DOL Clarifies the QPAM Exemption’s Anti-Criminal Rule

When a plan subject to the Employee Retirement Income Security Act (ERISA) appoints an investment manager to manage a portion of the plan’s portfolio, the plan will frequently insist that the manager qualify as a “qualified professional asset manager” or “QPAM.”
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This status assures the plan’s fiduciary that the manager will meet the conditions of a U.S. Department of Labor (DOL) prohibited transaction class exemption, PTCE 84-14. The so-called 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 ERISA or the Internal Revenue Code.

In recent years, the financial services industry has witnessed substantial corporate mergers, joint ventures and other forms of consolidation. With this growing consolidation among financial institutions, a technical issue arises under the QPAM exemption more frequently than plan sponsors might expect that can have significant financial consequences both for the plan and the manager. In this regard, the QPAM exemption contains an anti-criminal rule that requires that neither the QPAM nor any of its affiliates may have been convicted of a variety of crimes within 10 years immediately prior to the transaction.  This provision, section I(g), specifically provides the following:

“Neither the QPAM nor any affiliate thereof (as defined in section V(d)), nor any owner, direct or indirect, of a 5 percent or more interest in the QPAM is a person who within the 10 years immediately preceding the transaction has been either convicted or released from imprisonment, whichever is later, as a result of: any felony involving abuse or misuse of such person’s employee benefit plan position or employment, or position or employment with a labor organization; any felony arising out of the conduct of the business of a broker, dealer, investment adviser, bank, insurance company or fiduciary; income tax evasion; any felony involving the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; conspiracy or attempt to commit any such crimes or a crime in which any of the foregoing crimes is an element; or any other crime described in section 411 of ERISA.  For purposes of this section (g), a person shall be deemed to have been “convicted” from the date of the judgment of the trial court, regardless of whether that judgment remains under appeal.”

The issue of whether section I(g) of the QPAM exemption is satisfied comes up frequently for financial institutions when they are in the process of acquiring or merging with other entities in a corporate transaction. In the course of due diligence on a potential acquisition, a company may discover that a target company, or one of its employees, officer or directors, may have been under investigation, indicted or convicted of a crime.  As a result, as soon as the corporate acquisition is finalized, the QPAM’s legal status as a QPAM could be jeopardized. Failing to meet section I(g), and as a result failing to qualify as a QPAM, has a number of significant legal consequences both for the manager and for the plan whose assets are under the QPAM’s management. Importantly, the QPAM could potentially be liable for a breach of its contracts with ERISA clients to the extent that it made a representation that it qualifies as a QPAM. Moreover, the QPAM could be personally liable for a fiduciary breach and for excise taxes in connection with any transactions that the QPAM executed with a party in interest with respect to the plan.

The plan’s fiduciary could potentially have its own liability in connection with the manager’s transactions under ERISA’s co-fiduciary liability rules.  At a minimum, the plan’s fiduciary would want to ensure that the plan has an alternative legal strategy for avoiding prohibited transactions in connection with the manager’s activities, whether through reliance on a different prohibited transaction exemption or by seeking a new QPAM services provider.        

The DOL has issued a number of individual prohibited transaction exemptions for managers of ERISA assets where the manager could not satisfy the requirements of section I(g) of the QPAM Exemption.  Similarly, DOL has granted these kinds of exemptions under its expedited process, or EXPRO, under PTCE 96-62. In our experience, 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.

The DOL recently issued a helpful advisory opinion that makes clear that the sole judicial action that triggers a violation of section I(g) of PTE 84-14 is a criminal conviction. At issue specifically was whether a “deferred prosecution agreement” entered by an affiliate of a QPAM jeopardized the QPAM’s ability to serve as a QPAM (and rely on the QPAM Exemption) for its ERISA clients. The deferred prosecution agreement was entered in connection with investigations by the New York Attorney General’s Office, the U.S. Department of Justice, and the U.S. Office of Foreign Assets Control (OFAC) into allegations that the affiliate had falsified payment records involving countries sanctioned by OFAC over a period of years.

According to the DOL’s letter, under a deferred prosecution agreement, the government files a charging document with a court, but requests that the prosecution be deferred to allow the defendant to demonstrate its good conduct over a period of time. If the defendant successfully completes the deferred prosecution agreement (DPA), the charges may be dismissed and the dismissal is not treated as a conviction.  Under these facts, the DOL concluded that DPAs do not constitute criminal convictions such that the QPAM status of affiliates would be jeopardized. This was good news.

Because of the significance of losing QPAM status, we recommend that companies that provide QPAM services have procedures in place to identify when criminal investigations, indictments, or proceedings are initiated in connection with all affiliates. At a minimum, those procedures should call for a legal review to determine whether QPAM status may be called into question, and, if so, an identification of alternative prohibited transaction strategies or approaching the DOL as quickly as possible to explore applying for a formal prohibited transaction exemption. 


Ellen M. Goodwin and Stephen M. Saxon, Groom Law Group


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.