The U.S. Department of Labor (“DOL”) has recently extended the relief previously granted to five financial institutions which allows these banks to continue to rely on the QPAM exemption (Prohibited Transaction Exemption 84-14). The QPAM exemption permits ERISA plans and comingled funds to engage in transactions with “parties in interest” to those ERISA clients without running afoul of ERISA’s prohibited transaction rules, provided that the ERISA plan or fund is managed by a qualified professional asset manager (“QPAM”) and certain other conditions are satisfied. One of the conditions of the QPAM exemption is that neither the QPAM, nor any of its “affiliates” has been convicted of a felony regarding certain enumerated crimes.
A QPAM’s disqualification should not be confused with the disqualification under ERISA Section 411 from serving as an administrator, fiduciary or advisor to an employee benefit plan due to conviction of certain enumerated felonies. The QPAM exemption is a useful compliance tool, but it is not required to act as a fiduciary or to manage ERISA “plan assets.” QPAM status is sometimes seen as a desired credential even when the asset manager has other ways to comply with ERISA’s prohibited transaction rules.
Unlike disqualification under Section 411 of ERISA, the QPAM disqualification condition extends to a covered conviction of any of a broad range of persons affiliated with the QPAM, even if the convicted affiliate is not involved with the QPAM’s management activities in any way. The QPAM exemption broadly defines “affiliate” for this purpose to include: (1) any person directly or indirectly controlling, controlled by, or under common control with the QPAM; (2) any director of, relative of, or partner in the QPAM; (3) any entity in which the QPAM is an officer, director or five percent or more owner; and (4) any employee or officer of the QPAM that is a highly compensated employee and has control over the management or disposition of the ERISA client’s assets.
As a result of the breadth of the QPAM disqualification, many large financial institutions have had to seek DOL relief in recent years. The five financial institutions that received the recent extended relief are JPMorgan Chase & Co., Citigroup, Inc., Deutsche Bank AG, UBS Assets Management and Barclays Capital, Inc. and the length of the extensions range from three to five years.
Among other considerations, it is important for ERISA plan fiduciaries responsible for retaining and overseeing plan investment managers to ensure that their investment managers continue to qualify as QPAMs, or that another applicable exemption is in place.