whether a QPAM will be
disqualified, as opposed to providing that authority to itself.
Additionally, some commenters expressed concern that proposed
definition of the phrase ``participating in'' was vague and overbroad.
The Department's Response to Specific Comments Regarding the Written
Warning Letter and Written Ineligibility Notice
After considering the due process concerns expressed in comments
regarding the Proposed Amendment, the Department is removing from the
Final Amendment the written warning letter and Written Ineligibility
Notice process that was associated with Prohibited Misconduct. The
Department now is requiring the requisite factual determinations for
Prohibited Misconduct defined in Section V(s)(2) to have been made in
specified judicial proceedings.
Specifically, under the Final Amendment, a QPAM will become
ineligible under Section I(g) as a result of Prohibited Misconduct as
defined in Section VI(s)(2) if the QPAM, any Affiliates thereof (as
defined in Section VI(d)), or any owner, direct or indirect, of a five
(5) percent or more interest in the QPAM is found or determined in a
final judgment, or court-approved settlement by a federal or state
criminal or civil court in a proceeding brought by the Department, the
Department of Treasury, the Internal Revenue Service, the Securities
and Exchange Commission, the Department of Justice, the Federal Reserve
Bank, the Office of the Comptroller of the Currency, the Federal
Depository Insurance Corporation, the Commodities Futures Trading
Commission, a state regulator, or state attorney general to have
Participated In one or more of the following categories of conduct
irrespective of whether the court specifically considers this exemption
or its terms:
(A) engaging in a systematic pattern or practice of conduct that
violates the conditions of this exemption in connection with otherwise
non-exempt prohibited transactions;
(B) intentionally engaging in conduct violates the conditions of
this exemption in connection with otherwise non-exempt prohibited
transactions; or
(C) providing materially misleading information to the Department
or the Department of Treasury, the Internal Revenue Service, the
Securities and Exchange Commission, the Department of Justice, the
Federal Reserve Bank, the Office of the Comptroller of the Currency,
the Federal Depository Insurance Corporation, the Commodities Futures
Trading Commission, a state regulator or a state attorney general in
[[Page 23103]]
connection with this exemption's conditions.
By removing the warning letter and Written Ineligibility Notice
process and instead providing for ineligibility only after a
Conviction, a court's final judgment, or a court-approved settlement,
QPAMs, their Affiliates, and/or owners of a five (5) percent or more
interest thereby are disqualified only after the culpable entity was
afforded full due process in a legal proceeding overseen by a court.
Section V(s)(2) is much narrower than the proposal inasmuch as it
covers the types of misconduct specified in the proposal only when the
misconduct is established in court proceedings brought by state or
federal regulators. It ensures that the finding of misconduct was
subject to the robust procedural protections provided by such
proceedings.
Furthermore, by removing the warning letter and Written
Ineligibility Notice process, and redefining Prohibited Misconduct in
Section VI(s)(2) to be based on legal process that results in a court's
final judgment or court-approved settlement, the QPAM will have been
provided with sufficient notice that the conduct at issue is Prohibited
Misconduct that causes ineligibility. This will give QPAMs sufficient
time to apply for an individual exemption during the One-Year
Transition Period.
More generally, the Department notes that the modification in the
Final Amendment removes the Department from the process of making a
factual determination that Prohibited Misconduct has occurred. Instead,
for purposes of ineligibility due to Prohibited Misconduct in Section
VI(s)(2), the court's final judgment (or approved settlement) must
resolve the factual issue of whether any of these parties Participated
In the conduct that constitutes Prohibited Misconduct as defined in
Section VI(s)(2). Under the provision, the court does not have to make
a specific legal finding regarding whether such conduct constitutes
Prohibited Misconduct as defined in Section VI(s)(2) of the exemption,
but rather whether, as a factual matter, the parties engaged in the
specific conduct defined as Prohibited Misconduct in Section VI(s)(2).
The Department has made changes to Section VI(s)(2) to make this
distinction clear. The Department cautions QPAMs, their Affiliates, and
owners of a five (5) percent or more interest that final judgments and
court-approved settlements that include a finding that such conduct has
occurred will cause immediate ineligibility under Section I(g). In
these situations, a QPAM that intends to continue to rely on the QPAM
exemption following the One-Year Transition Period that begins on the
Ineligibility Date should submit an exemption application to the
Department as soon as possible.
As mentioned above, some commenters expressed concern that the
proposed definition of the phrase ``participating in'' was vague and
overbroad. The Department disagrees with this concern. The parameters
of the definition are similar to other definitions and conditions the
Department has included in administrative exemptions it has issued
since ERISA's enactment almost fifty years ago. Additionally, the
commonly accepted definition of what it means to ``participate in''
conduct is well understood. The Proposed Amendment specifically
provided additional guidance in the text of Proposed Section I(g)(3)(B)
regarding what the Department meant by using the term ``participating
in.'' \44\ Therefore, the Department has not changed the definition of
``Participating In'' in the Final Amendment but has included in the
definition the defined terms ``Participate In,'' ``Participates In,''
``Participated In,'' and ``Participation In'' for clarity and accuracy
and has moved the definition to the Definitions and General Rules in
Section VI(t).\45\
---------------------------------------------------------------------------
\44\ The preamble also specifically stated, ``For purposes of
proposed Section VI(s), the term `participating in' refers not only
to actively participating in the Prohibited Misconduct but also to
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.'' 87 FR at 45209.
\45\ Due to this change, the Recordkeeping provision is
redesignated as Section VI(u).
---------------------------------------------------------------------------
Costs Associated With Ineligibility Based on Participating In
Prohibited Misconduct
Several commenters also noted that regardless of the reason for
ineligibility, Plans would be exposed to substantial costs if a QPAM
becomes ineligible. These commenters recommended that the Department
exercise extreme caution before causing more QPAMs to face
ineligibility. Some commenters also expressed concerns that the
imposition of ineligibility is harmful to the Plans and their
participants and beneficiaries and prevents appointing fiduciaries from
exercising discretion to determine the best course of action for the
Plan by placing constraints on the Plan's choice of QPAMs.
The Department notes that the Proposed Amendment and this Final
Amendment appropriately place the burden associated with the costs of
ineligibility on the QPAM. In response to the comment, the Department
included the One-Year Transition Period in the Final Amendment to
reduce the costs and burdens associated with the possibility of
ineligibility, and to provide affected QPAMs with an opportunity to
apply for individual exemptions with appropriate conditions. Therefore,
the Department disagrees that the ineligibility provision unduly
prevents fiduciaries from exercising their discretion.
In crafting the amendments, the Department was also mindful that
the conduct that constitutes Prohibited Misconduct under the terms of
the exemption is quite serious and that engaging in such conduct calls
into question the QPAM's culture of compliance. The grant of an
exemption involves a discretionary determination by the Department to
permit parties to engage in conduct that is otherwise categorically
prohibited by ERISA and the Code and it requires specific findings
aimed at ensuring that the exemption is appropriately protective of the
Plan and participant interests at stake in the regulation of tax-
preferred retirement plans. While the prohibited transaction provisions
constrain fiduciary choice, those constraints are expressly imposed by
the statute for the protection of plan participants and beneficiaries.
An exemption is not justified merely by pointing to a constraint
expressly imposed by law and noting that it interferes with fiduciary
discretion; all prohibited transaction provisions constrain fiduciary
choice. The conditions of the QPAM Exemption are publicly and widely
available, and the possibility that a QPAM could become ineligible if
it participates in serious misconduct is clear. Moreover, if a
fiduciary does not want to provide the additional protections included
in this Final Amendment, it may pursue other options to receive
prohibited transaction relief, such as using another relevant class
prohibited transaction exemption or seeking an individual prohibited
transaction exemption. Additionally, the sophistication of fiduciaries
varies dramatically based on a variety of factors. The Department has
an obligation to protect Plans and their participants and
beneficiaries, even if an individual Plan fiduciary views such
protections as unnecessary.
However, as noted above, the Department modified the scope of the
Prohibited Misconduct provision in the Final Amendment; first, by
removing foreign agreements that are equivalent to
[[Page 23104]]
NPAs and DPAs from the definition of Prohibited Misconduct in Section
VI(s)(1) and second, by basing ineligibility as a result of Prohibited
Misconduct defined in Section VI(s)(2) on a factual finding or
determination by a court that the conduct described in Section
VI(s)(2)(A) through (C) occurred, which should reduce the number of
QPAMs that become ineligible. Moreover, the indemnification provision
will ensure that Plans are not bearing the costs of ineligibility for
QPAMs that become ineligible.
Both Categories of Prohibited Misconduct Only Will Apply Prospectively
Finally, several commenters requested clarification that the
Prohibited Misconduct provisions of Section VI(s)(1) and (2) will
result in ineligibility of a QPAM only on a prospective basis. In
response, the Department confirms that ineligibility tied to Prohibited
Misconduct related to executing NPAs and DPAs in Section VI(s)(1) of
the Final Amendment will be applied only on a prospective basis that
commences on the execution date of NPAs or DPAs with a U.S. federal or
state prosecutor's office or regulatory agency that falls on or after
June 17, 2024.
Similarly, under the Final Amendment, Section VI(s)(2)
determinations of Prohibited Misconduct will apply prospectively as of
the date of a court's final judgment or court-approved settlements that
fall on or after June 17, 2024.
Violations of the Exemption and Misleading Statements
One commenter requested that the Department provide examples of
Prohibited Misconduct for violations of the exemption or misleading
statements so that firms are not caught off guard for Participating In
Prohibited Misconduct. Another commenter requested clarification that
inadvertent technical errors, such as failure to timely notify the
Department of a legal name change, should not be deemed to be providing
materially misleading information to the Department. As a general
matter, the Department's position is that such inadvertent technical
errors do not result in Prohibited Misconduct, particularly when such
errors are corrected consistent with ERISA and Code standards, as
applicable. Similar to Convictions, the exemption's Prohibited
Misconduct provisions are aimed at protecting Plans and IRA owners from
conduct that calls into question a QPAMs integrity and compliance
culture and inadvertent technical errors, especially such errors that
are promptly corrected, should not amount to such conduct.
With respect to mistakes in timely reporting a legal name change,
the Department modified the reporting requirement in this Final
Amendment to address such issues, as discussed above in connection with
the reporting requirement. As discussed in detail above, the
modifications in the Final Amendment to the definition of Prohibited
Misconduct in Section V(s)(2) whereby requisite factual determinations
are made through a judicial proceeding will put a QPAM and its
Affiliates on notice regarding conduct that is defined as Prohibited
Misconduct in Section V(s)(2)(A) through (C).
Section I(h)--Timing of Ineligibility
The Proposed Amendment did not include any direct changes to the
ten-year ineligibility period under current Section I(g).\46\ The
Department added a new provision, Section I(h), that specified the
timing of ineligibility. In the Proposed Amendment, for Prohibited
Misconduct, the ineligibility period would have begun as of the date of
a Written Ineligibility Notice, whereas, for a Criminal Conviction, it
would have begun on the date the trial court enters its judgment.\47\
The Proposed Amendment clearly stated that for a foreign conviction,
ineligibility would begin on ``the date of the judgment of any court in
a foreign jurisdiction that is the equivalent of a U.S. federal or
state trial court. . . .'' This refers to a trial court of original or
primary jurisdiction, such as a court of first instance.\48\ The period
of ineligibility would have begun on the conviction date, regardless of
whether the judgment is appealed or the appeal has suspensive effect.
Only upon a subsequent final judgment reversing the conviction would a
person no longer be considered ``convicted'' for purposes of this
exemption.
---------------------------------------------------------------------------
\46\ The One-Year Transition Period, however, has an impact on
how a QPAM approaches the first year after experiencing an
ineligibility trigger.
\47\ For convictions that also result in imprisonment of a
person, the end of the ten-year period is counted from the date of
release from imprisonment.
\48\ This is generally considered to be the lowest level court
in a particular jurisdiction that has the power to render a judgment
of conviction.
---------------------------------------------------------------------------
This Final Amendment retains the ineligibility start date for a
Criminal Conviction as the date the trial court enters its judgment.
However, because the Final Amendment does not include the proposed
warning and Written Ineligibility Notice process, the timing for
Prohibited Misconduct in Section I(h)(2) of the Final Amendment has
been modified. In the Final Amendment, the ineligibility period for
Participating In Prohibited Misconduct begins on the date, on or after
June 17, 2024 that the QPAM, any Affiliate thereof (as defined in
Section VI(d)), or any owner, direct or indirect, of a five (5) percent
or more interest in the QPAM:
(A) executes an NPA or DPA described in Section VI(s)(1)); or
(B) is found or determined in a final judgment in certain federal
or state court proceedings (regardless of whether the judgment is
appealed) or a court-approved settlement to have Participated In the
conduct that meets the definition of Prohibited Misconduct in Section
VI(s)(2).
In the Proposed Amendment the Department specifically sought
comments on the timing of ineligibility. One commenter suggested that
the Winding-Down (Transition) Period should be restructured into two
distinct periods: the first to allow a QPAM to apply for an individual
exemption, and the second period to prevent disruption and assist Plans
in the event a transition is needed to a new QPAM. The Department
believes it has functionally provided this structure in the Final
Amendment. The One-Year Transition Period provides time for transition
that was not previously included in the exemption. As noted earlier in
this preamble, an ineligible QPAM should initiate an individual
exemption request as soon as it reasonably believes its Plan clients
likely will be harmed without additional prohibited transaction relief
after the Transition Period ends. The Department notes that it will
continue to consider individual exemption requests for ineligible QPAMs
to be able to continue providing services, as well as requests for
additional transitional relief to allow their client Plans to search
for and hire a new asset manager.
Proposed Section I(i) \49\--Warning and Opportunity to be Heard in
Connection With Prohibited Misconduct--Written Ineligibility Notice
---------------------------------------------------------------------------
\49\ Certain sections of the Final Amendment have been
renumbered and Section I(i) in the Final Amendment has been
redesignated as the One-Year Transition Period Due to Ineligibility.
---------------------------------------------------------------------------
The Department proposed an additional process that would be tied to
a determination that a QPAM had participated in Prohibited Misconduct.
In the proposal, before issuing a Written Ineligibility Notice in
connection with Prohibited Misconduct to the QPAM, the Department
indicated it would have issued a written warning, identified the
Prohibited Misconduct, and provided 20
[[Page 23105]]
days for the QPAM to respond. The Proposed Amendment also indicated
that if the QPAM failed to respond to the written warning within 20
days, the Department would have issued the Written Ineligibility
Notice. However, if the QPAM responded within the 20-day timeframe, the
Department would have provided the QPAM with the opportunity to be
heard either in person (including by phone or a videoconference) or in
writing, or a combination of both, before the Department decided
whether it would have issued the Written Ineligibility Notice.
As discussed under the Specific Comments Regarding Prohibited
Misconduct under the Written Ineligibility Notice Process heading
above, some commenters questioned the sufficiency of the process
leading to a warning letter and Written Ineligibility Notice, citing
due process concerns and specifically, the lack of an adversarial
process adjudicated by an independent third party (such as review by an
administrative law judge or federal court). Relatedly, another
commenter indicated that these provisions within the Proposed Amendment
would have provided the Department with too much discretion to cause a
QPAM's ineligibility. One commenter specifically noted the additional
due process protections provided through the court system for Criminal
Convictions are not present for a QPAM that Participates In Prohibited
Misconduct. Another commenter noted that the lack of an appeals process
as part of the proposed Written Ineligibility Notice process could
provide the Department with unchecked power.
As more fully discussed above under the Specific Comments Regarding
Prohibited Misconduct under the Written Ineligibility Notice Process
heading, in response to the process concerns expressed by commenters,
the Department has removed the proposed warning letter and Written
Ineligibility Notice process and modified the definition of Prohibited
Misconduct under Section VI(s). Removing the proposed warning letter
and Written Ineligibility Notice process from this Final Amendment, and
instead providing that a QPAM's ineligibility under Section VI(s)(2)
only occurs after a Conviction, a court's final judgment, or a court-
approved settlement, will afford QPAMs, their Affiliates, and owners of
a five (5) percent or more interest with substantial due process in a
legal proceeding that is overseen by a court, not the Department. Also,
this Final Amendment provides that ineligibility occurs under Section
VI(s)(1) when a QPAM, any Affiliate thereof (as defined in Section
VI(d)), or any owner, direct or indirect, of a five (5) percent or more
interest in the QPAM executes an NPA or DPA with a U.S. federal or
state prosecutor's office or regulatory agency, which generally will
afford QPAMs and their Affiliate(s) and owner(s) with the due process
protections that are associated with related criminal investigations.
Section I(i)--Mandatory One-Year Transition Period
Certain sections of the Final Amendment have been renumbered and
Proposed Section I(j) is now Section I(i) in the Final Amendment. As
part of the Proposed Amendment, the Department included a mandatory
one-year Winding-Down Period that would have begun on the Ineligibility
Date. The Winding-Down Period was designed to provide Plans with the
ability to wind down their relationships with a QPAM immediately after
the QPAM becomes ineligible to rely on the exemption. Satisfaction of
the conditions of the Winding-Down Period would affect the availability
of relief for all transactions covered by this exemption. As proposed,
the Department intended to include relief for past transactions and any
transaction continued during a one-year Winding-Down Period.
One commenter indicated that the term ``winding-down'' was
pejorative and should be replaced with more neutral nomenclature such
as a term indicating it is a transition period. The Department did not
intend for the term to be pejorative. Therefore, the Department has
substituted the word ``Transition'' for ``Winding-Down'' to avoid the
possible unintended implication that the Department intended the term
``Winding-Down'' to mean that the QPAM was necessarily going out of
business as a QPAM on the Ineligibility Date. The Department stresses,
however, that future relief based on an individual exemption
application is not guaranteed, and the new term should not be read to
suggest otherwise.
As noted above, the QPAM is free to apply for an individual
exemption that would enable it to continue its eligibility to act as a
QPAM and engage in transactions that would otherwise be prohibited
after the expiration of the Transition Period, although there is no
guarantee that the Department will grant such an exemption. Prohibited
transaction relief during the Transition period would be subject to
compliance with all conditions of the exemption except Section I(g)(3),
which is renumbered Section I(g)(1) in this Final Amendment.
The Proposed Amendment provided that once the Transition Period
begins, relief under the QPAM Exemption would only be available for
transactions undertaken for the QPAM's existing clients--i.e., the
QPAM's client Plans that had a pre-existing Written Management
Agreement (as required under Section VI(a)) on the Ineligibility Date
for transactions entered into before the Ineligibility Date. Thus,
after the Ineligibility Date, the QPAM would be prohibited from
engaging in new transactions in reliance on the QPAM Exemption for
existing client Plans. Additionally, if the QPAM obtained new client
Plans during the Transition Period, the Proposed Amendment would not
provide relief under the QPAM Exemption for any transactions the QPAM
entered into on their behalf, unless such relief was granted in a
separate individual exemption.
The Department designed the proposed Transition Period to mitigate
the cost and disruption to Plans, their participants and beneficiaries,
and IRA owners that can occur when a QPAM becomes ineligible for
relief. The proposed One-Year Transition Period was intended to give a
QPAM's client Plans time to decide whether to hire an alternative
discretionary asset manager that is eligible to operate as a QPAM or
continue their relationship with the ineligible QPAM. The Department
believed that a One-Year Transition Period would be necessary to ensure
that Plans have sufficient time to engage in a search for an
alternative QPAM or discretionary asset manager if they decide it is in
the Plan's best interest to do so.
The proposed Transition Period conditions required the QPAM to
provide notice of its ineligibility to its existing client Plans and
the Department (via [email protected]) within 30 days after the
Ineligibility Date. The proposed notice was required to: (1) include an
objective description of the facts and circumstances upon which the
Criminal Conviction or Written Ineligibility Notice \50\ is based; (2)
be written with sufficient detail, consistent with the QPAM's duties of
prudence and undivided loyalty under ERISA, to fully inform a Plan
fiduciary of the nature and severity of the criminal conduct or
Prohibited Misconduct; and (3) be sufficient enough to enable such Plan
fiduciary to satisfy its fiduciary duties of
[[Page 23106]]
prudence and loyalty under Title I of ERISA when hiring, monitoring,
evaluating, and retaining the QPAM.
---------------------------------------------------------------------------
\50\ The Written Ineligibility Notice has been removed from this
Final Amendment therefore, the term ``Written Ineligibility Notice''
in Section I(i) has been replaced with the term ``Prohibited
Misconduct'' in the Final Exemption.
---------------------------------------------------------------------------
The Proposed Amendment required that within 30 days after the
Ineligibility Date, the QPAM would have to notify its client Plans
that, as required by the proposed WMA provisions, the QPAM will not
restrict the client's ability to terminate or withdraw from its
arrangement with the QPAM. Thus, the QPAM would not be permitted to
impose any fees, penalties, or charges on client Plans in connection
with the process of terminating or withdrawing from a QPAM-managed
Investment Fund except for reasonable fees, appropriately disclosed in
advance, that are specifically designed to prevent generally recognized
abusive investment practices or specifically designed 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. If such fees, penalties, or charges occur, they must be
applied consistently and in a like manner to all such investors.
The Proposed Amendment also required the QPAM to indemnify, hold
harmless, and promptly restore losses to each client Plan for any
damages resulting from a violation of applicable laws, a breach of
contract, or any claim arising out the QPAM's ineligibility. For
purposes of this provision, the Proposed Amendment indicated that
actual losses specifically include losses and costs arising from
unwinding transactions with third parties and from transitioning Plan
assets to an alternative discretionary asset manager.
Additionally, to ensure Plans were protected from bad actors, the
Proposed Amendment required the QPAM not to employ or knowingly engage
any individual that Participated In conduct that is the subject of a
Criminal Conviction or Prohibited Misconduct. For Criminal Convictions,
this would apply regardless of whether the individual is separately
convicted in connection with the criminal conduct. The Proposed
Amendment indicated that the QPAM must adhere to this requirement no
later than the Ineligibility Date.
Finally, the Proposed Amendment prohibited the QPAM from relying on
the relief provided in the QPAM Exemption after the One-Year Transition
Period unless the Department granted the QPAM an individual exemption
allowing it to continue relying upon the exemption. The Proposed
Amendment provided that the Transition Period would not be suspended
while an individual exemption application is pending with the
Department.
The Department requested comments on the Transition Period,
including whether one year is the appropriate length of time and
whether there are additional protections for Plan participants and
beneficiaries and IRA owners that the Department should consider.
Many commenters argued that the proposed prohibition on the QPAM
engaging in any new transactions during the Transition Period, even for
existing clients, should be removed. These commenters indicated that
QPAMs who become ineligible should be permitted to make new investments
during the Transition Period on behalf of their client Plans that
conform to investment guidelines approved by a Plan fiduciary during
the Transition Period. In support of this position, commenters
indicated that when QPAMs have been engaged to carry out an investment
strategy that requires them to continually make new investments, the
proposed prohibition on engaging in new transactions for existing
clients could be particularly detrimental. For instance, there could be
a series of transactions that require ongoing adjustments (such as in
the case of swaps and other derivatives), and an inability to adjust
these transactions could detrimentally impact the QPAM's client Plans
and counterparties alike.
After considering these comments, the Department agrees that to
avoid the potential harm that QPAMs' client Plans could suffer if their
investments are effectively frozen, it is appropriate to remove the
prohibition on QPAMs entering into new transactions for existing client
Plans during the Transition Period. The Department reminds QPAMs that
they must meet their fiduciary obligations of prudence and loyalty set
forth in ERISA section 404 when making investment decisions on behalf
of their ERISA-covered Plan clients and IRA clients (to the extent that
ERISA section 404 is applicable) during the Transition Period.
One commenter suggested that the Department included the Transition
Period provisions in the Proposed Amendment because it clearly assumed
that QPAMs' client Plans would want to fire their asset manager. The
Department did not intend to convey this view in the Proposed
Amendment. The Department included this provision in the Proposed
Amendment to provide an ineligible QPAM's client Plans with an off-ramp
if they choose to terminate their relationship with the asset manager.
The Department's sole reason for including the Transition Period
provisions is to protect the affected Plans. Thus, for example, if a
Plan chooses to retain its relationship with a QPAM that becomes
ineligible, it may do so, but the Department's intention is to prevent
Plans from being locked into a contractual arrangement with an
ineligible QPAM.
Multiple commenters indicated that the process for replacing a
larger Plan's investment manager typically takes more than one year and
suggested alternative timeframes for the Transition Period. For
example, commenters suggested the Department extend the Transition
Period to at least 18 months or two years, and another commenter
offered the alternative of having the Transition Period last at least
until after the Department makes a final determination regarding
whether to grant or deny the QPAM's individual exemption application.
After considering these comments, the Department decided not to
change the timeframe for the Transition Period in the Final Amendment.
The Department recognizes that in some cases a longer Transition Period
could be necessary but determined the best way to address this
circumstance is through the individual exemption process on a case-by-
case basis. Performing the necessary analysis during the individual
exemption process will ensure the Department has sufficient information
to appropriately consider whether additional protections are necessary
for impacted Plans based on the QPAM's particular facts and
circumstances. The Department does not believe it is appropriate to
extend the Transition Period until a formal decision on an individual
exemption has been made as the Department processes individual
exemption applications on a case-by-case basis and the timeframes for
each case vary. Therefore, the duration of the Transition Period would
be uncertain.
One commenter noted that the Department's participant disclosure
regulation requires any change to a defined contributions plan's
designated investment alternatives to be disclosed to participants at
least 30 days (but not more than 90 days) in advance. The commenter
indicated that it appeared that the Department has not considered the
practical limitations of such notices on the duration of the Transition
Period. The one-year duration of the Transition Period, however,
provides more than sufficient time to accommodate the requirements of
the participant disclosure regulation. If additional relief is needed
beyond the one-year period, the QPAM may request a supplemental
individual exemption to ensure that such a change is made accordingly.
[[Page 23107]]
One commenter asserted that the Proposed Amendment did not clearly
indicate the QPAM's obligations to non-ERISA investors in a pooled fund
or how these investors would be treated. Another commenter suggested
that the Department should focus on the issue of pooled funds, where
QPAMs will need to balance the interests of Plans leaving the fund with
those Plans remaining in the fund. The Proposed Amendment and this
Final Amendment treat non-ERISA and Plan investors in a similar manner
to the way the Department has addressed this issue in individual
exemptions related to Section I(g) ineligibility. Specifically, the
provision prohibiting a QPAM from imposing fees, penalties, or charges
in the Proposed Amendment includes an explicit exception for
``reasonable fees, appropriately disclosed in advance, that are
specifically designed to: (a) prevent generally recognized abusive
investment practices or (b) 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 that such fees
are applied consistently and in a like manner to all such investors.''
The Department has retained this exception in this Final Amendment,
which addresses the commenter's concern.
Some commenters indicated that Plans should be given more control
over the decision to continue relying on the QPAMs. The commenters
suggested that the Department give Plans the ability to decide whether
to terminate or withdraw from their relationship with a QPAM and the
flexibility to determine a timeline for withdrawal. One commenter
asserted that Plans choose asset managers based on their reputation and
expertise in specific areas of asset management. The commenter added
that the Plan is in the best position to determine whether it is in the
Plan's best interests to terminate or withdraw from their relationship
with the QPAM. As discussed above, however, ultimately the decision on
whether to grant relief from ERISA and the Code's prohibited
transaction provisions rests with the Department. In the Department's
view, the individual exemption process provides a full, fair, and open
process for the Department to determine whether a QPAM should be
permitted to engage in otherwise prohibited transactions post-
conviction, and if so, the conditions which should be placed on such
relief. To the extent QPAMs obtain such individual exemptions, Plans
remain free to rely upon them to engage in transactions that would
otherwise be prohibited if the QPAMs meet the conditions that are
specified in the exemptions.
Finally, one commenter noted that to fully effectuate the intent of
the Transition Period provisions for stable value investment contracts,
the length of the period should be based on the duration of the
underlying investment portfolio or as otherwise provided under the
terms of the contract for an extended or amortized termination. The
Department declines to give preferential treatment to QPAMs responsible
for such investment contracts in this manner. Here too, the individual
exemption process is best suited to address any specific issues or
concerns based on the nature of the QPAM's investments or investment
practices.
Finally, the Department made a few additional ministerial changes
to the Transition Period provisions in the Final Amendment. First, the
Department capitalized the term ``Transition Period.'' \51\ Second, the
Department modified the first sentence of the Transition Period
provision to clarify its focus on client Plans, by replacing the phrase
``engage in'' with ``provide,'' and by dividing the first sentence into
two sentences to improve readability. Third, the Department replaced
the Proposed Amendment's reference to subsection I(g)(2) (regarding the
WMA) with a reference to subsection I(i) because the Department moved
the WMA requirements to this subsection. Finally, as noted above, since
the Written Ineligibility Notice provisions have been removed from the
Final Amendment, the term ``Written Ineligibility Notice'' as used in
this Section in the Proposed Amendment, now has been replaced with the
term ``Prohibited Misconduct.''
---------------------------------------------------------------------------
\51\ The Department capitalized the term in other Sections of
the Final Amendment as well.
---------------------------------------------------------------------------
Section I(j)--Requesting an Individual Exemption
The Proposed Amendment included a new Section I(k),\52\ which
provided that a QPAM that is ineligible or anticipates becoming
ineligible may apply for supplemental individual exemption relief. The
Proposed Amendment's Section I(k) instructed an applicant, as part of
such a request, to review the Department's most recently granted
individual exemptions involving Section I(g) ineligibility with the
expectation that similar conditions will be required if an exemption is
proposed and granted. Proposed Section I(k) also indicated that if an
applicant wished to exclude any term or condition from its exemption,
the applicant would need to accompany such request with a detailed
explanation of the reason such change is necessary and in the interest
of and protective of the Plan, its participants and beneficiaries, and
IRA owners. Proposed Section I(k) indicated that the Department would
review such requests consistent with the requirements of ERISA section
408(a) and Code section 4975(c)(2).
---------------------------------------------------------------------------
\52\ Section I(k) of the Proposed Amendment has been renumbered
in the Final Amendment as Section I(j).
---------------------------------------------------------------------------
To facilitate the processing of an individual exemption
application, proposed Section I(k) also instructed applicants to
provide detailed information in their applications quantifying the
specific cost or harms in dollar amounts, if any, that Plans would
suffer if a QPAM could not rely on the exemption after the Transition
Period, including the specific dollar amounts of investment losses
resulting from foregone investment opportunities and any evidence
supporting the proposition that investment opportunities would only be
available to Plans on less advantageous terms.
Proposed Section I(k) also indicated that an applicant should not
construe the Department's acceptance of an individual exemption
application as a guarantee that the Department will grant an individual
exemption. Therefore, a QPAM that submits an individual exemption
application must ensure that it manages Plan assets prudently and
loyally during the Transition Period with the understanding that final
approval of an individual exemption is not guaranteed.
The Proposed Amendment reinforced that for the Department to make
the necessary statutory findings under ERISA section 408(a) and Code
section 4975(c)(2), applicants also should anticipate that the
Department may condition individual exemptive relief on a certification
by a senior executive officer of the QPAM (or comparable person) that:
(1) all of the conditions of the Transition Period were met, and (2) an
independent audit reviewing the QPAM's compliance with the conditions
of the Transition Period has been completed.\53\ QPAMs affected by a
conviction also should not wait until late in the Transition Period to
apply for an individual exemption.
---------------------------------------------------------------------------
\53\ The Department additionally clarifies that the
certification of the independent audit would come at some point
after an individual exemption is granted and the One-Year Transition
Period has ended.
---------------------------------------------------------------------------
The Department received a few comments on this new provision. One
commenter noted that the conditions that have been incorporated into
the most recent individual exemption that
[[Page 23108]]
apply to a particular QPAM may not be appropriately tailored to a
subsequent application and fact pattern. Another commenter indicated
that the Department is increasingly adopting onerous conditions for
granting individual exemptions and seems even less likely to grant
them. Yet another commenter opined that an ineligible QPAM may be
unlikely to receive an individual exemption that is usable.
Considering the serious corporate criminal misconduct the
Department has seen in Section I(g) individual exemption applications
and audits submitted to the Department as required by granted
individual exemptions, the Department remains convinced that the proper
starting point for individual exemption conditions should be the
Department's most recently-issued individual exemptions. This
procedural standpoint is neither new nor undisclosed. For decades, the
Department has generally crafted proposed exemptions for similarly
situated applicants that contain similar conditions, subject to the
Department's periodic reevaluation of the exemption conditions to
ensure that they remain appropriately protective for the Department to
make the findings required by ERISA section 408(a) and Code section
4975(c)(2).
The Department will consider the individual facts and circumstances
of each application, but Section I(j) (formerly section I(k) in the
Proposed Amendment) is intended to clearly provide the appropriate
starting point for applicants that are preparing an exemption
application in connection with Section I(g) ineligibility. Regarding
the commenter's reference to the Department's onerous conditions, over
the past decade, the Department's experience indicates that QPAM
ineligibility under Section I(g) has occurred in most cases due to
serious corporate criminal misconduct. The Department believes that it
has tailored the conditions of the most recent Section I(g) individual
exemptions to appropriately address the potential for significant
financial harm to Plans, while providing workable relief. Moreover, if
a QPAM is concerned about the usability of a Section I(g) individual
exemption, then the QPAM, its Affiliates, and owners of a five (5)
percent or more interest may structure their conduct to avoid engaging
in transactions that are otherwise legally prohibited or rely on
exemptions other than the QPAM Exemption to avoid the consequences that
result from Section I(g) ineligibility.
The Department also notes that applicants may request more limited
relief than the QPAM Exemption otherwise provides. For example, a QPAM
may only need prohibited transaction relief for a particular limited
category of transactions, such as an on-going lease that was entered
into on behalf of an Investment Fund which is expected to continue past
the One-Year Transition Period. In such circumstances, due to the
limited nature of the transaction(s) for which relief is sought,
applicants should discuss the terms and conditions of prior individual
exemptions involving Section I(g) in connection with a request for more
limited prohibited transaction relief. The applicant also should
include a detailed explanation in its application regarding how Plans
will be otherwise protected and why the transaction cannot be unwound
before the end of the Transition Period without harm or losses to such
Plans.
Finally, the Department reminds any applicant anticipating that it
will need relief beyond the end of the One-Year Transition Period to
apply to the Department for an individual exemption as soon as
practicable. As a fiduciary, the QPAM has obligations with respect to
Plans beyond those required by the QPAM Exemption and should approach
the Department at the earliest point it appears a conviction will
occur, such as when a plea agreement has been entered into--even if the
conviction date has not yet been set--to ensure that appropriate steps
can be taken by or on behalf of its client Plans ultimately impacted by
the QPAM's loss of exemptive relief.
Section I(c)--Involvement in Investment Decisions by a Party in
Interest
The Proposed Amendment included modifications to Section I(c) of
the QPAM exemption that are consistent with the Department's original
intent when granting the exemption. In the 1984 grant notice, the
Department stated that an essential premise of the exemption is that
broad prohibited transaction relief can be afforded only if the
negotiations leading to, and the commitments and investments of, plan
assets are the sole responsibility of an independent investment
manager. The Department reasoned in the 1984 grant notice that the
potential for decision making with regard to plan assets that would
inure to the benefit of a party in interest would be increased if
exemptive relief were provide in circumstances where the QPAM has less
than ultimate discretion over acquisitions for an investment fund that
it manages.\54\
---------------------------------------------------------------------------
\54\ 49 FR at 9497.
---------------------------------------------------------------------------
The proposed new language in Section I(c) was intended to make
clear that a QPAM must not permit a Party in Interest to make decisions
regarding Plan investments under the QPAM's control. The Proposed
Amendment included in the opening of Section I(c) a statement providing
that the terms of the transaction, ``commitments, investment of fund
assets, and any corresponding negotiations on behalf of the Investment
Fund are the sole responsibility of the QPAM. . . .'' \55\ The
Department also proposed to add language at the end of Section I(c)
stating that the prohibited transaction relief in the exemption applies
``only in connection with an Investment Fund that is established
primarily for investment purposes'' and that ``[n]o relief is provided
under this exemption for any transaction that has been 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 the transaction as required by this
section I(c).'' \56\ For example, as stated in 1982 proposal for the
QPAM Exemption, a plan sponsor that negotiates a transaction and then
presents it to a QPAM for approval would not qualify for the relief in
the class exemption. The 1982 proposal further states that the relief
in the proposed exemption would be available even though the transfer
of assets by a plan to a QPAM is subject to general investment
guidelines, so long as there is no arrangement, direct or indirect, for
the QPAM to negotiate, or engage in, any specific transaction or to
benefit any specific person.\57\
---------------------------------------------------------------------------
\55\ 87 FR at 45227.
\56\ Id.
\57\ 47 FR at 56947.
---------------------------------------------------------------------------
The Department received numerous comments regarding the proposed
changes to the wording of Section I(c). Some of these commenters
indicated their understanding of the Department's view that a QPAM
should not act as a rubber stamp to approve transactions designed by
the Party in Interest who appointed the QPAM. Similarly, commenters
indicated they shared the goal of preventing the QPAM Exemption from
being abused, i.e., a QPAM being used to ``sanitize'' a transaction
where there is an underlying goal to avoid the restrictions of the
prohibited transaction rules. One commenter also indicated that it
understood the Department has long maintained that QPAMs should not
simply act as ``mere independent approvers'' but should be intimately
involved in the negotiation and approval of the transaction. The
[[Page 23109]]
commenter believed that this interpretation is widespread in the market
and needs no clarification. Another commenter also indicated that the
original QPAM Exemption was clear and understood by practitioners--a
named fiduciary could not appoint a QPAM to approve a pre-negotiated
transaction nor could the appointing fiduciary retain a veto or
approval right over any transaction.
Commenters also raised a variety of other general issues and
concerns with the proposed changes to Section I(c). One commenter noted
that the Department has not identified any evidence of harm
necessitating changes to the language of Section I(c). Another
commenter suggested that any proposal to make changes to the way
various Plan fiduciaries interact with QPAMs should be the subject of a
separate, carefully crafted proposal with stakeholder input and
regulatory cost analysis. A commenter also asked whether the
Department's clarifications were meant to refer to Plan sponsors
instead of a Party in Interest with no ability to meaningfully
influence a transaction.
The Department has an ongoing interest and responsibility under
ERISA section 408(a) and Code section 4975(c)(2) to revisit and update
exemptions on an ongoing basis to ensure that that they maintain their
protective purpose. Although Section I(a) of the exemption directly
addresses Plan sponsors, Section I(c) provides additional protections
that also apply to the Plan sponsor. These conditions are intended to
work together, not separately, to prevent a Plan sponsor from
attempting to influence a transaction. To the extent QPAMs are already
fully complying with the Department's expectation of independent
judgment, and not acting as mere rubber stamps, appropriate clarifying
language should impose no additional burden. It is essential to the
achievement of the exemption's aims, however, that the Department's
expectations be clear in this regard.
Modifications to Section I(c) are appropriate to ensure the
Department's intent is understood by practitioners, QPAMs, and their
client Plans. It is also important for QPAMs to be mindful of the
requirements of the exemption rather than simply deriving the benefits
of calling themselves QPAMs while ignoring the QPAM Exemption's core
requirements and protective intent. Moreover, the Department notes that
Section I(c) requires the asset manager to act independently, as a
general matter, from Plan sponsors and Parties in Interest. Without an
overarching compliance-focused approach to its asset management
arrangement and Section I(c), the protective purpose of ensuring the
QPAM's independence is undermined.
Commenters raised a variety of other topics, such as: (1) the
amount of permitted involvement by a Party in Interest/Plan sponsor in
investment decisions, including voting proxies; (2) arrangements that
involve multiple investment managers; (3) transactions initiated or
negotiated by a Party in Interest; (4) sub-advisers and collective
investment trusts; (5) pension risk transfers; (6) an Investment Fund
established primarily for investment purposes; (7) eliminating all the
changes in the Proposed Amendment; and (8) alternatives to the changes
in the Proposed Amendment. The Department revised the wording of
Section I(c) in this Final Amendment in response to some of these
comments, as discussed below. However, the Department reemphasizes that
the role of the QPAM under the terms of the exemption is not to act as
a mere independent approver of transactions. Rather, the QPAM must have
and exercise sole discretion over the commitments and investments of
Plan assets and the related negotiations on behalf of the Plan with
respect to an Investment Fund that is established primarily for
investment purposes for the relief provided under the exemption to
apply.
Involvement in Investment Decisions
One commenter opined that Plan sponsors and Plan fiduciaries should
be able to have meaningful involvement in the process of negotiating an
investment contract's investment guidelines without affecting the
ability of the investment manager to rely on the QPAM Exemption.
Another commenter requested that the Department clarify that routine
monitoring meetings and inquiries by Plan fiduciaries with respect to a
manager's trading strategies do not constitute ``planning.'' One
commenter also requested clarification that nothing in the Proposed
Amendment would prevent the trustees of multiemployer plans from
retaining or delegating the right to vote proxies held by the QPAM, or
to exercise other similar shareholder rights, even if such proxies or
rights relate to investments in a Party in Interest.
The Department notes that routine monitoring of meetings and
inquiries by Plan fiduciaries would not be considered ``planning'' for
purposes of Section I(c). This type of involvement is consistent with a
fiduciary's obligations under ERISA section 404 and the Department's
prior guidance regarding investment guidelines that may be provided to
the QPAM. For clarity, the Department is changing the word ``because''
to ``to the extent'' in the proposed sentence:
No relief is provided under this exemption for any transaction that
has been 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 the transaction as
required by this Section I(c).
That sentence now reads:
No relief is provided under this exemption for any transaction that
has been planned, negotiated, or initiated by a Party in Interest, in
whole or in part, and presented to a QPAM for approval to the extent
the QPAM would not have sole responsibility with respect to the
transaction as required by this Section I(c).
With respect to proxies and exercising other shareholder rights,
the Department notes that the QPAM Exemption was never intended to
cover transactions in which a Party in Interest is making the decisions
pertaining to specific transactions. The possibility that Plan
fiduciaries have been relying upon the QPAM Exemption for such
transactions highlights one of the reasons the Department proposed
changes to Section I(c). The Department would generally consider
reliance on the QPAM Exemption in these cases to be an abuse or misuse
of the QPAM Exemption.\58\ Importantly, as the Department stated in the
preamble of the original granted exemption in 1984, the Department
``does not interpret Section I(c) as exempting a subsidiary transaction
unless such transaction is itself subject to relief under the class
exemption and the applicable conditions are met.'' \59\
---------------------------------------------------------------------------
\58\ Any parties that require more detailed guidance on the
applicability of the QPAM Exemption to certain transactions may
submit an advisory opinion request to the Department.
\59\ 49 FR at 9497.
---------------------------------------------------------------------------
Multiple Investment Managers
Commenters indicated that Plan sponsors often hire multiple
investment managers to execute the Plan's overall investment strategy
with each manager being given certain assets to manage in a particular
manner. And since only the Plan sponsor knows the overall strategy, it
is natural and beneficial for the Plan sponsor to be able to have
ongoing dialogues with their managers without those dialogues
disqualifying the manager from serving as a QPAM.
The Department notes that the proposed changes to Section I(c) were
not intended to prevent Plan sponsors
[[Page 23110]]
from having ongoing dialogue with an investment manager. The
Department's intent and additional clarification regarding the proposed
changes re-emphasize that a Plan sponsor can provide investment
guidelines to a QPAM. The natural corollary would be for Plan sponsors
to revisit those investment guidelines at appropriate intervals. One of
the Department's key points with the proposed changes to Section I(c)
is that any direction from a Plan sponsor or other Party in Interest
for a QPAM to engage in a particular transaction would be contrary to
the intent of Section I(c). A Plan sponsor that utilizes multiple
QPAMs, however, may interact with each manager as part of a larger
overall investment strategy as long as the QPAMs retain the sole
authority to engage in transactions in accordance with the strategy,
and there is no direct or indirect arrangement for any QPAM to
negotiate, or engage in, any specific transaction or to benefit any
specific person.
Initiating, Planning, and Negotiation Transactions
Many commenters raised concerns regarding the use of the word
``initiate'' in the Department's proposed changes to Section I(c). Some
commenters expressed concern because Investment Fund transactions in
derivatives or other investment products that are developed and pitched
to a QPAM by a financial institution acting as a service provider to
the QPAM--a common scenario in the derivatives market--could be
interpreted as initiated by a Party in Interest. Commenters also
indicated that even if a transaction is not of a type that is
customarily negotiated, the counterparty Party in Interest would still
be involved. A few commenters opined that the reference to a
transaction being ``negotiated'' by the Party in Interest and then
``presented to a QPAM for approval'' is sufficient to achieve the
Department's objective. Further, a commenter indicated that the
proposed amendments mischaracterize the actual application of a QPAM's
discretionary authority. This commenter indicated that if not
eliminated, the terms ``planned,'' ``negotiated,'' and ``initiated''
should be clarified to address the Department's concerns more directly.
For example, if the Department is concerned about the practice of
hiring a QPAM for the sole purpose of approving a particular
transaction already contemplated and/or negotiated by another Plan
fiduciary, the Department should craft language more narrowly aimed at
preventing this situation.
The Department notes that whether a particular sales pitch or an
offer of an investment product from a Party in Interest would run afoul
of the intent of Section I(c), including the proposed changes, depends
on the associated facts and circumstances. It would be inappropriate
for the Department to embed these facts and circumstances into an
exemption condition, because the exemption would become unduly complex
and unworkable. As a general matter in this regard, QPAMs should
interpret the protective nature of Section I(c) expansively and avoid
responding to any sales pitch or offer with respect to a proposed
transaction that would call into question whether the QPAM is
ultimately solely responsible for planning, negotiating, and initiating
the transaction.
In order to further clarify this concept, the Department has added
the following sentences to Section I(c): ``In exercising its authority,
the QPAM must ensure that any transaction, commitment, or investment of
fund assets for which it is responsible are based on its own
independent exercise of fiduciary judgment and free from any bias in
favor of the interests of the Plan sponsor or other parties in
interest. The QPAM may not be appointed or relied upon to uncritically
approve transactions, commitments, or investments negotiated, proposed,
or approved by the Plan sponsor, or other parties in interest.''
Sub-Advisers and Collective Investment Trusts
A few commenters indicated that the Department's proposed language
could be interpreted to restrict the use of sub-advisers by a QPAM,
including in the context of collective investment trusts (CITs).
Commenters indicated that utilizing sub-advisers to make
recommendations for certain investments in which they specialize or
possess expertise is important because a QPAM may otherwise be
compelled to do its own research before investing Plan assets, even
when the QPAM can more readily rely upon a sub-adviser with specialized
expertise regarding certain types of assets. Commenters noted that
QPAMs regularly delegate certain investment responsibilities to a sub-
adviser but retain authority to approve transactions. With respect to
CITs, commenters indicated that in order to comply with securities and
banking laws, the sponsoring trust company generally retains ultimate
investment authority, but typically appoints a sub-adviser who invests
the CIT's assets on a day-to-day basis. Commenters felt the proposed
revision to Section I(c) would present a structural conundrum for CITs
and their providers given the standards imposed by the federal
securities laws and OCC regulations. According to commenters, the
proposed language requires that the QPAM have the ``sole authority''
over the transaction. Commenters indicated that neither the sponsoring
trust company nor sub-adviser have the sole authority, although both
are fiduciaries under ERISA and may need to rely on the QPAM Exemption.
The Department expects that a QPAM may rely on the specific
expertise of a prudently selected and monitored entity to assist the
QPAM in prudently managing Plan assets. Therefore, a QPAM's delegation
of certain investment-related responsibilities to a sub-adviser does
not, by itself, violate Section I(c), as long as the QPAM retains sole
authority with respect to planning, negotiating, and initiating the
transactions covered by the QPAM Exemption. A QPAM should not ``more
readily'' rely on a sub-adviser that has specialized expertise, in
order to engage in a particular transaction, if the reliance means that
the QPAM would not have sole authority with respect to planning,
negotiating, and initiating the transaction.
Furthermore, parties that participate in arrangements that do not
clearly identify which party has the ultimate responsibility and
authority to engage in a particular transaction should not assume that
the transaction is permitted by the QPAM Exemption. The Department
recommends that affected parties involved in such transactions seek an
advisory opinion or request other guidance from the Department
regarding whether the QPAM Exemption is available for such
transactions.
Pension Risk Transfers
One commenter suggested the proposed changes to Section I(c) could
render the QPAM Exemption unavailable for pension risk transfers where
a Plan purchases an annuity from an insurance company in connection
with the termination of the Plan or to annuitize a subset of the Plan's
participant population. The commenter did not provide specific details
as to what aspects of proposed Section I(c) would potentially create
problems for this type of transaction, however. The QPAM Exemption is
designed to accommodate a broad range of prudent investment
transactions, and the Department does not believe that the exemption
poses any special impediment to such transactions as they may relate to
pension risk transfers. If
[[Page 23111]]
the commenter's concerns remain after it considers the Department's
modifications to Section I(c) in the Final Amendment, the affected
parties may seek an advisory opinion or request other guidance from the
Department regarding whether the QPAM Exemption is available for such
transactions.
Fund Established Primarily for Investment Purposes
In connection with the Department's proposed language that the
Investment Fund must be established primarily for investment purposes,
one commenter requested the Department clarify that this includes a
fund that is established for mixed-use purposes that contains an
investment component. The commenter indicated the fund may have certain
non-investment purposes, such as the payment of benefits and Plan
expenses. Another commenter indicated that the QPAM Exemption long has
been used by Plans to hire managers, as well as trustees, custodians,
and recordkeepers, regardless of the type of Plan (pension, savings, or
welfare).
The Department notes that a fund that contains only a minor
investment component would not be eligible for the relief provided by
the QPAM Exemption. This is true regardless of the Plan type. If a Plan
has mixed-use purposes, the Plan sponsor should establish a separate
account for any investments held directly by the Plan in order to rely
upon the QPAM Exemption for that portion of the Plan's assets.
Relatedly, a fund or other pool of Plan assets that contains no
investment assets would not be able to rely upon the QPAM Exemption.
However, as provided in Section I(c) of this Final Amendment, an
Investment Fund that makes distributions and/or engages in other
activities that are ancillary to the fund's primary investment purpose
will not fail to be an Investment Fund established primarily for
investment purposes. The Department provides this additional
clarification in the Final Amendment because distributions and other
ancillary services are generally necessary in order for investment
funds to operate.
Recommended Alternatives
One commenter made a specific recommendation regarding the wording
of Section I(c) that would specify that the QPAM ``represents the
interest of the Investment Fund.'' The Department accepts this
suggested modification in addition to the other modifications discussed
above.
Another commenter suggested the Department should issue separate
guidance on Section I(c) that makes clear that a QPAM is expected to
act prudently on behalf of its Plan clients for any investment
opportunity that the QPAM may become aware of and where the QPAM is not
conflicted--regardless of how it became aware of the opportunity. The
commenter added that as long as the QPAM has the ultimate discretionary
authority and responsibility for deciding whether to enter into a given
transaction, the QPAM should not be prohibited from transactions merely
because such transaction is planned, negotiated, or initiated by a
Party in Interest.
The Department believes many of the revisions to Section I(c) in
this Final Amendment and related preamble discussion provide the
requested guidance. If questions remain regarding the source of
investment opportunities in relation to the QPAM's discretionary
authority, the Department encourages interested parties to submit an
advisory opinion request that details the particular facts and
circumstances that raise issues under Section I(c).
Section VI(a)--Asset Management and Equity Thresholds
The QPAM Exemption was originally granted, in part, on the premise
that large financial services institutions would be able to withstand
improper influence from Parties in Interest. The Department included
the asset management and equity thresholds in the exemption to set
minimum size thresholds that would help ensure a QPAM would be able to
withstand such influence. In 2005, the Department finalized an
amendment to the QPAM Exemption that updated the asset management and
shareholders' and partners' equity thresholds for registered investment
advisers in the QPAM definition in subsection VI(a)(4).\60\ In
connection with that amendment, the Department indicated that the
original thresholds ``may no longer provide significant protections for
Plans in the current financial marketplace'' and adjusted the figures
based on changes in the Consumer Price Index.\61\
---------------------------------------------------------------------------
\60\ 70 FR 49305.
\61\ Proposed Amendment to PTE 84-14, 68 FR 52419, 52423 (Sept.
3, 2003).
---------------------------------------------------------------------------
The Department has determined that the same rationale necessitates
further updates to the registered investment adviser thresholds and
those of other types of QPAMs, such as banks and insurance companies,
because they have not been updated since 1984. Therefore, the
Department is adjusting all of the thresholds in Section VI(a) based on
the original published figures in the 1984 grant notice. This will
ensure that changes to the thresholds for all types of financial
institutions reflect the same baseline change to the Consumer Price
Index (i.e., 1984 vs. 2021).\62\
---------------------------------------------------------------------------
\62\ For purposes of these changes, the Department used March
1984 and December 2021 as the relevant dates in the U.S. Bureau of
Labor Statistics CPI Inflation Calculator available at: https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------
The Proposed Amendment would have adjusted the $1,000,000 threshold
in subsection VI(a)(1) through (3) to $2,720,000 and the assets under
management threshold of $85,000,000 and the shareholders' and partners'
equity and the broker-dealer net worth thresholds of $1,000,000 in
subsection VI(a)(4) to $135,870,000 and $2,000,000, respectively. In
this Final Amendment, the Department decided to increase the thresholds
in three-year increments beginning in the year 2024 and ending in 2030.
The final incremental adjustment will raise the thresholds to the
amounts included in the Proposed Amendment. The incrementally adjusted
threshold amounts are provided in subsection VI(a)(1) through (4) of
the Final Amendment. By publication through notice in the Federal
Register no later than January 31st every year, the Department will
make subsequent annual adjustments for inflation to the Equity Capital,
Net Worth, and asset management thresholds in subsection VI(a)(1)
through (4) that are rounded to the nearest $10,000.
As a minor ministerial change, the Department proposed to replace
the reference to ``Federal Savings and Loan Insurance Corporation''
with ``Federal Deposit Insurance Corporation'' in subsection VI(a)(2),
because the Federal Savings and Loan Insurance Corporation was
abolished by Congress in 1989, and its responsibilities were
transferred to the Federal Deposit Insurance Corporation.\63\ The
Department received no comments on this ministerial change and retains
it in this Final Amendment.
---------------------------------------------------------------------------
\63\ See Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Public Law 101-73 (1989).
---------------------------------------------------------------------------
The Department received several comments regarding the proposed
asset management and equity thresholds. One commenter noted that the
proposed increases may have a material impact on the market for both
small and large managers. The commenters stated the sudden increase in
the thresholds could force small organizations out of the market, which
would prevent small managers and start-up managers from utilizing the
QPAM Exemption and put them at a competitive disadvantage.
[[Page 23112]]
As the Department previously stated, the QPAM Exemption was never
intended for small investment managers, and the exemption's minimum
asset and equity thresholds are intended to ensure that the fiduciaries
managing Plan assets are established institutions that are large enough
not to be unduly influenced in their discretionary decision-making
process by Parties in Interest. By spreading out the proposed increases
occurring with this Final Amendment incrementally from 2024 through
2030, the impact of a sudden increase in the threshold will be greatly
reduced. This longer implementation period will provide ample
opportunity for QPAMs to prepare and be on notice that the thresholds
are increasing in this manner and on an annual basis thereafter. The
Department notes that small asset managers or start-ups can apply for
individual exemptive relief to use the QPAM Exemption if they are
detrimentally impacted by the Final Amendment's increase to the equity
and asset thresholds, and the Department will consider those requests
on a case-by-case basis. An individual exemption, if granted, would
allow the Department to develop conditions for this circumstance that
would ensure the QPAM retains the appropriate independence and the
means to provide remedies to harmed Plans.
Another commenter stated that changes of such significance should
not be undertaken in the absence of an identifiable harm or evidence
supporting such harm to Plans, participants, and/or beneficiaries. The
Department disagrees and notes that the original intent and protection
of the exemption will erode if the asset and equity thresholds are
allowed to become irrelevant with the passage of time. What was
considered a large institution that could serve the protective purposes
of the exemption in 1984 would not be considered sufficiently large by
current standards. For the protective nature of the QPAM Exemption to
remain effective and relevant, the Department must update the asset and
equity thresholds to ensure that they keep pace with financial and
economic growth in the marketplace.
A commenter suggested the Department should conduct a survey or
issue a request for information designed to gather data necessary to
make an informed decision as to whether the thresholds should be
increased and, if so, to what extent. It is clear, however, that the
asset and equity thresholds have not kept pace with the economic and
financial growth of the marketplace, and the Department has undertaken
a robust and thorough rulemaking process for this Final Amendment.
Another commenter recommended that at the least, the Department
should grandfather QPAMs that met the pre-existing requirements and
allow them to continue to rely on the QPAM Exemption. The Department
declines to make this modification because allowing entities that fail
to meet the thresholds to avail themselves of the relief in the QPAM
Exemption would undermine the exemption's core purpose.
The Department received a comment stating that annual indexing of
the equity and asset thresholds will create situations where an entity
is a QPAM on one day, and not thereafter, leaving its client Plans in a
precarious position if the Plans are invested in continuing
transactions dependent on the QPAM Exemption. By incrementally
increasing the asset and equity thresholds, the Department is
effectively putting QPAMs on notice that the thresholds will increase
according to a predictable metric (the CPI), which will provide an
opportunity to prepare and manage their ERISA assets accordingly before
the increases are fully implemented.\64\
---------------------------------------------------------------------------
\64\ This includes possibly seeking individual exemption relief
in such circumstances.
---------------------------------------------------------------------------
Another comment stated that the indexing should only happen once
every five years, with a one-year effective date transition. The
Department declines to adopt this approach to the indexing. Five-year
indexing periods could lead to substantial deficiencies with respect to
QPAMs' compliance with the equity and threshold requirements of this
exemption. As a general matter, asset managers seeking to rely on this
exemption should be constantly aware of all the requirements of this
exemption, including the equity and threshold requirements, and take
appropriate action in response to the risk of non-compliance, including
by not engaging in prohibited transactions or by relying on and
complying with alternative exemptions. Further, the current asset and
equity thresholds are very outdated, and their ineffectiveness would be
exacerbated by waiting an additional five years to increase them.
Finally, a commenter recommended that the Department clarify that
the new dollar thresholds published by January 31st annually in the
Federal Register will not be applicable until January 1st of the
following year. The Department has made this clarification in the Final
Amendment by providing that each increase in the thresholds will be
effective as of the last day of the QPAM's fiscal year in which the
increase takes effect. The Department also will include the annual
notice of increases on the class exemption section of EBSA's
website.\65\
---------------------------------------------------------------------------
\65\ Available at: https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/class.
---------------------------------------------------------------------------
Section VI(u)--Recordkeeping
The Proposed Amendment also included a new recordkeeping
requirement in Section VI(t), which would require QPAMs to maintain
records for six years demonstrating compliance with this exemption. The
Recordkeeping requirement has been redesignated as Section VI(u) in
this Final Amendment.\66\ The Department proposed this addition to make
the QPAM Exemption consistent with other exemptions that generally
impose a recordkeeping requirement on parties relying on an exemption
and to ensure they will be able to demonstrate, and that the Department
will be able to verify, compliance with the exemption conditions.
---------------------------------------------------------------------------
\66\ The Department moved the definition of ``Participating In''
that appeared in Section I(g)(3) of the Proposed Amendment into the
Definitions and General Rules at Section VI(t) of this Final
Amendment.
---------------------------------------------------------------------------
The Recordkeeping requirement of the Proposed Amendment would
require that the records be kept in a manner that is reasonably
accessible for examination. The records must be made available, to the
extent permitted by law, to any authorized employee of the Department
or the Internal Revenue Service or another federal or state regulator;
any fiduciary of a Plan invested in an Investment Fund managed by the
QPAM; any contributing employer and any employee organization whose
members are covered by a Plan invested in an Investment Fund managed by
the QPAM; and any participant or beneficiary of a Plan and an IRA Owner
invested in an Investment Fund managed by the QPAM.
QPAMs also would be required to make such records reasonably
available for examination at their customary location during normal
business hours. Participants and beneficiaries of a Plan, IRA owners,
Plan fiduciaries, and contributing employers/employee organizations
would be able to request only information applicable to their own
transactions and not a QPAM's privileged trade secrets or privileged
commercial or financial information, or confidential information
regarding other individuals. If the QPAM refuses to disclose
information to a party other than the Department on the basis that
[[Page 23113]]
the information is exempt from disclosure, the Department would require
the QPAM to provide a written notice, within 30 days, advising the
requestor of the reasons for the refusal and that the Department may
request such information. The requestor would then be able to contact
the Department if it believes it would be useful for the Department to
request the information.
Any failure to maintain the records necessary to determine whether
the conditions of the exemption have been met would result in the loss
of the relief provided under the exemption only for the transaction or
transactions for which such records are missing or have not been
maintained. Such failure would not affect the relief for other
transactions if the QPAM maintains required records for such
transactions.
The Department received several comments opposing the Proposed
Amendment's recordkeeping requirement. Some commenters indicated that
the specific recordkeeping requirements are unnecessary given the
existing recordkeeping requirements under ERISA section 107. Other
commenters added that the requirement does not add materially to the
protective provisions already in place in the exemption and
unnecessarily increases regulatory compliance costs. Commenters also
pointed to other status-based exemptions that do not impose any
recordkeeping requirement on a transaction-by-transaction basis, while
others, like the insurance company general account exemption (PTE 95-
60) \67\ and INHAM exemption (PTE 96-23) \68\ do not have a
recordkeeping requirement at all.
---------------------------------------------------------------------------
\67\ As amended and restated at 87 FR 12985, 12996 (Mar. 8,
2022).
\68\ As amended and restated at 76 FR 18255 (Apr. 1, 2011).
---------------------------------------------------------------------------
Some commenters noted that only the Department (with respect to
ERISA Title I plans) and the IRS (with respect to ERISA Title II plans,
including IRAs) have the authority to enforce the terms of the QPAM
Exemption. Therefore, those commenters argued that requiring that
records be made available to employers, unions, and participants,
beneficiaries, and IRA owners, raises the risk of unnecessary
litigation and could cause QPAMs to increase the fees they charge to
Plans as a result. One commenter added that there are practical reasons
why having to retain records sufficient for a determination of
compliance is unworkable or otherwise not cost effective. For example,
a commenter argued that despite the Department's expectation that the
recordkeeping requirements would impose a negligible burden, this
requirement will, in fact, prove burdensome and costly because QPAMs
will need to be able to demonstrate compliance for every transaction
and, in some cases, to prove a negative. Another commenter asked for a
simplified recordkeeping requirement that would require QPAMs to
undertake prudent efforts to maintain accurate records reflecting their
QPAM duties and responsibilities while another commenter suggested the
Department should modify the Proposed Amendment to require process-
based records of compliance rather than transactional records. Another
commenter asked for clarification that the six-year recordkeeping
requirement does not create any new obligation to document the basis
for satisfaction of the exemption conditions. One commenter indicated
it is unclear what it means to ``verify'' compliance with the
conditions of the QPAM Exemption.
The Department's response to these comments is that these concerns
are overstated and inconsistent with how recordkeeping requirements
operate in prohibited transaction exemptions. The extent to which
transaction-by-transaction records are necessary depends on the facts
and circumstances. The Department often includes a recordkeeping
requirement in its administrative prohibited transaction exemptions to
ensure that the parties relying on an exemption can demonstrate, and
the Department can verify, compliance with the exemption's conditions.
Given the broad relief provided by this exemption, including a specific
recordkeeping requirement is necessary for the Department to verify
that the exemption conditions are being satisfied rather than relying
on ERISA's general recordkeeping requirement to maintain records. Given
the large number and variety of transactions entered into in reliance
on the QPAM Exemption, the Department did not intend for this provision
to require transaction-by-transaction recordkeeping. Rather, the
condition is focused on requiring the QPAM to retain records
satisfactory to prove compliance with the applicable conditions for any
section of the exemption the QPAM relied upon, such as satisfying the
definition of QPAM, and records supporting the limitation on the
involvement of Parties in Interest in investment transactions. The
QPAM's reliance on specific transactions covered by Sections II through
V of the exemption will require it to maintain more detailed records
such as, but not limited to, copies of leases, sales agreements,
service contracts, audit reports, policies and procedures, and detailed
descriptions of real estate. Financial institutions are accustomed to
keeping records of their transactions as a part of their regular
business practices and generally have recordkeeping systems already in
place.
Additionally, a commenter noted that the National Bank visitorial
powers provision and the Office of the Comptroller of the Currency
(OCC) regulations would prevent Plan investors from accessing the
records of national banks and federal savings associations. The
commenter asserted that this could lead to an unintended discriminatory
effect between these banks and state-chartered banks, which may not
have the same available safeguards on the release of a QPAM bank's
records. The Department notes that if the OCC regulations, in fact, bar
Plan investors from accessing this information, that is no reason to
bar others from accessing the records. If the commenter's purported
restriction on access to national bank records is meaningful to Plan
sponsor fiduciaries, then they are free to choose a QPAM that is not
restricted from providing access to such records.
One commenter asked the Department to withdraw the recordkeeping
requirement entirely, or if not, to modify it to be consistent with the
recordkeeping requirement in PTE 2020-02. As stated above, the
Department often includes a recordkeeping condition in administrative
prohibited transaction exemptions to ensure compliance with the
exemption. The recordkeeping requirement in PTE 2020-02 was developed
specifically for that exemption and the specific relief for investment
advice provided pursuant to certain conditions.
A commenter also requested that the 30-day window for producing
records should be expanded to at least 90 days and a QPAM should have
90 days to provide notice of grounds for non-production. The Department
notes that because QPAMs are fiduciaries, the Department is unpersuaded
that additional time is necessary or consistent with the QPAM's
fiduciary status. The Department believes a longer period would be
required only if a QPAM is not already maintaining the records
necessary to demonstrate compliance with this condition. To allow a
QPAM additional time to produce, or indicate that it is not producing,
records would be directly contrary to the purpose of the recordkeeping
condition.
[[Page 23114]]
Other Ministerial Changes
The Department did not receive any comments regarding the
ministerial changes in the Proposed Amendment. Therefore, the
Department is finalizing the proposed ministerial changes as proposed,
which include: (1) changing the headings of each portion of the
exemption from ``Part'' to ``Section,'' (2) removing many internal
cross-references to definitional provisions and instead capitalizing
the terms used in those definitional provisions throughout the
exemption,\69\ and (3) adding internal references to ``above'' and
``below'' throughout to direct readers where to find certain cross-
referenced provisions.
---------------------------------------------------------------------------
\69\ However, for the sake of clarity, cross-references have
been retained for the term ``Affiliate'' because it is defined in
different ways under Section VI(c) and (d) of the exemption.
---------------------------------------------------------------------------
The Department corrected two minor typographical errors by
changing: (1) ``assure'' to ``ensure'' in Section V and the related
audit provision in Section VI(q), and (2) ``INHAM'' to ``QPAM'' in
Section VI(p). All references to ``ERISA'' and the ``Code'' have been
updated so that they come before the sections referenced, and
references to the term ``employee benefit plan'' have been removed so
that the exemption only uses the term ``Plan.'' Finally, the Department
has amended the definition of the term ``Control'' in Section VI(e) so
that it specifically refers to variations of the word ``control'' used
throughout the exemption. Therefore, Section VI(e) now defines the
terms ``Controlling,'' ``Controlled by,'' ``under Common Control,'' and
``Controls'' in the same manner as the prior single term ``Control.''
Regulatory Impact Analysis
The Department has examined the effects of the Final Amendment as
required by Executive Order 12866,\70\ Executive Order 13563,\71\ the
Congressional Review Act,\72\ the Paperwork Reduction Act of 1995,\73\
the Regulatory Flexibility Act,\74\ section 202 of the Unfunded
Mandates Reform Act of 1995,\75\ and Executive Order 13132.\76\
---------------------------------------------------------------------------
\70\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\71\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 21, 2011).
\72\ 5 U.S.C. 804(2) (1996).
\73\ 44 U.S.C. 3506(c)(2)(A) (1995).
\74\ 5 U.S.C. 601 et seq. (1980).
\75\ 2 U.S.C. 1501 et seq. (1995).
\76\ Federalism, 64 FR 43255 (Aug. 10, 1999).
---------------------------------------------------------------------------
Executive Order 12866 (Regulatory Planning and Review), Executive Order
14094 (Modernizing Regulatory Review), and 13563 (Improving Regulation
and Regulatory Review)
Under Executive Order 12866 (as amended by Executive Order 14094),
the Office of Management and Budget (OMB)'s Office of Information and
Regulatory Affairs determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
executive review by OMB. As amended by Executive Order 14094, section
3(f) of Executive Order 12866 defines a ``significant regulatory
action'' as a regulatory action that is likely to result in a rule that
may: (1) have an annual effect on the economy of $200 million or more;
or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local, territorial, or tribal governments
or communities; (2) create a serious inconsistency or otherwise
interfere with an action taken or planned by another agency; (3)
materially alter the budgetary impact of entitlements, grants, user
fees or loan programs or the rights and obligations of recipients
thereof; or (4) raise legal or policy issues for which centralized
review would meaningfully further the President's priorities or the
principles set forth in the Executive Order. OMB has determined that
the Final Amendment is a significant regulatory action under Section
3(f)(1) of Executive Order 12866.
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; the regulation is tailored to impose the least burden on
society, consistent with achieving the regulatory objectives; and in
choosing among alternative regulatory approaches, the agency has
selected those approaches that maximize net benefits. Executive Order
13563 recognizes that some benefits are difficult to quantify and
provides that, where appropriate and permitted by law, agencies may
consider and discuss qualitative values that are difficult or
impossible to quantify, including equity, human dignity, fairness, and
distributive impacts.
The Department has quantified the impact of the Final Amendment
based on the best available data and provides an assessment of its
benefits, costs, and transfers below. Based on this assessment, the
Department concludes that the Final Amendment's benefits would justify
its costs. Pursuant to the Congressional Review Act, OMB has designated
the Final Amendment a ``major rule,'' as defined by 5 U.S.C. 804(2).
Need for Regulation
Substantial changes have occurred in the financial services
industry since the Department granted the QPAM Exemption in 1984.
Today's asset management industry has been marked by industry
consolidation and an increasingly global reach. As a result, QPAM
affiliations and investment strategies, including those involving Plan
assets, have changed significantly since 1984. This Final Amendment
updates some of the key elements of the QPAM Exemption to ensure that
Plans affected by the exemption remain protected in light of the
changes in the industry, and that the QPAM Exemption remains consistent
with the original intent.
The Final Amendment addresses ambiguity as to whether foreign
convictions are included in the scope of the ineligibility provision
under Section I(g). QPAMs today often have corporate or relationship
ties to a broad range of entities, some of which are located
internationally. Additionally, some global financial service
institutions may be headquartered, or have parent entities, in foreign
jurisdictions. These entities may have significant control and
influence over the operation of all entities within its organizational
structure, including those operating as QPAMs. Moreover, the
international ties of QPAMs extend to their investment strategies,
including those involving Plan assets.
The Final Amendment also expands ineligibility to include QPAMs
(and as applicable, an Affiliate or owner of a five (5) percent or more
interest) that Participate In Prohibited Misconduct, such as conduct
that has resulted in QPAMs entering into an NPA or DPA with a U.S.
federal or state prosecutor's office or regulatory agency; a systematic
pattern or practice of violating the exemption's conditions;
intentionally violating the exemption's conditions in connection with
otherwise non-exempt prohibited transactions; or providing materially
misleading information to the Department and other regulators in
connection with the exemption conditions. The Final Amendment ensures
that QPAMs are not able to avoid the conditions related to integrity
and ineligibility that are central to the QPAM Exemption by entering
into NPAs and DPAs with prosecutors to side-step the consequences that
otherwise would result from a Criminal Conviction. Plans may suffer
significant
[[Page 23115]]
harm if they are exposed to serious misconduct committed by
unscrupulous firms or individuals that ultimately results in an NPA or
DPA rather than Criminal Conviction and consequent ineligibility under
Section I(g). Likewise, intentionally or systematically violating the
exemption conditions exposes Plans to significant potential harm caused
by the misconduct of those with influence or control over managing the
investment of their assets. In the Department's view, QPAMs, and those
in a position to influence or control a QPAM's policies, that
repeatedly engage in serious misconduct do not display the requisite
standards of integrity necessary to provide the protection intended for
Plans that they are responsible for under the exemption.
Through its administration of the individual exemption program, the
Department also determined that certain aspects of the QPAM Exemption
would benefit from a focus on mitigating potential costs and disruption
to Plans that occurs when a QPAM becomes ineligible for the exemptive
relief because of ineligibility under Section I(g). The Final Amendment
requires QPAMs to provide a One-Year Transition Period to its client
Plans to avoid unnecessary disruptions to Plans that could occur upon a
Criminal Conviction or for Participating In Prohibited Misconduct. The
Transition Period will help bridge the gap between the QPAM Exemption
and the Department's administration of its individual exemption program
in connection with Section I(g) ineligibility.
The Department believes the changes to Section I(c) in the Final
Amendment are needed to clarify and remind QPAMs and Parties in
Interest of the level of involvement Parties in Interest may have in
investment decisions and prevent possible abuses of the exemption.
The Final Amendment is also needed to update asset management and
equity thresholds to current values in the definition of a ``QPAM'' in
Section VI(a). Some of the thresholds that establish the requisite
independence upon which the QPAM Exemption is based have not been
updated since 1984, and the thresholds for registered investment
advisers have not been updated since 2005. The amendment will
standardize all the thresholds to current values using the Bureau of
Labor Statistics Consumer Price Index (CPI).
Finally, the Final Amendment adds a recordkeeping requirement to
ensure QPAMs will be able to demonstrate, and the Department will be
able to verify, compliance with the exemption conditions. This
requirement is similar to a recordkeeping requirement the Department
generally includes in its individual Section I(g) exemptions.
Together, the Department believes the Final Amendment is necessary
to ensure the QPAM Exemption remains in the interest of and protective
of the rights of Plans and their participants and beneficiaries and IRA
owners as required by ERISA section 408(a) and Code section 4975(c)(2).
Affected Entities
The Final Amendment affects financial institutions acting as a
QPAM, and client Plans of QPAMs, including their participants and
beneficiaries.
Qualified Professional Asset Managers (QPAMs)
As discussed above in this preamble, to qualify as a QPAM, the
financial institution must be a bank, savings and loan association,
insurance company, or a registered investment adviser that meets
specified standards regarding financial size. The financial institution
must also acknowledge in a Written Management Agreement (WMA) that it
is a fiduciary with respect to each Plan that retains it as a QPAM.
Before this Final Amendment, the following entities were able to act as
a QPAM under the terms of the exemption:
(1) Banks--as defined in section 202(a)(2) of the Investment
Advisers Act of 1940, with equity capital in excess of $1,000,000.
(2) Savings and loan associations--the accounts of which are
insured by the Federal Deposit Insurance Corporation, with equity
capital or net worth in excess of $1,000,000;
(3) Insurance companies--subject to supervision under state law,
with net worth in excess of $1,000,000; and
(4) Investment advisers--registered under the Investment Advisers
Act of 1940 with total client assets under management in excess of
$85,000,000 and either (1) shareholders' or partners' equity in excess
of $1,000,000 or (2) payment of liabilities guaranteed by an affiliate,
another entity that could qualify as a QPAM, or a broker-dealer with
net worth of more than $1,000,000.
As amended, the thresholds in Section VI(a) will be indexed to the
CPI, rounded to the nearest $10,000. The amendment will update these
thresholds based on the price inflation since 1984. The increases in
thresholds will be phased-in incrementally between 2024 and 2030. This
Final Amendment increases the thresholds as follows:
(1) Banks--as defined in section 202(a)(2) of the Investment
Advisers Act of 1940, with equity capital in excess of $1,570,300
effective as of the last day of the fiscal year ending no later than
December 31, 2024, $2,140,600 effective as of the last day of the
fiscal year ending no later than December 31, 2027, and $2,720,000
effective as of the last day of the fiscal year ending no later than
December 31, 2030.
(2) Savings and loan associations--the accounts of which are
insured by the Federal Deposit Insurance Corporation, with equity
capital or net worth in excess of $1,570,300 as of the last day of the
fiscal year ending no later than December 31, 2024, $2,140,600
effective as of the last day of the fiscal year ending no later than
December 31, 2027, and $2,720,000 effective as of the last day of the
fiscal year ending no later than December 31, 2030.
(3) Insurance companies--subject to supervision under state law,
with net worth in excess of $1,570,300 effective as of the last day of
the fiscal year ending no later than December 31, 2024, $2,140,600
effective as of the last day of the fiscal year ending no later than
December 31, 2027, and $2,720,000 effective as of the last day of the
fiscal year ending no later than December 31, 2030.
(4) Investment advisers--registered under the Investment Advisers
Act of 1940 with total client assets under management in excess of
$101,956,000 effective as of the last day of the fiscal year ending no
later than December 31, 2004, $118,912,000 effective as of the last day
of the fiscal year ending no later than December 31, 2027, and
$135,868,000 effective as of the last day of the fiscal year ending no
later than December 31, 2030. In addition, the investment adviser must
either have shareholders' or partners' equity--or payment of
liabilities guaranteed by an affiliate, another entity that could
qualify as a QPAM, or a broker-dealer with net worth--in excess of
$1,570,300 effective as of the last day of the fiscal year ending no
later than December 31, 2024, $2,140,600 effective as of the last day
of the fiscal year ending no later than December 31, 2027, and
$2,720,000 effective as of the last day of the fiscal year ending no
later than December 31, 2030.
The Department will make subsequent annual adjustments for
inflation to the equity capital, net worth, and asset management
thresholds, rounded to the nearest $10,000, no later than January 31st
of each year by publication of a notice in the Federal Register.
QPAMs that met the prior thresholds, but that otherwise will not
meet the new threshold requirements, will also be
[[Page 23116]]
affected by the Final Amendment, because they no longer will be able to
rely on the QPAM Exemption.\77\ The Department proposed introducing the
entire increase at the end of the first year after granting the
amendment. However, after considering comments received in response to
the Proposed Amendment, the Department decided to implement the
increase incrementally over three-year periods, which provides Plans
and QPAMs with significantly more time to adjust and prepare if the
QPAM is unable to continue meeting the updated thresholds.
---------------------------------------------------------------------------
\77\ As noted earlier in this preamble, such QPAMs may submit an
individual exemption application requesting relief to continue
relying upon the QPAM Exemption.
---------------------------------------------------------------------------
Several comments on the Proposed Amendment stated that the
Department underestimated the number of QPAMs in the economic analysis
for the Proposed Amendment, with one commenter remarking that the
actual number of QPAMs was likely 10 to 20 times larger than the
Department's original estimate of 616 QPAMs.\78\ Another commenter
estimated that more than 90 percent of investment managers investing
Plan assets rely on the QPAM Exemption. They recommended an alternative
estimation methodology that involved multiplying the number of
investment managers reported on the Form 5500 Schedule C by 90
percent.\79\ This results in an estimate of 3,876 QPAMs.\80\ After
considering these comments, the Department has revised its estimates as
described below.
---------------------------------------------------------------------------
\78\ Comment submitted by SIFMA on 11 October 2022. (See https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/00009.pdf).
\79\ Comment submitted by the Seward and Kissel. (See https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/00025.pdf).
\80\ In the 2020 Form 5500, the Department identified 4,307
unique investment managers providing services under service code 28
(investment management) to Plans. This is estimated as: 4,307 x 90%
= 3,876. As discussed later in this section, small Plans do not file
the Form 5500 Schedule C, so relying solely on the Form 5500
Schedule C will likely underestimate the number of QPAMs.
---------------------------------------------------------------------------
Multiple QPAMs can exist within the same organizational hierarchy.
Accordingly, when estimating the effect of this exemption, the
Department focused not on the firm level, but rather at each distinct
entity within the organizational hierarchy providing services as a
QPAM. For example, multiple subsidiaries under a parent company may act
as QPAMs in addition to the parent company itself. The methodology
suggested by the commenter would count each subsidiary and the parent
company itself as if each were acting as separate QPAMs. Therefore, to
estimate the number of QPAMs, the Department identified the number of
unique entities that provided investment management services in the
2020 Form 5500 Schedule C dataset.\81\ This analysis yielded 5,702
unique investment managers.
---------------------------------------------------------------------------
\81\ The Department included service providers that were listed
under service codes 28 (investment management), 51 (investment
management fees paid directly by the plan), or 52 (investment
management fees paid indirectly by the plan).
---------------------------------------------------------------------------
Small Plans are not required to file a Schedule C; therefore, in
order to account for asset managers used by small Plans, the Department
looked at the Form 5500 Schedule C that were voluntarily filed by small
Plans. Among the 1,267 small Plans that filed a Schedule C, the
Department found 10 unique asset managers that were not used by large
Plans. Applying this ratio to the universe of small Plans, the
Department estimates that 5,153 additional unique QPAMs may be used by
small Plans.\82\ The Department believes that this adjustment likely
overstates the number of unique asset managers servicing the universe
of small Plans because it assumes unique asset managers would continue
to be found at the same rate for the entire universe, but the
Department is using this estimate to derive a conservative estimate for
purposes of this analysis. Therefore, based on the foregoing, the
Department estimates that 10,855 unique QPAMs could be affected by the
Final Amendment.\83\
---------------------------------------------------------------------------
\82\ If the ratio of 10 unique providers for 1,267 small Plans
is held constant for the whole universe of small plans, then that
would indicate a further (10/1,267) x 652,934 = 5,153 additional
unique QPAMs used exclusively by small Plans.
\83\ The number of unique QPAMs is calculated as: 5,702 QPAMs
found on the 2020 Form 5500 Schedule C + 5,153 QPAMs estimated as
servicing exclusively small Plans = 10,855 QPAMs.
---------------------------------------------------------------------------
Several comments expressed concern that the proposal would decrease
the number of entities acting as QPAMs due to the costs and risks
associated with the proposed requirements to add penalty-free
withdrawal and indemnification provisions for QPAMs that become
ineligible due to a Section I(g) triggering event. In response, the
Department moved these conditions into the transition provision of the
Final Amendment so that only QPAMs that experience an ineligibility
trigger will be required to agree to these provisions with their client
Plans. Based on this revision, the Department expects that the Final
Amendment will not have a significant effect on the number of entities
acting as QPAMs.
Plans, Participants, Beneficiaries, and IRA Owners
The Final Amendment will affect Plans whose assets are held by an
Investment Fund that is managed by a QPAM. The Department does not
collect data on Plans that use QPAMs to manage their assets. In the
proposal, the Department estimated that a single QPAM would service, on
average, 32 client Plans.\84\ A few commenters stated that the
Department underestimated the number of Plans that have hired a QPAM.
Commenters remarked that investment managers may manage assets for
hundreds to thousands of Plans, while one commenter stated that the
largest investment managers manage assets for between 2,000 and 4,000
client Plans.\85\ Another commenter estimated that the average number
of contracts per QPAM is 14,180 with a median of 14,500 based on the
number of QPAMs that are members of its association.\86\
---------------------------------------------------------------------------
\84\ 87 FR at 45220.
\85\ Comment submitted by SIFMA on 11 October 2022. (See https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/00009.pdf).
\86\ Comment submitted by the American Bankers Association on 6
January 2023. (See https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07-2/00142.pdf).
---------------------------------------------------------------------------
In response to these comments, the Department conducted further
analysis on QPAM-Plan relationships. In its analysis of the 2020 Form
5500, the Department found that the largest QPAMs can have thousands of
client Plans, with the largest having 3,158 clients. However, the
average number of client Plans per QPAM was significantly lower.
Examining the number of unique QPAM-Plan relationships within the Form
5500 universe, the Department estimates that there are 547,546 client
Plans with QPAM relationships, resulting in an average of 50 client
Plans per QPAM.\87\ Additionally, the Department estimates that 215,135
unique Plans have a relationship with a QPAM.\88\
---------------------------------------------------------------------------
\87\ In the 2020 Form 5500, the Department found 64,216 QPAM
relationships amongst a total of 87,559 Plans that filed the Form
5500 Schedule C. To estimate the number of total Plans with QPAM
relationships, the Department applies this ratio to the entire Plan
universe. This assumption implies that small plans have the same
number of relationships with QPAMs as the larger plans that file
Schedule C. The number of total Plans with QPAM relationships is
estimated as: (64,216/87,559) x 746,610 = 547,566 Plan client
relationships. This equates to an average of 50 clients per QPAM,
calculated as: 547,566 Plan client relationships/10,855 unique QPAMs
= 50.44 Plan clients per QPAM, rounded to 50.
\88\ In the 2020 Form 5500, the Department found 25,230 unique
plans using QPAMs among amongst a total of 87,559 Plans that filed
the Form 5500 Schedule C. To estimate the number of total Plans with
QPAM relationships, the Department applies this ratio to the entire
Plan universe. This assumption implies that small plans use QPAMs at
the same rate as the larger plans that file Schedule C. the number
of unique plans using QPAMs is estimated as (25,230/87,559) x
746,610 = 215,135.
---------------------------------------------------------------------------
[[Page 23117]]
While this estimate is larger than the Department's estimate for
the Proposed Amendment, it is substantially smaller than the estimates
provided by the commenters. The Department believes variance in the
estimates is likely due to the definition of Investment Fund in the
exemption and the various ways Plans may invest through those funds,
including as individual investment options for participant-directed
plans. The Department does not have sufficient data to differentiate
between single and pooled customer funds and/or whether those funds are
provided to different types of plans, such as defined benefit plans or
defined contribution plans (including individual account plans).
The Department reiterates that the scope of this exemption, and the
unit of analysis, is each distinct legal entity. A firm can have
multiple distinct legal entities that all act as QPAMs. The number of
clients per entity would be expected to be lower than the number of
client Plans per firm. The commenters did not clarify the types of
Plans or arrangements they were considering in connection with the
estimates they provided.
The definition of ``Plan'' also includes IRAs, and therefore, the
Final Amendment also affects IRA owners who hire a discretionary asset
manager that is a QPAM or invest in a pooled fund that relies upon a
QPAM. In 2020, nearly 65 million U.S. taxpayers had an IRA.\89\ A
survey of U.S. households conducted by the Investment Company Institute
found that approximately half of the households with a traditional IRA
consulted a professional financial adviser on how to manage income and
assets in retirement.\90\ The Department does not have data on the
proportion of IRAs that rely on a discretionary asset manager; however,
the Department assumes that such relationships are rare or that the
involvement of a QPAM is through a pooled investment fund managed on a
discretionary basis. The Department did not receive any comments
concerning the number of IRA owners that would be affected.
---------------------------------------------------------------------------
\89\ Internal Revenue Service. ``SOI Tax Stats--Accumulation and
distribution of Individual Retirement Arrangements (IRA).'' Table 1.
(2020). https://www.irs.gov/statistics/soi-tax-stats-accumulation-and-distribution-of-individual-retirement-arrangements.
\90\ The study found that 67 percent of traditional IRA-owning
households have a strategy for managing income and asset in
retirement and that 77 percent of those households consulted with a
professional financial advisor on how to manage income and assets.
The percent of IRA-owning households that consulted with a
professional financial advisor is estimated as: 67% x 77% = 52%.
(See Investment Company Institute. ``The Role of IRAs in US
Households' Saving for Retirement, 2022.'' ICI Research Perspective:
Vol. 29, No. 1. (February 2023). https://www.ici.org/system/files/2023-02/per29-01_0.pdf.)
---------------------------------------------------------------------------
Accounting Table
In accordance with OMB Circular A-4, Table 1 summarizing the
Departments' assessment of the benefits, costs, and transfers
associated with this regulatory action in an accounting statement. The
Department is unable to quantify all benefits, costs, and transfers of
this Final Amendment but has sought, where possible, to describe
qualitatively all non-quantified impacts.
Many of the expected benefits to Plans and their participants and
beneficiaries stem from provisions in the Final Amendment that will
impose minimal or no costs on QPAMs but will benefit them by providing
more certainty, protection, and transitional support, such as the
provision clarifying that foreign convictions are included in Section
I(g), clarification that QPAMs must not permit other Parties in
Interest to make decisions regarding Plan investments under the QPAM's
control, and the addition of a One-Year Transition Period for Plans
after an ineligibility trigger under Section I(g) has occurred.
Table 1--Accounting Statement
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits:
Non-Quantified:
Ensure the QPAM's integrity is enhanced compared to the regulatory baseline before the Final
Amendment, which will protect Plans affected by the exemption better than prior Section I(g).
Provide more clarity, certainty, protection, and transitional support for client Plans of an
ineligible QPAM.
Update the asset management and equity thresholds to ensure that QPAMs are sufficiently large to be
able to withstand improper influence from Parties in Interest.
----------------------------------------------------------------------------------------------------------------
Costs Estimate Year Discount Period covered
dollar rate (%)
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($Million/year)......................... $1.56 2023 7 2024-2033
1.44 2023 3 2024-2033
----------------------------------------------------------------------------------------------------------------
Quantified Costs:
Quantified costs include rule familiarization, the QPAM's adoption of additional protections after an
ineligibility trigger occurs, satisfying the exemption's recordkeeping requirements, and individual exemption
application costs for entities losing eligibility due to Participating In Prohibited Misconduct.
Non-Quantified Costs:
QPAMs that become ineligible for Participating In Prohibited Misconduct may incur costs associated
with indemnifying their client Plans for ``actual'' losses if they move to a new asset manager.
Some Plans may incur costs if they conduct a request for proposal sooner than they otherwise would
have if their asset manager no longer qualified as a QPAM due to the updated equity and asset thresholds in the
Final Amendment.
Transfers:
----------------------------------------------------------------------------------------------------------------
Non-Quantified:
Client Plans of ineligible QPAMs may choose to transfer assets and revenue away from the ineligible
asset managers to its competitors when a QPAM becomes ineligible due to occurrence of a Section I(g) triggering
event.
----------------------------------------------------------------------------------------------------------------
Benefits
The new and amended conditions will benefit Plans and their
participants and beneficiaries by providing more clarity, certainty,
protection, and transitional support. The heightened standards in this
Final Amendment may result in entities being more careful about
ensuring that their compliance programs are sufficiently robust to
prevent Prohibited Misconduct or Criminal Convictions from occurring.
In this respect, the exemption would provide clear guardrails that
would make the costs associated with QPAMs
[[Page 23118]]
becoming ineligible clearly avoidable. The specific benefits expected
to result from the rulemaking are discussed below.
Ineligibility Due to Foreign Criminal Convictions--Subsection
I(g)(1)(A) and Subsection VI(r)(2)
One of the primary underlying principles of the QPAM Exemption is
that any entity acting as a QPAM, or that is in a position to influence
a QPAM's policies, should maintain a high standard of integrity.\91\
This principle is called into question when a QPAM, or an entity that
may be in a position to influence its policies, is convicted of certain
crimes. With this concern in mind, the Department makes entities
ineligible for the prohibited transaction relief in the QPAM Exemption
as of the date of the trial court judgment for any of the crimes listed
in Section VI(r).\92\
---------------------------------------------------------------------------
\91\ 47 FR at 56947.
\92\ Criminal Conviction as defined in Section VI(r) of this
Final Amendment.
---------------------------------------------------------------------------
The baseline version of the exemption did not explicitly address
foreign convictions. Since the initial grant of the QPAM Exemption, the
Department has granted ten individual exemption requests from QPAM
applicants in connection with a foreign conviction, the first being in
2000.\93\ The amended exemption directly references foreign-equivalent
crimes, clarifying that a conviction ``by a foreign court of competent
jurisdiction or released from imprisonment, whichever is later, as a
result of a crime, however denominated by the laws of the relevant
foreign government'' will be considered a Criminal Conviction for
purposes of ineligibility under Section I(g).
---------------------------------------------------------------------------
\93\ See Prohibited Transaction Exemption (PTE) 2023-13, 88 FR
26336 (Apr. 28, 2023); PTE 2020-01, 85 FR 8020 (Feb. 12, 2020); PTE
2019-01, 84 FR 6163 (Feb. 26, 2019); PTE 2016-11, 81 FR 75150 (Oct.
28, 2016); PTE 2016-10, 81 FR 75147 (Oct. 28, 2016); PTE 2012-08, 77
FR 19344 (March 30, 2012); PTE 2004-13, 69 FR 54812 (Sept. 10,
2004); and PTE 96-62 (``EXPRO'') Final Authorization Numbers 2003-
10E, 2001-02E, and 2000-30E, See https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.
---------------------------------------------------------------------------
The Department believes this clarification in the Final Amendment
aligns the QPAM Exemption with the realities of modern investment
practices engaged in by many Plans. Further, it removes all doubt that
foreign-equivalent crimes are a basis for ineligibility, providing
necessary protections for Plans as required by ERISA section 408(a) and
Code section 4975(c)(2). This ultimately provides a benefit to a QPAM's
client Plans and their participants and beneficiaries that rely upon
QPAMs that are owned by or affiliated with entities operating in
foreign jurisdictions by not depriving them of the protection provided
by the amendment to this exemption, particularly including the
indemnification and penalty-free withdrawal conditions in the
Transition Period provisions.
Ineligibility Due to Participating In Prohibited Misconduct--Subsection
I(g)(1)(B) and Section VI(s) 94
---------------------------------------------------------------------------
\94\ Subsection I(g)(1) was proposed as subsection I(g)(3).
---------------------------------------------------------------------------
To reinforce the Department's premise regarding the integrity
standard, the Department is expanding the circumstances that lead to
ineligibility. The Final Amendment extends ineligibility under Section
I(g)(1)(B) to include QPAMs and their Affiliates and owners of a five
(5) percent or more interest that ``Participate In'' Prohibited
Misconduct. A more in-depth discussion on how the Department narrowed
the scope of entities whose ``Prohibited Misconduct'' could lead to
ineligibility in the Final Amendment is provided in an earlier section
of this preamble.
This extension of Section I(g) ineligibility will strengthen the
protections to Plans and their participants and beneficiaries that rely
upon QPAMs. The unamended exemption leaves Plans and their participants
and beneficiaries vulnerable to the activities of corporate families
with significant compliance failures that pose equal risk of loss to
Plan assets. Additionally, the Department expects that this Final
Amendment will prevent unfair and unequal treatment of entities and
corporate families that have a record of engaging in malfeasance that
ultimately may not result in a Criminal Conviction.
Mandatory One-Year Transition Period--Section I(i)
Under the previous and amended text of Section I(g), the immediate
ineligibility of a QPAM upon a judgment of conviction may expose Plans
to potential costs and losses without the necessary time to make
alternative investment arrangements. Before this Final Amendment, the
only way to avoid immediate ineligibility after a conviction was for
the QPAM to submit an individual exemption application to the
Department requesting relief to continue relying upon the QPAM
Exemption. The QPAM's client Plans had no additional protections under
the baseline version of the exemption to address the immediate loss of
the QPAM Exemption.
The Transition Period included in the Final Amendment is designed
to benefit client Plans by guarantying transitional relief and
protections if they decide to wind-down their arrangements with a QPAM
that becomes ineligible. The Transition Period ensures that responsible
Plan fiduciaries have the time and ability to choose an alternative
discretionary asset manager or investment strategy without incurring
undue costs. If Plan fiduciaries decide to retain an ineligible QPAM as
a discretionary asset manager, the One-Year Transition Period will
provide Plan fiduciaries with time to determine and prepare for any
changes that may become necessary for Plan investments.
Additionally, the Transition Period benefits QPAMs by providing
additional time for them to request an individual exemption from the
Department. This will allow QPAMs to communicate with and assist their
client Plans in determining an appropriate path forward for the
management of Plan assets consistent with their applicable fiduciary
obligations.
Requesting an Individual Exemption--Section I(j)
In addition to providing more certainty to QPAMs and Plans, the
Final Amendment also requires QPAMs that seek individual exemption
relief to review the Department's most recently granted individual
exemptions with the expectation that similar conditions will be
required if an exemption is proposed and granted. If an applicant
requests the Department to exclude any term or condition from its
exemption that is included in a recently issued similar individual
exemption, the applicant must accompany such request with a detailed
explanation of the reason such change is necessary, in the interest of,
and protective of the Plans and their participants and beneficiaries.
Applicants also should provide detailed information in their
applications quantifying the specific cost in dollar amounts, if any,
of the harms Plans would suffer if a QPAM could not rely on the
exemption after the Transition Period.
Currently, the Department requests such information from an
applicant if it does not include such information in its exemption
application requesting extended relief under the QPAM Exemption when
the QPAM becomes ineligible. Therefore, this provision will streamline
the application process and reduce costs because there will be fewer
back-and-forth discussions between the Department and the applicant.
[[Page 23119]]
Involvement in Investment Decisions by Parties in Interest--Section
I(c)
The modification to the language in Section I(c) will benefit Plans
and their participants and beneficiaries by ensuring that the Plan is
not engaging in harmful prohibited transactions that are orchestrated
by a Party in Interest. The Department understands that some Plan
fiduciaries, in conjunction with hiring a QPAM, may be engaging in
abuses of the exemption. The amended language will help ensure that
Plans, their participants and beneficiaries, and IRA owners are not
exposed to conflicts of interest that the QPAM Exemption was not
designed to address and for which the Department should not provide
prohibited transaction relief.
Asset Management and Equity Thresholds--Section VI(a)
As discussed earlier in this document, the Final Amendment updates
the asset management and equity thresholds in the exemption's
definition of the entities that are eligible to act as a QPAM to
account for inflation as measured by the CPI. After an initial phase-
in, the thresholds will be updated on an annual basis according to the
CPI.
A few commenters expressed concern that the Department did not
provide evidence in the Proposed Amendment to support the increase in
size thresholds and that the increased thresholds may create a high
barrier to entry for financial institutions providing QPAM services. In
proposing this update, the Department considered its original intent
when granting the QPAM Exemption. The exemption was based on the
premise that an asset manager of a certain size would be large enough
to withstand improper influence from Parties in Interest (i.e.,
maintain independence). Between March 1984, when the exemption was
published, and April 2023, the CPI increased by 194.4 percent. During
this period, the Department did not increase the equity thresholds for
banks, savings and loan associations, and insurance companies. The
asset management and equity thresholds for registered investment
advisers were increased only once during this period.
The Department maintains that while some entities may no longer be
able to satisfy the updated asset management and/or equity thresholds,
this Final Amendment is necessary for the Department to continue to
ensure that QPAMs are indeed large enough to maintain their
independence. This change will enhance the protections to Plans and
their participants and beneficiaries relying on a QPAM.
Costs
This analysis estimates the additional cost incurred by affected
entities because of the Final Amendment. The Department recognizes that
financial institutions providing QPAM services are already required to
comply with certain regulatory requirements in addition to the
conditions to qualify for exemptive relief under the QPAM Exemption,
such as those outlined by ERISA's fiduciary duty requirements to the
extent applicable, or an individual exemption granted in connection
with Section I(g) ineligibility. The Department considers these
requirements to be the regulatory baseline. The following analysis
considers only the additional costs imposed by the Final Amendment.
The Department estimates that the Final Amendment will impose total
costs of $6.8 million in the first year and $0.8 million in each
subsequent year. Over 10 years, the costs associated with the amendment
will total approximately $11.0 million, annualized to $1.6 million per
year (using a seven percent discount rate).\95\
---------------------------------------------------------------------------
\95\ The costs would be $12.3 million over a 10-year period,
annualized to $1.4 million per year using a three percent discount
rate.
---------------------------------------------------------------------------
Preliminary Assumptions and Cost Estimate Inputs
The Department assumes that different types of personnel will be
responsible for satisfying the requirements in the Final Amendment. To
account for the labor costs associated with different types of
personnel, the Department estimates the hourly labor costs for each
type of personnel. In the analysis below the Department applies the
hourly labor costs of $63.45 for clerical personnel, $159.34 for
internal legal professionals, $190.63 for financial managers, and
$535.85 for outside legal professionals.\96\
---------------------------------------------------------------------------
\96\ Labor costs for clerical personnel, accountants or
auditors, internal legal professionals, and financial managers are
based off internal Department of Labor calculations based on 2023
labor cost data. For a description of the Department's methodology
for calculating wage rates, see https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf. Labor costs for outside legal
professionals is calculated as a composite weighted average based on
the Laffey Matrix for Wage Rates for the time period 6/01/2022-5/31/
2023, see https://www.laffeymatrix.com/see.html. The labor cost is
estimated as: (40% x $413) + (35% x $508) + (15% x $733) + (10% x
$829) = $535.85.
---------------------------------------------------------------------------
The Final Amendment requires QPAMs to distribute various notices to
client Plans after an ineligibility trigger, as described below. The
Department does not have sufficient data to estimate how many QPAMs
will elect to send such notices electronically or by mail. For the
purposes of this analysis, the Department estimates that 80 percent of
these notices will be delivered by first-class mail at a first-class
mail postage rate of $0.68.\97\
---------------------------------------------------------------------------
\97\ USPS. ``Mailing & Shipping Prices.'' (2024). https://www.usps.com/business/prices.htm.
---------------------------------------------------------------------------
Costs Incurred by All QPAMs
The following analysis considers the marginal costs of the
amendments on all financial institutions acting as QPAMs. As discussed
in the Affected Entities section, the Department estimates that 10,855
financial institutions act as QPAMs and rely on the QPAM Exemption.
Rule Familiarization Costs
The Department expects that QPAMs are likely to rely on outside
specialized legal counsel to ensure compliance with the Final
Amendment. The specialized legal counsel likely will review the
amendment and present updates to multiple clients. On average, the
Department estimates that each QPAM will incur a cost equivalent to the
cost of consulting with an outside legal professional for one hour.
This results in an equivalent cost estimate of $5.82 million in the
first year.\98\
---------------------------------------------------------------------------
\98\ The hour burden is estimated as: 10,855 QPAMs x 1 hour =
10,855 hours. The labor cost of $535.85 is applied for an external
legal professional. The equivalent cost is estimated as: 10,855
hours x $535.85 = $5,816,652, rounded to $5.82 million.
---------------------------------------------------------------------------
Reporting Reliance on the QPAM Exemption--Section I(k)
Section I(k) of the Final Amendment will require QPAMs to report
their reliance on the QPAM Exemption by emailing the Department at
[email protected]. The email must include the legal name of the entity and
any name the QPAM may be operating under. This one-time cost is
expected to result in a minor clerical cost for QPAMs. The Department
estimates drafting and sending the email will take a clerical worker
employed by each QPAM 15 minutes, on average, resulting in an estimated
cost of $0.17 million in the first year.\99\ In subsequent years, new
QPAMs or QPAMs that change their name will be required to send the
notification. The Department does not have data on how many QPAMs will
be required to send this notification in subsequent years. For the
purposes of this analysis, the Department assumes
[[Page 23120]]
that one percent of QPAMs, or 109 QPAMs, will either be new or have a
name change.\100\ Accordingly, the reporting requirement is estimated
to total 27.3 hours with an equivalent cost of $1,729.\101\
---------------------------------------------------------------------------
\99\ The hour burden is estimated as: 10,855 QPAMs x 15 minutes
= 2,713.75 hours. The labor cost of $63.45 is applied for a clerical
worker. The equivalent cost is estimated as: 10,855 QPAMs x 15
minutes x $63.45 = $172,187, rounded to $0.17 million.
\100\ The number of QPAMs is estimated as: 10,855 QPAMs x 1% =
108.6, rounded to 109.
\101\ The hour burden is estimated as: 109 QPAMs x 15 minutes =
27.3 hours. The labor cost of $63.45 is applied for a clerical
worker. The equivalent cost is estimated as: 109 QPAMs x 15 minutes
x $63.45 = $1,729.
---------------------------------------------------------------------------
If a QPAM fails to report its reliance on the exemption within 90
days, the QPAM must send a notice to the Department within an
additional 90 days that includes its reliance on the exemption or name
change and explains the reason(s) for its failure to provide notice.
The Department does not have sufficient information to determine the
percentage of QPAMs that are likely to fail to report reliance. For the
purposes of this analysis, the Department estimates that two percent of
QPAMs, or 217 QPAMs in the first year and two QPAMs in subsequent years
will fail to report reliance.\102\ The Department estimates that
preparing the notice will require a legal professional to spend 30
minutes. Based on the foregoing, the Department estimates that the
burden is 108.5 hours with an equivalent cost of approximately $17,288
in the first year \103\ and one hour with an equivalent cost of
approximately $159 in subsequent years.\104\ The cost for a clerical
professional to draft and send an email notifying the Department of its
reliance or name change is included in the cost estimate of sending
notice of reliance above.
---------------------------------------------------------------------------
\102\ The number of QPAMs in the first year is estimated as:
10,855 x 2% = 217.1, rounded to 217. The number of QPAMs in
subsequent years is estimated as: 109 QPAMs x 2% = 2.2, rounded to
2.
\103\ The number of QPAMs in the first year is 217. The labor
cost of $159.34 is applied for an internal legal professional. The
equivalent cost is estimated as: 217 QPAMs x 0.5 hours x $159.34 =
$17,288, rounded to $17,000.
\104\ The hour burden is estimated as: 2 QPAMs x 0.5 hour = 1
hour. The labor cost of $159.34 is applied for an internal legal
professional. The equivalent cost is estimated as: 1 hour x $159.34
= $159.34, rounded to $159.
---------------------------------------------------------------------------
Recordkeeping--Section VI(u)
Under this new provision, QPAMs will be required to maintain
records sufficient to determine whether the conditions of the exemption
have been met for a given transaction. QPAMs also will be required to
make those records available to the persons identified in Subsection
VI(u)(2) for six years. If a QPAM refuses to disclose information to
any of the parties listed in Section VI(u) on the basis that
information is exempt from disclosure, the QPAM must provide a written
notice advising the requestor of the reason for the refusal and that
the Department may request such information.
In the Proposed Amendment, the Department posited that QPAMs, as
fiduciaries, already maintain records as part of their regular business
practices consistent with this requirement. Further, the Department
stated that the recordkeeping requirement corresponds to the six-year
retention requirement in ERISA section 107. Therefore, the Department
estimated that the recordkeeping requirement would impose a negligible
burden, because most QPAMs already are maintaining records in
accordance with the proposed amendment's recordkeeping
requirement.\105\
---------------------------------------------------------------------------
\105\ 87 FR at 45224.
---------------------------------------------------------------------------
The Department received several comments that the Department
underestimated the cost associated with the recordkeeping requirement
in the economic analysis for the Proposed Amendment. Several commenters
expressed concern that the requirements in the Proposed Amendment were
vague or confusing. In response to these comments, the Department has
provided additional guidance on recordkeeping earlier in this preamble
to alleviate potential confusion. The additional guidance clarifies
that recordkeeping should be based on a ``facts and circumstances''
test. After further consideration, the Department maintains that these
requirements are consistent with common business practices for entities
relying on the QPAM Exemption.
The Department recognizes that some QPAMs may not be maintaining
records that satisfy the requirements of the Final Amendment and
accordingly will experience higher marginal costs to comply with this
requirement. However, the Department expects that most QPAMs are
already fully compliant. The Department estimates that, on average, the
additional recordkeeping requirement will require clerical personnel at
a QPAM to spend one hour annually resulting in an estimated equivalent
cost of approximately $689,000.\106\
---------------------------------------------------------------------------
\106\ The hour burden is estimated as: 10,855 QPAMs x 1 hour =
688,750 hours. The labor cost of $63.45 is applied for clerical
personnel. The equivalent cost is estimated as: 10,855 QPAMs x 1
hour x $63.45 = $688,750, rounded to $689,000.
---------------------------------------------------------------------------
The Department does not have data on how often a QPAM might refuse
to disclose information to any of the parties listed in Section VI(u);
however, the Department believes such instances will be rare. The
Department did not receive comments on the frequency or the costs. For
the purposes of this analysis, the Department estimates that two
percent of QPAMs, or 217 QPAMs, will refuse to disclose requested
information annually. The Department estimates that drafting a written
notice advising the requestor of the reason for the refusal and that
the Department may request such information will require an internal
legal professional to spend one hour, which results in an estimated
equivalent cost of approximately $35,000.\107\
---------------------------------------------------------------------------
\107\ The number of QPAMs is estimated as 10,855 x 2% = 217
QPAMs. The hour burden is estimated as: 217 QPAMs x 1 hour = 217
hours. The labor cost of $159.34 is applied for a legal
professional. The equivalent cost is estimated as: 217 QPAMs x 1
hour x $159.34 = $34,577, rounded to $35,000.
---------------------------------------------------------------------------
Additionally, some commenters expressed concern that this
requirement would lead to heightened litigation risk from those who
request the records, which would further increase costs for QPAMs. This
concern fails to account for the fact that a QPAM is a fiduciary with
obligations to its client Plans, including their participants and
beneficiaries. The Department has included a similar recordkeeping
requirement in many administrative prohibited transaction exemptions
and is not aware that such requirements have resulted in increased
litigation for those entities subject to the requirements. Commenters
did not provide data or estimates of the direct cost that might be
associated with the purported increased litigation risk. Therefore, the
Department believes that such cost will be minimal or nonexistent when
compared to the baseline litigation risk associated with being a
fiduciary asset manager.
Involvement in Investment Decisions by Parties in Interest--Section
I(c)
The Department anticipates that the modifications to Section I(c)
will not change the costs of the exemption compared to cost of the
baseline QPAM Exemption because the types of transactions that were
intended to be excluded by previous Section I(c) are the same types of
transactions intended to be excluded by modified Section I(c).
Costs Incurred by QPAMs Losing Eligibility for the Exemption for a
Criminal Conviction or Prohibited Misconduct
According to past QPAM Section I(g) individual exemption
applicants, the QPAM Exemption serves as one of the most advantageous
exemptions for financial institutions that are involved with
discretionary asset management. Even if other exemptions are available,
financial institutions may seek QPAM
[[Page 23121]]
status to mitigate risk of exposure to excise taxes under Code sections
4975(a) and (b) for engaging in non-exempt prohibited transactions if
they fail to meet the conditions of those exemptions.
Financial Institutions also use QPAM status to attract and maintain
client Plans. Although a QPAM that fails to satisfy Section I(g) may
continue to operate as an asset manager for Plans, the Department
understands that some entities use QPAM status as an indicator of size
and/or sophistication to potential client Plans. According to past
individual exemption applicants, if an entity is no longer able to
represent that it is a QPAM, Plans are less likely to retain the QPAM
as their manager, even in situations where the client technically does
not need the relief provided by the exemption.
The loss of eligibility for the QPAM Exemption may create perceived
or actual costs in the form of lost opportunities for the financial
institution. The costs associated with the loss of reliance on the QPAM
Exemption are not added costs imposed by this Final Amendment, but
rather costs attributable to the criminal behavior of a QPAM or its
Affiliate or owner of a five (5) percent or more interest. Such costs
are not considered as part of this analysis, which only considers costs
that are directly imposed by this amendment.
Estimate of the Number of Financial Institutions Experiencing
Ineligibility Due to a Criminal Conviction or Prohibited Misconduct
The Department believes the individual exemptions granted in the
past provide the best basis for estimating how many QPAMs will
experience an ineligibility trigger in the future. The Department only
has data on the number of QPAMs covered by each individual exemption
since 2013. As shown in Table 2 below, the Department granted
individual exemptions to 65 QPAMs facing ineligibility under current
Section I(g) in connection with 14 separate convictions or possible
convictions.\108\
---------------------------------------------------------------------------
\108\ Ineligible QPAMs that request individual exemptions
generally request relief for the entire ten-year ineligibility
period. However, to engage in a thorough fact-finding process and to
verify compliance with certain audit provisions in the individual
exemptions, the Department has granted exemptions that include less
than ten years of relief in many situations. Ineligible QPAMs then
typically apply for an extension of relief even though no additional
conviction has occurred. Additionally, in situations where an
ineligible QPAM is impacted by a subsequent conviction before the
expiration of the ten-year ineligibility period for the initial
conviction, the Transition Period would also not be implicated, so
there is no additional cost burden associated with subsequent
convictions. There was a total of three subsequent convictions after
an initial conviction for some entities in 2017, 2018, and 2019.
---------------------------------------------------------------------------
The number of QPAMs affected in any given year is a function of the
number of convictions covered by Section I(g) and the number of
entities within a corporate family operating as QPAMs. As shown by past
experience, this number is likely to fluctuate between years. Based on
the experience shown in Table 2, the Department estimates that, on
average, eight QPAMs each year will lose eligibility due to a Criminal
Conviction.\109\ As this is an average, the number of affected QPAMs
impacted by ineligibility due to a Criminal Conviction could be higher
than eight in some years and lower than eight in others.
---------------------------------------------------------------------------
\109\ The Department did not include in this estimate any of the
possible QPAMs that have remote relationships with a convicted
entity that are identified in the individual exemptions as ``Related
QPAMs.'' The Department has never received comments, questions,
requests for guidance, or separate individual exemption applications
from any entities that would fall into that definition, and
therefore, assumes such entities are not operating as QPAMs.
Table 2--Past Convictions and Affected QPAMs *
------------------------------------------------------------------------
Number of Number of
convictions affected QPAMs
------------------------------------------------------------------------
2013.................................... 1 4
2014.................................... 1 3
2015.................................... 1 20
2016.................................... 6 25
2017.................................... .............. ..............
2018.................................... .............. ..............
2019.................................... .............. ..............
2020.................................... .............. ..............
2021.................................... 1 13
-------------------------------
Total............................... 10 65
Average............................. 1.1 7.2
Estimated Yearly Average ** 2 8
(rounded)..........................
------------------------------------------------------------------------
* The average number of affected QPAMs includes zeros for years without
convictions, 2017 through 2020.
** The corresponding calculated averages include decimals; therefore, to
err on the side of caution and inclusion the estimated yearly average
is rounded to the upper integer.
The Department's expansion of the ineligibility provision to
include Prohibited Misconduct under Subsection I(g)(1)(B) and Section
VI(s) will likely increase the number of QPAMs that become ineligible
under Section I(g). For the Proposed Amendment, the Department
estimated that eight additional QPAMs each year would experience
ineligibility due to the Prohibited Misconduct provisions, which equals
the average annual number of QPAMs that have experienced ineligibility
due to a Criminal Conviction. The Final Amendment reduced the scope of
entities whose Prohibited Misconduct could cause ineligibility for a
QPAM as compared to the Proposed Amendment and as discussed in more
detail in an earlier section of the preamble. The Department does not
have sufficient data to determine the exact number of QPAMs that will
become ineligible due to this change. For the purposes of this
analysis, the Department assumes four additional QPAMs will become
ineligible.\110\
---------------------------------------------------------------------------
\110\ Due to the reduced scope of entities captured by
Participating In Prohibited Misconduct, the Department lowered the
estimate to four as compared to the estimate of eight in the
Proposed Amendment.
---------------------------------------------------------------------------
The Final Amendment also clarifies that Section I(g) applies to
foreign
[[Page 23122]]
convictions that are substantially equivalent to U.S. federal or state
crimes that are enumerated in Section I(g) of the exemption. The
Department and QPAMs have treated foreign convictions as causing
ineligibility under Section I(g) since at least 2000.\111\ Therefore,
the Department believes that the clarifying reference that includes
foreign convictions within the scope of Section I(g) will not change
the number of financial institutions losing eligibility.
---------------------------------------------------------------------------
\111\ See Prohibited Transaction Exemption (PTE) 2023-13, 88 FR
26336 (Apr. 28, 2023); PTE 2020-01, 85 FR 8020 (Feb. 12, 2020); PTE
2019-01, 84 FR 6163 (Feb. 26, 2019); PTE 2016-11, 81 FR 75150 (Oct.
28, 2016); PTE 2016-10, 81 FR 75147 (Oct. 28, 2016); PTE 2012-08, 77
FR 19344 (March 30, 2012); PTE 2004-13, 69 FR 54812 (Sept. 10,
2004); and PTE 96-62 (``EXPRO'') Final Authorization Numbers 2003-
10E, 2001-02E, and 2000-30E, See https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.
---------------------------------------------------------------------------
In total, the Department estimates that 12 QPAMs, on average, will
become ineligible due to a Criminal Conviction or Prohibited Misconduct
annually. The Department received a few comments confirming that the
expansion of ineligibility would increase the number of financial
institutions that would lose eligibility; however, the comments did not
provide data that directly address the Department's estimates.
Notice to the Department of Prohibited Misconduct or Foreign NPA or DPA
of the QPAM and Its Affiliates or Owners
The Department is including a requirement in this Final Amendment
that whenever a QPAM, its Affiliates, or owners of a five (5) percent
or more interest Participates In Prohibited Misconduct or executes a
foreign NPA or DPA, they must notify the Department at [email protected].
The Department does not have sufficient data to estimate how frequently
such Prohibited Misconduct would occur, but the Department assumes it
will occur infrequently. For the purposes of this analysis, the
Department assumes that four instances of Prohibited Misconduct each
year will require such a notice, at a cost of approximately $300.\112\
---------------------------------------------------------------------------
\112\ The Department estimates that preparing and sending each
notice will require an in-house legal professional 30 minutes and a
clerical staff 5 minutes. The hour burden is estimated as: 4 notices
x (30 minutes + 5 minutes) = 2 hour and 20 minutes. The labor cost
of $159.34 is applied for an in-house legal professional, and a
labor cost of $63.45 is applied for clerical staff. The equivalent
cost is estimated as: 4 notices x [(30 minutes x $159.34) + (5
minutes x $63.45)] = $324, rounded to $300.
---------------------------------------------------------------------------
Mandatory One-Year Transition Period--Section I(i)
The amendment includes a mandatory One-Year Transition Period that
the QPAM must provide to its client Plans that begins on the
Ineligibility Date. During this period, relief under the QPAM Exemption
would only be available for existing client Plans of the QPAM. The
Department modeled the Transition Period provisions from the conditions
included in the Department's recent individual Section I(g) exemptions.
This Final Amendment does not include the provisions from the
Proposed Amendment that would have prevented QPAMs from engaging in new
transactions on behalf of existing client Plans during the Transition
Period. The Department has not included a similar requirement in past
one-year QPAM individual exemptions it has issued, and several
commenters expressed concern that this provision would be harmful to
Plans that rely on QPAMs. After considering these comments, the
Department has removed this restriction in the Final Amendment.
As amended, the Department expects that QPAMs will not incur
increased costs as a result of a Criminal Conviction due to the
Transition Period provisions because these costs would be equivalent to
the costs incurred by QPAMs who have obtained an individual exemption
that includes similar conditions. However, an increased cost will be
associated with the expansion of the ineligibility provisions. As
discussed above, the Department estimates that four additional QPAMs
will become ineligible each year due to Participating In Prohibited
Misconduct.
Notice to Plans--Subsection I(i)(1)
Within 30 days of the Ineligibility Date, the QPAM must provide
notice to the Department and each of its client Plans. The preamble
provides more detail regarding the information the QPAM is required to
include in this notice.
QPAMs that experience ineligibility and apply for individual
exemption relief already are required to provide this type of notice,
therefore, the Department is not attributing an incremental burden to
this requirement. However, due to the expanded scope of ineligibility,
QPAMs that become ineligible due to Participating In Prohibited
Misconduct will incur the cost of sending notices to their client
Plans.
As discussed in the Affected Entities section above, the Department
estimates that each QPAM provides discretionary asset management
services to an average of 50 Plans. The Department estimates that a
legal professional at each QPAM will spend, on average, 30 minutes
preparing the notice, and clerical personnel will spend two minutes
preparing each notice to be sent to a Plan by mail, resulting in an
equivalent labor cost of approximately $700.\113\ Additionally, the
Department assumes that notices sent by mail will require two pages of
paper each, resulting in a material and postage cost of approximately
$100.\114\
---------------------------------------------------------------------------
\113\ The hour burden is estimated as: (4 QPAMs x 0.5 hours of
professional legal time) + (4 QPAMs x 50 Plans x 80% of notices
being mailed x 2/60 hours of clerical personnel time) = 7.3 hours.
The labor cost of $159.34 is applied for a legal professional, and
the labor cost of $63.45 is applied for clerical personnel. The
equivalent cost is estimated as: (4 QPAMs x 0.5 hours of
professional legal time x $159.34) + (4 QPAMs x 50 Plans x 80% of
notices being mailed x 2/60 hours of clerical personnel time x
$63.45) = $657, rounded to $700.
\114\ The material and postage cost are estimated as: (4 QPAMs x
50 Plans x 80% of notices being mailed) x [(2 pages x $0.05 per
page) + $0.68] = $124, rounded to $100.
---------------------------------------------------------------------------
The Department believes the cost of sending this notice to the
Department will be negligible because the QPAM will have already
prepared and sent the notice to client Plans, and the notice to the
Department is required to be submitted electronically.
Indemnification
As discussed above, QPAMs will be required to indemnify, hold
harmless, and promptly restore actual losses to each client Plan for
any damages directly resulting from a QPAM losing eligibility for the
exemption due to a Criminal Conviction or Prohibited Misconduct.
Damages may include losses and related costs arising from unwinding
transactions with third parties and transitioning Plan assets to an
alternative asset manager.
When the Department has granted individual exemptions for Section
I(g) ineligibility, it has included these additional protections and
required QPAMs to ensure that Plans are permitted to withdraw from
their asset management arrangement with an ineligible QPAM without
penalty and be indemnified and held harmless in the event of future
misconduct. Accordingly, the Department has not attributed any
incremental burden to this requirement.
However, due to the expanded scope of ineligibility, QPAMs that
become ineligible as a result of Participating In Prohibited Misconduct
may incur costs associated with indemnifying their client Plans for
losses that would occur if they moved to a new asset manager. In the
proposal, the Department requested comments on the cost of the
indemnification provision. The Department received several comments
asserting that the indemnity obligation
[[Page 23123]]
will increase the risk and cost associated with being a QPAM, and that
these costs will be passed onto Plans in the form of higher fees. The
Department did not receive any comments providing data directly
addressing the amount of the cost for indemnification.\115\
---------------------------------------------------------------------------
\115\ The Department received several comments addressing the
specific costs associated with amending WMAs, as required under the
Proposed Amendment. These costs did not directly address
indemnification costs but rather contract negotiation and updating
the WMAs. The Department moved the proposed requirements for the WMA
into the Transition Period provisions in response to commenters and
believes the cost to ineligible QPAMs regarding this will generally
be captured within the required notices to client Plans after an
ineligibility trigger.
---------------------------------------------------------------------------
Costs Incurred by QPAMs Requesting an Individual Exemption--Section
I(j)
The Final Amendment retains Section I(j) \116\ from the Proposed
Amendment, which provides that a QPAM that is ineligible or anticipates
that it will become ineligible may apply for an individual exemption
from the Department. This individual exemption would allow the QPAM to
continue relying on the relief provided in the QPAM Exemption for a
longer period than the One-Year Transition Period.
---------------------------------------------------------------------------
\116\ Proposed Section I(k) has been redesignated as Section
I(j) in the Final Amendment.
---------------------------------------------------------------------------
Costs for all QPAMs Seeking an Individual Exemption
The Department estimates that, on average, three individual
exemption applications will be submitted to the Department each year.
The Department estimates that four QPAMs annually will be covered by
each exemption application (12 QPAMs total; with four losing
eligibility due to Prohibited Misconduct and eight losing eligibility
due to a Criminal Conviction). The Final Amendment instructs applicants
that apply for an individual exemption to provide the Department with
detailed information quantifying the cost of the harm, if any, its
client Plans would suffer if a QPAM could not rely on the QPAM
Exemption after the Transition Period. Section I(j) also instructs all
applicants to include in their exemption applications the specific
dollar amounts of investment losses resulting from foregone investment
opportunities that would result from ineligibility and any evidence
supporting the proposition that investment opportunities will only be
available to client Plans on less advantageous terms. For this
requirement, the Department assumes a financial professional will spend
four hours preparing this supporting information. Therefore, the
Department estimates that for the three applications covering the
estimated 12 QPAMs losing eligibility annually, the cost associated
with the additional requirement will be approximately $2,300.\117\
---------------------------------------------------------------------------
\117\ The hour burden is estimated as: 3 applications x 4 hours
= 12 hours. At an hourly rate of $190.63 is applied for financial
professional. The equivalent cost is estimated as: (3 applications x
4 hours x $190.63 financial professional rate) = $2,288, rounded to
$2,300.
---------------------------------------------------------------------------
Finally, Section I(j) of the Final Amendment provides that if an
applicant would like to request the Department to exclude any term or
condition from its individual exemption that is included in a recently
granted individual exemption, the applicant must provide a detailed
statement explaining why the variation is necessary and in the interest
of and protective of affected Plans, their participants and
beneficiaries, and IRA owners. The Department expects QPAMs that become
ineligible due to a Criminal Conviction already will conduct this
analysis and thus would not incur incremental costs. Alternatively, if
this information is not included in an application, the Department will
generally require it before proceeding with a final determination
regarding the exemption request.
The Department assumes the four QPAMs that are estimated to become
ineligible due to Participating In Prohibited Misconduct would incur
incremental costs due to the requirement to review the Department's
most recently granted individual exemptions involving Section I(g)
ineligibility. To satisfy the requirement, the Department estimates
that an outside legal professional will spend three hours drafting this
addition to the individual exemption application. Preparing an
individual exemption application is specialized work, and the
Department assumes that most legal professionals that are retained by
QPAMs will have prior experience. Based on the foregoing, the
Department estimates that the costs associated with the additional
requirement totals approximately $1,600 for the application covering
the four ineligible QPAMs due to Participating In Prohibited
Misconduct.\118\
---------------------------------------------------------------------------
\118\ The hour burden is estimated as: (1 application x 3 hours)
= 3 hours. A labor cost of $535.85 is applied for an outside legal
professional. The equivalent cost is estimated as: (1 application x
3 hours x $535.85 outside legal professional labor) = $1,608 rounded
to $1,600.
---------------------------------------------------------------------------
Costs for QPAMs That Become Ineligible Due to Prohibited Misconduct
In the Final Amendment, the Department expanded the scope of
ineligibility to include Participating In Prohibited Misconduct. This
provision could cause additional financial institutions to lose
eligibility for the QPAM Exemption and may require them to incur the
additional costs associated with preparing and filing an exemption
application with the Department.
In the Proposed Amendment, the Department estimated that two
additional applicants each year would apply for an individual
exemption, each covering four ineligible QPAMs, resulting in a total
cost of approximately $30,000,\119\ or a per-application cost of
approximately $15,000. The Department received one comment stating that
the Department underestimated this cost, and that provided an
alternative estimate that the cost for filing an individual exemption
will total between $250,000 and $500,000.\120\ This commenter did not
support its estimates with specific information detailing how the cost
estimate was derived. However, after considering the comment, the
Department has revised its estimate as discussed below.
---------------------------------------------------------------------------
\119\ 87 FR 45204, pp. 45220.
\120\ Comment submitted by SIFMA on 11 October 2022. (See
https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/00009.pdf).
---------------------------------------------------------------------------
The Department has limited information on the process for preparing
an exemption application. Based on the applications received, the
Department believes that each QPAM affected may need to dedicate
clerical and in-house legal time to gather information for the
application. For this Final Amendment, the Department estimates that
gathering the information for the application will require, on average,
an in-house legal professional and clerical personnel each to spend 20
hours gathering and preparing information for the application. The
Department assumes that the formal exemption application will be
prepared by an outside legal professional specializing in such matters
who will spend 15 hours, on average, preparing the application. For the
four QPAMs becoming ineligible due to Participating In Prohibited
Misconduct, the Department estimates that this provision will result in
an estimated cost of approximately $26,000.\121\
---------------------------------------------------------------------------
\121\ The hour burden is estimated as: [4 QPAMs x (20 hours from
an in-house legal professional + 20 hours for clerical personnel)] +
(1 application x 15 hours from an external legal professional) = 175
hours. The labor cost of $159.34 is applied for an in-house legal
professional, a labor cost of $63.45 is applied for clerical
personnel, and a labor cost of $535.85 is applied for an outside
legal professional. The equivalent cost is estimated as: (4 QPAMs x
20 hours x $159.34) + (4 QPAMs x 20 hours x $63.45) + (1 application
x 15 hours x $535.85) = $25,861, rounded to $26,000.
---------------------------------------------------------------------------
[[Page 23124]]
While this estimate is higher than the Department's estimate in the
Proposed Amendment, it is significantly lower than the estimate
provided by the commenter. As previously stated, the commenter did not
elaborate on the methodology it used to derive its cost estimate. The
Department's analysis only includes the costs directly associated with
preparing documentation for the application and preparing the
application itself.\122\ Additionally, the commenter did not elaborate
on the type of entity that would be requesting exemptive relief.
Applications may vary in complexity, depending on the nature of the
Prohibited Misconduct and the number of QPAMs affected. The Department
believes that its updated estimate for the Final Amendment reflects a
fair representation of the cost to prepare an exemption application in
a typical scenario.
---------------------------------------------------------------------------
\122\ It is unclear if the commenter was also considering the
ongoing costs associated with complying with the individual
exemption. For purposes of this portion of the Department's
analysis, ongoing costs associated with complying with a granted
individual exemption are not included as a cost of filing the
exemption application under Section I(j).
---------------------------------------------------------------------------
Applicants that receive a final granted individual exemption must
prepare and distribute a notice to interested parties. Similarly, each
of the four QPAMs will be required to send an objective description of
the facts and circumstances upon which the misconduct is based to each
client Plan. The Department estimates that approximately 200 notices
will be distributed annually, corresponding to an average of 50 client
Plans for each of the four QPAMs estimated to be affected by the
application. The Department estimates that clerical personnel will
spend 10 minutes distributing the notices and objective descriptions,
resulting in a labor cost of approximately $2,100.\123\ In addition,
the Department estimates that material and mailing costs for these
notices will total approximately $400.\124\
---------------------------------------------------------------------------
\123\ The hour burden is estimated as: 4 QPAMs x 50 Plans per
QPAM x (10/60) hours = 33.3 hours. A labor cost of $63.45 is applied
for clerical personnel The equivalent cost is estimated as: 4 QPAMs
x 50 Plans per QPAM x (10/60) hours x $63.45 = $2,116, rounded to
$2,100.
\124\ The Department further assumes that notices and the
descriptions of facts and circumstances will be delivered
separately, comprising 15 and 5 pages, respectively. With a printing
cost of $0.05 per page and a mailing cost of $0.66 per notice, the
Department estimates the mailing cost as 4 QPAMs x 50 Plans per QPAM
x 80% of notices mailed x {[(15 x $0.05) + $0.68] + [(5 x $0.05) +
$0.68]{time} = $378, rounded to $400.
---------------------------------------------------------------------------
Costs Incurred by Plans and Participants, Beneficiaries
The Department received several comments stating that the Proposed
Amendment would increase Plan expenses. Commenters identified the
following as factors that are likely to increase Plan expenses: (1)
increased resources devoted to avoiding non-exempt prohibited
transactions; (2) disruptions during the Transition Period; (3)
increased fees due to the risk of ineligibility, and (4) transition
costs associated with replacing an ineligible QPAM.
The Department also received several comments stating that the
Proposed Amendment would decrease the investment options available to
Plans, specifically regarding a counterparty in a trade who is a Party
in Interest. Several commenters expressed concern that the proposed
modifications to Section I(c) would limit access to primary investment
markets and could limit access to asset classes that are not typically
traded on large exchanges, such as asset-backed securities. In response
to these comments, the Department did not include many of the proposed
modifications in the Final Amendment. Therefore, the Department
believes there will be no related costs incurred by Plans and their
participants and beneficiaries due to the modifications to Section I(c)
in the Final Amendment.
Asset Management and Equity Thresholds--Section VI(a)
As a result of the adjustments to the asset management and equity
thresholds in the QPAM definition in Section VI(a), the Department
acknowledges that some QPAMs may not meet the new threshold
requirements, and, consequently, would no longer be able to rely on the
QPAM Exemption. The Department expects Plans that utilize these QPAMs
will incur costs due to this transition but does not have sufficient
data to estimate the impact.\125\
---------------------------------------------------------------------------
\125\ Some QPAMs have suggested in the past that there could be
costs associated with unwinding transactions that relied on the QPAM
Exemption and reinvesting assets in other ways. The loss of QPAM
status could also require an asset manager to keep lists of Parties
in Interest to its client Plans to ensure the asset manager does not
engage in prohibited transactions. However, even without the QPAM
Exemption, a wide variety of investments are available that do not
involve non-exempt prohibited transactions.
---------------------------------------------------------------------------
The Department requested similar data in connection with individual
exemption applications when a QPAM becomes ineligible due to
convictions covered by Section I(g), but the data provided, and cost
identified by applicants has been limited. Additionally, the Department
requested comments and data in the Proposed Amendment regarding the
number of QPAMs who will potentially become unable to rely upon the
QPAM Exemption and the number of Plans and the value of Plan assets
that will be impacted by the increase in asset management and equity
thresholds.
As discussed in the Benefits section above, several commenters
expressed concern that the Department did not provide evidence to
support the increase in the asset and equity thresholds. Additionally,
commenters noted that the increased thresholds may create a high
barrier to entry for financial institutions or would disqualify small
financial institutions, which would impose transition costs for client
Plans that search for a new investment manager to replace an ineligible
QPAM. One commenter noted that the inflation increases would introduce
uncertainty regarding a QPAM's eligibility.\126\ One commenter noted
that a Plan transitioning to a new asset manager would incur costs
associated with searching for a new asset manager to replace the QPAM
(such as the costs and time required for a request for proposal
process; costs associated with consultants to assist or manage the
process, legal review and negotiation of a new management agreement,
and other due diligence expenses; brokerage and other transaction costs
associated with the sale of portfolio investments to accommodate the
investment policies and strategy of the new asset manager; the
opportunity costs of holding cash pending investment by the new asset
manager; and lost investment opportunities in connection with a change
of asset manager). Another commenter estimated that a formal request
for proposal for a new QPAM would cost between $10,000 and $50,000 with
legal fees ranging between $10,000 and $20,000 for a typical asset
class or $20,000 to $40,000 for a more specialized strategy.
---------------------------------------------------------------------------
\126\ Comment submitted by the Spark Institute on 11 October
2022. (See https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/00026.pdf).
---------------------------------------------------------------------------
However, none of the commenters directly addressed the number of
QPAMs that will lose eligibility due to the increased thresholds or
relatedly, the number of client Plans serviced by those QPAMs. The
Department received one comment stating that an incremental increase
approach would give smaller investment fiduciaries, who would be most
affected by the threshold
[[Page 23125]]
changes, more time to prepare for and respond to threshold changes and
minimize the negative impact on these entities.
As discussed in the preamble and after considering these comments,
the Department decided to phase in the initial increase to asset and
equity thresholds incrementally over an extended period rather than
implement the entire increase in a single year in order to reduce the
immediate impact on QPAMs and their client Plans. QPAMs and Plans
relying on those QPAMs that will lose the ability to rely upon the QPAM
Exemption, particularly in the second and third portions of the phase-
in period will have time to make needed adjustments.
Although Plans may continue to rely on asset managers who do not
satisfy the definition of QPAM, the Department acknowledges that some
Plans may choose to hire a different asset manager if their current
asset manager is not able to rely on the QPAM Exemption. The Department
understands that it is common industry practice to conduct a request
for proposal every three to five years, and some Plans may choose to do
so sooner than they otherwise would have because of the new threshold
requirements. These Plans will incur costs with preparing and reviewing
proposals from potential new asset managers. The Department lacks
sufficient data to estimate the number of Plans and QPAMs that would be
affected by the increased thresholds in the definition of QPAM.
Summary of Costs
The total estimated annual costs associated with the Final
Amendment will be approximately $6.8 million in the first year and $0.8
million in subsequent years. Table 3 summarizes the costs for each
requirement.
Table 3--Cost Summary
------------------------------------------------------------------------
Aggregate cost change (in dollars)
Requirement -------------------------------------
First year Subsequent year
------------------------------------------------------------------------
All QPAMs:
Rule Familiarization.......... $5,816,652 .................
Reporting Reliance on the QPAM 172,187 $1,729
Exemption....................
Notice of Failure to Report 17,288 159
Reliance on the QPAM
Exemption....................
Recordkeeping................. 688,750 688,750
Refusal to Disclose Requested 34,577 34,577
Information..................
QPAMs Losing Eligibility:
Notice to Plans............... 782 782
Notice to the Department of 340 340
Prohibited Misconduct and
Foreign NPA/DPA..............
QPAMs Applying for Individual
Exemptions:
Quantification of Costs Plans 2,288 2,288
Will Suffer..................
Review of Past Exemptions..... 1,608 1,608
Exemption Application......... 25,861 25,861
Individual Exemption Notices.. 2,494 2,494
-------------------------------------
Total Estimated Annual 6,762,827 758,588
Cost.....................
------------------------------------------------------------------------
Note: Only quantifiable costs are displayed.
Transfers
If an asset manager cannot rely on the relief under the QPAM
Exemption (e.g., because it is ineligible due to its Participation In
Prohibited Misconduct or due to the change in asset or equity
thresholds), its client Plans may choose to transfer assets and revenue
away from the asset manager to its competitors. From the Plan's
perspective, the reduction in assets entrusted to the original asset
manager (and associated revenue reduction) are offset by the increase
in assets managed by another asset manager or managers (and associated
revenue increase). Even if the impact of the switch is minimal or
neutral from the point of view of the Plan, it is nevertheless
appropriately characterized as a transfer from a societal
perspective.\127\
---------------------------------------------------------------------------
\127\ Although a QPAM's client Plans could be expected to move
some or all of its assets to another asset manager if the QPAM is
convicted of an enumerated crime, this discussion does not address
these transfers. The Department has long viewed both domestic and
foreign convictions as causing ineligibility under the existing
exemption. Consequently, the regulatory baseline already includes
the impact of such convictions.
---------------------------------------------------------------------------
Although the Department does not have sufficient data to quantify
the likely size of such revenue transfers, they could have an annual
effect that exceeds $200 million due to the significant pool of Plan
assets that QPAMs manage. To the extent the Final Amendment results in
the movement of assets from asset managers that cannot rely on the
exemption to other asset managers, the associated revenue transfers
promote the Department's objectives in issuing this amendment to the
QPAM Exemption and enhance the security of Plan investments.
In the Proposed Amendment, the Department requested comments on
whether a QPAM's client Plans would be likely to move all or some of
their assets to an alternative asset manager after a QPAM becomes
ineligible due to expansion of the ineligibility provision. The
Department did not receive comments directly addressing this issue. The
cost of conducting a request for proposal and searching for a new asset
manager are discussed in greater detail above, in the Cost section.
Regulatory Alternatives
Section 6(a)(3)(C) of Executive Order 12866 requires the Department
to assess the cost and benefits of feasible alternatives for rules that
are determined to be ``significant'' under Section 3(f)(1) of the
executive order. Therefore, the Department considered several
alternatives to the provisions in the Final Amendment that are
discussed in this section.
Do not amend the QPAM Exemption--Continue status quo of addressing
ineligibility under current Section I(g) and only through
administration of the individual exemption program.
The Department considered not expanding the scope of Section I(g)
and maintaining its practice of addressing ineligibility under Section
I(g) only
[[Page 23126]]
through the individual exemption process. However, it is the
Department's understanding that its issuance of a subsequently revoked
opinion caused uncertainty in the regulated community regarding whether
foreign convictions are within the scope of Section I(g) of the QPAM
Exemption. This amendment provides clarity on that point. Further,
immediate ineligibility under Section I(g) has become a source of
uncertainty and potential disruption to Plans. As the financial
services industry has become increasingly consolidated, the number of
entities becoming ineligible for relief under the QPAM Exemption has
grown, prompting more entities to face ineligibility. Through the
individual exemption process, client Plans would continue to be exposed
to the potential for immediate disruption and transition costs that
might otherwise be avoided through this Final Amendment.
The Department decided against this alternative in favor of this
amendment, relying on its experience processing individual exemption
applications to create a smoother transition between the QPAM Exemption
and the individual exemption program so that a QPAM's client Plans have
certainty regarding their rights after an ineligibility event occurs.
Amend the QPAM Exemption to expressly exclude foreign convictions.
The Department considered expressly limiting the scope of
convictions to only those in a U.S. federal or state trial courts.
However, given the increasingly global reach of asset managers and
investment strategies, the Department determined such a limitation
would leave Plans less protected and be inconsistent with the ERISA
section 408(a) and Code section 4975(c)(2) required findings. An
affiliated entity's criminal misconduct in a foreign jurisdiction is an
important indicator of the integrity of the entire corporate
organization and casts doubt on a QPAM's ability to act in a manner
that will properly protect Plans and their participants and
beneficiaries from the related damages, losses, and other harm that
often result from such criminal misconduct.
Amend the QPAM Exemption to require QPAMs to amend Written
Management Agreements with up-front terms that apply in the event of
ineligibility.
In the proposal, the Department included a requirement for all
QPAMs to amend their WMAs with client Plans to include:
(1) A provision providing that in the event the QPAM, its
Affiliates, and five percent or more owners engage in conduct resulting
in a Criminal Conviction or receipt of a Written Ineligibility Notice,
the QPAM would not restrict its client Plan's ability to terminate or
withdraw from its arrangement with the QPAM;
(2) 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 failure of such QPAM to
remain eligible for relief under the QPAM Exemption as a result of
conduct that leads to a Criminal Conviction or Prohibited Misconduct;
and
(3) A provision requiring the QPAM to agree not to employ or
knowingly engage any individual that Participated In the conduct that
is the subject of a Criminal Conviction or Prohibited Misconduct.
In the Proposed Amendment, the Department remarked that these
provisions would benefit Plans by providing them with additional
certainty that the Plan and its assets will be insulated from losses if
a Criminal Conviction or Prohibited Misconduct occurs.
The Department estimated that the cost associated with amending the
WMAs would result in a total equivalent cost of $135,540,\128\
resulting in an average cost of approximately $220 for each QPAM.
Comments on the Proposed Amendment criticized the Department's
estimation methods, stating that the Department had significantly
underestimated the burden this requirement would impose. For instance,
one commenter estimated that the Department's estimate was off at least
by a factor of 100. Another commenter estimated that it would cost
between $1 billion and $12.3 billion.
---------------------------------------------------------------------------
\128\ 87 FR 45204, pp. 45218.
---------------------------------------------------------------------------
In its estimate, the Department assumed that amendments to WMAs
would be uniform across client Plans, and accordingly, the Department
estimated that the associated costs would be relatively small. However,
several commenters disagreed with this assumption, stating that the
necessary amendments would differ by the type of relationship and
investment strategy. Some commenters noted that such amendments would
require QPAMs to open contract negotiations with each QPAM client Plan,
potentially leading to a time-consuming process. Other commenters
indicated that some QPAMs would incur costs associated with consulting
outside counsel on these provisions and contract negotiations. Further,
several of the commenters stated that amending necessary contracts
would not be possible within the 60-day effective period proposed.
The Department believes that these provisions provide an important
protection to Plans, participants, beneficiaries, and IRA owners.
Namely, these provisions ensure that Plans and IRA owners can terminate
the arrangement or withdraw from a QPAM-managed Investment Fund without
penalty, protecting Plans and IRA owners from unnecessary costs when
relief under the exemption is lost through no fault of their own.
However, based on the feedback from commenters, the Department removed
the requirement to amend WMAs. Instead, the Final Amendment requires
QPAMs to notify and agree to these provisions with Plans in the Notice
to Plans required within 30 days of the Ineligibility Date. The
Department determined the approach in the Final Amendment provides the
same protection to Plans while significantly reducing the cost burden.
Asset Management and Equity Thresholds
The Department considered two alternatives related to the asset
management and equity thresholds, described below.
Amend the QPAM Exemption to remove asset management and equity
thresholds.
As an alternative to updating the asset management and equity
thresholds, the Department revisited whether such thresholds could be
removed entirely from the exemption. The Department determined that
this approach would be inconsistent with one of the core concepts upon
which the QPAM Exemption was based. In the absence of an appropriate
alternative ensuring that a QPAM will remain an independent decision-
maker, free from influence of other Plan fiduciaries, the Department is
unable to justify the removal of the thresholds.
Update the asset management and equity thresholds to full CPI-
adjusted values at once.
The proposal included CPI-adjusted values that would have been
fully updated to 2022 values. The Department received a variety of
comments regarding the possible unintended impact to QPAMs and their
client Plans who would not be able to satisfy such significant
increases at once. In response to those concerns, the Department
determined that a more appropriate way to update the thresholds is
through a phase-in to the proposed values, which is included in this
Final Amendment.
[[Page 23127]]
Amend the QPAM Exemption to include entering into NPAs or DPAs of
owners and Affiliates of QPAMs as a possible Section I(g) ineligibility
trigger.
In the Proposed Amendment, Section I(g) would have been implicated
if the QPAM, its owners of a five (5) percent or more interest, or
Affiliates enter into an NPA or DPA and subsequently received a Written
Ineligibility Notice from the Department. The approach in the Proposed
Amendment was intended to ensure QPAMs could not avoid the consequences
that otherwise would result from a Criminal Conviction under Section
I(g) by entering into NPAs or DPAs with prosecutors. In this Final
Amendment, the Department limited the scope of Prohibited Misconduct to
NPAs or DPAs that are entered into with a U.S. Federal or State
prosecutor's office or regulatory agency and Prohibited Misconduct that
is found in or determined by a court or court-approved settlement.
In the Proposed Amendment, the Department estimated that eight
QPAMs would be affected by the ineligibility provisions due to
Participating In Prohibited Misconduct.\129\ As discussed in the cost
section, due to the narrowing of the Prohibited Misconduct provision,
the Department estimates that four QPAMs annually may become ineligible
due to the reduced scope of entities captured in the Final Amendment
rather than the eight QPAMs that were estimated in the Proposed
Amendment.
---------------------------------------------------------------------------
\129\ 87 FR at 45218.
---------------------------------------------------------------------------
Uncertainty Associated With the Final Amendment
The Department is uncertain regarding the total number of QPAMs and
examined multiple alternative estimation methodologies before utilizing
the one outlined in this amendment.
The first alternative considered was adding additional service
codes from form 5500 data. The Department looked at service providers
identified under service code 28 and found that they were also
frequently identified under service code 50 and 27 (direct payment from
the plan and investment advisory respectively). However, after
examining these codes in detail, the Department found them too
definitionally dissimilar from investment management and that the firms
under these codes seemed less likely to meet the asset and equity
thresholds required by the QPAM Exemption. Thus, the Department only
included codes 28, 51, and 52.
The Department also examined completely different methodologies for
generating the number of QPAMs. One proposed methodology was to use
data from the SEC and FDIC to estimate the number of QPAMs. The
Department could use the FDIC data to see banks with defined benefit
plan or defined contribution plan funds in trustee accounts and could
use asset data to estimate the number of entities above and below the
asset threshold, but that data was generated at the firm-level. Since a
firm can contain multiple distinct entities, all acting as QPAMs, the
Department believed that use of this data would lead to a significant
undercount of QPAMs.
The Department is also uncertain about the extent to which the
changes in asset management and equity thresholds would give rise to
new costs because some QPAMs that meet the current thresholds no longer
would be able to rely on the exemption if they do not meet the
increased thresholds. Some of these small QPAMs may lose this portion
of their business. However, there still may be other exemptions that
they could use, or they could seek an individual exemption that could
allow them to continue offering services.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995, the
Department solicited comments concerning the information collection
request included in the Proposed Amendment entitled ``Proposed
Amendment to Prohibited Transaction Class Exemption 84-14 (the QPAM
Exemption).'' \130\ At the same time, the Department also submitted an
information collection request to the (OMB), in accordance with 44
U.S.C. 3507(d).
---------------------------------------------------------------------------
\130\ 87 FR 45204.
---------------------------------------------------------------------------
The Department received one comment addressing the audit cost
estimates in the paperwork burden analysis of the information
collections. Other comments submitted contained information relevant to
the costs and administrative burdens attendant to the Proposed
Amendment. The Department considered these public comments in
connection with making changes to the Final Amendment, analyzing the
economic impact of the Proposed Amendment and developing the revised
paperwork burden analysis summarized below.
ICRs are available at RegInfo.gov (reginfo.gov/public/do/PRAMain).
Requests for copies of the ICR can be sent to the PRA addressee:
By mail: James Butikofer, Office of Research and Analysis, Employee
Benefits Security Administration, U.S. Department of Labor, 200
Constitution Avenue NW, Room N-5718, Washington, DC 20210
By email: [email protected]
Prohibited Transaction Exemption 84-14, 49 FR 9494 (March 13,
1984), as corrected at 50 FR 41430 (October 10, 1985) and amended at 70
FR 49305 (August 23, 2005) and at 75 FR 38837 (July 6, 2010) (the QPAM
Exemption) permits various parties related to Plans to engage in
transactions involving Plan assets if, among other conditions, the
assets are managed by a QPAM. The following analysis considers the
paperwork burden associated with the existing QPAM Exemption as well as
the incremental cost associated with the Final Amendment.
Affected Entities
As discussed in the Affected Entities section of the regulatory
impact analysis, the Department estimates that there are 10,855 QPAMs.
Additionally, the Department estimates that each QPAM, on average,
provides services to 50 Plans and that there are 215,135 total Plans
with relationships with QPAMs.\131\
---------------------------------------------------------------------------
\131\ For more information on how the number of QPAMs, average
number of relationships between QPAMs and Plans, and unique number
of Plans was estimated, refer to the Affected Entities section of
the regulatory impact analysis.
---------------------------------------------------------------------------
QPAM-Sponsored Plans--Policies and Procedures--Section V(b)
The existing information collection requirements of the QPAM
Exemption require in-house QPAMs to develop written policies and
procedures designed to ensure compliance with the conditions of the
exemption. Existing in-house QPAMs will have already prepared their
policies and procedures in accordance with the QPAM Exemption. However,
some in-house QPAMs may also update their policies and procedures in a
given year.
The latest Form 5500 estimates from the year 2020 indicate that
there are approximately 50 in-house QPAMs.\132\ The Department
estimates that the burden associated with preparing policies and
procedures will affect ten percent of all in-house QPAMs, including all
new in-house QPAMs and some existing in-house QPAMs. Therefore, the
Department estimates that about five QPAMs will need to
[[Page 23128]]
update their policies and procedures each year.\133\ The Department
estimates that the burden associated with new QPAMs meeting the
policies and procedures requirements of the QPAM Exemption will be five
hours with an equivalent cost of $797.\134\
---------------------------------------------------------------------------
\132\ The Department estimated the number of in-house QPAMs by
examining Schedule C of the 2020 Form 5500. Small Plans are not
required to file the Schedule C. This estimate could underestimate
the number of in-house QPAMs with small Plans, but the Department
believes that in-house QPAMs with small Plans would be rare. In
order for this to occur, an investment manager would have to
simultaneously be large enough to qualify as a QPAM and small enough
to qualify as a small plan for the Form 5500-SF.
\133\ This is estimated as: 50 in-house QPAMs x 10% = 5.
\134\ The burden is estimated as follows: (5 QPAMs x 1 hour) = 5
hours. A labor rate of $159.34 is used for legal counsel and applied
in the following calculation: (5 QPAMs x 1 hour x $159.34) = $797.
---------------------------------------------------------------------------
QPAM-Sponsored Plans--Independent Audit--Section V(c)
Additionally, the exemption requires in-house QPAMs to engage an
independent auditor to conduct an annual exemption audit and issue an
audit report to the Plan. The Department estimates that each of the 50
in-house QPAMs will use in-house legal professionals, financial
managers, and clerical time to provide documents and respond to
questions from the auditor. The Department assumes QPAMs use either a
law firm or a consulting firm to conduct the exemption audits, and the
Department assumes that the average cost of an exemption audit is
$25,000.\135\ This results in a total estimated cost of
$1,250,000.\136\ Additionally, each exemption audit is assumed to
require about 5 hours of a legal professional's time, 13 hours of a
financial manager's time, and six hours of clerical time for each of
the 50 QPAMs to provide needed materials for the audit. This results in
a burden estimate of 1,200 hours with an equivalent cost of
$182,780.\137\
---------------------------------------------------------------------------
\135\ The Department has received information from industry
representatives that the cost of a similar annual audit required by
PTE 96-23 (the INHAM Exemption) may range from approximately $10,000
to $25,000, depending on asset size and how many years the INHAM has
used the auditing firm. Because of the type of audit required for an
in-house QPAM, the Department has assumed that the average cost of
an exemption audit required by the QPAM Exemption would be $25,000.
\136\ Assuming that the average cost of an exemption audit would
be $25,000: 50 in-house QPAMs x $25,000 = $1,250,000.
\137\ The burden is estimated as follows: (50 x 5 hours) + (50 x
13 hours) + (50 x 6 hours) = 1,200 hours. A labor rate of $159.34 is
used for legal counsel, a labor rate of $190.63 is used for a
financial professional, and a labor rate of $63.45 is used for a
clerical worker. These labor rates are applied in the following
calculation: (50 x 5 hours x $159.34) + (50 x 13 hours x $190.63) +
(50 x 6 hours x $63.45) = $182,780.
---------------------------------------------------------------------------
This results in a per-entity cost of $28,656 for each audit. The
Department received one comment on its cost estimate for the audit,
noting that legal expenses associated with QPAMs would approach or
exceed $100,000. This commenter did not provide additional information
to support this estimate.
Property Manager Written Guidelines--Section I(c)
The exemption also contains a requirement for written guidelines
when, in certain instances, a property manager acts on behalf of a
QPAM. In this case, the QPAM is required to establish and administer
the guidelines. Because agreements between an institution and a
property manager are customary, the Department estimates that this
requirement will impose no additional burden on QPAMs.
Reporting Reliance on the QPAM Exemption--Subsection I(k)
QPAMs will have to report their reliance on the QPAM Exemption via
email to [email protected]. This notification would occur only once for most
QPAMs. The information required under subsection I(k) is limited to the
legal name of the entity relying upon the exemption and any name the
QPAM may be operating under. The Department expects it will take 15
minutes, on average, for each QPAM to both prepare and send this
electronic notification. This burden is estimated to amount to 2,713.8
hours with an equivalent cost of $172,187 in the first year.\138\ In
subsequent years, new QPAMs or QPAMs that change their name will be
required to send the notification. The Department does not have data on
how many QPAMs will be required to send this notification in subsequent
years. For the purposes of this analysis, the Department assumes that
one percent of QPAMs, or 109 QPAMs, will either be new or have a name
change.\139\ Accordingly, this is estimated to amount to 27.3 hours,
with an equivalent cost of $1,729.\140\
---------------------------------------------------------------------------
\138\ The hour burden is estimated as: 10,855 QPAMs x 15 minutes
= 2,713.8 hours. The labor cost of $63.45 is applied for a clerical
worker. The equivalent cost is estimated as: 10,855 QPAMs x 15
minutes x $63.45 = $172,187.
\139\ The number of QPAMs is estimated as: 10,855 QPAMs x 1% =
108.6, rounded to 109.
\140\ The hour burden is estimated as: 109 QPAMs x 15 minutes =
27.3 hours. The labor cost of $63.45 is applied for a clerical
worker. The equivalent cost is estimated as: 109 QPAMs x 15 minutes
x $63.45 = $1,729.
---------------------------------------------------------------------------
If a QPAM fails to report its reliance on the exemption within 90
days, the QPAM must send a notice to the Department within an
additional 90 days, indicating its reliance on the exemption or name
change, as well as an explanation for the failure to provide notice.
The Department does not have information on what percent of QPAMs are
likely to fail to report reliance. For the purposes of this analysis,
the Department estimates that two percent of QPAMs required to report
will fail to report reliance each year, or 217 QPAMs in the first year
and two QPAMs in subsequent years.\141\ The Department estimates that
preparing the notice will require a legal professional 30 minutes. The
burden is estimated to be 108.5 hours with an equivalent cost of
approximately $17,288 in the first year \142\ and one hour with an
equivalent cost of approximately $159 in subsequent years.\143\ The
cost for a clerical professional to draft and send an email notifying
the Department of its reliance or name change is included in the cost
estimate of sending notice of reliance above.
---------------------------------------------------------------------------
\141\ The number of QPAMs in the first year is estimated as:
10,855 x 2% = 217.1, rounded to 217. The number of QPAMs in
subsequent years is estimated as: 109 QPAMs x 2% = 2.2, rounded to
2.
\142\ The hour burden is estimated as: 217 QPAMs x 0.5 hour =
108.5 hours. The labor cost of $159.34 is applied for an internal
legal professional. The equivalent cost is estimated as: 108.5 hours
x $159.34 = $17,288, rounded to $17,000.
\143\ The hour burden is estimated as: 2 QPAMs x 0.5 hour = 1
hour. The labor cost of $159.34 is applied for an internal legal
professional. The equivalent cost is estimated as: 1 hour x $159.34
= $159.34, rounded to $159.
---------------------------------------------------------------------------
Recordkeeping--Section VI(u)
The amendment adds a new recordkeeping provision that will apply to
all 10,855 QPAMs. Due to the fiduciary status of QPAMs and the existing
regulatory environment in which they exist, the Department assumes that
QPAMs already maintain many of the required records as part of their
regular business practices. In addition, the recordkeeping requirements
correspond to the six-year period in ERISA sections 107 and 413. The
Department expects that the recordkeeping requirement would impose, on
average, a burden of one hour per QPAM. Therefore, the Department
estimates that the overall hour burden of this recordkeeping
requirement for all 10,855 QPAMs will be 10,855 hours with an
equivalent cost of $688,750.\144\
---------------------------------------------------------------------------
\144\ The hour burden is estimated as: 10,855 QPAMs x 1 hour =
10,855 hours. The labor cost of $63.45 is applied for clerical
personnel. The equivalent cost is estimated as: 10,855 QPAMs x 1
hour x $63.45 = $688,750.
---------------------------------------------------------------------------
If a QPAM refuses to disclose information to any of the parties
listed in Section VI(u) on the basis that such information is exempt
from disclosure, the QPAM must provide a written notice advising the
requestor of the reason for the refusal and that the Department may
request such information. The Department does not have data on how
often such a refusal is likely to occur. For the purposes of this
illustration, the Department
[[Page 23129]]
estimates that two percent of QPAMs, or 217 QPAMs, will refuse to
disclose requested information annually. The Department estimates that
drafting a written notice advising the requestor of the reason for the
refusal and that the Department may request such information will
require an internal legal professional to spend one hour, resulting in
a burden of 217 hours with an equivalent cost of approximately
$34,577.\145\
---------------------------------------------------------------------------
\145\ The number of QPAMs is estimated as 10,855 x 2% = 217
QPAMs. The hour burden is estimated as: 217 QPAMs x 1 hour = 217
hours. The labor cost of $159.34 is applied for a legal
professional. The equivalent cost is estimated as: 217 QPAMs x 1
hour x $159.34 = $34,577.
---------------------------------------------------------------------------
Notice to Plans--Subsection I(i)(1)
Within 30 days after the Ineligibility Date, the QPAM must provide
notice to the Department and each of its client Plans. The preamble
provides more detail on what the QPAM is required to include in this
notice. As discussed in the Cost section of the regulatory impact
analysis, the Department estimates that 12 QPAMs will lose eligibility
each year, eight due to a Criminal Conviction and four due to
Participating In Prohibited Misconduct.
As discussed in the Affected Entities section, the Department
estimates that each QPAM provides services to 50 Plans, on average. The
Department estimates that a legal professional at each ineligible QPAM
will spend one hour preparing the notice and two minutes for clerical
personnel will spend two minutes preparing each notice to be sent to a
Plan by mail, resulting in an hour burden of 22 hours with an
equivalent cost of $1,971.\146\ Additionally, the Department assumes
that notices sent by mail will require two pages of paper each,
resulting in a material and postage cost of approximately $374.\147\
---------------------------------------------------------------------------
\146\ The hour burden is estimated as: (12 QPAMs x 0.5 hours of
professional legal time) + (12 QPAMs x 50 Plans x 80% of notices
being mailed x 2/60 hours of clerical personnel time) = 22 hours.
The labor cost of $159.34 is applied for a legal professional, and
the labor cost of $63.45 is applied for clerical personnel. The
equivalent cost is estimated as: (12 QPAMs x 0.5 hours of
professional legal time x $159.34) + (12 QPAMs x 50 Plans x 80% of
notices being mailed x 2/60 hours of clerical personnel time x
$63.45) = $1,971.
\147\ The material and postage cost are estimated as: (12 QPAMs
x 50 Plans x 80% of notices being mailed) x [(2 pages x $0.05 per
page) + $0.68] = $374.
---------------------------------------------------------------------------
The Department believes the cost of sending this notice to the
Department will be negligible since the QPAM will already prepare and
send the notice to their client Plans and the notice is required to be
sent electronically.
Notice to the Department of Prohibited Misconduct and Foreign NPA or
DPA
If a QPAM, an Affiliate, or owner of a five (5) percent or more
interest in a QPAM Participates in Prohibited Misconduct or enters into
a foreign equivalent of an NPA or DPA, the QPAM is required to provide
notice to the Department of the agreement. The Department does not have
data on how frequently these entities enter into such agreements but
assumes it will be infrequent. For the purposes of this analysis, the
Department assumes that four instances each year will require such a
notice. The Department estimates that this will result in a cost of
approximately $340.\148\
---------------------------------------------------------------------------
\148\ If preparing and sending each notice were to require an
in-house legal professional 30 minutes and a clerical staff 5
minutes. The hour burden is estimated as: 4 notices x (30 minutes +
5 minutes) = 2 hour and 20 minutes. The labor cost of $159.34 is
applied for an in-house legal professional, and a labor cost of
$63.45 is applied for clerical staff. The equivalent cost is
estimated as: 4 notices x [(30 minutes x $159.34) + (5 minutes x
$63.45)] = $340. The Department assumes such notices will be sent
electronically and will not create material or postage costs.
---------------------------------------------------------------------------
Requesting an Individual Exemption--Section I(j)
Participating In Prohibited Misconduct could lead a QPAM to request
an individual exemption. The burden for filing an application
requesting an individual exemption is included in the ICR for the
Exemption Procedure Regulation, which has been approved under OMB
Control Number 1210-0060. Instead of amending that ICR, the estimated
burden for applications from QPAMs Participating In Prohibited
Misconduct is included here.\149\
---------------------------------------------------------------------------
\149\ In three years when control number 1210-0060 is extended,
the increase in requests for individual exemptions will be captured
in the historical data used for the renewal and the burden going
forward will be captured there.
---------------------------------------------------------------------------
The Department estimates that there will, on average, be one
application each year related to Prohibited Misconduct, affecting four
QPAMs. The Department estimates that gathering and preparing the
information for the application will take, on average, 20 hours of in-
house legal professional labor and 20 hours of clerical personnel labor
at each QPAM. The Department assumes that the application will be
prepared by an outside legal professional specializing in such matters.
The Department estimates that it will require 15 hours, on average, of
outside legal professional labor to prepare the application. For the
four QPAMs losing eligibility due to Prohibited Misconduct, this will
result in an hour burden of 175 hours with an equivalent cost of
$25,861.\150\
---------------------------------------------------------------------------
\150\ The hour burden is estimated as: [4 QPAMs x (20 hours from
an in-house legal professional + 20 hours for clerical personnel)] +
(1 application x 15 hours from an external legal professional) = 175
hours. The labor cost of $159.34 is applied for an in-house legal
professional, a labor cost of $63.45 is applied for clerical
personnel, and a labor cost of $535.85 is applied for an outside
legal professional. The equivalent cost is estimated as: (4 QPAMs x
20 hours x $159.34) + (4 QPAMs x 20 hours x $63.45) + (1 application
x 15 hours x $535.85) = $25,861.
---------------------------------------------------------------------------
For applications that reach the stage of publication of a proposed
individual exemption in the Federal Register, a notice must be prepared
and distributed to interested parties. Similarly, if the exemption is
ultimately granted, each of these four QPAMs will be required to send
an objective description of the facts and circumstances upon which the
misconduct is based to each client Plan. The Department estimates that
approximately 200 notices will be distributed annually, corresponding
to an average of 50 client Plans for each of the four QPAMs estimated
to be affected by the application. The Department estimates that it
will take 10 minutes for clerical personnel to distribute the notices
and objective descriptions, resulting in an hour burden of 33.3 hours
with an equivalent cost of approximately $2,116.\151\ In addition,
material and mailing costs for all of these notices totals
approximately $378.\152\ The Department estimates that approximately 40
(20 percent of the total number of notices) will be distributed
electronically.
---------------------------------------------------------------------------
\151\ The hour burden is estimated as: 4 QPAMs x 50 Plans per
QPAM x (10/60) hours = 33.3 hours. A labor cost of $63.45 is applied
for clerical personnel The equivalent cost is estimated as: 4 QPAMs
x 50 Plans per QPAM x (10/60) hours x $63.45 = $2,116, rounded to
$2,100.
\152\ The Department further assumes that notices and the
descriptions of facts and circumstances will be delivered
separately, comprising 15 and 5 pages, respectively. With a printing
cost of $0.05 per page and a mailing cost of $0.66 per notice, the
Department estimates the mailing cost as 4 QPAMs x 50 Plans per QPAM
x 80% of notices mailed x {[(15 x $0.05) + $0.68] + [(5 x $0.05) +
$0.68]{time} = $378.
---------------------------------------------------------------------------
Additional Requirement for QPAMs Requesting an Individual Exemption
New Section I(j) indicates that a QPAM that is ineligible or
anticipates that it will become ineligible due to an actual or possible
Criminal Conviction or Participating In Prohibited Misconduct may apply
for an individual exemption from the Department to continue to rely on
the relief provided in this exemption for a longer period than the One-
Year Transition Period. In such an event, an applicant should review
the Department's most recently granted individual exemptions
[[Page 23130]]
involving Section I(g) ineligibility. If an applicant requests the
Department to exclude any term or condition from its exemption that is
included in a recently granted individual exemption, the applicant must
include a detailed statement with its exemption application explaining
the reason(s) why the variation is necessary and in the interest and
protective of affected Plans and their participants and beneficiaries.
For the three applications covering the 12 ineligible QPAMs, the burden
is estimated to be 9 hours with an equivalent cost of $4,823.\153\
---------------------------------------------------------------------------
\153\ The hour burden is estimated as: (3 applications x 3
hours) = 9 hours. A labor cost of $535.85 is applied for an outside
legal professional. The equivalent cost is estimated as: (3
application x 3 hours x $535.85 outside legal professional labor) =
$4,823.
---------------------------------------------------------------------------
Such applicants also should provide detailed information in their
applications quantifying the specific cost or harms in dollar amounts,
if any, Plans would suffer if a QPAM could not rely on the exemption
after the Transition Period, including the specific dollar amounts of
investment losses resulting from foregone investment opportunities and
any evidence supporting the proposition that investment opportunities
would only be available to Plans on less advantageous terms. All three
applications will need to include this information if they submit an
exemption application. The Department estimates that it will require
four hours of a financial professional's time to prepare such
information. Therefore, for the three applications covering the
estimated 12 QPAMs losing eligibility annually, the cost associated
with the additional requirement results in an hour burden of 12 hours
with an equivalent cost of $2,288.\154\
---------------------------------------------------------------------------
\154\ The hour burden is estimated as: 3 applications x 4 hours
= 12 hours. At an hourly rate of $190.63 is applied for financial
professional. The equivalent cost is estimated as: (3 applications x
4 hours x $190.63 financial professional rate) = $2,288.
---------------------------------------------------------------------------
Summary
Based on the foregoing, the PRA burden associated with the
information collection requirements contained in the QPAM Exemption are
summarized below:
Agency: DOL-EBSA.
Type of Review: Revision.
Title of Collection: Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers under Prohibited
Transaction Exemption 1984-14.
OMB Control Number: 1210-0128.
Affected Public: Business or other for-profits.
Estimated Number of Respondents: 10,855.
Estimated Number of Annual Responses: 23,093.
Frequency of Response: Annual or as needed.
Estimated Total Annual Burden Hours: 15,353.
Estimated Total Annual Burden Cost: $1,250,752.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \155\ imposes certain
requirements with respect to federal rules that are subject to the
notice and comment requirements of section 553(b) of the Administrative
Procedure Act and are likely to have a significant economic impact on a
substantial number of small entities.\156\ Unless an agency determines
that a regulation or amendment will not have a significant economic
impact on a substantial number of small entities, section 604 of the
RFA requires the agency to present a final regulatory flexibility
analysis of the Final Amendment.
---------------------------------------------------------------------------
\155\ 5 U.S.C. 601 et seq. (1980).
\156\ 5 U.S.C. 551 et seq. (1946).
---------------------------------------------------------------------------
The Department emphasizes that the QPAM Exemption was always
premised on the QPAM being an entity of sufficient size to withstand
undue influence from Parties in Interest. The Department clearly makes
this point in the preamble to 1982 QPAM proposal where it stated that
the minimum capital and funds-under-management standards are intended
to ensure that the eligible fiduciaries managing the accounts or
investment funds are established institutions which are large enough to
discourage the exercise of undue influence upon their decision-making
processes by parties in interest.\157\
---------------------------------------------------------------------------
\157\ 47 FR 56945, 56947 (Dec. 21, 1982).
---------------------------------------------------------------------------
This is consistent with the Department's past actions. When the
exemption was granted, the Department declined to reduce or delete the
asset and equity thresholds as requested by some commenters.\158\
Furthermore, when the Department raised the thresholds for investment
advisers in 2005, it stated that the thresholds had ``not been revised
since 1984 and may no longer provide significant protections for plans
in the current financial marketplace.'' \159\
---------------------------------------------------------------------------
\158\ See 49 FR at 9502.
\159\ See Proposed Amendment, 68 FR 52419, 52423 (Sept. 3,
2003).
---------------------------------------------------------------------------
As discussed in greater detail below, the Department lacks data to
be able to identify how many asset managers providing services to Plans
fall below the SBA size thresholds and above the QPAM eligibility
thresholds. However, given the nature of the QPAM Exemption and based
on the premise of the entity being large enough to remain independent,
the requirements of this Final Amendment are applicable to all
entities, regardless of size.
On September 16, 2022, the Department published a supplementary
Initial Regulatory Flexibility Analysis explaining the possible impact
on small entities of the amended exemption.\160\
---------------------------------------------------------------------------
\160\ 87 FR 56912.
---------------------------------------------------------------------------
The Department has considered the comments submitted to the
Department as well as the information discussed in hearings conducted
by the Department to update this analysis. Specifically, the Department
responded to the following comments in this analysis:
Several commenters on the Proposed Amendment stated that
the Department underestimated the number of QPAMs in the supplementary
Initial Regulatory Flexibility Analysis for the Proposed Amendment. In
response to these comments, the Department has revised its methodology
to estimate the number of QPAMs leading to an increase in the estimate
of QPAMs.
A few commenters stated that the Department underestimated
the number of Plans that have hired a QPAM. In response to these
comments, the Department has revised its estimates of the number of
QPAM-Plan relationships.
The Department received several comments that the
Department underestimated the cost associated with the recordkeeping
requirement in the supplementary Initial Regulatory Flexibility
Analysis for the Proposed Amendment. In response to these comments, the
Department has provided additional guidance on recordkeeping earlier in
this preamble to alleviate potential confusion.
There were no comments filed by the SBA's Office of Advocacy.
Despite the importance of a QPAM being sufficiently large to
withstand undue influence from parties in interest, the Department has
determined that the Final Amendment could have a significant impact on
a substantial number of small entities in an abundance of caution,
because it does not have sufficient information to determine it would
not. Therefore, the Department presents its Final Regulatory
Flexibility Analysis below.
Need for and Objectives of the Amendment
Substantial changes have occurred in the financial services
industry since the
[[Page 23131]]
Department granted the QPAM Exemption in 1984. These changes include
industry consolidation and an increasingly global reach for financial
services institutions, both in their affiliations and in their
investment strategies.
The baseline version of the QPAM Exemption is ambiguous regarding
whether foreign convictions are included in the scope of the
ineligibility provision under Section I(g). Today, QPAMs often have
corporate or relationship ties to a broad range of entities, some of
which are located internationally. Additionally, some global financial
service institutions are headquartered or have parent entities that
reside in foreign jurisdictions. These entities may have significant
control and influence over the operation and management of all entities
within a large financial institution's organizational structure,
including those entities operating as QPAMs. Additionally, the
international ties of QPAMs come not just from their affiliations and
parent entities, but also their investment strategies, including those
involving Plan assets.
The Department is also concerned about QPAMs that engage in
significant misconduct of a similar type and nature as the conduct that
might lead to a Criminal Conviction,\161\ but ultimately does not
result in a conviction. Under the baseline version of the exemption, a
QPAM could theoretically avoid the conditions related to integrity and
ineligibility under Section I(g) by entering into an NPA or DPA with
prosecutors, which would allow it to side-step the consequences that
otherwise would result from a Criminal Conviction. Plans may suffer
significant harm if they are exposed to serious misconduct committed by
a QPAM, its Affiliates, or owners of a five (5) percent or more
interest that ultimately results in a an NPA or DPA rather than a
Criminal Conviction and consequent ineligibility under Section I(g).
---------------------------------------------------------------------------
\161\ The term ``Criminal Conviction'' is defined in Section
VI(r) of this Final Amendment.
---------------------------------------------------------------------------
Likewise, intentionally or systematically violating the conditions
of the exemption exposes Plans to significant potential harm at the
hands of those with influence or control over their assets. In the
Department's view, QPAMs that repeatedly engage in these types of
serious misconduct do not display the requisite standards of integrity
necessary to warrant their eligibility for the broad relief provided in
the QPAM Exemption.
Through its administration of the individual exemption program, the
Department also determined that certain aspects of the QPAM Exemption
would benefit from a focus on mitigating potential costs and disruption
to Plans when a QPAM becomes ineligible for the exemptive relief due to
Section I(g). The Final Amendment would reduce the harmful impact on
Plans by requiring QPAMs that become ineligible to allow their client
Plans to withdraw from their arrangement with the QPAM penalty-free and
indemnify their client Plans for certain losses during a One-Year
Transition Period to avoid unnecessary disruptions to Plans when a QPAM
becomes ineligible due to a Criminal Conviction or Participation In
Prohibited Misconduct. The Transition Period will help bridge the gap
between the QPAM Exemption and the Department's administration of its
individual exemption program in connection with Section I(g)
ineligibility.
The Final Amendment also is needed to update asset management and
equity thresholds to current values in the definition of QPAM in
Section VI(a). Some of the thresholds that establish the requisite
independence upon which the QPAM Exemption is based have not been
updated since 1984, and the thresholds for registered investment
advisers have not been updated since 2005. The amendment will
standardize all the thresholds to current values using the CPI.
Finally, the Final Amendment is needed to add a standard
recordkeeping requirement to ensure QPAMs will be able to demonstrate,
and the Department will be able to verify, compliance with the
exemption conditions.
As a whole, the changes to the QPAM Exemption in this Final
Amendment are necessary to ensure it remains in the interest of and
protective of the rights of Plans and their participants and
beneficiaries as required by ERISA section 408(a) and Code section
4975(c)(2).
Affected Small Entities
Qualified Professional Asset Managers (QPAMs)
To qualify as a QPAM, financial institutions must meet equity
capital, net worth, and/or asset under management requirements. The
Final Amendment will update these thresholds based on the price
inflation since 1984, incrementally phasing in the thresholds from the
Proposed Amendment over the period between 2024 and 2030. This Final
Amendment increases the thresholds as follows:
(1) Banks--as defined in section 202(a)(2) of the Investment
Advisers Act of 1940, with equity capital in excess of $1,570,300 as of
the last day of the fiscal year ending no later than December 31, 2024,
$2,140,600 effective as of the last day of the fiscal year ending no
later than December 31, 2027, and $2,720,000 effective as of the last
day of the fiscal year ending no later than December 31, 2030.
(2) Savings and loan associations--the accounts of which are
insured by the Federal Deposit Insurance Corporation, with equity
capital or net worth in excess of $1,570,300 effective as of the last
day of the fiscal year ending no later than December 31, 2024,
$2,140,600 effective as of the last day of the fiscal year ending no
later than December 31, 2027, and $2,720,000 effective as of the last
day of the fiscal year ending no later than December 31, 2030.
(3) Insurance companies--subject to supervision under state law,
with net worth in excess of $1,570,300 effective as of the last day of
the fiscal year ending no later than December 31, 2024, $2,140,600
effective as of the last day of the fiscal year ending no later than
December 31, 2027, and $2,720,000 effective as of the last day of the
fiscal year ending no later than December 31, 2030.
(4) Investment advisers--registered under the Investment Advisers
Act of 1940 with total client assets under management in excess of
$101,956,000 effective as of the last day of the fiscal year ending no
later than December 31, 2024, $118,912,000 effective as of the last day
of the fiscal year ending no later than December 31, 2027, and
$135,868,000 effective as of the last day of the fiscal year ending no
later than December 31, 2030. In addition, the investment adviser must
either have shareholders' or partners' equity-- or payment of
liabilities guaranteed by an affiliate, another entity that could
qualify as a QPAM, or a broker-dealer with net worth-- in excess of
$1,570,300 effective as of the last day of the fiscal year ending no
later than December 31, 2024, $2,140,600 effective as of the last day
of the fiscal year ending no later than December 31, 2027, and
$2,720,000 effective as of the last day of the fiscal year ending no
later than December 31, 2030.
The Department will make subsequent annual adjustments for
inflation to the equity capital, net worth, and asset management
thresholds, rounded to the nearest $10,000, no later than January 31 of
each year by publication in the Federal Register.
As discussed in the Affected Entities section above, the Department
estimates that there are 10,855 QPAMs. The Department does not know how
many
[[Page 23132]]
QPAMs fit the SBA's small entity definition for the finance and
insurance sector. SBA outlines size standards to determine whether an
entity is a small entity. The size standards and NAICS codes are
summarized in the table below.
Table 4--SBA Size Thresholds and NAICS Codes by Potential QPAM Type
----------------------------------------------------------------------------------------------------------------
SBA size threshold
-------------------------------
Entity type NAICS codes Receipts in Assets in
millions of millions of
dollars dollars
----------------------------------------------------------------------------------------------------------------
Investment Banks................................................ 523150 47.0 ..............
Commercial Banks................................................ 522110 .............. $850
Savings and Loan Associations................................... 522180 .............. 850
Insurance Companies............................................. 524113 47.0 ..............
Investment Advisers............................................. 523940 47.0 ..............
----------------------------------------------------------------------------------------------------------------
The Department lacks sufficient data to identify how many of the
estimated asset managers providing services to Plans fall below the SBA
size thresholds and are above the QPAM eligibility thresholds. However,
the Department believes some small entities that meet the SBA's
definition could be significantly impacted by the Final Amendment to
the QPAM Exemption.
For example, some smaller QPAMs may no longer be able to rely upon
the exemption due to the increases in the asset and equity thresholds
in the definition of ``QPAM'' in Section VI(a) of the Final Amendment.
After considering public comments and testimony at the public hearing
regarding the Proposed Amendment, the Department has decided to
implement the proposed increase in thresholds incrementally between
2024 and 2030 to reduce the potential impact on small entities.
Additionally, to the extent that Plans that are small entities are more
likely to hire a QPAM that is a small entity, the Final Amendment could
also impact them by reducing the market of available QPAMs.
Plans, Participants, Beneficiaries, and IRA Owners
The Final Amendment will affect Plans whose assets are held by an
Investment Fund that is managed by a QPAM. The Department does not
collect data on Plans that use QPAMs to manage their assets. As
discussed in the Affected Entities section of the regulatory impact
analysis above, the Department estimates that a single QPAM services,
on average, 50 client Plans, resulting in an estimate of 547,566 total
client Plan relationships. The Department estimates that 483,350 of
these relationships are with small Plans.\162\ Additionally, the
Department estimates that 215,135 unique Plans have a relationship with
a QPAM, of which 189,905 are assumed to be small Plans.\163\
---------------------------------------------------------------------------
\162\ In the 2020 Form 5500, the Department found 64,216 QPAM
relationships amongst a total of 87,559 Plans that filed the Form
5500 Schedule C. Small Plans are not required to file Schedule C.
The number of client-Plan relationships for small Plans is estimated
as: 547,566 - 64,216 = 483,350.
\163\ In the 2020 Form 5500, the Department found 25,230 Plans
that used QPAM service providers of 87,559 Plans that filed the Form
5500 Schedule C. Small Plans are not required to file Schedule C.
The number of client-Plan relationships for small Plans is estimated
as: 215,135 - 25,230 = 189,905.
---------------------------------------------------------------------------
Impacts of the Rule
In analyzing compliance costs associated with the Final Amendment,
the Department considers the QPAM's existing compliance costs as the
regulatory baseline. This includes ERISA's fiduciary duty requirements
(to the extent applicable), requirements under the prior version of the
QPAM Exemption, typical requirements in the individual exemption
process, and individual exemptions granted in connection with Section
I(g) ineligibility. The Department does not expect that the Final
Amendment will lead to more than a modest increase to the existing
costs associated with QPAM ineligibility and individual exemption
requests related to Criminal Convictions. The Department is uncertain,
however, regarding the number of QPAMs that would become ineligible
under the expansion of the ineligibility provision related to
Participating In Prohibited Misconduct. The Department also is
uncertain about the extent to which the changes to asset management and
equity thresholds in the Final Amendment will cause new costs for a
small, unknown number of QPAMs that would lose their eligibility to
rely on the exemption because they do not meet the increased
thresholds. In order to mitigate such costs, the Department has phased-
in the increase in the equity and asset thresholds in three-year
increments beginning in 2024 and ending in 2030.
As discussed above, the Department lacks information and data to
estimate the number of small QPAMs that would no longer be able to rely
upon the exemption due to the expansion of the ineligibility provision
related to Participating In Prohibited Misconduct or due to the
increased size thresholds. The Department expects that small QPAMs
remaining able to rely upon the amended QPAM Exemption will experience
a similar impact as larger entities. Accordingly, the following
analysis considers the cost that each QPAM is estimated to incur,
depending on whether that QPAM loses the ability to rely upon the QPAM
Exemption.
Although the Department has provided a cost analysis below, the
heightened standards in this Final Amendment may result in entities
being more diligent in compliance. Further, the Final Amendment will
provide clear guardrails that would make the costs associated with
QPAMs becoming ineligible under Section I(g) more clearly avoidable.
Preliminary Assumptions and Cost Estimate Inputs
The Department assumes that different types of personnel will be
responsible for satisfying the requirements in the Final Amendment. To
account for the labor costs associated with different types of
personnel, the Department estimates the hourly labor costs for each
type of personnel. In the analysis below, the Department applies the
hourly labor costs of $63.45 for clerical personnel, $159.34 for
internal legal professionals, $190.63 for financial managers, and
$535.85 for outside legal professionals.\164\
---------------------------------------------------------------------------
\164\ Labor costs for clerical personnel, accountants or
auditors, internal legal professionals, and financial managers are
based off internal Department of Labor calculations based on 2023
labor cost data. For a description of the Department's methodology
for calculating wage rates, see https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf. Labor costs for outside legal
professionals is calculated as a composite weighted average based on
the Laffey Matrix for Wage Rates for the time period 6/01/2022-5/31/
2023, see https://www.laffeymatrix.com/see.html. The labor cost is
estimated as: (40% x $413) + (35% x $508) + (15% x $733) + (10% x
$829) = $535.85.
---------------------------------------------------------------------------
[[Page 23133]]
The Final Amendment requires QPAMs to distribute various notices to
client Plans in certain situations, as described below. The Department
does not have sufficient data to estimate how often QPAMs will elect to
send such notices electronically or by mail. For the purposes of this
analysis, the Department estimates that 80 percent of these notices
will be delivered by first-class mail. The Department assumes the
postage cost associated with sending notices through first-class mail
is $0.66.\165\
---------------------------------------------------------------------------
\165\ See USPS. ``Mailing & Shipping Prices.'' (2023). https://www.usps.com/business/prices.htm.
---------------------------------------------------------------------------
Costs Incurred by All QPAMs
Rule Familiarization Costs
The Department expects that QPAMs are likely to rely on outside
specialized legal counsel to ensure compliance with the Final
Amendment. On average, the Department estimates that each QPAM will
incur a cost equivalent to the cost of consulting with an outside legal
professional for one hour. This results in an average cost of $536 per
entity in the first year.\166\
---------------------------------------------------------------------------
\166\ The labor cost of $535.85 is applied for an external legal
professional. The cost burden is estimated as: 1 hour x $535.85 =
$535.85, rounded to $536.
---------------------------------------------------------------------------
Reporting Reliance on the QPAM Exemption--Subsection I(k)
The Department believes that the one-time requirement to report
reliance on the QPAM Exemption via email to [email protected] will result in
a minor additional clerical cost. The information required under
subsection I(k) is limited to the legal name of the entity relying upon
the exemption and any name the QPAM may be operating under. This
notification would occur only once for most QPAMs. In subsequent years,
new QPAMs or QPAMs that change their name will be required to send the
notification. The Department expects it will take one hour, on average,
for each QPAM to prepare and send this electronic notification. This
cost is estimated to be approximately $63 per entity either upon
enactment of the Final Amendment, origination of a new QPAM, or a name
change.\167\
---------------------------------------------------------------------------
\167\ The labor rate of $63.45 is applied for a clerical worker.
The cost is estimated as: (15/60) hours x $63.45 = $15.86, rounded
to $16.
---------------------------------------------------------------------------
If a QPAM fails to report their reliance on the exemption within 90
days, the Final Amendment provides the QPAM with an additional 90 days
to send the notice to the Department. This notice must include an
explanation for the QPAM's failure to provide timely notice. The
Department estimates that preparing the notice will require a legal
professional to spend 30 minutes on average resulting in a cost
estimate of $80 per entity upon the effective date of the Final
Amendment, origination of a new QPAM, or a name change.\168\ The
Department includes the cost for a clerical professional to draft and
send an email notifying the Department of its reliance or name change
in the cost estimate.
---------------------------------------------------------------------------
\168\ The labor rate of $159.34 is applied for an internal legal
professional. The cost is estimated as: 0.5 hour x $159.34 = $79.67,
rounded to $80.
---------------------------------------------------------------------------
Recordkeeping--Section VI(u)
The Final Amendment includes a new recordkeeping provision that
will apply to all QPAMs. Due to the fiduciary status of QPAMs and the
existing regulatory environment, the Department assumes that QPAMs
already maintain such records as part of their regular business
practices. In addition, the recordkeeping requirements correspond to
the six-year record retention period in ERISA section 107. The
Department recognizes that some QPAMs may not be keeping records that
satisfy the requirements and accordingly will experience a larger
marginal cost for this requirement. However, the Department expects
that most QPAMs are already fully compliant. The Department estimates
that, on average, the additional recordkeeping requirements will
require a QPAM's clerical personnel to spend one hour, resulting in a
per-QPAM cost of $63.\169\
---------------------------------------------------------------------------
\169\ The labor rate of $63.45 is applied for a clerical
professional. The cost is estimated as: 1 hour x $63.45 = $63.45,
rounded to $63.
---------------------------------------------------------------------------
If a QPAM refuses to disclose information to any of the parties
listed in Section VI(u), on the basis that information is exempt from
disclosure, the QPAM must provide a written notice advising the
requestor of the reason for the refusal and that the Department may
request such information. The Department does not have sufficient data
to estimate how often such a refusal is likely to occur; however, the
Department believes such instances will be rare. In the case when a
QPAM refuses to disclose the information, the Department estimates that
an internal legal professional will spend one hour, resulting in a per-
QPAM cost of $159.\170\
---------------------------------------------------------------------------
\170\ The labor rate of $159.34 is applied for an internal legal
professional. The cost is estimated as: 1 hour x $159.34 = $159.34,
rounded to $159.
---------------------------------------------------------------------------
Costs Incurred by QPAMs Losing Eligibility for the Exemption for a
Criminal Conviction or Prohibited Misconduct
In the regulatory impact analysis, the Department estimated that
eight QPAMs would lose eligibility due to Criminal Convictions and four
QPAMs would lose eligibility due to Prohibited Misconduct each year.
The Department does not have sufficient data to estimate how many QPAMs
losing eligibility are small entities. The following analysis examines
the per-entity cost of a typical QPAM losing eligibility. The
Department does not expect the cost for small and large QPAMs losing
eligibility to be significantly different.
Notice to the Department of Prohibited Misconduct and Foreign NPAs or
DPAs
If the QPAM, its Affiliates, or owners of a five percent or more
interest in a QPAM Participates in Prohibited Misconduct or enters into
a foreign equivalent of an NPA or DPA, the QPAM must notify the
Department of the agreement. The Department assumes that this notice
will require a legal professional to spend 30 minutes producing the
notice and a clerical worker five minutes to send the notice, resulting
in a per-entity cost of $85.\171\
---------------------------------------------------------------------------
\171\ If preparing and sending each notice were to require an
in-house legal professional 30 minutes and a clerical staff 5
minutes. The hour burden is estimated as: 1 notices x (30 minutes +
5 minutes) = 35 minutes. The labor cost of $159.34 is applied for an
in-house legal professional, and a labor cost of $63.45 is applied
for clerical staff. The cost is estimated as: (30 minutes x $159.34)
+ (5 minutes x $63.45) = $85. The Department assumes such notices
will be sent electronically and will not create material or postage
costs.
---------------------------------------------------------------------------
Mandatory One-Year Transition Period--Section I(i)
As amended, the Department expects that the costs incurred by a
QPAM during the Transition Period would be equivalent to the costs
incurred by a QPAM obtaining an individual exemption. However, there
will be an increased cost associated with the expansion of the
ineligibility provisions. As discussed above, the Department estimates
that four additional QPAMs will become ineligible each year due to
Prohibited Misconduct.
Notice to Plans--Subsection I(i)(1)
Within 30 days after the Ineligibility Date, the QPAM must provide
notice to the Department and each of its client Plans. The preamble
provides more detail on the information the QPAM is required to include
in this notice.
QPAMs that experience ineligibility and apply for individual
exemption relief are already required to provide
[[Page 23134]]
this type of notice. Therefore, the Department has attributed no
incremental burden to this requirement for QPAMs that become ineligible
due to a Criminal Conviction. However due to the expanded scope of
ineligibility, QPAMs that become ineligible due to Participating In
Prohibited Misconduct will incur costs to send notices to their client
Plans.
The Department estimates that a legal professional will spend 30
minutes preparing the notification for each QPAM, and clerical staff
will spend two minutes preparing and distributing the notifications by
mail. Additionally, the Department assumes that each notice will
require two sheets of paper. The total incremental cost related to
ineligibility for Participating in Prohibited Misconduct is $196 per
entity, including mailing expenses.\172\
---------------------------------------------------------------------------
\172\ The labor cost of $159.34 is applied for a legal
professional, and the labor cost of $63.45 is applied for clerical
personnel. The equivalent cost is estimated as: (0.5 hours of
professional legal time x $159.34) + (50 Plans x 80% of notices
being mailed x 2/60 hours of clerical personnel time x $63.45) =
$165. The material and postage cost are estimated as: (50 Plans x
80% of notices being mailed) x [(2 pages x $0.05 per page) + $0.68]
= $31. The total cost is estimated to be $196 ($165 + $31).
---------------------------------------------------------------------------
The cost to send this notice to the Department will be negligible
because it is required to be sent electronically, and the QPAM will
have already prepared and sent the notice to its client Plans.
Indemnification
As discussed above, the Final Amendment requires QPAMs to agree to
indemnify, hold harmless, and promptly restore actual losses to each
client Plan for any damages directly resulting from a QPAM losing
eligibility for the exemption due to a Criminal Conviction or
Prohibited Misconduct. Damages may include losses and related costs
arising from unwinding transactions with third parties, transitioning
Plan assets to an alternative asset manager, and exposure to excise
taxes under Code section 4975.
When the Department has granted individual exemptions regarding
section I(g) ineligibility, it has required applicants to comply with
additional protections for their plan and IRA clients that allow them
to withdraw from the asset management arrangement without penalty and
indemnify and hold them harmless in the event future misconduct occurs.
Accordingly, in this analysis, no incremental burden is attributed to
this requirement for QPAMs that become ineligible due to a Criminal
Conviction.
However due to the expanded scope of ineligibility, QPAMs that
become ineligible due to Participating In Prohibited Misconduct may
incur costs associated with indemnifying their client Plans for losses
that would occur if they moved to a new asset manager. In the Proposed
Amendment, the Department requested comments on the costs of the
indemnification provisions. The Department received several comments
noting that the indemnity obligation will increase the risk and cost
associated with being a QPAM and that these costs will be passed onto
Plans in higher fees. The Department, however, did not receive any
comments directly addressing the amount of the indemnification costs,
and the Department does not have sufficient information and data to
estimate these costs.\173\
---------------------------------------------------------------------------
\173\ The Department received several comments addressing the
specific costs associated with amending WMAs, as required under the
Proposed Amendment. These costs did not directly address
indemnification costs but rather contract negotiation and updating
the WMAs. The Department moved the proposed requirements for the WMA
into the Transition Period provisions in response to commenters and
believes the cost to ineligible QPAMs regarding this will generally
be captured within the required notices to client Plan after an
ineligibility trigger.
---------------------------------------------------------------------------
Costs Incurred by QPAMs Requesting an Individual Exemption--Section
I(j)
The amendment adds Section I(j), which states that a QPAM that is
ineligible or anticipates that it will become ineligible may apply for
an individual exemption from the Department. This individual exemption
would allow the QPAM to continue relying on the relief provided in the
QPAM Exemption for a longer period than the One-Year Transition Period.
Costs for all QPAMs Seeking an Individual Exemption
The Department estimates that, on average, QPAMs will submit three
applications annually. In these three applications, the Department
estimates that 12 QPAMs annually will become ineligible, with four
losing eligibility due to Prohibited Misconduct and eight losing
eligibility due to a Criminal Conviction.
The Final Amendment will require all QPAMs to include in their
exemption applications the specific dollar amounts of investment losses
resulting from foregone investment opportunities and any evidence
supporting the proposition that investment opportunities would only be
available to client Plans on less advantageous terms. For this
requirement, the Department assumes a financial professional will spend
four hours preparing the report, resulting in a per-application cost of
$763, and a per-entity cost of $191.\174\
---------------------------------------------------------------------------
\174\ An hourly rate of $190.63 is applied for financial
professional. The equivalent cost is estimated as: (4 hours x
$190.63 financial professional rate) = $763.
---------------------------------------------------------------------------
If an applicant requests the Department to exclude any term or
condition from its exemption that is included in a recently granted
individual exemption, the applicant must include a detailed statement
with its exemption application explaining the reason(s) why the
variation is necessary and in the interest and protective of affected
Plans, their participants and beneficiaries, and IRA owners. While the
Department is including this requirement in the Final Amendment, it
expects that applicants who are ineligible due to Criminal Conduct
already are conducting this analysis and thus would not incur an
incremental cost.
QPAMs that become ineligible due to Participating In Prohibited
Misconduct will incur incremental costs due to the requirement to
review the Department's most recently granted individual exemptions
involving Section I(g) ineligibility. The Department estimates that an
outside legal professional would spend three hours reviewing past
individual exemptions and draft this addition to the individual
exemption application, resulting in a per-application cost of
$1,600.\175\ The Department estimates that each application would cover
four QPAMs, resulting in a per-entity cost of $402.
---------------------------------------------------------------------------
\175\ A labor cost of $535.85 is applied for an outside legal
professional. The equivalent cost is estimated as: (3 hours x
$535.85 outside legal professional labor) = $1,608.
---------------------------------------------------------------------------
Due to the expanded scope of ineligibility to include Participating
In Prohibited Misconduct, additional financial institutions may lose
eligibility for the QPAM Exemption and may seek an individual
exemption. These entities would incur the additional costs of filing
the application.
For this Final Amendment, the Department estimates that gathering
the information for the application will require, on average, an in-
house legal professional and clerical personnel to spend 10 hours each
gathering and preparing information for the application at each QPAM.
The Department assumes that the application will be prepared by an
outside legal professional specializing in such matters. Once it
receives information from the affected QPAMs, the Department estimates
that an outside legal professional will spend 15 hours preparing the
application. For the four QPAMs losing eligibility due to Prohibited
Misconduct, this will result
[[Page 23135]]
in a per-application cost of $26,000 \176\ or a per-QPAM cost of
$6,465.
---------------------------------------------------------------------------
\176\ The hour burden is estimated as: [4 QPAMs x (20 hours from
an in-house legal professional + 20 hours for clerical personnel)] +
(1 application x 15 hours from an external legal professional) = 175
hours. The labor cost of $159.34 is applied for an in-house legal
professional, a labor cost of $63.45 is applied for clerical
personnel, and a labor cost of $535.85 is applied for an outside
legal professional. The equivalent cost is estimated as: (4 QPAMs x
20 hours x $159.34) + (4 QPAMs x 20 hours x $63.45) + (1 application
x 15 hours x $535.85) = $25,861, rounded to $26,000.
---------------------------------------------------------------------------
For applications that are published as proposed exemptions, the
QPAM must prepare and distribute a notice to interested persons.
Similarly, if the exemptions are ultimately granted, each of these four
QPAMs will be required to send an objective description of the facts
and circumstances upon which the misconduct is based to each client
Plan. The Department estimates four QPAMs will be required to notify
interested parties and client Plans under these circumstances, with
each QPAM having an average of 50 client Plans. The Department
estimates that clerical personnel will spend 10 minutes to distribute
the notices and objective descriptions, resulting in a per-QPAM cost of
$264 \177\ In addition, material and mailing costs for these notices
totals approximately $94.\178\
---------------------------------------------------------------------------
\177\ A labor cost of $63.45 is applied for clerical personnel
The equivalent cost is estimated as: 50 Plans per QPAM x (10/60)
hours x $63.45 = $264.
\178\ The Department further assumes that notices and the
descriptions of facts and circumstances will be delivered
separately, comprising 15 and 5 pages, respectively. With a printing
cost of $0.05 per page and a mailing cost of $0.68 per notice, the
Department estimates the mailing cost as 50 Plans per QPAM x 80% of
notices mailed x {[(15 x $0.05) + $0.68] + [(5 x $0.05) +
$0.68]{time} = $94.
---------------------------------------------------------------------------
Costs Incurred by Plans and Participants and Beneficiaries
As a result of the adjustments to the asset management and equity
thresholds to the QPAM definition in Section VI(a), the Department
acknowledges some QPAMs may not meet the new threshold requirements,
and, consequently, would no longer be able to rely on the QPAM
Exemption. The Department expects QPAMs and Plans that utilize these
QPAMs to incur costs due to this transition, but it lacks sufficient
data to estimate the impact.\179\ The Department has requested similar
data in connection with individual exemption applications following
convictions covered by Section I(g), but the data provided by
applicants and costs identified by them has been limited. The
Department requested comments on these costs in the Proposed Amendment
but did not receive comments identifying specific costs that would be
incurred due to a possible transition to a new QPAM by small or large
entities.
---------------------------------------------------------------------------
\179\ Some QPAMs have suggested in the past that there could be
costs associated with unwinding transactions that relied on the QPAM
Exemption and reinvesting assets in other ways. The loss of QPAM
status could also require an asset manager to keep lists of Parties
in Interest to its client Plans to ensure the asset manager does not
engage in prohibited transactions. However, even without the QPAM
Exemption, a wide variety of investments are available that do not
involve non-exempt prohibited transactions.
---------------------------------------------------------------------------
Summary of Costs
The Department estimates that the total, per-entity, estimated
incremental annual costs associated with the amendment will range
between $854 and $10,282 in the first year and between $318 and $9,746
in subsequent years. Table 5 summarizes the per entity costs for each
requirement and the estimated annual costs associated with the
amendment for QPAMs to comply with the exemption, QPAMs who trigger the
conditions associated with Participating In Prohibited Misconduct, and
QPAMs that become ineligible due to a Criminal Conviction.
Table 5--Incremental Cost Summary Associated With Amendments, per Entity
----------------------------------------------------------------------------------------------------------------
Cost for QPAMs
with Cost for QPAMs
Cost for QPAMs prohibited with a
Requirement to comply with misconduct conviction
exemption (estimated 4 (estimated 8
per year) per year)
----------------------------------------------------------------------------------------------------------------
Rule Familiarization............................................ $536 $536 $536
Reporting Reliance on the QPAM Exemption \1\.................... $16 $16 $16
Notice of Failure To Report Reliance \2\........................ $80 $80 $80
Recordkeeping................................................... $63 $63 $63
Notice of Refusal To Disclose Requested Information............. $159 $159 $159
Notice of Prohibited Misconduct or Foreign NPA/DPA \3\.......... .............. $85 ..............
Notice to Plans of Ineligibility................................ .............. $196 ..............
Requesting an Individual Exemption Costs: \4\
Preparation Labor Cost...................................... .............. $6,465 ..............
Notices Distribution........................................ .............. $622 ..............
Additional Requirement--Criminal Conviction................. .............. .............. $191
Additional Requirement--Prohibited Misconduct............... .............. $593 ..............
-----------------------------------------------
First Year Total Estimated Annual Cost.................. $854 $8,815 $1,045
Cost as a Percentage of Equity Capital or Net Worth Threshold 0.05% 0.65% 0.07%
Effective December 31, 2024 \5\................................
-----------------------------------------------
Subsequent Years Total Estimated Annual Cost \1\........ $318 $9,746 $509
Cost as a Percentage of Equity Capital or Net Worth Threshold 0.02% 0.62% 0.03%
Effective December 31, 2024 \5\................................
----------------------------------------------------------------------------------------------------------------
Notes: Only quantifiable costs are displayed.
\1\ Most entities will only need to provide this notice once, either upon the effective date of the Final
Amendment or when first relying on the QPAM Exemption. Entities will also need to provide the notice after a
name change.
\2\ Entities will only need to provide this notice after failing to report its reliance on the exemption within
the allotted time.
\3\ Entities will only need to provide such a notice if the QPAM, its Affiliates, or owners of a five (5)
percent or more interest Participate In Prohibited Misconduct or execute a foreign equivalent of a non-
prosecution or deferred prosecution agreement.
\4\ One individual exemption application associated with ineligible QPAMs (caused by Prohibited Misconduct) are
estimated each year, affecting 4 QPAMs. This cost reflects the total cost of the application divided by the
number of QPAMs.
[[Page 23136]]
\5\ Banks, savings and loan associations, insurance companies, and investment advisers each have different size
threshold requirements, as discussed in more detail in the Affected Entities Section of the regulatory impact
analysis. However, the size threshold requirements for each entity type include either an equity capital or
net worth requirement. Effective no later than December 31, 2024, the equity capital and net worth
requirements will be $1,570,300. For subsequent years, this estimate does not reflect future increases in
equity capital and net worth threshold requirements. As these thresholds increase, the Department expects that
the cost as a percentage of equity capital or net worth will decrease.
On January 1, 2025, each entity type will be required to have
either equity capital or net worth exceeding $1,570,300. Table 5 shows
the per entity cost as a percent of this equity capital or net worth
threshold. While some entities face additional size threshold
requirements, this measure can provide insight into the magnitude of
costs faced by small QPAMs. This demonstrates that the smallest asset
managers able to qualify for the QPAM Exemption, who are not facing
ineligibility, are estimated to incur costs amounting to 0.05 percent
of this threshold in the first year and 0.02 percent in subsequent
years. The incremental costs incurred by the few QPAMs facing
ineligibility due to Prohibited Misconduct or a Criminal Conviction are
higher but remain below one percent of the threshold.
As discussed in the Affected Entities section, the Department lacks
sufficient data to identify how many of the estimated asset managers
providing services to Plans fall below the SBA's small business size
thresholds and are above the QPAM eligibility thresholds. Table 6 shows
the estimated cost as a percent of the SBA size threshold, in terms of
annual receipts for investment banks, insurance companies and
investment advisers and in terms of assets under management for
commercial banks and savings and loans associations. For most QPAMs,
the cost to comply with the Final Amendment is expected to amount to
less than 0.01 percent of the respective SBA threshold. The few QPAMs
facing ineligibility due to Prohibited Misconduct or a Criminal
Conviction may incur costs around 0.02 percent of the respective SBA
threshold. The table also shows the estimated cost relative to 50
percent and 10 percent of the SBA threshold for receipts and assets.
Even for entities with receipts or assets amounting to 10 percent of
the SBA threshold, the costs associated with the Final Amendment
account for less than 0.5 percent of the SBA threshold.
Table 6--Incremental Cost Associated With Amendments, as a Percent of the SBA Size Standard
--------------------------------------------------------------------------------------------------------------------------------------------------------
SBA threshold 50% of SBA threshold 10% of SBA threshold
-----------------------------------------------------------------------------------------------
Size standard $47.0 Million $850 Million $23.5 Million $425 Million $4.7 Million $85.0 Million
in receipts in assets \2\ in receipts in assets \2\ in receipts in assets \2\
\1\ (%) (%) \1\ (%) (%) \1\ (%) (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
First Year Total Estimated Annual Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Compliance With the Exemption........................... 0.002 (\3\) 0.004 (\3\) 0.018 0.001
QPAMs With Prohibited Misconduct........................ 0.022 0.001 0.044 0.002 0.219 0.012
QPAMs With a Conviction................................. 0.002 (\3\) 0.004 (\3\) 0.022 0.001
--------------------------------------------------------------------------------------------------------------------------------------------------------
Subsequent Years Total Estimated Annual
--------------------------------------------------------------------------------------------------------------------------------------------------------
Compliance With the Exemption........................... 0.001 (\3\) 0.001 (\3\) 0.007 (\3\)
QPAMs With Prohibited Misconduct........................ 0.021 0.001 0.041 0.002 0.207 0.011
QPAMs With a Conviction................................. 0.001 (\3\) 0.002 (\3\) 0.011 0.001
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The entities subject to this SBA size threshold include investment banks, insurance companies, and investment advisers.
\2\ The entities subject to this SBA size threshold include commercial banks and savings and loan associations.
\3\ Less than 0.001%.
In summary, the Department lacks data on how QPAMs are distributed
relative to the measures of size used by the SBA. However, due to the
equity capital and net worth thresholds to qualify for the QPAM
exemption, the Department expects that most QPAMs will be on the higher
end of the receipts or assets distribution. Based on the analysis
above, the Department does not expect the costs associated with the
Final Amendment to represent a significant percentage of annual
receipts or assets under management of QPAMs.
Regulatory Alternatives
This section of the Final Regulatory Flexibility Act analysis
addresses alternatives the Department considered when developing the
Final Amendment. The Department evaluates these alternatives and
discusses how the alternatives would have affected small entities
qualitatively and quantitatively where possible. A more in-depth
discussion of the regulatory alternatives is included in the regulatory
impact analysis above.
Do Not Amend the QPAM Exemption
The Department considered not expanding the scope of Section I(g)
and maintaining its practice of addressing ineligibility under Section
I(g) only through the individual exemption process. In considering
whether to amend the QPAM Exemption, the Department compared the
marginal costs imposed on QPAMs to the marginal benefits experienced by
Plans. The Department decided against this alternative in favor of this
Final Amendment, relying on its experience processing individual
exemption applications to create a smoother transition between the QPAM
Exemption and the individual exemption program so that a QPAM's client
Plans have certainty regarding their rights after an ineligibility
event occurs.
While QPAMs, including small QPAMs, will experience increased costs
associated with the Final Amendment, for most QPAMs, these costs are
expected to be small compared to the size thresholds required for an
investment manager to qualify as a QPAM. This is demonstrated in Table
5 above.
Amend the QPAM Exemption to require QPAMs to amend Written
Management Agreements with up-front terms that apply in the event of
ineligibility.
In the Proposed Amendment, the Department included a requirement
for all QPAMs to amend their WMAs with client Plans to include:
(1) A provision providing that in the event the QPAM, its
Affiliates, and five percent or more owners engage in conduct resulting
in a Criminal Conviction or receipt of a Written
[[Page 23137]]
Ineligibility Notice, the QPAM would not restrict its client Plan's
ability to terminate or withdraw from its arrangement with the QPAM;
(2) 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 failure of such QPAM to
remain eligible for relief under the QPAM Exemption as a result of
conduct that leads to a Criminal Conviction or Prohibited Misconduct;
and
(3) A provision requiring the QPAM to agree not to employ or
knowingly engage any individual that Participated In the conduct that
is the subject of a Criminal Conviction or Prohibited Misconduct.
As discussed in greater detail above in the preamble, the
Department believes that these provisions provide an important
protection to Plans, participants, beneficiaries, and IRA owners.
However, based on the feedback from commenters, the Department has
removed the requirement to amend WMAs. Instead, the Final Amendment
requires QPAMs to notify and agree to these provisions with Plans in
the Notice QPAMs must send to Plans within 30 days after the
Ineligibility Date. The Department determined the approach in the Final
Amendment provides the same protection to Plans while significantly
reducing the cost burden for large and small QPAMs to amend their WMAs.
Asset Management and Equity Thresholds
The Department considered two alternatives related to the asset
management and equity thresholds, described below.
Amend the QPAM Exemption to remove asset management and equity
thresholds.
As an alternative to updating the asset management and equity
thresholds, the Department revisited whether such thresholds could be
removed entirely from the exemption. Removing thresholds would allow
more small investment managers to qualify for relief under the
exemption. However, the Department determined that this approach would
be inconsistent with one of the core concepts upon which the QPAM
Exemption was based. In the absence of an appropriate alternative
ensuring that a QPAM will remain an independent decision-maker, free
from the influence of other Plan fiduciaries, the Department is unable
to justify the removal of the thresholds.
Update the asset management and equity thresholds to full CPI-
adjusted values at once.
The Proposed Amendment included CPI-adjusted values that would have
been fully updated to 2022 values. The Department received a variety of
comments regarding the possible unintended impact to QPAMs and their
client Plans who would not be able to satisfy such significant
increases at once. This could have resulted in smaller QPAMs losing
relief and caused significant disruption and cost to those small QPAMs
and their client Plans.
In order to minimize the impact of an immediate increase in the
asset and equity thresholds on small QPAMs who may lose QPAMs status,
the Department determined that the most appropriate method to update
the thresholds in the Final Amendment is to increase them in three-year
increments beginning in 2024 and ending in 2030. This approach will
limit the disruption an uncertain number of small QPAMs could
experience if they lose their eligibility to rely on the exemption due
to the increased thresholds by providing them with an extended period
to adjust their business models.
Steps the Agency Has Taken To Minimize the Impacts on Small Entities
The Department's decision to update the asset management and equity
thresholds could have a significant impact on some small QPAMs that no
longer qualify to use the exemption. As discussed in the Regulatory
Alternatives section, to reduce the impact on small QPAMs, the
thresholds were adjusted in three-year increments to give small QPAMs
time to make decisions and adjust.
Some small QPAMs may lose the QPAM portion of their business.
Others may adapt. There still may be other exemptions that these QPAMs
could use to service their Plan clients, or they could seek an
individual exemption that could allow them to continue offering QPAM
services, depending upon the facts and circumstances presented to the
Department in the exemption application.
Duplicate, Overlapping, or Relevant Federal Rules
The Department has attempted to avoid duplication of requirements.
The required policies and procedures and exemption audit are unique to
the circumstances of the particular transactions covered by the
exemption and do not replicate any other requirements by state or
federal regulations. The exemption permits respondents to satisfy the
requirements for written guidelines between the QPAM and property
manager with documents that are already in existence due to ordinary
and customary business practices, provided such documents contain the
required disclosures.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 requires each
federal agency to prepare a written statement assessing the effects of
any federal mandate in a proposed or final agency rule that may result
in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any one year by state, local, and
tribal governments, in the aggregate, or by the private sector.\180\
For purposes of the Unfunded Mandates Reform Act, as well as Executive
Order 12875, this Final Amendment does not include any federal mandate
that the Department expects would result in such expenditures by state,
local, or tribal governments, or the private sector.\181\
---------------------------------------------------------------------------
\180\ 2 U.S.C. 1501 et seq. (1995).
\181\ Enhancing the Intergovernmental Partnership, 58 FR 58093
(Oct. 28, 1993).
---------------------------------------------------------------------------
Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism, and requires adherence by federal agencies to specific
criteria in the process of their formulation and implementation of
policies that have ``substantial direct effects'' on the states, the
relationship between the national government and states, or on the
distribution of power and responsibilities among the various levels of
government.\182\ Federal agencies promulgating regulations that have
federalism implications must consult with state and local officials and
describe the extent of their consultation and the nature of the
concerns of state and local officials in the preamble to the final
rule.
---------------------------------------------------------------------------
\182\ Federalism, 64 FR 153 (Aug. 4, 1999).
---------------------------------------------------------------------------
In the Department's view, this Final Amendment will not have
federalism implications because it would not have direct effects on the
states, on the relationship between the national government and the
states, nor on the distribution of power and responsibilities among
various levels of government. The Department welcomed input from
affected states regarding this assessment in the Proposed Amendment but
received no comments.
General Information
The attention of interested persons is directed to the following:
[[Page 23138]]
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) and/or Code section 4975(c)(2) does not
relieve a fiduciary, or other Party in Interest with respect to a Plan
or IRA, from certain other provisions of ERISA and the Code, including
but not limited to any prohibited transaction provisions to which the
exemption does not apply and the general fiduciary responsibility
provisions of ERISA section 404 which require, among other things, that
a fiduciary act prudently and discharge their duties respecting the
Plan solely in the interests of the participants and beneficiaries of
the Plan. Additionally, the fact that a transaction is the subject of
an exemption does not affect the requirements of Code section 401(a),
including that the Plan must operate for the exclusive benefit of the
employees of the employer maintaining the Plan and their beneficiaries;
(2) In accordance with ERISA section 408(a) and Code section
4975(c)(2), and based on the entire record, the Department finds that
this exemption is administratively feasible, in the interests of Plans,
their participants and beneficiaries, and IRA owners, and protective of
the rights of participants and beneficiaries of the Plan and IRA
owners;
(3) The Final Amendment to the QPAM Exemption is applicable to a
particular transaction only if the transaction satisfies the conditions
specified in the exemption; and
(4) The Final Amendment to the QPAM Exemption is supplemental to,
and not in derogation of, any other provisions of ERISA and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
PTE 84-14
PTE 84-14 is amended to read as follows:
Section I--General Exemption
The restrictions of ERISA section 406(a)(1)(A) through (D) and the
taxes imposed by Code section 4975(a) and (b), by reason of Code
section 4975(c)(1)(A) through (D), shall not apply to a transaction
between a Party in Interest with respect to a Plan and an Investment
Fund (as defined in Section VI(b)) in which the Plan has an interest,
and which is managed by a Qualified Professional Asset Manager (QPAM)
(as defined in Section VI(a)), if the following conditions are
satisfied:
(a) At the Time of the Transaction (as defined in Section VI(i)),
the Party in Interest, or its Affiliate (as defined in Section VI(c)),
does not have the authority to--
(1) Appoint or terminate the QPAM as a manager of the Plan assets
involved in the transaction, or
(2) Negotiate on behalf of the Plan the terms of the management
agreement with the QPAM (including renewals or modifications thereof)
with respect to the Plan assets involved in the transaction;
Notwithstanding the foregoing, in the case of an Investment Fund in
which two or more unrelated Plans have an interest, a transaction with
a Party in Interest with respect to a Plan will be deemed to satisfy
the requirements of this Section I(a) if the assets of the Plan managed
by the QPAM in the Investment Fund, when combined with the assets of
other Plans established or maintained by the same employer (or
Affiliate thereof described in Section VI(c)(1) below) or by the same
employee organization, and managed in the same Investment Fund,
represent less than ten (10) percent of the assets of the Investment
Fund;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 2006-16 (71 FR 63786; October
31, 2006) (relating to securities lending arrangements) (as amended or
superseded),
(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools) (as amended or superseded), or
(3) Prohibited Transaction Exemption 82-87 (47 FR 21331; May 18,
1982) (relating to certain mortgage financing arrangements) (as amended
or superseded);
(c) The terms of the transaction, commitments, and investment of
fund assets, and any associated negotiations are determined by the QPAM
(or under the authority and direction of the QPAM) which represents the
interests of the Investment Fund. Either the QPAM, or (so long as the
QPAM retains full fiduciary responsibility with respect to the
transaction) a property manager acting in accordance with written
guidelines established and administered by the QPAM, makes the decision
on behalf of the Investment Fund to enter into the transaction,
provided that the transaction is not part of an agreement, arrangement,
or understanding designed to benefit a Party in Interest. In exercising
its authority, the QPAM must ensure that any transaction, commitment,
or investment of fund assets for which it is responsible is based on
its own independent exercise of fiduciary judgment and free from any
bias in favor of the interests of the plan sponsor or other parties in
interest. The QPAM may not be appointed or relied upon to uncritically
approve transactions, commitments, or investments negotiated, proposed,
or approved by the plan sponsor, or other parties in interest. The
prohibited transaction relief provided under this exemption applies
only in connection with an Investment Fund that is established
primarily for investment purposes. No relief is provided under this
exemption for any transaction that has been planned, negotiated, or
initiated by a Party in Interest, in whole or in part, and presented to
a QPAM for approval to the extent the QPAM would not have sole
responsibility with respect to the transaction as required by this
Section I(c);
(d) The Party in Interest dealing with the Investment Fund is
neither the QPAM nor a person Related to the QPAM;
(e) The transaction is not entered into with a Party in Interest
with respect to any Plan whose assets are managed by the QPAM, when
combined with the assets of other Plans established or maintained by
the same employer (or Affiliate thereof described in subsection
VI(c)(1) below) or by the same employee organization, and managed by
the QPAM, represent more than twenty (20) percent of the total client
assets managed by the QPAM at the time of the transaction; and
(f) At the Time of the Transaction, and at the time of any
subsequent renewal or modification thereof that requires the consent of
the QPAM, the terms of the transaction are at least as favorable to the
Investment Fund as the terms generally available in arm's length
transactions between unrelated parties.
(g) Integrity.
(1) Ineligibility due to a Criminal Conviction or Prohibited
Misconduct. Subject to the Ineligibility Date provision set forth in
Section I(h), a QPAM is ineligible to rely on this exemption for 10
years following:
(A) A Criminal Conviction, as defined in Section VI(r), of the QPAM
or any Affiliate thereof (as defined in Section VI(d)), or any owner,
direct or indirect, of a five (5) percent or more interest in the QPAM;
or
(B) The QPAM, any Affiliate thereof (as defined in Section VI(d)),
or any owner, direct or indirect, of a five (5) percent or more
interest in the QPAM Participates In Prohibited Misconduct as defined
in Section VI(s) and VI(t); or
[[Page 23139]]
(2) Notice to the Department regarding Participation In Prohibited
Misconduct. The QPAM must submit a notice to the Department at
[email protected] if the QPAM, any Affiliate (as defined in Section VI(d)),
or any owner, direct or indirect, of a five (5) percent or more
interest in the QPAM, Participates In Prohibited Misconduct as defined
in Section VI(s) and VI(t), or enters into an agreement with a foreign
government, however denominated by the laws of the relevant foreign
government, that is substantially equivalent to a non-prosecution
agreement (NPA) or deferred prosecution agreement (DPA) described in
section VI(s)(1). The notice must be sent within 30 calendar days after
the Ineligibility Date for the Prohibited Misconduct as determined
pursuant to Section (I)(h)(2) below or the execution date of the
substantially-equivalent foreign NPA or DPA, and the notice must
include a description of the Prohibited Misconduct or the
substantially-equivalent foreign NPA or DPA and the name of and contact
information for the QPAM.
(h) Ineligibility Date. A QPAM shall become ineligible:
(1) as of the ``Conviction Date,'' which is the date of the
judgment of the trial court (or the date of the judgment of any court
in a foreign jurisdiction that is the equivalent of a U.S. federal or
state trial court), regardless of whether that judgment is appealed; or
(2) (A) as of the date on or after June 17, 2024 that the QPAM, any
Affiliate thereof (as defined in Section VI(d)), or any owner, direct
or indirect, of a five (5) percent or more interest in the QPAM
executes a non-prosecution agreement, or a deferred prosecution
agreement described in Section VI(s)(1); or
(B) as of the date on or after June 17, 2024 that a final judgment
(regardless of whether the judgment is appealed) or a court-approved
settlement is ordered by a Federal or State criminal or civil court in
connection with determining that the QPAM, any Affiliate thereof (as
defined in Section VI(d)), or any owner, direct or indirect, of a five
(5) percent or more interest in the QPAM has engaged in Prohibited
Misconduct as defined in Section VI(s)(2) and VI(t).
A person will become eligible to rely on this exemption again only
upon a subsequent judgment reversing such person's conviction or civil
judgment, the effective date of any individual prohibited transaction
exemption it receives that expressly permits the relief in this
exemption, or the expiration of the 10-year ineligibility period.
(i) One-Year Transition Period Due to Ineligibility (One-Year
Transition Period or Transition Period). Any QPAM that becomes
ineligible under subsection I(g)(1) must provide a Transition Period
for its client Plans. Relief is available for transactions (including
past transactions) under this exemption during the Transition Period
for a maximum period of one year after the Ineligibility Date, provided
that the QPAM complies with each condition of the exemption throughout
the one-year period (including those additional conditions specified in
this subsection (i)). The relief is available during the Transition
Period under this exemption only for the QPAM's client Plans that had a
pre-existing Written Management Agreement required under subsection
VI(a) with the QPAM on the Ineligibility Date. A QPAM must ensure that
it manages Plan assets prudently and loyally during the Transition
Period. During the Transition Period, the QPAM must comply with the
following additional conditions:
(1) Within 30 days after the Ineligibility Date, the QPAM must
provide notice to the Department at [email protected] and each of its Client
Plans stating:
(A) Its failure to satisfy subsection I(g)(1) and the resulting
initiation of this One-Year Transition Period;
(B) That during the Transition Period, the QPAM:
(i) Agrees not to restrict the ability of a client Plan to
terminate or withdraw from its arrangement with the QPAM;
(ii) Will not impose any fees, penalties, or charges on client
Plans in connection with the process of terminating or withdrawing from
an Investment Fund managed by the QPAM except for reasonable fees,
appropriately disclosed in advance, that are specifically designed to:
(a) prevent generally recognized abusive investment practices, or (b)
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 that such fees are applied consistently
and in a like manner to all such investors;
(iii) Agrees to indemnify, hold harmless, and promptly restore
actual losses to the client Plans for any damages that directly result
to them from a violation of applicable laws, a breach of contract, or
any claim arising out of the conduct that is the subject of a Criminal
Conviction or Prohibited Misconduct of the QPAM, an Affiliate (as
defined in Section VI(d)), or an owner, direct or indirect, of a five
(5) percent or more interest in the QPAM. Actual losses specifically
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 Code section 4975 as a result of a QPAM's inability to rely upon
the relief in the QPAM Exemption; and
(iv) Will not employ or knowingly engage any individual that
Participated In the conduct that is the subject of a Criminal
Conviction or Prohibited Misconduct, regardless of whether the
individual is separately convicted in connection with the criminal
conduct.
(C) An objective description of the facts and circumstances upon
which the Criminal Conviction or Prohibited Misconduct is based,
written with sufficient detail to fully inform the client Plan's
fiduciary of the nature and severity of the conduct so that the
fiduciary can satisfy its duties of prudence and loyalty under section
404 of ERISA (29 U.S.C. 1104), as applicable, with respect to hiring,
monitoring, evaluating, and retaining the QPAM in a non-QPAM capacity;
(2) As of the Ineligibility Date under Section I(h), the QPAM must
not employ or knowingly engage any individual that Participated In the
conduct that is the subject of a Criminal Conviction or that
Participated In Prohibited Misconduct causing ineligibility of the QPAM
under subsection I(g)(1); and
(3) After the One-Year Transition Period expires, and if the
Criminal Conviction is not reversed on appeal, the entity may not rely
on the relief provided in this exemption until the expiration of the
10-year ineligibility period unless it obtains an individual exemption
permitting it to continue relying upon this exemption.
(j) Requests for an Individual Exemption. A QPAM that is ineligible
or anticipates that it will become ineligible due to an actual or
possible Criminal Conviction or Participating In Prohibited Misconduct
as defined in Sections VI(r) and VI(s) may apply for an individual
exemption from the Department to continue to rely on the relief
provided in this exemption for a longer period than the One-Year
Transition Period. An applicant should review the Department's most
recently granted individual exemptions involving Section I(g)
ineligibility with the expectation that similar conditions will be
required of the applicant, if the Department proposes and grants a
requested exemption. To that end, if an applicant requests the
Department to exclude any term or condition from its
[[Page 23140]]
exemption that is included in a recently granted individual exemption,
the applicant must include a detailed statement with its exemption
application explaining the reason(s) why the proposed variation is
necessary and in the interest and protective of affected Plans, their
participants and beneficiaries, and individuals for whose benefit a
Plan described in Code section 4975(e)(1)(B) or (C) is established (IRA
owners). The Department will review such requests consist with the
requirements of ERISA section 408(a) and Code section 4975(c)(2). Such
applicants also should provide detailed information in their
applications quantifying the specific cost or harms in dollar amounts,
if any, their client Plans would suffer if the QPAM could not rely on
the exemption after the Transition Period, including the specific
dollar amounts of investment losses resulting from foregone investment
opportunities and any evidence supporting the proposition that
investment opportunities would be available to client Plans on less
advantageous terms. An applicant should not construe the Department's
acceptance of an individual exemption application as a guarantee that
the Department will grant an individual exemption. A QPAM that submits
an individual exemption application must ensure that it manages Plan
assets prudently and loyally during the Transition Period in accordance
with section 404 of ERISA (29 U.S.C. 1104), as applicable.
(k) Any QPAM that relies upon this exemption must notify the
Department via email at [email protected]. Each QPAM that relies upon the
exemption must report the legal name of each business entity relying
upon the exemption in the email to the Department and any name the QPAM
may be operating under. This notification needs to be reported only
once unless there is a change to the legal name or operating name(s) of
the QPAM relying upon the exemption or the QPAM no longer is relying on
the exemptive relief provided in the exemption. The QPAM must provide
notice to the Department within ninety (90) calendar days of its
reliance on the exemption or a change to its legal or operating name.
If the QPAM inadvertently fails to provide notice to the Department
within the initial 90 calendar day period, it may notify the Department
of its reliance on the exemption or name change and failure to report
without losing the relief provided by this exemption. This notice must
be provided within an additional 90 calendar days along with an
explanation for the QPAM's failure to provide notice. A QPAM may notify
the Department if it is no longer relying upon this exemption at any
time.
Section II--Specific Exemption for Employers
The restrictions of ERISA sections 406(a), 406(b)(1), and 407(a)
and the taxes imposed by Code section 4975(a) and (b), by reason of
Code section 4975(c)(1)(A) through (E), shall not apply to:
(a) The sale, leasing, or servicing of Goods or the furnishing of
services, to an Investment Fund managed by a QPAM by a Party in
Interest with respect to a Plan having an interest in the fund, if--
(1) The Party in Interest is an employer any of whose employees are
covered by the Plan or is a person who is a Party in Interest by virtue
of a relationship to such an employer (described in Section VI(c)
below),
(2) The transaction is necessary for the administration or
management of the Investment Fund,
(3) The transaction takes place in the ordinary course of a
business engaged in by the Party in Interest with the general public,
(4) The amount attributable in any taxable year of the Party in
Interest to transactions engaged in with an Investment Fund pursuant to
this Section II(a) does not exceed one (1) percent of the gross
receipts derived from all sources for the prior taxable year of the
Party in Interest, and
(5) The requirements of Sections I(c) through (g) above are
satisfied with respect to the transaction.
(b) The leasing of office or commercial space by an Investment Fund
maintained by a QPAM to a Party in Interest with respect to a Plan
having an interest in the Investment Fund, if--
(1) The Party in Interest is an employer any of whose employees are
covered by the Plan or is a person who is a Party in Interest by virtue
of a relationship to such an employer (described in Section VI(c)
below);
(2) No commission or other fee is paid by the Investment Fund to
the QPAM or to the employer, or to an Affiliate of the QPAM or employer
(as defined in Section VI(c) below), in connection with the
transaction;
(3) Any unit of space leased to the Party in Interest by the
Investment Fund is suitable (or adaptable without excessive cost) for
use by different tenants;
(4) The amount of space covered by the lease does not exceed
fifteen (15) percent of the rentable space of the office building,
integrated office park, or of the commercial center (if the lease does
not pertain to office space);
(5) In the case of a Plan that is not an eligible individual
account plan (as defined in ERISA section 407(d)(3)), immediately after
the transaction is entered into, the aggregate fair market value of
employer real property and employer securities held by the Investment
Funds of the QPAM in which the Plan has an interest does not exceed ten
(10) percent of the fair market value of the assets of the Plan held in
those Investment Funds. In determining the aggregate fair market value
of employer real property and employer securities as described herein,
a Plan shall be considered to own the same proportionate undivided
interest in each asset of the Investment Fund or funds as its
proportionate interest in the total assets of the Investment Fund(s).
For purposes of this requirement, the term ``employer real property''
means real property leased to, and the term ``employer securities''
means securities issued by an employer any of whose employees are
covered by the Plan or a Party in Interest of the Plan by reason of a
relationship to the employer described in ERISA section 3(14)(E) or
(G); and
(6) The requirements of Sections I(c) through (g) above are
satisfied with respect to the transaction.
Section III--Specific Lease Exemption for QPAMs
The restrictions of ERISA section 406(a)(1)(A) through (D),
406(b)(1) and (2), and the taxes imposed by Code section 4975(a) and
(b), by reason of Code section 4975(c)(1)(A) through (E), shall not
apply to the leasing of office or commercial space by an Investment
Fund managed by a QPAM to the QPAM, a person who is a Party in Interest
of a Plan by virtue of a relationship to such QPAM described in ERISA
section 3(14)(G), (H), or (I), or a person not eligible for the General
Exemption of Section I above by reason of Section I(a), if--
(a) The amount of space covered by the lease does not exceed the
greater of 7,500 square feet or one (1) percent of the rentable space
of the office building, integrated office park, or of the commercial
center in which the Investment Fund has the investment;
(b) The unit of space subject to the lease is suitable (or
adaptable without excessive cost) for use by different tenants;
(c) At the Time of the Transaction, and at the time of any
subsequent renewal or modification thereof that requires the consent of
the QPAM, the terms of the transaction are not more
[[Page 23141]]
favorable to the lessee than the terms generally available in arm's
length transactions between unrelated parties; and
(d) No commission or other fee is paid by the Investment Fund to
the QPAM, any person possessing the disqualifying powers described in
Section I(a), or any Affiliate of such persons (as defined in Section
VI(c) below), in connection with the transaction.
Section IV--Transactions Involving Places of Public Accommodation
The restrictions of ERISA section 406(a)(1)(A) through (D) and
406(b)(1) and (2) and the taxes imposed by Code section 4975(a) and
(b), by reason of Code section 4975(c)(1)(A) through (E), shall not
apply to the furnishing of services and facilities (and Goods
incidental thereto) by a place of public accommodation owned by an
Investment Fund managed by a QPAM to a Party in Interest with respect
to a Plan having an interest in the Investment Fund, if the services
and facilities (and incidental Goods) are furnished on a comparable
basis to the general public.
Section V--Specific Exemption Involving QPAM-Sponsored Plans
The relief in Sections I, III, or IV above from the applicable
restrictions of ERISA section 406(a), section 406(b)(1) and (2), and
the taxes imposed by Code section 4975(a) and (b), by reason of Code
section 4975(c)(1)(A) through (E), shall apply to a transaction
involving the assets of a Plan sponsored by the QPAM or an Affiliate
(as defined in Section VI(c)) of the QPAM if:
(a) The QPAM has discretionary authority or control with respect to
the Plan assets involved in the transaction;
(b) The QPAM adopts Written Policies and Procedures that are
designed to ensure compliance with the conditions of the exemption;
(c) An independent auditor, who has appropriate technical training
or experience and proficiency with ERISA's fiduciary responsibility
provisions and so represents in writing, conducts an Exemption Audit on
an annual basis. Following completion of the Exemption Audit, the
auditor shall issue a written report to the Plan presenting its
specific findings regarding the level of compliance with: (1) the
Written Policies and Procedures adopted by the QPAM in accordance with
Section V(b) above, and (2) the objective requirements of this
exemption. The written report shall also contain the auditor's overall
opinion regarding whether the QPAM's program complied with: (1) the
Written Policies and Procedures adopted by the QPAM, and (2) the
objective requirements of the exemption. The Exemption Audit and the
written report must be completed within six months following the end of
the year to which the audit relates; and
(d) The transaction meets the applicable requirements set forth in
Sections I, III, or IV above.
Section VI--Definitions and General Rules
For purposes of this exemption:
(a) The term ``Qualified Professional Asset Manager'' or ``QPAM''
means an Independent Fiduciary which is--
(1) A bank, as defined in section 202(a)(2) of the Investment
Advisers Act of 1940 that has the power to manage, acquire or dispose
of assets of a Plan, which bank has, as of the last day of its most
recent fiscal year, Equity Capital in excess of $1,000,000. Effective
as of the last day of the fiscal year ending no later than December 31,
2024, substitute $1,570,300 for $1,000,000. Effective as of the last
day of the fiscal year ending no later than December 31, 2027,
substitute $2,140,600 for $1,000,000. Effective as of the last day of
the fiscal year ending no later than December 31, 2030, substitute
$2,720,000 for $1,000,000; or
(2) A savings and loan association, the accounts of which are
insured by the Federal Deposit Insurance Corporation that has made
application for and been granted trust powers to manage, acquire or
dispose of assets of a Plan by a State or Federal authority having
supervision over savings and loan associations, which savings and loan
association has, as of the last day of its most recent fiscal year,
Equity Capital or Net Worth in excess of $1,000,000. Effective as of
the last day of the fiscal year ending no later than December 31, 2024,
substitute $1,570,300 for $1,000,000. Effective as of the last day of
the fiscal year ending no later than December 31, 2027, substitute
$2,140,600 for $1,000,000. Effective as of the last day of the fiscal
year ending no later than December 31, 2030, substitute $2,720,000 for
$1,000,000; or
(3) An insurance company which is qualified under the laws of more
than one State to manage, acquire, or dispose of any assets of a Plan,
which company has, as of the last day of its most recent fiscal year,
Net Worth in excess of $1,000,000 and which is subject to supervision
and examination by a State authority having supervision over insurance
companies. Effective as of the last day of the fiscal year ending no
later than December 31, 2024, substitute $1,570,300 for $1,000,000.
Effective as of the last day of the fiscal year ending no later than
December 31, 2027, substitute $2,140,600 for $1,000,000. Effective as
of the last day of the fiscal year ending no later than December 31,
2030, substitute $2,720,000 for $1,000,000; or
(4) An investment adviser registered under the Investment Advisers
Act of 1940 that has total client assets under its management and
control in excess of $85,000,000 as of the last day of its most recent
fiscal year, and either (A) Shareholders' or Partners' Equity in excess
of $1,000,000, or (B) payment of all of its liabilities including any
liabilities that may arise by reason of a breach or violation of a duty
described in ERISA sections 404 and 406 is unconditionally guaranteed
by--(i) A person with a relationship to such investment adviser
described in subsection VI(c)(1) below if the investment adviser and
such Affiliate have Shareholders' or Partners' Equity, in the
aggregate, in excess of $1,000,000; or (ii) A person described in
(a)(1), (a)(2) or (a)(3) of Section VI above; or (iii) A broker-dealer
registered under the Securities Exchange Act of 1934 that has, as of
the last day of its most recent fiscal year, Net Worth in excess of
$1,000,000. Effective as of the last day of the fiscal year ending no
later than December 31, 2024, substitute $101,956,000 for $85,000,000
and $1,346,000 for $1,000,000. Effective as of the last day of the
fiscal year ending no later than December 31, 2027, substitute
$118,912,000 for $85,000,000 and $1,694,000 for $1,000,000. Effective
as of the last day of the fiscal year ending no later than December 31,
2030, substitute $135,868,000 for $85,000,000 and $2,040,000 for
$1,000,000;
Provided that such bank, savings and loan association, insurance
company, or investment adviser has acknowledged in a ``Written
Management Agreement'' that it is a fiduciary with respect to each Plan
that has retained the QPAM.
(5) By publication through notice in the Federal Register, the
Department will make subsequent annual adjustments for inflation to the
Equity Capital, Net Worth, and asset management thresholds in
subsection VI(a)(1) through (4), rounded to the nearest $10,000, no
later than January 31 of each year. The adjustments will be effective
as of the last day of the fiscal year in which the increase takes
effect, ending no later than December 31 of such fiscal year.
(b) An ``Investment Fund'' includes single customer and pooled
separate accounts maintained by an insurance company, individual trusts
and common, collective or group trusts maintained by a bank, and any
other
[[Page 23142]]
account or fund to the extent that the disposition of its assets
(whether or not in the custody of the QPAM) is subject to the
discretionary authority of the QPAM.
(c) For purposes of Section I(a) and Sections II and V above, an
``Affiliate'' of a person means--
(1) Any person directly or indirectly, through one or more
intermediaries, Controlling, Controlled by, or under Common Control
with the person;
(2) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, ten (10)
percent or more partner (except with respect to Section II this figure
shall be five (5) percent), or highly compensated employee as defined
in Code section 4975(e)(2)(H) (but only if the employer of such
employee is the Plan sponsor); and
(3) Any director of the person or any employee of the person who is
a highly compensated employee, as defined in Code section
4975(e)(2)(H), or who has direct or indirect authority, responsibility
or control regarding the custody, management or disposition of Plan
assets involved in the transaction. A named fiduciary (within the
meaning of ERISA section 402(a)(2)) of a Plan with respect to the Plan
assets involved in the transaction and an employer any of whose
employees are covered by the Plan will also be considered Affiliates
with respect to each other for purposes of Section I(a) above if such
employer or an Affiliate of such employer has the authority, alone or
shared with others, to appoint or terminate the named fiduciary or
otherwise negotiate the terms of the named fiduciary's employment
agreement.
(d) For purposes of Section I(g) above an ``Affiliate'' of a person
means--
(1) Any person directly or indirectly through one or more
intermediaries, Controlling, Controlled by, or under Common Control
with the person;
(2) Any director of, Relative of, or partner in, any such person;
(3) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, or a five
percent or more partner or owner; and
(4) Any employee or officer of the person who--
(A) Is a highly compensated employee (as defined in Code section
4975(e)(2)(H) or officer (earning ten (10) percent or more of the
yearly wages of such person); or
(B) Has direct or indirect authority, responsibility, or control
regarding the custody, management or disposition of Plan assets.
(e) The terms ``Controlling,'' ``Controlled by,'' ``under Common
Control with,'' and ``Controls'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(f) The term ``Party in Interest'' means a person described in
ERISA section 3(14) and includes a ``disqualified person,'' as defined
in Code section 4975(e)(2).
(g) The term ``Relative'' means a relative as that term is defined
in ERISA section 3(15), or a brother, a sister, or a spouse of a
brother or sister.
(h) A QPAM is ``Related'' to a Party in Interest for purposes of
Section I(d) above if, as of the last day of its most recent calendar
quarter: (i) The QPAM owns a ten (10) percent or more Interest in the
Party in Interest; (ii) a person Controlling, or Controlled by, the
QPAM owns a twenty (20) percent or more Interest in the Party in
Interest; (iii) the Party in Interest owns a ten (10) percent or more
Interest in the QPAM; or (iv) a person Controlling, or Controlled by,
the Party in Interest owns a twenty (20) percent or more Interest in
the QPAM. Notwithstanding the foregoing, a Party in Interest is
``Related'' to a QPAM if: (i) A person Controlling, or Controlled by,
the Party in Interest has an ownership Interest that is less than
twenty (20) percent but greater than ten (10) percent in the QPAM and
such person exercises Control over the management or policies of the
QPAM by reason of its ownership Interest; (ii) a person Controlling, or
Controlled by, the QPAM has an ownership Interest that is less than
twenty (20) percent but greater than ten (10) percent in the Party in
Interest and such person exercises Control over the management or
policies of the Party in Interest by reason of its ownership Interest.
For purposes of this definition:
(1) The term ``Interest'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership, or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an ``Interest'' if, other than in
a fiduciary capacity, the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(i) ``At the Time of the Transaction'' means the date upon which
the transaction is entered into. In addition, in the case of a
transaction that is continuing, the transaction shall be deemed to
occur until it is terminated. If any transaction is entered into on or
after December 21, 1982, or a renewal that requires the consent of the
QPAM occurs on or after December 21, 1982, and the requirements of this
exemption are satisfied at the time the transaction is entered into or
renewed, respectively, the requirements will continue to be satisfied
thereafter with respect to the transaction. Notwithstanding the
foregoing, this exemption shall cease to apply to a transaction exempt
by virtue of Section I or Section II above at such time as the
percentage requirement contained in Section I(e) is exceeded, unless no
portion of such excess results from an increase in the assets
transferred for discretionary management to a QPAM. For this purpose,
assets transferred do not include the reinvestment of earnings
attributable to those Plan assets already under the discretionary
management of the QPAM. Nothing in this paragraph shall be construed as
exempting a transaction entered into by an Investment Fund which
becomes a transaction described in ERISA section 406 or Code section
4975 while the transaction is continuing, unless the conditions of this
exemption were met either at the time the transaction was entered into
or at the time the transaction would have become prohibited but for
this exemption.
(j) The term ``Goods'' includes all things which are movable or
which are fixtures used by an Investment Fund but does not include
securities, commodities, commodities futures, money, documents,
instruments, accounts, chattel paper, contract rights, and any other
property, tangible or intangible, which, under the relevant facts and
circumstances, is held primarily for investment.
(k) For purposes of subsection VI(a)(1) and (2) above, the term
``Equity Capital'' means stock (common and preferred), surplus,
undivided profits, contingency reserves, and other capital reserves.
(l) For purposes of subsection VI(a)(2), (3), and (4) above, the
term ``Net Worth'' means capital, paid-in and contributed surplus,
unassigned surplus, contingency reserves, group contingency reserves,
and special reserves.
(m) For purposes of subsection VI(a)(4) above, the term
``Shareholders' or Partners' Equity'' means the equity
[[Page 23143]]
shown in the most recent balance sheet prepared within the two years
immediately preceding a transaction undertaken pursuant to this
exemption, in accordance with generally accepted accounting principles.
(n) The term ``Plan'' refers to an employee benefit plan described
in ERISA section 3(3) and/or a plan described in Code section
4975(e)(1).
(o) For purposes of Section VI(a) above, the term ``Independent
Fiduciary'' means a fiduciary managing the assets of a Plan in an
Investment Fund that is independent of and unrelated to the employer
sponsoring such Plan. For purposes of this exemption, the fiduciary
will not be deemed to be independent of and unrelated to the employer
sponsoring the Plan if such fiduciary directly or indirectly Controls,
is Controlled by, or is under Common Control with the employer
sponsoring the Plan. Notwithstanding the foregoing: (1) for the period
from December 21, 1982, through November 3, 2010, a QPAM managing the
assets of a Plan in an Investment Fund will not fail to satisfy the
requirements of this section solely because such fiduciary is the
employer sponsoring the Plan or directly or indirectly Controls, is
Controlled by, or is under Common Control with the employer sponsoring
the Plan; and (2) effective after November 3, 2010 a QPAM acting as a
manager for its own Plan or the Plan of an Affiliate (as defined in
subsection VI(c)(1) above) will be deemed to satisfy the requirements
of this section if the requirements of Section V above are met.
(p) An ``Exemption Audit'' of a Plan must consist of the following:
(1) A review of the Written Policies and Procedures adopted by the
QPAM pursuant to Section V(b) above for consistency with each of the
objective requirements of this exemption (as described in Section VI(q)
below);
(2) A test of a representative sample of the Plan's transactions
during the audit period that is sufficient in size and nature to afford
the auditor a reasonable basis:
(A) To make specific findings regarding whether the QPAM is in
compliance with (i) the Written Policies and Procedures adopted by the
QPAM pursuant to Section VI(q) below and (ii) the objective
requirements of this exemption, and
(B) To render an overall opinion regarding the level of compliance
of the QPAM's program with subsection VI(p)(2)(A)(i) and (ii) above;
(3) A determination as to whether the QPAM has satisfied the
definition of a QPAM under the exemption; and
(4) Issuance of a written report describing the steps performed by
the auditor during the course of its review and the auditor's findings.
(q) For purposes of Section VI(p), the Written Policies and
Procedures must describe the following objective requirements of this
exemption and the steps adopted by the QPAM to ensure compliance with
each of these requirements:
(1) The definition of a QPAM in Section VI(a);
(2) The requirement of Sections V(a) and I(c) regarding the
discretionary authority or control of the QPAM with respect to the Plan
assets involved in the transaction, in negotiating the terms of the
transaction and with respect to the decision on behalf of the
Investment Fund to enter into the transaction;
(3) For a transaction described in Section I above:
(A) That the transaction is not entered into with any person who is
excluded from relief under Section I(a), Section I(d), or Section I(e)
above;
(B) That the transaction is not described in any of the class
exemptions listed in Section I(b) above;
(4) If the transaction is described in Section III above:
(A) That the amount of space covered by the lease does not exceed
the limitations described in Section III(a) above, and
(B) That no commission or other fee is paid by the Investment Fund
as described in Section III(d) above.
(r) ``Criminal Conviction'' occurs when a QPAM, any Affiliate
thereof (as defined in Section VI(d)), or any owner, direct or
indirect, of a five (5) percent or more interest in the QPAM:
(1) is convicted in a U.S. federal or state court or released from
imprisonment, whichever is later, as a result of any felony involving
abuse or misuse of such person's Plan position or employment, or
position or employment with a labor organization; any felony arising
out of the conduct of the business of a broker, dealer, investment
adviser, bank, insurance company or fiduciary; income tax evasion; any
felony involving the larceny, theft, robbery, extortion, forgery,
counterfeiting, fraudulent concealment, embezzlement, fraudulent
conversion, or misappropriation of funds or securities; conspiracy or
attempt to commit any such crimes or a crime in which any of the
foregoing crimes is an element; or any crime that is identified or
described in ERISA section 411; or
(2) is convicted by a foreign court of competent jurisdiction or
released from imprisonment, whichever is later, as a result of a crime,
however denominated by the laws of the relevant foreign government,
that is substantially equivalent to an offense described in(r)(1) above
(excluding convictions and imprisonment that occur within a foreign
country that is included on the Department of Commerce's list of
``foreign adversaries'' that is codified in 15 CFR 7.4, as amended).
(s) ``Prohibited Misconduct'' means when a QPAM, any Affiliate
thereof (as defined in Section VI(d)), or any owner, direct or
indirect, of a five (5) percent or more interest in the QPAM:
(1) Enters into a non-prosecution (NPA) or deferred prosecution
agreement (DPA) on or after June 17, 2024 with a U.S. federal or state
prosecutor's office or regulatory agency, where the factual allegations
that form the basis for the NPA or DPA would have constituted a crime
described in Section VI(r) if they were successfully prosecuted; or
(2) Is found or determined in a final judgment, or court-approved
settlement by a Federal or State criminal or civil court that is
entered on or after June 17, 2024 in a proceeding brought by the
Department, the Department of Treasury, the Internal Revenue Service,
the Securities and Exchange Commission, the Department of Justice, the
Federal Reserve Bank, the Office of the Comptroller of the Currency,
the Federal Depository Insurance Corporation, the Commodities Futures
Trading Commission, a state regulator, or state attorney general to
have Participated In one or more of the following categories of conduct
irrespective of whether the court specifically considers this exemption
or its terms:
(A) engaging in a systematic pattern or practice of conduct that
violates the conditions of this exemption in connection with otherwise
non-exempt prohibited transactions;
(B) intentionally engaging in conduct that violates the conditions
of this exemption in connection with otherwise non-exempt prohibited
transactions; or
(C) providing materially misleading information to the Department,
the Department of Treasury, the Internal Revenue Service, the
Securities and Exchange Commission, the Department of Justice, the
Federal Reserve Bank, the Office of the Comptroller of the Currency,
the Federal Depository Insurance Corporation, the Commodities Futures
Trading Commission, a state regulator or a state attorney general in
[[Page 23144]]
connection with the conditions of the exemption.
(t) ``Participate In,'' ``Participates In,'' ``Participating In,''
``Participated In,'' and ``Participation In'' all refer not only to
active participation in Prohibited Misconduct, but also to knowing
approval of the conduct, or knowledge of such conduct without taking
active steps to prohibit such conduct, including reporting the conduct
to the appropriate compliance personnel.
(u) The QPAM maintains the records necessary to enable the persons
described in subsection (u)(2) below to determine whether the
conditions of this exemption have been met with respect to a
transaction for a period of six years from the date of the transaction
in a manner that is reasonably accessible for examination. No
prohibited transaction will be considered to have occurred solely due
to the unavailability of such records if they are lost or destroyed due
to circumstances beyond the control of the QPAM before the end of the
six-year period.
(1) No party, other than the QPAM responsible for complying with
this Section VI(u), will be subject to the civil penalty that may be
assessed under ERISA section 502(i) or the excise tax imposed by Code
section 4975(a) and (b), if applicable, if the records are not
maintained or available for examination as required by this Section
VI(u) below.
(2) Except as provided in subsection (3) or precluded by 12 U.S.C.
484 (regarding limitations on visitorial powers for national banks),
and notwithstanding any provisions of ERISA section 504(a)(2) and (b),
the records are reasonably available at their customary location during
normal business hours for examination by:
(A) Any authorized employee of the Department or the Internal
Revenue Service or another state or federal regulator,
(B) Any fiduciary of a Plan invested in an Investment Fund managed
by the QPAM,
(C) Any contributing employer and any employee organization whose
members are covered by a Plan invested in an Investment Fund managed by
the QPAM, or
(D) Any participant or beneficiary of a Plan invested in an
Investment Fund managed by the QPAM.
(3) None of the persons described in subsection (2)(B) through (D)
above are authorized to examine records regarding an Investment Fund
that they are not invested in, privileged trade secrets or privileged
commercial or financial information of the QPAM, or information
identifying other individuals.
(4) Should the QPAM refuse to disclose information to a person
described in subsection (2)(A) through (D) above on the basis that the
information is exempt from disclosure, the QPAM must provide a written
notice advising the requestor of the reasons for the refusal and that
the Department may request such information by the close of the
thirtieth (30th) day following the request.
(5) A QPAM's failure to maintain the records necessary to determine
whether the conditions of this exemption have been met will result in
the loss of the relief provided under this exemption only for the
transaction or transactions for which such records are missing or have
not been maintained. Such failure does not affect the relief for other
transactions if the QPAM maintains required records for such
transactions in compliance with this Section VI(u).
Signed at Washington, DC, this 18th day of March, 2024.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2024-06059 Filed 4-2-24; 8:45 am]
BILLING CODE 4510-29-P
