Is the qualified professional wealth manager exemption threatened?


In late July, the Department of Labor’s Benefits Security Administration announced a proposed amendment to the 84-14 Class Prohibited Transaction Exemption.

The PTE is commonly known as the “Qualified Professional Asset Manager Exemption”, and its basic purpose is to allow various parties connected to pension plans covered by the fiduciary provisions of the Income Security Act pension plan employees from engaging in otherwise prohibited transactions involving pension plans. and individual retirement account assets. To satisfy the QPAM exemption, the assets in question must be managed by QPAMs that are “independent of interested parties” to the regime and who meet, among other things, specified financial standards.

The proposed amendment includes a number of significant changes. As summarized in an EBSA press release, the amendment would better protect schemes and their participants and beneficiaries, among other changes, by resolving what EBSA calls “perceived ambiguity” about whether convictions foreign criminal offenses are included within the scope of the inadmissibility provision of the exemption. The amendment further expands the ineligibility provision to include other types of serious misconduct. Other provisions are intended to mitigate potential costs and disruptions to plans and IRAs when a QPAM becomes ineligible due to conviction or other gross misconduct.

Other changes made by the Amendments include an update to the asset and equity management thresholds in the current definition of “qualified professional asset manager” and the addition of a record keeping requirement. standard which is currently lacking in the exemption. Finally, the amendment aims to clarify the independence and the required control that an AQAM must have with regard to investment decisions and transactions.

A surprise proposal

Speaking to PLANADVISER about the implications of the amendment, Carol McClarnon, tax group partner at Eversheds Sutherland, calls it “unexpected and worrying”.

“In its press release announcing the proposal, the DOL named six goals of the proposed changes,” McClarnon said. “At first glance, these goals appear to be sensible clarifications. However, the actual conditions proposed to achieve these goals reveal that the proposal would significantly increase the costs and liability exposure of managers, perhaps even limiting the QPAM exemption as a viable solution.

As McClarnon observes, prior to the publication of the proposal last week, the common perception among pension industry regulatory experts was that the DOL was unlikely to order EBSA to take a measure like this, because the key DOL sub-agency is still operating without a Senate-confirmed Chief.

“The perception has been that EBSAs have put a lot of things on hold,” McClarnon said. “We knew the QPAM issue was on EBSA’s radar, but I think it’s fair to say that few expected to see a proposal as ambitious as this come out now. Frankly, I was quite surprised to see this proposal come out.

A fundamental derogation

McClarnon says the QPAM exemption is of fundamental importance to the functioning of the modern pension plan system. Indeed, many plans invest in pooled funds and group-type investments with other plans and third parties, and because of the way ERISA defines and treats “interested parties” to pension plans or other institutional investors subject to the fiduciary provisions of ERISA. Any party interested in a given pension plan may be barred from entering into certain transactions with that plan if the transaction results in additional compensation for the interested party, McClarnon notes.

Interested parties may include, but are not limited to, trustees or employees of the plan, any person who provides services to the plan, an employer whose employees are covered by the plan, an organization of employees whose members are covered by the plan , a person who owns 50% or more of such an employer or employee organization, or relatives of such persons.

McClarnon explains that certain plan transactions with interested parties are prohibited under ERISA and must, regardless of their significance, be disclosed in the plan’s annual report to the DOL.

“In practice, the QPAM exemption is used very commonly and for a variety of purposes,” McClarnon says. “Just imagine if you had, say, 1,000 ERISA-covered retirement plans invested in a given fund. Each of those plans will have a ton of interested parties. In the most basic terms, the QPAM exemption states that, if you, as an asset manager, meet the regulatory requirements, most dealings with these interested parties in the plan are acceptable. The new proposal addresses qualifications in a significant way.”

A heavy proposition

Based on his initial reading and discussions with his colleagues, McClarnon says the proposal appears to be “so burdensome that you could almost say that it essentially changes the availability of the QPAM exemption.” She points out that in the nearly four decades since the inception of the QPAM exemption framework, the world of financial services has become much more interconnected.

“In today’s industry, you just have a lot more complexity, with larger conglomerates and highly sophisticated international entities doing business with US pension plans,” McClarnon says. “The proposed framework, if not adjusted after the comment period, will make it very difficult for these types of entities to reliably and effectively use the QPAM exemption, in my view.”

As an example, McClarnon points to the provision of the proposal that states that a QPAM-affiliated person’s entry into a non-suit agreement will trigger the ineligibility restrictions.

“To me, that’s concerning because you don’t usually admit to foul play when you’re entering into a deal like this,” McClarnon said. “There is also a new concept and a new condition that they called ‘integrity’. The proposal indicates that the DOL may prevent an entity from using the QPAM exemption based on its own internal review process and the determination that a user of the QPAM exemption has not acted with integrity, which which he defines in the proposal using various examples and stipulations. In my opinion, there are very few due process remedies for an entity in this situation.

McClarnon says she is perhaps most troubled by the proposal’s provision that seeks to insulate pension plans from harm if a service provider they work with has their QPAM exemption revoked by EBSA. Consider the potential consequences of such a framework, she says.

“They don’t want to cause any difficulties with the plans in the event of a disqualification, which makes sense,” McClarnon said. “However, the proposal appears to require the investment manager to sign a written agreement in which they state that, if there is a criminal conviction or the ineligibility provision is triggered for some other reason, QPAM itself must bear the full cost of helping the plan transition into a new investment.Just imagine the potential cost of this if we are considering a large pension plan or group of plans.

What happens after

McClarnon stresses that she understands that the DOL and EBSA have essential work to do to protect pension plans and their participants. However, it expects the investment community to respond strongly to this proposal and that the comment period can help EBSA refine the proposal in a constructive manner.

“The potential for unintended consequences here is so great,” McClarnon says. “The exemption serves an essential purpose in the current pension plan system. It is intended to allow plans to be able to invest in things that would otherwise be subject to technical restrictions on prohibited transactions that are not actually related to potential operational conflicts of interest. If the proposal is not refined, you might see investment providers unwilling to take on this type of exposure.

The one element of the proposal she would most like to see changed, McClarnon says, is the contractual requirement for QPAM to cover the full expenses of a transition of funds on behalf of a plan.

“I really don’t like the forced contract requirement,” McClarnon says. “I don’t think EBSA should be telling people that these contracts need to be made. I also want to point out that, yes, a giant financial services company may be able to figure out how to make this new framework work, and they may even have the scale and resources to meet the disclaimers But many smaller advisors use this exemption all the time, and in fact, it’s built into many standard operating agreements used by all different parts of the industry. This is very common in all sorts of mutual trust arrangements, for example, and we know these investments are becoming more and more popular. There are so many pitfalls for the oblivious and the foolhardy in all of this.

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