Chapter 11: QPAM Exemption (PTE 84-14)
Due to the breadth and scope of the prohibited transaction rules, many normal-course transactions for the benefit of a plan would be, at first blush, impermissible. For example, a manager could not enter into a prime brokerage agreement on behalf of an ERISA plan if the broker or an affiliate is already a service provider to the plan. In 1984, the DOL issued a class exemption for qualified professional asset managers (“QPAMs”) designed to allow these types of transactions where otherwise prudent, assuming satisfaction of certain conditions (PTE 84-14). The policy behind the exemption is that the interposition of a large, independent investment adviser, bank or insurance company between the plan and its parties in interest (which may be numerous) can provide adequate protection for the plan and its participants where the counterparty is a party in interest. The exemption has been amended and arguably restricted several times since its initial issuance (most recently in 2024), yet it remains a vitally important tool for asset managers and a market standard expectation for plan investors making the appointment.
The QPAM Exemption prescribes two sets of rules: one establishing the requirements for a manager to qualify and retain its status as a QPAM, the other limiting the transactional settings in which the exemption will apply. This summary focuses on the requirements as they apply to registered investment advisers. In brief summary, the requirements are as follows:
- The manager must qualify as a QPAM by satisfying certain size-based tests for assets under management and shareholder equity and registering with the DOL.
- The party in interest cannot have certain types of authority over the manager.
- The plan must not make up more than 20% of the manager’s assets under management.
- The manager must make the decision to enter into the transaction.
- The party in interest cannot be the manager or a person “related” to the manager.
- The terms of the transaction must be at arm’s length.
- The manager and its affiliates must not have committed certain disqualifying acts.
A more detailed discussion of these requirements are set forth below.
1. Qualification as a QPAM –The manager must meet the definition of a QPAM at the time of the transaction or, in the case of a continuing transaction, at the time the transaction is entered into or renewed. This means that, at the relevant times, a manager that is a registered investment adviser:
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Must have more than $101,956,000 of total client assets under its management and control as of the last day of its most recent fiscal year.
This test will be increased to $118,912,000 for 2027 and $135,868,000 for 2030, and the DOL will make subsequent annual adjustments for inflation thereafter.
*The timing of the test means that a new manager cannot qualify as a QPAM until after its first fiscal year closes. - Must have shareholders’ or partners’ equity, as shown in the most recent balance sheet prepared within the two years immediately preceding the transaction, in accordance with GAAP, in excess of $1,346,000 or an unconditional guarantee by an affiliate with more than that amount in equity of payment of all the manager’s liabilities. As with the AUM test, these minimums will increase to $1,694,000 for 2027 and $2,040,000 for 2030.
- Must have acknowledged in a written management agreement that it is a “fiduciary” with respect to the relevant ERISA clients.
- Must have notified the DOL of its intention to rely on the QPAM Exemption by listing the entity’s legal name and business names (if different) and emailing the agency at [email protected]. Updates to this information should be made within 90 days following a change. The filed information is publicly available at QPAM Reliance Notices. If a QPAM fails to send this email, the exemption will not be available for transactions that occur until the QPAM: (i) notifies the DOL of its reliance on the exemption or name change and its prior failure to report and (ii) provides the DOL with an explanation for its failure to provide timely notice. For managers that are not currently relying on the QPAM Exemption but who may need to use it in the future, it may be advisable to proactively register with the DOL. This will preserve the manager’s ability to use the exemption, if needed, or if it wishes to hold itself out as a QPAM for marketing purposes to ERISA plans, governmental plans or other investors.
2. Restrictions on the Power of Appointment with Respect to the Manager – At the time of a transaction (or when the transaction is entered into or renewed, in the case of a continuing transaction), neither the party in interest on the other side of the transaction nor any of its “affiliates” (defined below) can have the authority to:
- Appoint or terminate the manager as a manager of the plan assets involved in the transaction (including, for example, by acquiring or redeeming an interest in a fund managed by the manager); or
- Negotiate the terms of a management agreement with the manager (including renewals or modifications) on behalf of the ERISA client with respect to the assets involved in the transaction.
In other words, the person with whom the QPAM is transacting must not have authority relative to the QPAM that could potentially influence the transaction in a manner adverse to the plan. However, these restrictions do not apply if there are two or more plans in a fund and the assets of the investing plan, together with the assets of other plans of the same employer and affiliates, account for less than 10% of the total assets of the fund. This means that a fund’s manager will generally have to inquire into who has investment authority over an ERISA investor’s assets only if the investor holds a 10% or more interest in the fund.
For purposes of these rules, an “affiliate” of a party in interest includes, among others:
- any person directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the party in interest;
- any corporation, partnership, trust or unincorporated enterprise of which the party in interest is an officer, director, or 10% or more partner;
- any director or employee who earns 10% or more of the wages paid by the party in interest or who has direct or indirect authority, responsibility or control regarding the custody, management or disposition of plan assets.
This condition—sometimes referred to as the “hire/fire” condition or the “power of appointment” condition—is generally the most challenging for managers to be certain they have satisfied. While in most cases they will know the identity of the authorized person responsible for placing a plan’s assets under their management, they will not necessarily know the identity of all of that person’s affiliates, particularly, if the person is affiliated with a major financial institution. In certain situations, responsibility for compliance with this condition is contractually split between the manager and the counterparty, who may be in a better position than the manager to determine whether it has affiliates with hire/fire power over the assets being managed. In general, managers are most concerned with knowing the identities of any financial institutions (such as banks, custodians and brokers) that have hire/fire authority, but the broader net of affiliates may be important to certain funds, such as direct lending funds that may need to avoid lending to any interest whose affiliate has hire/fire authority.
3. The Plan’s Holdings Cannot Make Up More Than 20% of the Manager’s Total Assets Under Management –The assets of the plan in question and all other plans of the same employer and its affiliates must represent no more than 20% of the total client assets managed by the manager. In this context, an employer’s “affiliate” means only a person directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the employer. This limitation is designed to ensure that a QPAM is not so beholden to the plan whose assets are under management that it lacks independence. A manager will not be prohibited from acting as a QPAM with respect to plans that make up 20% or less of a manager’s assets, which means a manager may be able to act as a QPAM with respect to some clients but not others. This condition primarily affects smaller and/or newer investment advisers.
4. The Manager Must Oversee the Transaction – The terms of the transaction, commitments, investment of fund assets and any associated negotiations must be determined by the QPAM itself or “under the authority and direction” of the QPAM—the QPAM must make the decision to enter into the transaction and the transaction must not be part of an agreement, arrangement or understanding designed to benefit the party in interest.
This requirement means that a QPAM cannot serve merely to rubber stamp a decision that has been made by others. The 2024 amendments to the QPAM Exemption heighten this standard by providing that the QPAM must have “sole responsibility” with respect to the transaction and ensure that a transaction involving the plan must be “based on its own independent exercise of fiduciary judgment.” However, the language that permits the transaction to be negotiated under the authority and direction of the manager gives co-fiduciaries such as sub-advisers and CIT managers hired by a bank some room to involve themselves in the transaction. That said, documentation among these parties should make clear who the intended QPAM is and the scope of authority. CITs in particular may face challenges under the amended language to the extent the sponsoring bank retains oversight of the investment portfolio.
5. The Party in Interest Cannot Be Related to the Manager – The party in interest involved cannot be either the manager or a person or entity “related” to the manager. An entity is related to the manager if, as of the last day of its most recent calendar quarter:
- the manager owns 10% or more of the entity;
- a person controlling or controlled by the manager owns 20% or more of the entity;
- the entity owns 10% or more of the manager; or
- a person controlling or controlled by the entity owns 20% or more of the manager.
For purposes of these tests, interests held in a fiduciary capacity are not counted when applying the 10% or 20% test. In addition to these bright line rules, ownership interests between 10% and 20% may also cause parties to be considered related if one party exercises control over the management or policies of the other by reason of its ownership interest.
6. Arms-Length Transactions – The terms of the transaction must be at least as favorable to the fund as terms generally available in arm’s length transactions between unrelated parties. This test is applied both at the time the transaction is entered into and at the time of any subsequent renewal or modification that requires consent of the manager.
7. The Manager Must Not Have Committed Certain Disqualifying Acts –The manager must meet an “integrity” standard that has been a focus of the amendments that took effect in June 2024. In connection with these amendments, the DOL has signaled that global asset managers are expected to operate their entire enterprises in accordance with a culture of compliance based on the standards set forth in the QPAM Exemption. These standards have been reorganized and expanded into “Criminal Convictions” and “Prohibited Misconduct.” In each case, a manager will lose the ability to rely on the exemption for up to a 10-year period, which can effectively foreclose the opportunity to manage ERISA assets given the importance of QPAM status and reliance on the exemption in the market.
- Under the criminal convictions category, neither the manager, nor any of its affiliate, nor any direct or indirect 5% owner of the manager, may be a person convicted of or released from prison with respect to a list of specified financial-related felonies or other major crimes within the 10 years preceding the transaction. The list of crimes and definition of “affiliates” make it clear that the bad acts of even certain remotely-related parties can disqualify the QPAM from relying on the QPAM Exemption.
- In addition, the manager will not be permitted to rely on the exemption for a period of up to 10 years if the QPAM, an “affiliate” or a 5% owner engages in “prohibited misconduct,” which falls short of a criminal conviction but includes various non-prosecution or other settlement agreements with U.S. or state agencies involving allegations of conduct that would have resulted in such convictions if successfully prosecuted.
Various additional reporting and transition requirements are also imposed in connection with a violation of these integrity rules. A QPAM that has lost eligibility under the exemption may still be able to apply to the DOL for individual exemptive relief, but the agency has signaled such exemptions will be more difficult to obtain than in the past, and subject to numerous and potentially burdensome ongoing reporting and compliance oversight.
Due to the practical, legal and economic consequences of losing the ability to rely on the QPAM Exemption, asset managers, especially those with multiple affiliated entities outside the United States, would be wise to consider the potential ERISA impact of governmental investigations and other dispute resolutions involving any affiliated entity.
The QPAM Exemption does not provide an exemption from the self dealing prohibitions of Section 406(b) of ERISA. It also does not provide an exemption for securities lending or the acquisition of interests in mortgage pools or mortgage financing arrangements. These transactions must meet the requirements of separate class exemptions.
Chapter 12: Other Key Exemptions
It is sometimes not possible for a manager to qualify as a QPAM, or a manager that is a QPAM may be unable to use the exemption for certain accounts or transactions. For example, new managers may have a period of time before they meet the QPAM Exemption’s assets under management test or may have ERISA clients that account for more than 20% of their assets under management. Managers in these situations may still manage investments under other exemptions.
“Blind” Transactions
The legislative history to ERISA as part of its original enactment indicates that ordinary course “blind” purchase and sale transactions by a plan on an established exchange where the identity of the counterparty is not known should not constitute prohibited transactions if the counterparty happened to be a party in interest.
This concept is extended somewhat to an exemption involving the use of electronic communication networks, alternative trading systems or similar execution or trading systems or venues (collectively, “ECNs”) in which an asset manager or an affiliate may have an ownership interest. See Purchase & Sale of Securities and Debt Instruments.
Service Provider Exemption
A manager, whether or not it is a QPAM, may potentially rely on the so‑called “Service Provider Exemption” set forth in Section 408(b)(17) of ERISA for a wide variety of transactions with parties in interest, many of which are also covered by the QPAM Exemption. As a matter of market practice, this statutory exemption, which was enacted more than 20 years after the DOL first issued the QPAM Exemption, has not taken hold as a regularly relied-upon opportunity for exemptive relief.
The Service Provider Exemption applies only to transactions between a plan and a party in interest that is a service provider but not a fiduciary that exercises any discretionary authority or control with respect to the investment of the plan assets involved in the transaction or that renders investment advice (or an affiliate of such a fiduciary). The Service Provider Exemption applies to the following types of transactions: (1) the sale, exchange or lease of property between a plan and a party in interest; (2) lending or money or other extension of credit between a plan a party in interest; or (3) the transfer to, or use by or for the benefit of, a party in interest, of any assets of a plan.
The Service Provider Exemption can only apply if the plan receives no less, and pays no more, than “adequate consideration.” The definition of “adequate consideration” for a security for which there is a generally recognized market depends on whether such security is traded on a registered national securities exchange:
- Securities Traded on a National Securities Exchange. In this context, adequate consideration means the price of the security prevailing on a national securities exchange that is registered under Section 6 of the Exchange Act, taking into account factors such as the size of the transaction and the marketability of the security.
- Securities Not Traded on a National Securities Exchange. If the security is not traded on a national securities exchange but is still traded on a generally recognized market, adequate consideration refers to a price not less favorable to the plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of the party in interest, taking into account factors such as the size of the transaction and marketability of the security.
- Assets Other than Securities for Which There is a Generally Recognized Market. In the case of an asset other than a security for which there is a generally recognized market, the fair market value of the asset is determined in good faith by a fiduciary or fiduciaries in accordance with regulations prescribed by the DOL Secretary. Note, these regulations have not been promulgated, which is one reason why the exemption is not relied upon as frequently as it might. Broker‑dealer and bank counterparties may have varying levels of comfort relying on the Service Provider Exemption if another one is available because, in the absence of DOL regulations, there remains uncertainty about what counts as adequate consideration, for example, in the case of a debt instrument that is not considered a “security.” Market practice is evolving in this regard—especially in light of the 2024 amendments that have made reliance on the QPAM Exemption more complex and demanding—so it may be worthwhile to discuss the exemption with counterparties even if they have expressed discomfort with using it in the past.
Special‑Purpose Exemptions
See the Section of this Handbook on “Transactions” for descriptions of commonly used special‑purpose exemptions, most of which may be used whether or not the manager is a QPAM.
Chapter 13: Indicia of Ownership and Non-U.S. Assets
Generally, managers of plan assets have an obligation under Section 404(b) of ERISA to not maintain the indicia of ownership of plan assets outside the jurisdiction of the district courts of the United States, subject to limited exceptions. An original requirement of ERISA since its enactment in 1974, the DOL has never defined the phrase, “indicia of ownership,” and it arguably has become less clear in a modern-day investment environment featuring digital documentation, non-certificated securities and asset classes that did not exist at the time of ERISA’s enactment. The indicia of ownership rules may require, for example, a deed for non‑U.S. real property or subscription agreements and similar documentation for non‑U.S. partnership interests, to be held in the manager’s U.S. offices.
The DOL has adopted regulations that provide several exceptions to these requirements in order to permit the indicia of ownership of non‑U.S. securities and non‑U.S. currencies to be held outside the United States.
- The simplest exception applies where the manager is a registered investment adviser that is organized in the United States and has its principal place of business in the United States and that has, as of the last day of its most recent fiscal year, in excess of (i) $50 million in assets under management and (ii) $750,000 in shareholders’ or partners’ equity. Note, these requirements at one time aligned with the definition of a QPAM, but they have not been amended to keep up with the evolving QPAM standards.
- Another exception applies where the indicia of ownership are physically held by (or are in transit to) a branch of a U.S. bank with equity capital in excess of $1,000,000 or a U.S.‑registered broker or dealer with net worth in excess of $750,000, either of which is determined as of the last day of the financial institution’s most recent fiscal year.
- A third exception applies where the indicia of ownership are maintained by a U.S. bank in the custody of a foreign securities depository, foreign clearing agency which acts as a securities depository, or foreign bank, which entity is supervised or regulated by a government agency or regulatory authority in the foreign jurisdiction having authority over such depositories, clearing agencies or banks, provided that certain conditions are satisfied. These conditions include that the non-U.S. bank is liable to the ERISA plan to the same extent it would be if it retained the physical possession of the indicia of ownership within the United States.
A manager that is not organized in the United States or does not have its principal place of business in the United States will not be able to take advantage of the first exception described above. In order to maintain the indicia of ownership of non‑U.S. securities and non‑U.S. currencies outside the United States, such a manager would need to satisfy another exception, such as the exception that permits the indicia of ownership to be maintained by a U.S. bank in the custody of a foreign bank.
It is not clear how the third exception works for certain commonly traded types of securities, because the indicia of ownership rules have not kept pace with the way in which assets are held. In particular, questions have been raised about what constitutes the indicia of ownership for uncertificated securities and certain new forms in which securities are traded, such as A Shares traded on the Hong Kong, Shanghai and Shenzhen Stock Connect. Similar questions would apply to cryptocurrencies. A practical approach in the absence of guidance would be to discuss these matters with the ERISA client together with its custodian and the custodian’s non‑U.S. sub‑custodial network, because they may be in a better position than the non‑U.S. manager to satisfy an applicable exception.
Chapter 14: Fidelity Bonds
Section 412 of ERISA requires that every fiduciary (other than regulated financial institutions, including certain banks, insurance companies, and registered brokers and dealers) of an employee benefit plan and every person who handles funds or other property of such a plan be covered by a so-called “fidelity” bond insuring against fraud or dishonesty (including as examples: larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion and willful misapplication). Personnel with discretionary authority to invest plan assets are treated as handling funds of the plan, including appointed asset managers. Persons whose duties with respect to plan investments are essentially advisory without actual discretion or control are generally not treated as handling funds of the plan. The requirement will apply with respect to every client that is a retirement plan, a master trust, or a commingled fund if the plan, trust or fund is subject to Title I of ERISA.
A plan must be bonded for at least 10% of the amount of funds handled in the preceding year, subject to a maximum of $500,000. If the plan holds employer securities, then a maximum of $1,000,000 applies. An “employer security” is a security issued by an employer of employees covered by the plan, or by an affiliate of such employer. Note that a plan is not considered to be holding employer securities for this purpose merely because the plan invests in a broadly diversified common or pooled investment vehicle that holds employer securities but that is independent of the employer and its affiliates. Thus, a manager’s purchase of an employer security for a broadly diversified plan asset fund in which an ERISA client holds an interest should not cause the relevant plan to be treated as holding employer securities for bonding purposes. However, if the manager purchases an employer security for an ERISA client’s separate account, the relevant ERISA plan would be treated as holding employer securities for bonding purposes.
With respect to situations where assets of more than one plan are held together, the rules state the following: “Where the funds or other property of several plans are commingled (if permitted by law) with each other or with other funds, [the bonding] arrangement shall allow recovery to be attributed proportionately to the amount for which each plan is required to be protected.” Thus, for example, in the case of a client that is a master trust, the manager should look through the master trust to determine the coverage required for each plan investing (directly or indirectly) through the master trust.
Examples
- A manager manages a $20 million separate account for a client that is a trust holding assets of one plan, with no employer securities. The bond required for this client is the lesser of (i) 10% of $20 million (i.e., $2 million) and (ii) $500,000. Therefore, the bond required for this client is $500,000.
- A manager manages a $20 million separate account for a client that is a master trust holding assets of two plans, Plan A (which makes up 20% of the trust) and Plan B (which makes up 80% of the trust), neither of which holds employer securities. The bond required for this client must cover separately the $4 million that is attributable to Plan A and the $16 million that is attributable to Plan B. The bond required for Plan A is the lesser of (i) 10% of $4 million (i.e., $400,000) and (ii) $500,000, or $400,000. The bond required for Plan B is the lesser of (i) 10% of $16 million (i.e., $1,600,000) and (ii) $500,000, or $500,000. Therefore, the bond required for this client is $400,000 plus $500,000, or $900,000.
The same reasoning applies to fidelity bonds for commingled funds that are subject to ERISA. That is, a manager should look through a commingled fund to determine the coverage required for each plan investing (directly or indirectly) in the commingled fund.
Examples
- A manager manages an $80 million commingled fund that has one ERISA investor, a trust holding assets of one plan, with no employer securities. This ERISA investor holds 25% of the fund. The bond required for this commingled fund is the lesser of (i) 10% of $20 million (i.e., $2 million) and (ii) $500,000. Therefore, the bond required for this commingled fund is $500,000.
- A manager manages an $80 million commingled fund that has two ERISA investors, Plan A (which holds a 5% interest) and Plan B (which holds a 20% interest), neither of which holds employer securities. The bond required for this commingled fund must cover separately the $4 million that is attributable to Plan A and the $16 million that is attributable to Plan B. The bond required for Plan A is the lesser of (i) 10% of $4 million (i.e., $400,000) and (ii) $500,000, or $400,000. The bond required for Plan B is the lesser of (i) 10% of $16 million (i.e., $1,600,000) and (ii) $500,000, or $500,000. Therefore, the bond required for this commingled fund is $400,000 plus $500,000, or $900,000.
If commingled funds and/or master trusts invest in other commingled funds and/or master trusts, the rules apply on a look‑through basis in a manner analogous to the foregoing examples.
Managers should double‑check their fidelity bond documentation to make sure the bond covers client assets, not just plans sponsored by the manager for its own employees. In Field Assistance Bulletin No. 2008-04, the DOL clarified many questions surrounding fidelity bonds and links to the Circular 570 with a list of approved sureties.”
As referenced earlier in this Handbook, fidelity bonds are separate and distinct from any fiduciary liability insurance that may be acquired to protect against losses caused by a fiduciary’s breach of duty. Although many plan fiduciaries may be covered by fiduciary liability insurance, it is not required and does not satisfy the fidelity bonding required by ERISA.