October 19, 2022
The IAA recently submitted a comment letter in response to the DOL’s proposed amendments to its QPAM Exemption. Many IAA members are QPAMs (qualified professional asset managers) and rely on this class exemption to be able to engage in common transactions with or on behalf of retirement plans that would otherwise be prohibited. The proposal would significantly narrow the availability of the exemption and make it more difficult for advisers to use.
While we support the DOL’s efforts to protect the interests of plans and plan participants and beneficiaries, the potential impacts of the proposal would likely extend beyond these objectives and have negative consequences that may not be in the best interest of plans and their participants and beneficiaries.
Our comment letter makes several recommendations that we believe would better achieve the DOL’s goals with less of a negative effect on advisers that need to be able to rely on the exemption for ordinary course activities.
Transactions Presented to a QPAM for Approval. The proposal would require that the material terms of any transaction with a plan must be the “sole responsibility” of the QPAM, and that a transaction would not be able to be “planned, negotiated, or initiated” by a party connected to the plan (a “party in interest”) and presented to the QPAM for approval. Because this would make it exceedingly difficult, if not impossible, to engage in many transactions that are beneficial to the plan, we have asked the DOL to make clear that the “sole responsibility” condition would be met if the QPAM – and not a party in interest – negotiates and approves the terms of the transaction.
New Conditions Regarding the Eligibility of a QPAM. The proposal would clarify and expand the conditions that must be met for a QPAM to be eligible to rely on the exemption.
Written Investment Management Agreement. QPAMs would need to make several changes to their existing and future written investment management agreements (IMAs) to continue to qualify for the exemption. We have asked the DOL not to apply this requirement retroactively, but if it does, to permit a QPAM to send out a one-time notice that it is legally obligated to meet the conditions under the proposal.
Foreign Convictions. The proposal would codify the DOL’s view that certain foreign criminal convictions of the QPAM or an affiliate would automatically disqualify the QPAM from relying on the exemption. We have recommended that instead of an automatic disqualification, the DOL should require the QPAM to make certain certifications and, if the DOL believes further action is warranted, it should then provide a process to address the foreign conviction.
Other Prohibited Misconduct. QPAMs would also be disqualified from using the exemption if they engage in broadly defined “prohibited conduct.” We have recommended that the DOL narrow and provide clearer guidance as to the scope and types of disqualifying misconduct.
Winding-Down Period. To mitigate disruption for existing plan clients, we have recommended that the DOL allow QPAMs to enter into new transactions with existing Plan clients during the period prescribed for the winding-down of the QPAM relationships.
Recordkeeping and Reporting Obligations. The proposal includes several new recordkeeping, disclosure, and reporting requirements. We have asked the DOL to narrow the recordkeeping and disclosure requirements, for example to cover materials related to the QPAM’s compliance with the exemption, and to confirm that a failure to report to the DOL on a timely basis would not by itself cause the QPAM to lose its eligibility to rely on the exemption.
Increase in AUM Threshold. We have recommended that the DOL not raise the AUM threshold for a QPAM, as proposed, because these increases are likely to create barriers to entry or force smaller or emerging QPAMs to exit the market. We have also asked that the DOL grandfather current QPAMs where their AUM level would no longer meet the proposed threshold.
Transition Periods. Finally, we have recommended that if the DOL requires that IMAs be renegotiated, it provides an adequate transition period of 18 months for QPAMs to come into compliance. Additionally, if the DOL raises the AUM threshold, it should provide a transition period of one year for QPAMs that would no longer qualify under the new threshold.
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