QPAM Exemption
Rev. 08/05/10; E-mail Alert 2010-12

On July 6, 2010, the Department of Labor adopted an amendment to prohibited transaction exemption (PTE) 84-14, allowing for a qualified professional asset manager (QPAM) to manage the assets of its own plan or the plan of an affiliate (75 Fed. Reg. 38,837).  Limited relief is also provided for leases of office or commercial space between managed funds and QPAMs or contributing employers.  The class exemption is contingent upon an independent auditor conducting an annual audit to assure compliance with the conditions of the exemption.  This amendment is effective November 3, 2010. In the interim a QPAM may rely on transitional relief provided in the amendment to PTE 84-14 that was published August 23, 2005 (70 Fed Reg. 49,312).

Background
PTE 84-14 allows various parties related to employee benefit plans to engage in transactions involving plan assets if the assets are managed by QPAMs that are independent of the parties in interest. In 2005, the DOL issued a proposed exemption that would allow for employers in the financial services industry to serve as QPAMs for their company plan or the plan of an affiliate prospectively.  The proposed amendment to PTE 84-14 offered retroactive relief for firms that managed investment funds held within their own plan from December 21, 1982 up until the release of the final amendment.

A QPAM is an independent fiduciary that is a:

• Bank, as defined in section 202(a)(2) of the Investment Advisers Act of 1940, or
• Savings and loan association, or
• Insurance company which is qualified under the laws of more than one State to manage, acquire, or dispose of any assets of a plan, or
• Investment adviser registered under the Investment Advisers Act of 1940

Exemption Requirements
The newly added amendment, Part V, effective November 3, 2010, provides relief in Parts I, III or IV of PTE 84-14 from the applicable restrictions of ERISA section 406(a) and (b)(1)&(2), and the taxes imposed under IRC section 4975(a) and (b) for a QPAM that manages an investment fund containing the assets of the QPAM’s company plan or the plan of an affiliate if the QPAM meets all of the following requirements:

(a) The QPAM has discretionary authority or control with respect to the plan assets involved in the transaction; and

(b) The QPAM adopts written policies and procedures that are designed to assure compliance with the conditions of the exemption; the written policies and procedures must describe the objective requirements of the exemption found in Part VI(q) (detailed below) and the steps adopted by the QPAM to assure compliance; and

(c) An independent auditor, who has appropriate technical training or experience and proficiency with ERISA's fiduciary responsibility provisions, conducts an exemption audit annually. Following completion of the exemption audit, the auditor shall issue a written report to the plan presenting its specific findings regarding the level of compliance:

• with the policies and procedures adopted by the QPAM in accordance with section VI(b); and 
• with the objective requirements of the exemption.

The written report shall also contain the auditor’s overall opinion regarding whether the QPAM’s program complied:

1. with the policies and procedures adopted by the QPAM; and
2. with the objective requirements of the exemption. The exemption audit and the written report must be completed within six months following the end of the year to which the audit relates;

(d) The transaction meets the applicable requirements set forth in Parts I, III, or IV of the exemption.

1. A review of the written policies and procedures adopted by the QPAM pursuant to section V(b) for consistency with each of the objective requirements of this exemption (as described in section VI(q)).
2. A test of a representative sample of the plan's transactions during the audit period that is sufficient in size and nature to afford the auditor a reasonable basis:

   A. To make specific findings regarding whether the QPAM is in compliance with (i) the written policies and procedures adopted by the QPAM pursuant to section VI(q) of the exemption and (ii) the objective requirements of the exemption; and

   B. To render an overall opinion regarding the level of compliance of the in-house asset managers (INHAM's) program with section VI(p)(2)(A)(i) and (ii) of the exemption.

3. A determination as to whether the QPAM has satisfied the definition of a QPAM under the exemption; and
4. Issuance of a written report describing the steps performed by the auditor during the course of its review and the auditor's findings.

Part VI (q)
For purposes of section VI(p), the written policies and procedures must describe the following objective requirements of the exemption and the steps adopted by the QPAM to assure compliance with each of these requirements:

1. The definition of a QPAM in section VI(a).
2. The requirement of sections V(a) and I(c) regarding the discretionary authority or control of the QPAM with respect to the plan assets involved in the transaction, in negotiating the terms of the transaction and with respect to the decision on behalf of the investment fund to enter into the transaction.
3. For a transaction described in Part I:

   A. that the transaction is not entered into with any person who is excluded from relief under section I(a), section I(d), or section I(e),

   B. that the transaction is not described in any of the class exemptions listed in section I(b),

4. If the transaction is described in section III:

   A. That the amount of space covered by the lease does not exceed the limitations described in section III(a); and

   B. That no commission or other fee is paid by the investment fund as described in section III(d).

Conclusion
Compliance with PTE 84-14 provides an exemption from penalties under Section 406 of the Employee Retirement Income Security Act of 1974 (ERISA), and from taxes imposed under IRC Sections 4975(a) and (b).  During the proposed regulation commentary period the DOL received requests ranging from eliminating the independent audit requirement entirely to performing the audit less frequently.  In response to these comments, the DOL noted the exemption audit is necessary, and at a frequency no less than annually, in order to address the lack of the QPAM’s independence and to ensure the conditions of the exemption are met. 

A financial firm is under no obligation to serve as a QPAM for its own plan.  Firms must decide whether they will comply with the exemption requirements prior to November 4, 2010 or will no longer serve as a QPAM for their plan.