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Compliance April 2, 2024
DOL Creates More Ways for QPAMs to Be Disqualified
The rule adds kinds of misconduct that could result in disqualification and requires managers to also indemnify their clients if they are disqualified.
Reported by Paul Mulholland
The Department of Labor has finalized a new rule governing the qualified professional asset manager exemption. The final rule adds new types of misconduct that can result in a disqualification and makes it easier for retirement plans to leave a QPAM. The rule was initially proposed in July 2022.
A QPAM is an investment manager—often a bank or insurance company—that facilitates transactions between a qualified plan and parties in interest. A plan normally cannot transact with a party in interest, which can include service providers and the sponsor itself, unless they are relying on an exemption from the DOL.
The exemption allows a QPAM to facilitate these transactions between the plan and interested parties. The QPAM must be financially independent from the transacting parties. The new rule maintains the provision that a QPAM can be disqualified for 10 years if the QPAM, an affiliate or “five percent or more owners” of the QPAM engage in conduct leading to a criminal conviction. It also adds foreign convictions and domestic non-prosecution agreements to the sorts of misconduct that can lead to a disqualification. The proposal included foreign non-prosecution agreements, but that was removed by the final rule.
The final rule also does not consider criminal convictions to be disqualifying if they are from the foreign adversary list maintained by the Department of Commerce. That list currently includes: China, Cuba, Iran, North Korea, Russia and Venezuela. This change from the proposal was inspired by commenters concerned about due process issues and malicious prosecutions by actors in authoritarian states.
If a QPAM is disqualified, it enters a one-year transition period and continue to execute new and old transactions for the plan; the proposal only permitted new transactions to be executed. The QPAM must also indemnify the plan for the costs of finding a new QPAM.
The release on the final rule states, “When QPAMs breached their obligations and faced the loss of QPAM status, they commonly argued that the Department should grant relief, notwithstanding their misconduct, lest the Plans and IRA owners sustained the collateral costs and injury associated with the loss of QPAM status. The express obligation to indemnify and restore losses caused by the QPAM’s own misconduct mitigates this danger.”
Kendra Isaacson, a principal in public policy consultancy Mindset, says many will be happy that plans will not have to update their contracts with QPAMs to include indemnification provisions. Under the new rule, QPAMs already convicted will be required by DOL to indemnify any plans they work with.
Isaacson says the PTE 2020-02 updates in the retirement security proposal contained similar disqualification provisions as the final QPAM rule. PTE 2020-02 is a class exemption that permits an adviser to receive compensation from plan assets for giving advice in the best interest of the plan for a reasonable fee. She says the DOL might have held onto the QPAM proposal until after sending the retirement security proposal to the Office of Management and Budget so the disqualification provisions between the two could be harmonized.
