Proposed changes to the qualified professional asset manager exemption

By Andrew Gaines, Craig Spenner, David Miller and Jason Behrens

On July 27, 2022, the Department of Labor (DOL) released a proposed amendment to the 84-14 Prohibited Transactions Class Exemption (the “QPAM Exemption”). The QPAM exemption has generally been most invoked over the Prohibited Transactions Class Exemption for investment managers managing plan assets subject to the Employees Retirement Income Security Act of 1974 (ERISA) due its general provisions and available DOL guidance on its requirements and limitations. .

In 2006, Congress passed an amendment to ERISA creating a new statutory exemption commonly referred to as the “Service Provider Exemption” which, at least in theory, would be easier to comply with and provide an equally broad exemption. Unfortunately, the DOL has yet to provide any regulations or published guidelines regarding the key elements of the Service Provider Exemption some sixteen years after its inception. As a result, investment managers and plan trustees appear to be reluctant to avail themselves of the service provider exemption and have continued to avail themselves of the QPAM exemption in most cases.

In addition, ERISA trustees, who are the custodians of the allocation of plan assets to external investment managers, often require QPAM eligibility when selecting these external investment managers. As a result, most investment managers as well as ERISA trustees will be very interested in any proposed changes to the QPAM exemption, as these changes could affect their ability to comfortably engage in certain transactions in a way that each party habituated under the existing QPAM exemption. .

The proposed changes to the QPAM exemption, if finalized, will require investment managers who rely on the QPAM exemption to comply with additional terms and possibly make certain changes to contractual agreements with ERISA clients to continue to rely on the QPAM exemption. Below is a summary of the proposals that could materially impact the ability of investment managers to use the QPAM exemption.

QPAM Equity and Assets Under Management Qualification

In 2005, the DOL adjusted the equity and asset management thresholds under the exemption originally created in 1984. or partners’ equity and $85,000,000 of assets under management at the end of its term. tax year as a condition to qualify as a Qualified Professional Asset Manager (QPAM). DOL proposes to increase equity threshold to $2,040,000 for RIAs and $2,720,000 for banks, savings, credit and insurance companies, and to increase assets threshold under management at $135,870,000. In addition, the DOL has proposed that these thresholds be updated on January 31 of each year based on inflation.

Notification to DOL of QPAM status

The DOL has proposed a new condition on QPAMs requiring notification, by email, to the DOL of an entity’s use of the QPAM exemption. QPAMs would be required to report the legal name of each entity claiming the exemption. The notice should only be provided once, unless the name of the QPAM changes. The DOL intends to post a list of all QPAMs on its website. There is a risk that the DOL will use this list to target future audits and investigations.

Changes to QPAM Ineligible Status

The DOL has proposed that the list of crimes that would prevent an entity from becoming a QPAM include crimes committed outside the United States that are substantially similar to crimes currently listed in the QPAM exemption. In addition, the DOL wishes to expand the circumstances that lead to ineligibility by expanding the types of serious misconduct in which a QPAM could participate in, or become aware of and not take proactive steps to stop it, such as breach of terms. of exemption or providing misleading information to the DOL.

The DOL also proposes that management agreements contain terms that would apply in the event the QPAM is disqualified from using the QPAM exemption. If finalized, the management agreements should allow the ERISA client to withdraw from its agreement with the QPAM without costs or penalties in the event that the QPAM becomes ineligible under the QPAM exemption. QPAM would also be required to indemnify the ERISA client and make good any losses suffered by that client as a result of QPAM’s actions that led to QPAM’s disqualification. Existing management agreements would most likely need to be amended to account for the potential disqualification of a QPAM.

Finally, the DOL proposed a mandatory one-year liquidation period that would begin as soon as a QPAM becomes ineligible. The one-year period would be for the benefit of the ERISA client to terminate their relationship with the QPAM and settle all ongoing business, as well as to find a suitable replacement for the QPAM and transition to the new replacement. Any QPAM that becomes ineligible will remain ineligible for a period of ten years beginning when the DOL issues a notice of ineligibility to QPAM.

Involvement of QPAM in investment decisions

The DOL believes that many QPAMs do not necessarily determine investment decisions on certain transactions, but rather the terms and conditions of the transaction are determined prior to QPAM involvement, and then QPAM automatically approves the transaction and relies on the QPAM exemption. The DOL believes this is contrary to the original intent of the QPAM Exemption when it was created in 1984. The DOL wants QPAM to be the ultimate decision maker when it comes to investment decisions regarding the assets under its management.

The DOL has proposed language that would prohibit other parties from making decisions or having influence over assets managed by QPAM other than corporate functions and oversight associated with any transaction. The focus on the argument that QPAM itself is solely responsible for investment decisions creates concerns about the use of, for example, non-QPAM sub-advisers or other types advisors who can participate in the investment decision-making process.

The DOL also proposed language requiring that the relief provided by the QPAM exemption apply only “in connection with an investment fund that is established primarily for investment purposes.” The DOL’s use of “primarily” could indicate that it is seeking to remove the QPAM exemption from applying to certain investment-related transactions by asset pools established for mixed purposes. The DOL should provide additional color as to its use of “primarily” and whether it is intended to affect certain investment-related transactions.

Record keeping

If passed, the DOL’s proposed changes would require QPAMs to maintain records regarding compliance with the QPAM exemption for six years. This proposal is consistent with the other record keeping requirements of the DOL’s Prohibited Transaction Exemptions and would require that the records be available for inspection by the DOL or other federal regulators, as well as any fiduciary of the ERISA client or the employer or employee organization whose plan assets are managed by QPAM. for six years.


It has been over a decade since the DOL made changes to the QPAM exemption. The proposed changes to the QPAM exemption include three very important new hurdles that have not been required in the past and that investment managers may not want to undertake. In particular, (i) register with the Department of Labor and make that registration public, (ii) require certain conditions in investment management agreements with investor clients, including the obligation to indemnify clients in the event of non-compliance that have not been required in the past, and (iii) retain records for six years.

It is likely that each of the new requirements will result in new monetary costs associated with compliance for any investment manager as well as administrative burdens. The proposed changes to equity and assets under management thresholds should come as no surprise to the market. Similarly, stricter compliance with the already existing requirement that QPAM be solely responsible for negotiations regarding plan assets used in a possible prohibited transaction is not surprising and should also be less controversial.

The question that remains, has the DOL gone beyond the intended purpose of protecting ERISA plans, such that if these rules are finalized in their current form, the additional administrative burdens actually make it more difficult or more costly for ERISA plans to use external investment managers to invest plan assets for plan participants and beneficiaries? While the market size of ERISA plan assets for investment management is so large that it will never be overlooked by investment managers, it is not ridiculous to conclude that there will be investment who may not want to undertake these new requirements and the increased risk associated with them and decide that managing ERISA plan assets is not an activity they wish to continue undertaking.

This could certainly be the case when it comes to investment managers who focus on private alternative investment strategies.

The DOL has allowed 60 days to submit formal comments on their proposed rule. We expect that many investment managers will take the opportunity to express their concerns that the proposed changes make the QPAM exemption less attractive or possibly unavailable in certain situations and/or make suggestions to the proposed rules, including with respect to ineligibility conditions, where costs may be incurred, with respect to existing management agreements and notification to the DOL of QPAM status.

The investment management industry will finally have a chance to voice their concerns over these rules and we’ll see how it plays out.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.