As an asset manager, you may be familiar with the regulatory issues that come into play when a fund permits investments from “benefit plan investors,” which generally include certain employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and individual retirement accounts. The main concerns include the need to avoid “prohibited transactions” under ERISA and the Internal Revenue Code of 1986, as amended (the “Code”), and the application of fiduciary status under ERISA when benefit plan investor investments become significant enough so that the fund is deemed to hold ERISA “plan assets.”
Often, managers will work to structure the fund so as to avoid being deemed to hold ERISA plan assets, for example, by limiting benefit plan investor investments to no more than 25% of the fund’s total assets. But what if a sizeable benefit plan investor wants to invest in the fund? How can you track what may and may not be considered a “prohibited transaction” or be confident you’re not inadvertently triggering a breach of your ERISA fiduciary duties? For funds with numerous or sizeable benefit plan investors (generally those exceeding 25% of the fund assets), asset managers may seek relief under the Department of Labor’s Prohibited Transaction Exemption 84-14, as amended, which applies to certain “qualified professional asset managers” or “QPAMs.” This exemption is commonly referred to as the “QPAM Exemption.”
What is the QPAM Exemption?
The QPAM Exemption provides relief from federal excise taxes and required compliance actions that otherwise apply if the fund were to engage in a prohibited transaction under ERISA or the Code.
What transactions are prohibited under ERISA and the Code?
As a general rule, a fiduciary that manages ERISA assets may not use those assets to engage in the sale or exchange, leasing of property, loan or extension of credit, or certain other transactions with a “party in interest” or a “disqualified person.” These transactions are prohibited unless an exception applies. Under ERISA and the Code, the list of “parties in interest” and “disqualified persons” is long and includes service providers to the employee benefit plan (such as the plan’s accountants, attorneys, and brokers with whom the plan conducts business), certain affiliates of the plan, and employee participants and employer sponsors of the plan, among other persons. Many ordinary course transactions are swept into the category of “prohibited transactions.”
What happens if the fund engages in a prohibited transaction?
The IRS imposes a 15% excise tax on the amount involved in any prohibited transaction for each year in which the transaction continues. In addition, any prohibited transaction must be unwound, which can be costly and time-consuming. Engaging in a prohibited transaction is also considered a breach of fiduciary duty under ERISA, which could result in personal liability for plan losses with respect to any individual asset manager with discretionary management authority over the fund’s ERISA plan assets.
Why is it important to qualify as a QPAM?
Asset managers must avoid entering into prohibited transactions when no exemption is available. Due to the sweeping nature of the types of transactions deemed prohibited under ERISA and the Code, managers may find it nearly impossible to enter into many types of transactions on behalf of benefit plan investor clients without first obtaining extensive representations from the investor to ensure the fund won’t inadvertently engage in a prohibited transaction. The QPAM Exemption relieves a manager that qualifies as a QPAM of this administrative burden and operates to avoid the potential for excise taxes and other penalties by excluding many of common transactions that would otherwise be prohibited under ERISA and the Code. In addition, certain lenders transacting with the fund often require the fund to either represent that it does not manage ERISA plan assets or that it qualifies as a QPAM under the QPAM Exemption before moving forward with any loan or credit facility transaction.
Are all prohibited transactions exempt under the QPAM Exemption?
No. Prohibited transactions are generally divided into two categories – party in interest transactions, and fiduciary self-dealing transactions. The QPAM Exemption only applies to the party in interest transactions. Unless another exception applies, a fiduciary managing ERISA plan assets may not engage in certain self-dealing transactions (for example, those involving conflicts of interest between the fund and the benefit plan investor).
Who may qualify as a QPAM?
QPAM status is only available to registered investment advisers (RIAs) and certain types of banks and savings and loan institutions. RIAs seeking QPAM status must generally have total client assets under management and shareholder or partner equity in excess of the thresholds stated in the table below.
| Fiscal Year Ending no Later than | AUM Requirement | Equity Ownership Requirement |
| December 31, 2024 | $101,956,000 | $1,346,000 |
| December 31, 2027 | $118,912,000 | $1,694,000 |
| December 31, 2030 | $135,868,000 | $2,040,000 |
What else is required to maintain status as a QPAM?
In addition to the qualification requirements, an RIA seeking QPAM status must meet the requirements summarized below.
- The RIA must notify the DOL of its intent to rely on the QPAM Exemption, when it changes its name, and again when it no longer qualifies as a QPAM.
- The QPAM must acknowledge its fiduciary status in writing.
- No single employee benefit plan (including certain affiliate plans) may make up more than 20% of the QPAM’s assets under management.
- The party in interest cannot have certain types of authority over the manager.
- The QPAM must make an independent decision to enter into the transaction and must have the sole responsibility for the management of plan assets.
- The party in interest involved in the transaction cannot be the QPAM or a person related to the QPAM.
- The terms of the transaction must be at arm’s length.
- The QPAM must maintain records of the transaction for at least six years.
- The QPAM and its affiliates must not have engaged in certain disqualifying acts.
We are an RIA seeking to qualify as a QPAM. What’s next?
An investment manager seeking to qualify as a QPAM should first determine whether it currently meets or will meet all of the requirements to satisfy the QPAM Exemption. The qualification points should be fully vetted before notifying the DOL of the intent to qualify and well before making any representations to benefit plan investors or other parties that it may engage in a transaction as a QPAM.