PLANADVISER - November/December 2020 - 39

compliance consult
David Kaleda
Are You a QPAM?
The nuances of a qualified professional asset manager's role
FIDUCIARIES of plans governed by the
Employee Retirement
Income
Security
Act (ERISA), who hire advisers to
manage plan assets on a discretionary
basis, rely on these advisers to avoid
engaging in transactions that are
prohibited under ERISA Section 406(a).
Advisers should, therefore, look to
complying with applicable prohibited
transaction exemptions (PTEs). One
particularly helpful exemption is the
qualified professional asset manager,
or QPAM, exemption. Advisers should
understand the nuances of the QPAM
exemption and, first and foremost, confirm they are indeed
one of these managers as the exemption defines.
As a reminder, Section 406(a) states that a plan fiduciary
should not cause a plan to enter into certain enumerated
transactions with a party in interest. These prohibited
transactions include, for example, the sale or exchange,
or leasing, of any property; the lending of money or other
extension of credit; and the transfer to, or use by or for the
benefit of, a party in interest, of any assets of the plan. A
party in interest is broadly defined to include, among other
things, a plan service provider-e.g., a broker/dealer (B/D),
trustee or custodian-a plan fiduciary, an employer sponsoring
the plan, employees covered by the plan, and certain
related persons and entities.
The bottom line is that an adviser should be aware that
almost any transaction between a plan and another party
could be prohibited under Section 406(a). However, the good
news is that the QPAM exemption provides broad exemptive
relief so long as the adviser meets the exemption's conditions.
As a threshold matter, the adviser firm must be able to
demonstrate that it is a qualified professional asset manager
as defined in the exemption.
The exemption provides that a qualified professional
asset manager includes a bank, as defined in Section 202(a)
(2) of the Investment Advisers Act of 1940 (Advisers Act), that
has equity capital in excess of $1 million. Also included is
an insurance company that is subject to the insurance laws
of more than one state, further subject to examination by at
least one state insurance regulator, and that has a net worth in
excess of $1 million. The bank and insurance company must
have the power to be in the business of managing, acquiring
or disposing of assets of a plan. Additionally, a QPAM may
... almost any
transaction
between a plan
and another
party could
be prohibited
under Section
406(a).
be an investment adviser, registered under
the Advisers Act, that has total client assets
under its management and control in excess
of $85 million, and shareholders' or partners'
equity in excess of $1 million. The regulators,
as applicable, should be overseeing the firm's
asset management activities.
The Department of Labor (DOL), in issuing
the QPAM exemption, purposefully included
the above-described regulatory, assets under
management (AUM) and control, and capital
requirements in the exemption's definition
of QPAM. These requirements are designed
to ensure that the bank, insurance company
or investment adviser's investment activities are under the
supervision of applicable regulators and that the entities
have the level of sophistication necessary to enter into otherwise
prohibited transactions. Further, the DOL believes such
entities are more likely to have the financial wherewithal to
pay losses to the plan in the event they breach their fiduciary
duties under ERISA.
Importantly, advisers should be careful
in evaluating
whether they indeed fall into the definition of a QPAM. There
are instances where this may not be the case. For example,
while investment advisers may meet the $85 million assets
under management and control requirement, they do not
always meet the equity requirement. Additionally, it's difficult
for non-U.S. advisers to fall within the definition of a
QPAM, because they are not regulated by U.S. federal or state
law as set forth in the QPAM definition. In some instances,
an adviser who otherwise might be a QPAM cannot rely
upon the exemption because the entity or an affiliate has
been convicted of certain crimes.
In summary, discretionary advisers should look to their
compliance policies and procedures to determine how they
address Section 406(a) prohibited transactions and whether
they've been relying on the QPAM exemption or whether they
should utilize it. However, the adviser must meet the conditions
of this exemption.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered,
in Washington, D.C. He
has an extensive background in the financial services sector. His
range of experience includes handling fiduciary matters affecting
investment managers, advisers, broker/dealers, insurers, banks and
service providers.
planadviser.com November-December 2020 | 39
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PLANADVISER - November/December 2020

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