The U.S. Department of Labor (the “Department”) on November 1, 2013 issued Advisory Opinion 2013-05A (the “Opinion”) concerning the application of certain anti-criminal provisions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In particular, as discussed below, the Opinion generally provides clarification regarding what may be considered a “conviction” for purposes of Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”).
You may already be aware of the recent rule-making activities by the Securities and Exchange Commission to disqualify securities offerings involving “bad actors” from being eligible for certain exemptions that may apply to otherwise covered private offerings. Previous DechertOnPoints published on July 26, 2013 and September 27, 2013 discuss some recent developments regarding the securities-law rules governing bad actors.
Similar issues can arise under ERISA. For instance, Section 411 of ERISA prohibits a person who is convicted of certain enumerated crimes from serving in various capacities, including as a plan fiduciary, for 13 years after such conviction (or until the end of imprisonment, if later). Additionally, under the QPAM Exemption, which may exempt from the prohibited-transaction rules of ERISA (and corresponding tax rules) certain transactions involving plan assets managed by a “qualified professional asset manager” (a “QPAM”), a manager that may otherwise qualify as a QPAM is generally disqualified from relying upon the QPAM Exemption if it or any of its affiliates has been convicted of certain crimes during the prior 10 years.
In a number of cases, questions can arise as to whether a “conviction” has occurred for purposes of Section 411 of ERISA or the QPAM Exemption. For example, in McKinney v. Moore, 40 Empl. Bens. Cas. (BNA) 2793 (S.D.N.Y. 2007), the court held that a deferred prosecution agreement of a union official constituted a “conviction” for purposes of Section 411 of ERISA. See also Int’l Longshoremen’s Ass’n v. United States, 451 F. Supp. 685 (S.D. Ala. 1978) (holding that a plea of nolo contendere was equivalent to a “conviction” for purposes of Section 411 of ERISA).
Dechert LLP recently procured from the Department clarification that, in the view of the Department, a deferred prosecution agreement is indeed not a “conviction” for purposes of the QPAM Exemption. This clarification may be helpful to ERISA managers who have entered into deferred prosecution agreements or whose affiliates have done so. It should be noted that, under certain circumstances (for example, in the case of investment advisers that have a number of affiliates), this issue may have greater relevance in the context of the QPAM Exemption than in the context of Section 411 of ERISA generally, because the anti-criminal rule under the QPAM Exemption also extends to parties who are affiliated with a QPAM under the potentially broad definition of “affiliate” set forth in Part VI(d) of the QPAM Exemption.