Amendments To The Forty-Year-Old QPAM Rule: What RIAs Managing Retirement Plan Money Need To Know

Summary: The Department of Labor (DOL) recently published a final amendment to the 1984 QPAM (Qualified Professional Asset Manager) Exemption, effective from June 17, 2024. This final amendment establishes stricter requirements for investment managers relying on the QPAM Exemption, including notice and record-keeping provisions, broader ineligibility requirements, and higher asset management and equity thresholds for QPAMs.

Background: Under the Employee Retirement Income Security Act (ERISA), Congress broadly prohibits transactions between retirement plans and enumerated "parties in interest" with respect to those plans. Examples include brokers, custodians, and other service providers to a plan.

Given the all-encompassing nature of this ERISA prohibition, Congress allowed for exemptions to these broad rules in several key areas. The "QPAM Exemption" (PTE 84-14) is one of the most frequently used exemptions. A QPAM is a fiduciary manager that is a bank, savings, and loan association; insurance company; or registered investment adviser that meets specified criteria.

The QPAM Exemption is considered essential for registered investment advisers (RIAs) that have retirement plans as clients. The QPAM Exemption allows the RIA to enter into transactions with other financial services firms, such as banks and brokerage firms, on behalf of the plan, generally without any fear that these transactions will violate ERISA.

The final amendment makes several key changes to the QPAM Exemption, including the following:

1. The RIA must now provide a one-time notice to the DOL that the RIA is relying upon the QPAM Exemption. The DOL grants the RIA an initial 90-day period to report its reliance on the QPAM Exemption to the DOL, which ends September 15, 2024. There is an additional 90-day period to cure inadvertent failures to report, provided a valid explanation is given for the delayed filing. If the RIA fails to notify the DOL during this cure period, the RIA will lose the QPAM Exemption for transactions that occur until the failure is cured.
2. RIAs must now have increased assets under management (AUM) and owners' equity. The final amendment raises the AUM threshold to $101,956,000 starting no later than December 31, 2024 (up from $85 million previously), with scheduled increases in 2027 and 2030. The owners' equity threshold is increased to $1,570,300, starting at the end of 2024, again with 2027 and 2030 increases.
3. Crimes disqualifying a RIA from relying on the QPAM Exemption. This requirement previously excluded a RIA from using the QPAM Exemption if the RIA, its affiliates, or 5% or more owners had been adjudicated in a U.S. court to have committed certain financial crimes such as fraud, theft, misappropriation of funds or securities, or extortion. The amendment expands this list to include foreign crimes that are substantially equivalent to the U.S. crimes described above.
4. Required independent decision-making of QPAMs. The amendment clarifies that the Exemption is not available unless the RIA retains sole discretion over investment decisions subject to the QPAM Exemption. Specifically, the RIA may not permit other parties to make decisions regarding investments under the RIA's control.
5. New record-keeping requirements. In general, to qualify for the QPAM Exemption, RIAs must maintain records for six years demonstrating compliance with QPAM Exemption, keeping them in a manner that is reasonably accessible for examination.

RIAs that rely on the QPAM Exemption (or are considering doing so, even in conjunction with another exemption) should review their continued qualification under the amended QPAM Exemption. If a RIA seeks to rely on the QPAM Exemption going forward, it is critical that the RIA submits notice to the DOL no later than September 15, 2024. If you have questions about the QPAM Exemption, please contact your Reed Smith attorney or one of the authors.

Client Alert 2024-162