Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption)

<RULE> DEPARTMENT OF LABOR <SUBAGY>Employee Benefits Security Administration</SUBAGY> <CFR>29 CFR Part 2550</CFR> <DEPDOC>[Application No. D-12022]</DEPDOC> <RIN>Z-RIN 1210 ZA07</RIN> <SUBJECT>Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption)</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Employee Benefits Security Administration, U.S. Department of Labor. <HD SOURCE="HED">ACTION:</HD> Final amendment to class exemption. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document gives notice of a granted amendment to prohibited transaction class exemption 84-14 (the QPAM Exemption). The QPAM Exemption provides relief from certain prohibited transaction restrictions of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and Title II of ERISA, as codified in the Internal Revenue Code of 1986, as amended (the Code). </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> The amendment is effective June 17, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Brian Mica, telephone (202) 693-8540, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (this is not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> Title I of ERISA broadly prohibits transactions between plans and any “party in interest”—who, in general, are people or entities closely connected to ERISA-covered employee benefit plans as defined in ERISA section 3(3). Title II of ERISA, codified in the Code, includes parallel prohibitions applicable to “disqualified persons”  <SU>1</SU> <FTREF/> who, in general, are persons or entities closely connected to plans  <SU>2</SU> <FTREF/> as defined in Code section 4975(e)(1). <FTNT> <SU>1</SU>  The term “disqualified person” is defined in Code Section 4975(e)(2) and is similar to definition of the term “party in interest” codified in ERISA section 3(14). All references to “party in interest” in this Preamble and the QPAM exemption include “disqualified person.” </FTNT> <FTNT> <SU>2</SU>  For purposes of the exemption that term “Plans” includes plans and Individual Retirement Accounts (IRAs) described in Code section 4975(e)(1) and ERISA-covered employee benefit plans described in ERISA section 3(3) (referred to as “Plans,” and “IRAs” herein). Although the Department is using the same definition of “plan” in the final amendment that previously existed in the QPAM Exemption, the Department is finalizing a ministerial change which will capitalize this term when referring to plans impacted by the amendment. </FTNT> Absent an exemption, ERISA section 406(a)(1)(A) through (D) and Code section 4975(c)(1)(A) through (D) prohibit, among other things, sales, leases, loans, and the provision of services between these parties. Congress enacted these prohibitions to protect plans, their participants and beneficiaries, and IRA owners  <SU>3</SU> <FTREF/> from the potential for abuse that arises when plans and IRAs engage in transactions with closely connected parties. <FTNT> <SU>3</SU>  For purposes of this Final Amendment, the term “IRA owner” refers to the individual for whom an IRA (as defined in the Final Amendment) is established. </FTNT> The Department grants this exemption, which was proposed on its own motion, pursuant to its authority under ERISA section 408(a) and Code section 4975(c)(2). <SU>4</SU> <FTREF/> As required by ERISA section 408(a) and Code section 4975(c)(2), the Department finds that the exemption is administratively feasible, in the interests of Plans and their participants and beneficiaries and protective of the rights of participants and beneficiaries of Plans and IRA owners. <FTNT> <SU>4</SU>  The exemption also is granted in accordance with procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)). Please note that effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2018), transferred the authority of the Secretary of the Treasury to issue exemptions to the Secretary of Labor. Therefore, this notice of amendment to the QPAM Exemption is issued solely by the Department. </FTNT> The QPAM Exemption permits an investment fund  <SU>5</SU> <FTREF/> holding assets of Plans and IRAs that is managed by a “qualified professional asset manager” (QPAM) to engage in transactions with a “party in interest” or “disqualified person” to Plans or an IRAs, subject to protective conditions. <SU>6</SU> <FTREF/> This amendment modifies Section I(g) of the exemption, a provision under which a QPAM may become ineligible to rely on the QPAM Exemption for a period of 10 years if the QPAM, various affiliates, or certain owners of the QPAM are convicted of certain crimes. As discussed in detail below, this amendment: (1) requires a QPAM to provide a one-time notice to the Department that the QPAM is relying upon the exemption; (2) updates the list of crimes enumerated in the prior version of Section I(g) to explicitly include foreign crimes that are substantially equivalent to the listed crimes; (3) expands the circumstances that may lead to ineligibility; and (4) provides a one-year winding down (transition) period to help Plans and IRAs avoid or minimize possible negative impacts of terminating or switching QPAMs or adjusting asset management arrangements when a QPAM becomes ineligible pursuant to Section I(g), and gives QPAMs a reasonable period to seek an individual exemption, if appropriate. <SU>7</SU> <FTREF/> <FTNT> <SU>5</SU>  For purposes of the QPAM Exemption, an investment fund includes single customer and pooled separate accounts maintained by an insurance company, individual trusts, and common, collective, or group trusts maintained by a bank, and any other account or fund subject to the discretionary authority of the QPAM. <E T="03">See</E> Section VI(b) of the QPAM Exemption. </FTNT> <FTNT> <SU>6</SU>  Class Exemption for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers, 49 FR 9494 (Mar. 13, 1984) as corrected at 50 FR 41430 (Oct. 10, 1985), as amended at 66 FR 54541 (Oct. 29, 2001), 70 FR 49305 (Aug. 23, 2005), and 75 FR 38837 (July 6, 2010). </FTNT> <FTNT> <SU>7</SU>  As further discussed below, the Department has substituted the term “transition period” for the term “winding-down period” that it used in the proposed amendment. The terms have the same meaning. </FTNT> This amendment also: (1) provides clarifying updates to Section I(c) regarding a QPAM's authority over investment decisions; (2) adjusts the asset management and equity thresholds in the QPAM definition in Section VI(a); and (3) adds a new recordkeeping provision in Section VI(u). The amendment will affect participants and beneficiaries of Plans, IRA owners, the sponsoring employers of such Plans or IRAs (if applicable) and other plan sponsors, QPAMs, and counterparties engaging in transactions covered under the QPAM Exemption. <HD SOURCE="HD1">Background of the QPAM Exemption</HD> In 1984, the Department published the QPAM Exemption, which permits an investment fund managed by a QPAM to engage in a broad range of transactions with parties in interest with respect to a Plan, subject to protective conditions. The Department developed and granted the QPAM Exemption based on the premise that it could provide broad exemptive relief from the prohibitions of ERISA section 406(a)(1)(A) through (D) and Code section 4975(c)(1)(A) through (D) for transactions in which a Plan engages with a Party in Interest only if the commitments and investments of Plan assets and the negotiations leading thereto are the sole responsibility of an independent investment manager. Section I of the QPAM Exemption (the General Exemption)  <SU>8</SU> <FTREF/> provides broad prohibited transaction relief for a QPAM-managed Investment Fund to engage in transactions with a Party in Interest, but it does not include relief for the QPAM to engage in any transactions involving its own self-dealing or conflicts of interest or kickbacks, which are prohibited under ERISA section 406(b)(1) through (3) and 4975(c)(1)(E) and (F). This important limitation on the relief in the QPAM Exemption serves as a key protection for Plans that are affected by the exemption. The QPAM Exemption also includes conditions designed to ensure that the QPAM does not engage in transactions with a Party in Interest that has the power to influence the QPAM's decision-making processes. Additionally, QPAMs remain subject to the fiduciary duties of prudence and undivided loyalty set forth in ERISA section 404 with respect to their client Plans. <FTNT> <SU>8</SU>  The Department proposed a ministerial change to replace “Part” with “Section” in the QPAM Exemption. For consistency, the Department is using only the term “Section” throughout this preamble. The Department also proposed a ministerial change to capitalize defined terms in the QPAM Exemption and is using those capitalized terms throughout this preamble as they are being finalized in this amendment. </FTNT> The General Exemption covers many different types of transactions. For example, the exemption provides relief for a QPAM to use fund assets to purchase an asset from certain Parties in Interest  <SU>9</SU> <FTREF/> to a Plan that is invested in the fund. The General Exemption also facilitates much more complex transactions, such as when a QPAM designs a fund to replicate the return of certain commodities indices by investing in futures, structured notes, total return swaps, and other derivatives where a Party in Interest to a Plan that invested in the fund is involved in the transaction. <SU>10</SU> <FT ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 417k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━