The qualified professional asset manager ("QPAM") class prohibited transaction exemption 84-14 ("the QPAM Exemption" or "PTE 84-14") is one of the most widely used and important exemptions for asset managers. Managers of funds and separate accounts subject to ERISA are also often required to make representations regarding their QPAM status in order to enter into common transactions and trading agreements (e.g., ISDAs, purchase and sale agreements, credit agreements and investment management agreements). Even managers who do not have ERISA funds or accounts may take steps to qualify as QPAMs so as to be prepared in the event that a fund holds ERISA plan assets in the future (this is especially true for open-ended funds). In April, the U.S. Department of Labor ("DOL") adopted amendments to the QPAM Exemption that are having a dramatic effect on how certain managers operate. For a more detailed discussion of the new requirements and their impact on asset managers, see our Alert here.
Since the amendments took effect on June 17, 2024, many managers have already taken steps to comply with PTE 84-14's new (or revised) conditions. With the initial 90-day deadline for DOL registration approaching on September 15, 2024, this serves as a good reminder of what managers should be doing now in order to ensure continued reliance:
- Register All QPAMs (as well as Potential QPAMs) with the DOL – The amendments require QPAMs to report to the DOL by email (at QPAM@dol.gov) the legal name of each business entity relying on the exemption and any name under which the QPAM may be operating. The notification must be made within 90 calendar days of either the date the manager first relies on the QPAM Exemption or a change to the QPAM's legal or operating name. For entities that are currently relying on PTE 84-14, the DOL notice must be submitted by September 15, 2024. If a QPAM fails to send this email, the exemption will not be available for transactions that occur until the QPAM (1) notifies the DOL of its reliance on the exemption or name change and its prior failure to report and (2) provides the DOL with an explanation for its failure to provide timely notice. For investment managers that are not currently relying on the QPAM Exemption but who may need to use it in the future, it may be advisable to proactively register with the DOL. This will preserve the manager's ability to use the exemption, if needed, or if it holds itself out as a QPAM for marketing purposes to ERISA plans, governmental plans or other investors. For more details on how to notify the DOL of QPAM status or for assistance drafting this notice, please contact Joshua A. LichtensteinSharon Remmer.
- Implement or Strengthen QPAM Compliance Protocols with Respect to Foreign Affiliates – The amendments broaden the universe of bad acts that can cause a manager to lose its QPAM status by including certain non-prosecution agreements ("NPAs") and deferred prosecution agreements ("DPAs") and by expressly including foreign convictions or imprisonments as a result of a crime that is substantially equivalent to the list of U.S. crimes covered by the exemption. In addition, a manager is required to provide notice to the DOL if the QPAM, its 5% owners or its affiliates enter into a foreign equivalent of an NPA or DPA, and the agency may choose to treat such non-U.S. NPA or DPA as disqualifying. Given the broader scope of disqualifying triggers, asset managers with affiliates operating outside the United States are advised to adopt a U.S. compliance and surveillance mindset to monitor for potential disqualifying acts. Firms are also advised to utilize robust background checks and screenings when hiring non-U.S. personnel to avoid inadvertently triggering disqualification due to a new hire's prior conviction.
- Ensure Precise Contract Drafting to Make Clear that the QPAM Retains "Sole Responsibility" – As firms are thinking about how they can demonstrate that their non-U.S. affiliates are acting under the authority of the U.S.-based QPAM when making investments for ERISA funds and accounts, precision in contract drafting is key. One potential approach is to have the QPAM entity appoint an agent or representative—such appointment being formally documented—who will liaise with the affiliate where the trading or investment activity is taking place. The QPAM agent or representative will then act in a supervisory role, preserving the overall authority of the QPAM.
- Obtain Records of (and Implement Formal Recordkeeping Procedures with Respect to) Any Transaction Where the QPAM Exemption Was Relied Upon – The amendments require QPAMs to maintain records necessary to enable the DOL, plan fiduciaries, contributing employers, unions and plan participants to determine that the QPAM Exemption's conditions were satisfied. These records must be maintained for six years from the date of the transaction. Failure to maintain records results in the loss of exemptive relief for the applicable transaction(s). If a manager does not have formal recordkeeping measures already in place for such documents, consider implementing these measures now in order to ensure that any documentation demonstrating compliance with the exemption will be available for inspection.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.