The banks have applied for an exemption that would enable them to keep their status as qualified professional asset managers (QPAMs). The QPAM Exemption allows the manager to engage in transactions with parties in interest with respect to the plan without running afoul of the prohibited transaction restrictions of the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code. It contains an anti-criminal rule that requires that neither the QPAM nor any of its affiliates have been convicted of a variety of crimes within 10 years immediately prior to the transaction. Ambiguities arise particularly when there are investigations of foreign affiliates in foreign jurisdictions, because foreign laws may not be enforced in the same way they are enforced under U.S. laws, and certain acts that may be “criminal” or “felonies” in this country may not be treated similarly in other jurisdictions.
According to news reports, BNP pleaded guilty in June to processing nearly $9 billion in transactions from 2004 to 2012 that violated U.S. sanctions against Sudan, Iran and Cuba, and it agreed to pay a $8.97 billion penalty. On May 19, 2014, Credit Suisse pleaded guilty to criminal charges that it facilitated tax evasion by helping U.S. clients avoid paying taxes to the IRS. The $2.6 billion fine imposed is the largest ever monetary penalty in a criminal tax case.
Failing to qualify as a QPAM has a number of significant legal consequences both for the asset manager and for a pension plan that has assets under the QPAM’s management. The QPAM could potentially be liable for a breach of its contracts with Employee Retirement Income Security Act (ERISA) clients to the extent that it made a representation that it qualifies as a QPAM. The plan’s fiduciary could potentially have its own liability in connection with the manager’s transactions under ERISA’s co-fiduciary liability rules. The Department of Labor (DOL) recently issued a helpful advisory opinion that makes clear that the sole judicial action that triggers a violation of the QPAM exemption’s anti-criminal rule is a criminal conviction.
BNP and Credit Suisse are big players in the swaps market. A swap, a tool often used by a pension plan to manage financial risk, is a contract between the retirement plan and another party, usually a swap dealer. When transacting a swap in its most basic form, the plan and the dealer agree to exchange certain cash flows or other rights to which each party is entitled before they enter into the swap. For example, the plan may own bonds that periodically pay cash based on a fixed rate of interest while the dealer owns bonds that periodically pay cash based on a floating rate of interest. Through the swap contract, the parties “swap” those payment streams without having to buy the underlying bonds.
According to Bloomberg, the Labor Department must rule in favor of extending a bank’s QPAM status before sentencing, or it is automatically revoked. Credit Suisse’s sentencing is scheduled for August 12, and BNP Paribas does not yet have a sentencing date.