The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code Of 1986, as amended (“Code”) contain broad prohibitions on transactions between ERISA-covered employee benefit plans and Individual Retirement Accounts (“Plans”), as well as certain people or entities closely connected to such Plans, known as “parties in interest” or “disqualified persons”. Absent an exemption, the types of transactions that are prohibited include sales and leases or loans between a Plan and a party or parties in interest, or services provided to the Plan by a party or parties in interest. Although any such transactions are generally prohibited, the Department of Labor (“DOL”) is permitted to make rules granting certain exceptions or exemptions to this prohibition. One such exemption (the “QPAM Exemption” or “Exemption”) applies to transactions involving independent qualified professional asset managers (“QPAMs”). QPAMs include banks, savings and loan associations, insurance companies and registered investment advisers meeting certain requirements.

The QPAM Exemption has existed since 1984 as set forth in Prohibited Transaction Exemption (“PTE”) 84-14, but the DOL recently amended the Exemption in a Final Amendment to PTE 84-14 published in the Federal Register on April 3, 2024 (“Final Amendment”). Because QPAMs have discretionary control over Plan funds and maintain a certain degree of independence from other Plan fiduciaries, transactions handled by a QPAM are less likely to present an opportunity for a party in interest to abuse its power or influence over Plan assets. For this reason, when Plan assets are held in investment funds managed by QPAMs, the DOL allows such QPAMs to engage in transactions with parties in interest or disqualified persons, subject to certain conditions. Those conditions have historically included the following:

• The QPAM must enter into a written management agreement stating that such person or entity is a fiduciary with respect to client Plans. The QPAM is subject to the fiduciary duties of prudence and undivided loyalty set forth in ERISA Section 404.
• The QPAM must meet certain equity capital, net worth and/or asset under management requirements. Essentially, the QPAM must meet certain dollar amount requirements to ensure that the QPAM is large enough to be sufficiently independent.
• The QPAM cannot engage in any transactions involving its own self-dealing, conflicts of interest or kickbacks. The QPAM must remain sufficiently independent.
• The QPAM must not have been convicted of certain crimes (or must have obtained an individual exemption from the DOL despite such convictions).

The Final Amendment, effective 75 days after its publication in the Federal Register on April 3, 2024, makes the following changes to the conditions required for eligibility under the Exemption:

• The Final Amendment changes the equity capital, net worth and/or asset under management requirements for Exemption qualification. In order to be eligible for the Exemption, QPAMs must meet certain equity capital, net worth and/or asset under management requirements. The Final Amendment updates these thresholds based on inflation since 1984, with increases phased in over the period between 2024 and 2030. This phasing of increases is meant to mitigate costs for small QPAMs that would lose their eligibility based on the increased thresholds.
• The Final Amendment requires a QPAM to provide a one-time notice to the DOL that the QPAM is relying upon the Exemption. All QPAMs must report their reliance on the QPAM Exemption by emailing the DOL at QPAM@dol.gov. The email must include the legal name of the QPAM and any other name the QPAM may be operating under. Any new QPAMs, or any QPAM that subsequently changes its name, will be required to submit a new notification within 90 days.
• The Final Amendment updates the list of crimes enumerated in the prior version of the Exemption to explicitly include foreign crimes that are “substantially equivalent” to the previously listed crimes. This update ameliorates any previous lack of clarity regarding the coverage of certain foreign crimes under the rules of the Exemption.
• The Final Amendment expands the circumstances that may lead to ineligibility. The Final Amendment expands ineligibility to include QPAMs and, as applicable, affiliates or five percent owners of QPAMs, which participate in certain “Prohibited Misconduct”. Prohibited Misconduct includes (a) entering into a non-prosecution agreement (“NPA”) or deferred prosecution agreement (“DPA”) with a US 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 otherwise prohibited under the QPAM Exemption if they were successfully prosecuted or (b) engaging in certain other misconduct as determined in a final judgement or court-approved settlement.
• The Final Amendment includes new recordkeeping requirements for QPAMs. The Final Amendment requires that QPAMs maintain records sufficient to determine whether the conditions of the Exemption have been met with respect to the transactions it engages in. QPAMs will generally be required to disclose these records to certain parties upon request.

For Plans working with QPAMs, it is important to be aware that these changes could potentially disqualify existing QPAMs from eligibility for the QPAM Exemption. For this reason, the Final Amendment also provides for a one-year “Transition Period” with respect to QPAMs that become ineligible for the Exemption. This Transition Period is intended provide Plans with a reasonable time frame to decide whether to continue its relationship with an ineligible QPAM or look for alternative QPAMs or investment managers, thereby minimizing the costs and disruptions that may be caused by the Final Amendment’s changes to the rules of the Exemption. Additionally, ineligible QPAMs may apply for an individual exemption during the Transition Period, if appropriate.

QPAMs that become ineligible to rely on the Exemption after the effective date of the Final Amendment will need to provide client Plans and the DOL with a notice of such ineligibility within 30 days of the date that the QPAM becomes ineligible. The required notice provisions include a statement that during the Transition Period, the QPAM will not restrict client Plans’ ability to withdraw from or terminate its arrangement with the QPAM or impose fees in connection with such termination or withdrawal (other than certain reasonable fees as identified within the rules of the Exemption). The notice must also state that the QPAM will indemnify the client Plans for any damages directly resulting from certain misconduct or breach of contract on the part of the QPAM or its affiliates or five percent owners.