On April 3, 2024, the Department of Labor (DOL) released its final rule amending Prohibited Transaction Exemption 84-14 (PTE 84-14). PTE 84-14 exempts from ERISA’s prohibited transaction rules certain transactions between parties in interest and plans managed by a Qualified Professional Asset Manager (QPAM) when the conditions of the exemption are met.[1] The final rule (1) expands the type of conduct that will render a QPAM ineligible to rely on the exemption, (2) provides for a transition period in which to cease conducting transactions that are no longer exempt if a QPAM becomes ineligible for the exemption, (3) requires that QPAMs register with the DOL and (4) increases certain AUM and equity thresholds necessary for QPAM qualification. The final rule also attempts to provide clarity as to the extent to which a QPAM must be involved in a transaction in order to take advantage of the exemption and adds certain recordkeeping requirements.
The final rule will become effective on June 17, 2024, which is 75 days following its April 3rd publication in the Federal Registrar.
Expanded Ineligibility
QPAMs that are convicted of any federal or state crimes set forth in the enumerated list in PTE 84-14 are not eligible to rely on PTE 84-14. The final rule explicitly provides that conviction of a QPAM (or its affiliate, as defined in PTE 84-14, or its 5% owner) by a foreign court or release from imprisonment, in either case, as a result of a crime substantially equivalent to any such enumerated crime will result in a loss of eligibility to rely on the exemption. Although there is no formal process for determining whether a foreign crime is “substantially equivalent,” the DOL has stated that impacted QPAMs may contact the Office of Exemption Determinations for guidance.
Along with the explicit inclusion of foreign crimes as a source of ineligibility, the final rule also provides that a QPAM will become ineligible to rely on the exemption if it engages in “Prohibited Misconduct.” This includes the entrance into a non-prosecution or deferred prosecution agreement with a federal or state prosecutor’s office or a regulatory agency, as well as a finding by a federal or state court that a QPAM (or its affiliate or 5% owner) engaged in a pattern or practice of violating the PTE 84-14 exemption, intentionally violated the exemption or provided misleading information to certain federal or state regulators in connection with the exemption.[2]
In a welcome relief from the proposed rule, the final rule provides that a QPAM must notify the DOL upon the entrance into the foreign equivalent of a non-prosecution or deferred prosecution agreement, but the entrance into such an agreement will not result in ineligibility. Further, the requirement in the final rule that a federal or state court must determine if Prohibited Misconduct exists is responsive to commentator’s concerns that the proposed rule, which had put that determination in the hands of the DOL, did not afford impacted QPAMs with the necessary due process protections before losing their eligibility status.
Transition Period Available
If a QPAM becomes ineligible as a result of a criminal conviction or a finding of Prohibited Misconduct, the final rule provides that the QPAM must provide a one-year transition period for its client plans. Relief during this transition period is available only with respect to client plans with which the QPAM was already engaged as of the date it became ineligible and is subject to certain conditions set forth in the exemption. These conditions require that within 30 days of becoming ineligible, the QPAM give notice to the DOL and each client plan (1) of the facts surrounding the QPAM’s conduct and (2) that during the transition period, the QPAM will:
- Not restrict the ability of a client plan to terminate or withdraw from its arrangement with the QPAM;
- Not impose any fees, penalties or charges on client plans in connection with the process of terminating or withdrawing (other than certain fees designed to protect against abusive investment practices or protect other investors in pooled funds);
- Indemnify the client plan for any actual losses from damages resulting from the misconduct; and
- Not employ or knowingly engage any individual that participated in the conduct.
Unlike the proposed rule, the final rule does not require QPAMs to update their existing agreements with their client plans to provide for the above conditions immediately following the rule’s effectiveness. Rather, notice is triggered only upon the loss of eligibility.
Following the end of the one-year transition period, the impacted QPAM may no longer rely on the PTE 84-14 exemption unless the QPAM obtains an individual exemption from the DOL. To that end, the DOL reiterated throughout the preamble to the final rule that any QPAM that will need relief beyond the one-year transition period should submit their application for an individual exemption as soon as possible.
Involvement in Investment Decisions
The final rule modified PTE 84-14 to clarify the DOL’s position that the exemption will not cover a pre-negotiated transaction that a QPAM has merely “rubber-stamped” or sanitized. Although the DOL does not view the changes in the final rule as modifying its existing position on QPAM involvement in exempt transactions, the new language should cause QPAMs to carefully consider whether certain transactions “initiated” by a party in interest, such as derivative transactions pitched by financial institutions, fall outside of the exemption. Similarly, consideration may have to be given in instances where there are multiple sub-advisors, including with respect to collective investment trusts.
Asset Management and Equity Thresholds
The final rule updates the QPAM’s asset management and equity thresholds to ensure that the exemption is only available to institutions large enough to withstand being unduly influenced by parties in interest. The updates thresholds are as follows:
Subsequent adjustments will be made by the DOL no later than January 31 of each year.
Notice and Recordkeeping Requirements
The final rule requires a QPAM relying on the PTE 84-14 exemption to inform the DOL of the QPAM’s legal name and any name under which it may be operating within 90 days of the QPAM’s reliance on the exemption. No other notice to utilize the exemption is required unless there is a change to the names previously provided. There is also a 90-day cure period following a failure to provide the required notification, as long as a late notice is accompanied by an explanation of the reason for the QPAM’s failure to provide timely notice. A QPAM may also notify the DOL if it is no longer relying on the exemption. The DOL will be publishing a list of registered QPAMs on its website.
In addition, the final rule requires that QPAMs keep records necessary to demonstrate that the conditions of the PTE 84-14 exemption have been met with respect to a transaction that is conducted in reliance on the exemption. The records must be maintained for a period of six years from the date of the transaction and be provided, within 30 days of a request, to government agents, plan fiduciaries, contributing employers and employee organizations and participants. Disclosure to non-government individuals is limited to information directly related to their business with the QPAM and does not include trade secrets or privileged information.
Our Take
The inclusion of foreign crimes modernizes PTE 84-14 in light of the increasing globalization of the financial services sector, and the increase in asset management and equity thresholds ensures that the exemption remains limited to large managers. Both of these developments, although limiting on the availability of the exemption, are unsurprising. In codifying the one-year transition period for ineligible QPAMs, the DOL is, to a large degree, codifying its existing practice in granting relief through individual exemptions. However, the clarification on QPAM involvement in transactions will cause QPAMs to have to consider their involvement in transactions to a degree they have not had to in the past and, along with their legal counsel, monitor the DOL for future advisory opinions on specific transactions.
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