Overview
On April 3, 2024, the Department of Labor published its final grant of the amendments to Prohibited Transaction Exemption 84-14, the so-called QPAM exemption, also known as the Qualified Professional Asset Manager Exemption. The proposed exemption was published in July 2022, and the Department held a hearing and provided an extended comment period three times.
The changes from the proposed exemption to the final are largely positive. The Department has abandoned its proposed requirement that all investment management agreements be amended to add contractual obligations specified in the exemption. Much of the troublesome language in Part I(c) that suggested that any information or ideas from a plan sponsor or a counterparty would preclude the use of the exemption has been softened or clarified to make clear that the QPAM must be the ultimate decision maker. The due process issues raised by many commenters concerning the proposed exemption's "letter of ineligibility process" for Prohibited Misconduct have been remedied by having a court decision or court approval of a settlement agreement be the trigger for ineligibility rather than the Department's own conclusions. The transition period following a determination of ineligibility covers all transactions of existing clients for a year, and not just continuing transactions from the past, although additional conditions during that period are required. Foreign non-prosecution agreements and deferred prosecution agreements are no longer triggers for ineligibility, but instead require prompt notice to the Department as do other instances of Prohibited Misconduct. Because it is often difficult to assess whether a foreign settlement is equivalent to a US deferred prosecution (DPA) or non-prosecution agreement (NPA), it would have been helpful had the exemption contained a best of knowledge or best efforts standard for the notification. The final exemption also provides that foreign crimes in jurisdictions listed as foreign adversaries do not trigger disqualification.
The exemption continues to require notice to the Department if an investment manager is using the QPAM exemption. It does not appear that the list will be public, nor is it clear what the Department will do with the names. Failure to provide the notice is dealt with reasonably. The effective date for the change in minimum assets under management may be problematic and harmful to plans.
All entities becoming ineligible have a one year transition period, during which the exemption continues to apply to past, continuing and future transactions, so long as additional conditions are met, including notice of the criminal conduct or prohibited misconduct, reasonable fees, giving plans the ability to terminate their relationship, indemnifying clients from certain losses, and not hiring individuals who participated in the criminal conduct or prohibited misconduct.
There are a few surprising new concepts that did not have the benefit of notice and comment. Prohibited misconduct includes NPAs and DPAs entered into with state or federal prosecutors or other regulatory agencies, where the factual allegations that form the basis of the NPA or DPA would have constituted a crime had the conduct been successfully prosecuted. It is unclear (and not explained in the preamble) why regulatory agencies were added to this definition. Regulatory agencies rarely have the authority to bring a criminal action for a crime described in Section VI(r), and the standard imposed by the final exemption – where the factual allegations that form the basis for the agreement – might be read to sweep in alleged and unproven facts in a civil proceeding. Indeed, the definition depends not only on mere allegations, but also on the assumption that a prosecutor would proceed to charge a company with the criminal conduct and the further assumption that the prosecutor would win.1
The provision is contained in a somewhat circular definition of Prohibited Misconduct in the Section VI definitions. Subsection (s)(1) provides as follows:
(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 [INSERT DATE 75 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER] 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 . . . . (Emphasis supplied).
We think this section needs a correction to make clear that it has no application to agreements reached as part of a civil investigation.
Section VI(s)(2) adds another new concept to the definition of prohibited misconduct that was neither proposed, nor had the benefit of public comment. That section provides that a QPAM is ineligible if it, its affiliates and 5% owners:
(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 connection with the conditions of the exemption.
Conditions (A) and (B) are not significantly different than the bases on which the Department had proposed to administratively make QPAMs ineligible and it is hard to imagine conduct by a QPAM or its affiliates that violates these two provisions, particularly in enforcement actions by regulators other than the Department. Condition (C) is more troublesome since every law enforcement agency can be quick to allege that the entity under examination has provided misleading information. Since this condition relates to QPAMs, their affiliates and 5% owners, one could imagine immediate disqualification in any case resolved by court order, regardless of how remote from the QPAM. However, it is helpful that the misleading information has to be given "in connection with the conditions of the exemption". It is difficult to imagine misinformation provided in connection with the exemption to any regulator not responsible for compliance with the exemption. However, had we had the opportunity of notice and comment, we would have pointed out that factual errors in exemption applications are not unheard of, and since this condition neither requires intention or frequency or pattern, the penalty of ineligibility seems punitive and arbitrary. In our view, the condition should be tempered by a best of knowledge, or similar standard, or the provision of misleading information should be intentional or part of a systematic pattern.
While it seems unlikely that the Department would bring a matter to court alleging that factual errors, especially where inadvertent or isolated, should make a QPAM ineligible, we think this entire section could benefit from a technical correction, if not a re-proposal of this section for notice and comment.
Future alerts will address other issues in the final exemption. Please feel free to contact Melanie Nussdorf, Raisa Daigneault, Eric Serron or Paul Ondrasik if you have additional questions.
Endnote
1 The preamble suggests that the matter must be criminal in nature and the investigation conducted in accordance with our country’s notions of appropriate criminal procedure, including notice that the entity is a target of a criminal investigation. The preamble provides:
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 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. (Emphasis Supplied).
