On July 26, 2022, the U.S. Department of Labor (DOL) announced several significant proposed amendments to Prohibited Transaction Class Exemption 84-14 (the Exemption). The Exemption is frequently relied on by certain professional managers of pooled funds or accounts that constitute “plan assets” under the Employee Retirement Income Security Act of 1974 as amended (ERISA) and that are subject to the far-reaching prohibited transaction rules under ERISA and the Internal Revenue Code. Absent an exemption, these rules prohibit any transaction between a manager using “plan assets” and certain parties related to the underlying plans and accounts (referred to as parties in interest).
However, if a manager (referred to as a qualified professional asset manager, or QPAM) is able to satisfy the requirements of the Exemption (including requirements that the transaction is undertaken on arms-length terms and the party in interest is unrelated to the QPAM), the fund or account may permissibly engage in certain investment transactions that would otherwise violate the prohibited transaction rules. The most significant proposals relate to the following areas:
- Requirement to Provide Notice: The Exemption currently may be used without giving notice to the DOL. Under the proposed amendments, a QPAM must report to the DOL the legal name of each business entity relying on the Exemption and any name under which the QPAM may be operating. This notice needs to be provided only once unless there is a change to the legal name or operating name(s) of the QPAM or the QPAM no longer is relying on the exemptive relief provided in the Exemption.
- Changes in Amounts of Net Capital and Client Assets Under Management (AUM) Required for QPAM Status: The Exemption currently contains certain net capital and AUM requirements for QPAMs, which vary depending on the type of entity acting as the manager. For a registered investment adviser, the proposed amendments would increase the minimum amount of the adviser’s AUM from in excess of $85 million to in excess of $135,870,000. In addition, the minimum amount of shareholders’ or partners’ equity would be increased from in excess of $1 million to in excess of $2,040,000. These amounts would then be increased for inflation no later than January 31 of each year (rounded to the nearest $10,000).
- Responsibility for Negotiation of Transactions: Currently, the Exemption covers transactions that are negotiated under the authority and general direction of a QPAM. Under the proposed amendments, to qualify for the Exemption the terms of any transaction, commitment, or investment of fund assets, as well as any associated negotiations, must be the sole responsibility of the QPAM. In addition, the fund or account from which the relevant “plan assets” are drawn must be an investment fund established primarily for investment purposes. Further, no relief will be provided for a transaction that has been planned, negotiated, or initiated by a party in interest and presented to a QPAM for approval (because the QPAM would not be considered to have had sole responsibility for the transaction).
- Significant Expansion of Disqualifying Provisions for Certain Criminal Convictions and Prohibited Misconduct: A QPAM currently cannot rely on the Exemption during the 10-year period following the later of the date on which the QPAM (or certain of its affiliates) is convicted of, or the date on which it is released from imprisonment with respect to, (i) any felony involving abuse or misuse of such person's employee benefit plan position or employment; (ii) any felony arising out of the conduct of the business of a broker, dealer, investment adviser, bank, insurance company or fiduciary; (iii) income tax evasion; (iv) any felony involving the theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, conversion, or misappropriation of funds or securities; or (v) conspiracy or attempt to commit any such crimes. The proposed amendments expand the types of criminal convictions that result in loss of QPAM status to include convictions by a foreign court of competent jurisdiction as a result of a crime, however denominated by the laws of the relevant foreign government, that is substantially equivalent to an offense described in the preceding sentence.
In addition, the proposed amendments add a new provision under which the DOL can disqualify a QPAM by providing notice to the QPAM that it is ineligible to rely on the Exemption by reason of engaging in “prohibited misconduct,” which consists of (a) any conduct that forms the basis for a nonprosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a crime described above; (b) any conduct that forms the basis for an agreement, however denominated by the laws of the relevant foreign government, that is substantially equivalent to a nonprosecution agreement or deferred prosecution agreement described in clause (a); (c) engaging in a systematic pattern or practice of violating the conditions of the Exemption in connection with otherwise nonexempt prohibited transactions; (d) intentionally violating the conditions of the Exemption in connection with otherwise nonexempt prohibited transactions; or (e) providing materially misleading information to the DOL in connection with the conditions of the Exemption.
- Protective IMA Provisions Relating to Disqualifications: The Exemption does not currently require that the investment management agreement (IMA) with a QPAM contain protective provisions relating to the treatment of “plan assets” investors in the event that the manager loses its QPAM status. The proposed amendments require an IMA with a QPAM to provide, among other things, that if the manager loses its QPAM status as a result of a criminal conviction or prohibited misconduct, then for a period of at least 10 years the QPAM (i) will not restrict the ability of a “plan assets” investor to terminate or withdraw from its arrangement with the QPAM; (ii) will not impose any fees or penalties on such an investor in connection with its withdrawal from the fund or account managed by the disqualified QPAM (except for reasonable fees, disclosed in advance, designed to prevent abusive investment practices or to ensure equitable treatment of all investors); (iii) must agree to indemnify and promptly restore actual losses to such investors for any damages that directly result from a violation of applicable laws, a breach of contract, or any claim arising out of the conduct that causes the QPAM’s disqualification; and (iv) will not employ or knowingly engage any individual that participated in the conduct that causes the QPAM’s disqualification, regardless of whether the individual is separately convicted in connection with the disqualification.
The proposed amendments were published in the Federal Register on July 27, 2022, for notice and comment.
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