On July 6, 2010 the DOL published in final form an Amendment (the “Amendment”) to the QPAM Exemption (as amended, the “Amended Exemption”) to permit a QPAM to utilize the relief provided by the exemption with respect to an employee benefit plan sponsored by the QPAM or any of the QPAM’s affiliates. The Amendment was proposed by the DOL on its own motion on August 23, 2005 and will be effective on November 3, 2010 (the “Effective Date”); provided, prior to the Effective Date, a QPAM may continue to act as investment manager for its own in-house plan in reliance on the transitional relief provided in the amendment to PTE 84-14 that was published on August 23, 2005.
The Scope of the Amendment
The QPAM Exemption works to exempt a wide range of prohibited transactions under ERISA involving assets of an employee benefit plan managed by a QPAM, provided that, among other conditions, the QPAM is independent of such party in interest (including independence from the plan sponsor). The QPAM Exemption also provides (i) exemptive relief to employers to provide certain limited amounts of goods and services to a managed fund in the ordinary course of such an employer’s business, (ii) limited exemptive relief for leases of office or commercial space between managed funds and QPAMs or employers and (iii) relief for transactions involving places of public accommodation owned by the managed fund. As described below, after the Effective Date, a QPAM that is acting as a manager for its own employee benefit plan or that of an affiliate will be deemed to meet the definition of “independent fiduciary” set forth in the QPAM Exemption if the requirements of Part V of the Amended Exemption are met.
Under the Amended Exemption, the relief provided by Parts I (General Exemption), III (Specific Lease Exemption for QPAMs) or IV (Transactions Involving Places of Public Accommodation) of the QPAM Exemption, shall apply to transactions involving the assets of an employee benefit plan sponsored by the QPAM or an affiliate of the QPAM if the following conditions are met:
(1) The QPAM has discretionary authority or control with respect to the plan assets involved in the transaction;
(2) The QPAM adopts written policies and procedures designed to assure compliance with the Amended Exemption;
(3) An independent auditor, who has appropriate technical training or experience and proficiency with ERISA’s fiduciary responsibility provisions and so represents in writing, conducts an exemption audit (as described below) on an annual basis. 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: (1) with the policies and procedures adopted by the QPAM; and (2) with the objective requirements of the Amended 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 Amended 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; and
(4) The transaction satisfies the applicable requirements set forth in Parts I, III, or IV of the QPAM Exemption (none of which Parts have been substantively modified by the Amendment).
For purposes of the Amended Exemption, an “exemption audit” of a plan must consist of the following:
(1) A review of the written policies and procedures adopted by the QPAM for consistency with each of the objective requirements of the Amended Exemption (as described below);
(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 required written policies and procedures and (ii) the objective requirements of the Amended Exemption; and
(B) to render an overall opinion regarding the level of compliance of the QPAM with its policies and procedures and the conditions of the Amended Exemption;
(3) A determination as to whether the QPAM has satisfied the definition of an QPAM under the Amended Exemption; and
(4) Issuance of a written report that describes the steps performed by the auditor during the course of its review and the auditor’s findings.
Policies and Procedures
For purposes of the foregoing, the required written policies and procedures must describe the following objective requirements of the Amended Exemption and the steps adopted by the QPAM to assure compliance with each of the following:
(1) The definition of a QPAM (which has not been modified by the Amendment);
(2) The conditions of the Amended Exemption 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 a covered transaction;
(3) For a transaction described in the General Exemption in Part I of the QPAM Exemption:
(A) that the transaction is not entered into with any person who is excluded from relief under Section I(a) (relating to power of appointment and termination and the authority to negotiate the terms of the QPAM’s management agreement), Section I(d) (relating to the relationship of the QPAM to the party in interest), or Section I(e) (relating to the 20% “diverse clientele” test) of the Amended Exemption; and
(B) that the transaction is not described in any of the class exemptions listed in Section I(b) (for securities lending, certain mortgage pools and certain mortgage financing arrangements); and
(4) If the transaction is described in Section III of the Amended Exemption:
(A) that the amount of space covered by the lease does not exceed the greater of 7500 square feet or one (1) percent of the rentable space of the property in which the investment fund has the investment; and
(B) that no commission or other fee is paid by the investment fund to the QPAM, any person possessing disqualifying powers with respect to the QPAM or any affiliate of such persons.
In sum, the Amended Exemption serves to remove any residual doubt that may have existed under the QPAM Exemption as to whether and under what circumstances a QPAM may act with respect to the managed assets of its own, or one of its affiliate’s, employee benefit plans.