Investment Management/
ERISA Fiduciary Alert
August 2010
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
DOL Amends QPAM Exemption to Allow a
QPAM to Manage Assets of its Own Plan, but
with New Conditions
On July 6, 2010, the U.S. Department of Labor (“DOL”) amended Prohibited
Transaction Exemption 84-14 (“PTE 84-14” or the “QPAM Exemption”). The
amendment (“Amendment”)1 adds new conditions that qualified professional asset
managers (“QPAMs”) must satisfy in order to rely on the QPAM Exemption when
managing assets of a tax-qualified plan sponsored by the QPAM or its affiliates
(“Affiliated Plan”) or an investment fund in which an Affiliated Plan has invested.
Specifically, the Amendment provides that, when managing assets of an Affiliated
Plan, the QPAM must have adopted written policies and procedures designed to
ensure compliance with the conditions of PTE-84-14 and also undergo an annual
audit for compliance with these policies and procedures, as well as certain conditions
of PTE 84-14. This change is effective November 3, 2010. The Amendment does
not change the conditions of the QPAM Exemption with respect to unaffiliated plans
that are or may become clients of the QPAM.
Background
The QPAM Exemption is widely relied upon by banks, insurance companies and
Securities and Exchange Commission (“SEC”)-registered investment advisers that
manage assets of plans subject to the Employee Retirement Income Security Act of
1974, as amended (“ERISA”), or other retirement accounts that are subject to Section
4975 of the Internal Revenue Code of 1986, as amended (“Code”) (collectively,
“plans”). In particular, Part I of PTE 84-14 permits these QPAMs to engage in a
broad range of transactions on behalf of plans that otherwise would be prohibited by
ERISA or the Code if the transaction is with a “party in interest” or “disqualified
person.”
Before August 2005, many practitioners believed that the QPAM Exemption
permitted a QPAM to manage assets of its Affiliated Plan. However, in connection
with the adoption of amendments to PTE 84-14 in August 2005, the DOL stated that
the QPAM Exemption did not apply when the QPAM managed assets of an
Affiliated Plan. Although the DOL treated this as merely “clarifying” the original
intent and scope of PTE 84-14, the DOL’s position was controversial. Recognizing
this, the DOL provided transitional relief for QPAMs and proposed to amend the
QPAM Exemption to permit a QPAM to manage assets of an Affiliated Plan.2
Since 2005, QPAMs have managed assets for their Affiliated Plans under this
transitional relief.3 The Amendment finalizes the 2005 proposal4 and, upon
becoming effective on November 3, 2010, will replace the transitional relief.
1
75 Fed. Reg. 38837 (July 6, 2010).
For a discussion of the 2005 amendment developments, see our August 2005 alert by clicking here.
3
70 Fed. Reg. 49305 (Aug. 23, 2005).
4
70 Fed. Reg. 49312 (Aug. 23, 2005).
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Investment Management/ERISA Fiduciary Alert
Scope
Policies and Procedures
The Amendment is very narrow in its scope: it
provides the same relief as is already available under
the QPAM Exemption and applies only to
transactions of an Affiliated Plan that is managed by
the QPAM. Because the DOL has stated that the
Amendment permits a QPAM to manage an
investment fund in which an Affiliated Plan has
invested,5 the Amendment also applies to
transactions of a plan assets fund managed by the
QPAM in which an Affiliated Plan is an investor.
However, the DOL has stated informally that the
Amendment does not permit a QPAM to charge an
Affiliated Plan a fee.
In order to manage assets of an Affiliated Plan, a
QPAM must adopt written policies and procedures
that “describe the following objective requirements”
of the QPAM Exemption and set forth the steps
adopted by the QPAM to ensure compliance with
them. All such policies and procedures must
address items (1) and (2) below. If the QPAM
relies, or intends to rely, on Part I of PTE 84-14,
which permits most transactions between plans and
parties in interest, the policies and procedures must
also address the conditions described in item
(3) below. Finally, if the QPAM relies, or intends
to rely, on Part III of PTE 84-14, which permits a
QPAM to lease office or commercial space from a
fund managed by the QPAM, the policies and
procedures must address the conditions described in
item (4) below:
Conditions of the Amendment
The Amendment creates a new Part V of PTE 84-14
that sets forth the conditions for transactions
involving Affiliated Plans. A QPAM that manages
assets of an Affiliated Plan (either in a separate
account or in a pooled investment fund) must satisfy
the following conditions:
a) The QPAM must have discretionary authority or
control with respect to the Affiliated Plan’s
assets involved in the transaction;
b) The QPAM must adopt written policies and
procedures designed to assure compliance with
the conditions of the exemption;
c) The QPAM must submit to an annual audit by
an independent auditor who reviews the policies
and procedures, tests compliance with those
procedures, and issues a written report; and
d) As to each transaction involving an Affiliated
Plan, the transaction must meet the applicable
requirements of the relevant part of the QPAM
Exemption.
Conditions (a) and (d) apply on a transaction-bytransaction basis and essentially duplicate the
current requirements of PTE 84-14. Conditions (b)
and (c) are new, ongoing requirements, which are
discussed in more detail below.
5
75 Fed. Reg. 38837, 38840 (July 6, 2010).
1) QPAM Status: In general, QPAM status is
limited to banks, insurance companies and
SEC-registered investment advisers that meet
certain asset requirements and that acknowledge
their fiduciary status in writing.
2) Discretionary Authority and Control: As to
each transaction for which the QPAM
Exemption is to apply, the QPAM must have
discretionary authority or control regarding the
assets involved in the transaction, in negotiating
the terms of the transaction and with respect to
the decision to enter into the transaction.
3) Objective Conditions of PTE 84-14, Part I: The
policies and procedures must address the
following conditions described in Part I: the
party in interest involved in the transaction and
its affiliates may not have the power to appoint
or terminate the QPAM or negotiate the terms
of the plan’s agreement with the QPAM (as
defined in the Exemption); the party in interest
involved in the transaction may not be the
QPAM or a person “related” to the QPAM; the
transaction may not involve a plan that
represents 20% or more of total client assets
managed by the QPAM; and the transaction
may not be one of three types of transactions
that are specifically covered by other class
exemptions.
August 2010
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Investment Management/ERISA Fiduciary Alert
4) Objective Conditions of PTE 84-14, Part III:
The policies and procedures must address the
conditions described in Part III (a) (limiting the
amount of space that the QPAM may lease) and
Part III(d) (prohibiting a payment of a
commission to the QPAM and certain other
persons).
Although many QPAMs already have written
policies and procedures that address ERISA issues
and the QPAM Exemption, such existing policies
may not cover the required conditions or cover them
in sufficient detail to satisfy the Amendment. For
example, the required minimum level of assets under
an adviser’s management (which is part of the
definition of “QPAM”) is not typically part of a
compliance or procedures manual. QPAMs may
need to review and, as necessary, revise their
existing policies and procedures if they wish to rely
on those policies and procedures to manage an
Affiliated Plan.
Annual Audit
The annual audit required by the Amendment is
designed to review and test the sufficiency of the
QPAM’s policies and procedures and compliance
with the QPAM Exemption generally. The annual
audit must be conducted by an “independent auditor,
who has appropriate technical training or experience
and proficiency with ERISA’s fiduciary
responsibility rules” and who makes a written
representation to that effect. The annual audit must
consist of:
1) A review of the QPAM’s written policies and
procedures;
2) A test of a representative sample of the
Affiliated Plan’s transactions during the audit
period. In testing the sample, the auditor should
look to see if there are patterns of compliance
failures and, if such patterns appear, the auditor
may need to test additional transactions to make
an accurate assessment of the extent and causes
of non-compliance;
3) A determination of whether the QPAM has
satisfied the QPAM definition; and
4) A written report describing the steps taken by
the auditor during the course of its review and
the auditor’s findings. The written report must
contain specific findings and the auditor’s
opinion regarding whether, and to what extent,
the QPAM is in compliance with its written
policies and procedures and the objective
requirements of the QPAM Exemption.
The annual audit must be completed within six
months after the end of the year to which it relates.
The DOL has noted that the annual audit
requirement is substantially similar to the audit
requirement under PTE 96-23, which applies to “InHouse Asset Managers.” In finalizing the
Amendment, the DOL rejected comments that
suggested that the annual audit was unnecessary or
that PTE 96-23 was not relevant to QPAMs
managing assets of Affiliated Plans. Instead, the
DOL reiterated its view that the annual audit was
necessary to address the lack of independence
between the QPAM and the Affiliated Plan.
Moreover, because the DOL specifically rejected
audits that cover periods longer than 12 months, the
Amendment’s November 3, 2010, effective date
means that the first audit must either cover the
period from November 3 to December 31, 2010
(with calendar year audits to follow) or the period
from November 3, 2010 to November 2, 2011.6
If the annual audit identifies a transaction that does
not comply with the policies and procedures or the
QPAM Exemption, the DOL expects that the report
will clearly identify each such transaction, the
specific procedures or conditions that were not
satisfied and the steps taken, if any, to remedy the
transactions that failed to comply with the
“objective” conditions of the QPAM Exemption
identified above. To the extent that the report
identifies a deficiency, particularly a failure to
comply with the listed conditions of PTE 84-14, the
DOL expects the QPAM to address the deficiency.
Failure to do so, in the DOL’s view, would raise
issues under Section 404 of ERISA in addition to
PTE 84-14.7 To the extent the audit identifies a
deficiency that involves both the Affiliated Plan and
other plans (e.g., a transaction involving a “plan
asset fund” in which the Affiliated Plan and other
plans are invested), the QPAM may well be
6
It is possible that the DOL may revise the Amendment to
permit the initial audit to cover a longer period in light of the
November 3, 2010 effective date.
7
75 Fed. Reg. 38837, 38841 (July 6, 2010).
August 2010
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Investment Management/ERISA Fiduciary Alert
required under the circumstances to address the
deficiency with respect to all affected plans,
including but not limited to the Affiliated Plan.
The Amendment resolves the issues raised by the
DOL in 2005. More importantly, the Amendment
provides certainty and important prohibited
transaction relief to QPAMs that manage
investments of Affiliated Plans. However, in
contrast to much of the rest of the QPAM
Exemption, compliance with the Amendment is not
automatic or routine. A QPAM seeking to rely on
the Amendment to manage an Affiliated Plan will
need to take a number of affirmative steps, including
drafting policies and arranging for an annual audit as
outlined above, in order to obtain the relief offered
by the Amendment.
*
*
*
Please contact any member of the ERISA Fiduciary
Group listed below if you have further questions.
Catherine S. Bardsley
catherine.bardsley@klgates.com
202-778-9289
Mark J. Duggan
mark.duggan@klgates.com
617-261-3156
John J. Nestico
john.nestico@klgates.com
704-331-7529
David E. Pickle
david.pickle@klgates.com
202-778-9887
William A. Schmidt
william.schmidt@klgates.com
202-778-9373
William P. Wade
william.wade@klgates.com
310-552-5071
Kristina M. Zanotti
kristina.zanotti@klgates.com
202-778-917
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participants and public sector entities. For more information, visit www.klgates.com.
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©2010 K&L Gates LLP. All Rights Reserved
August 2010
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