The retirement industry has gotten big — really big. Retirement investments valued at more than $ 33 trillion, according to the Institute of Investment Companies, now make up the largest share of US company stocks. Defined benefit and contribution plans account for more than half of this.

Large international asset managers such as Barclays, Citigroup, and JPMorgan Chase have also grown up. One consequence of this interconnected network of financial institutions holding pension assets is the potential for conflicts of interest, which are regulated by the Employees Retirement Income Security Act 1974. The private sector pension law prohibits transactions with any “interested party”, including plan participants, promoters, trustees and anyone who administers the plan. Institutions often use a qualified professional asset manager exemption to help them do business.

1. What is a QPAM?

This is a class exemption that the US Department of Labor gives to investment advisers, banks, banks, savings and loan companies, and insurance companies of a certain size and size. a certain status that allows them to do business in areas otherwise prohibited by ERISA.

Registered investment advisers who manage at least $ 85 million in client assets or companies that hold at least $ 1 million in partner or shareholder equity can generally be classified as QPAM. Sponsors can appoint QPAMs to manage pension assets to avoid violations by interested parties and to exempt themselves from direct fiduciary responsibility.

The idea behind the block exemption is that, as long as the plans are protected by an independent and respectable asset manager who negotiates at arm’s length with the stakeholders, the pension plans are more or less open to the whole market.

2. Why are QPAMs important?

The industry operates on the general assumption that almost all financial services companies could pose potential conflicts of interest to a pension plan, especially since the definition of an interested party is so broad. Qualifying as a QPAM has become standard practice for most companies wishing to hold plans managed by ERISA.

QPAM status has become so important, in fact, that it has replaced the conventional understanding of an exemption to become a sort of badge of honor, according to industry executives. Almost all of the major fund managers operating in the ERISA managed space are QPAM qualified and must maintain this class status to maintain these industry contracts.

QPAMs are also a way to generate private equity or alternative investments. Private transactions with pension plans covered by ERISA would likely fall under the prohibited transactions because, by their very nature, they cannot be publicly reviewed for conflicts or personal transactions.

3. What is an individual exemption?

When the Ministry of Labor proposed the QPAM exemption in 1982, it included an important caveat in the preamble: QPAMs, writes the ministry, “are expected to maintain a high level of integrity” and, as such, cannot have been convicted of a crime. crime within 10 years of a qualified operation.

This penal provision of Section I (g) applies not only to the asset manager itself, but also to “affiliates”, including employees or other entities in which QPAM has a 5% stake. In a global financial market, this can involve a large number of people and companies.

If a large investment bank in the United States has a small South Korean subsidiary, for example, a felony conviction there could put all of the company’s US pension assets at risk.

To avoid this, DOL’s Employee Benefits Security Administration offers individual exemptions that maintain an asset manager’s exemption as long as that company or individual remains free from further felony convictions and can prove that QPAM status is in. the best interest of the pension assets it manages. An individual exemption often subjects the QPAM to further agency review, such as periodic audits.

4. How are individual waivers granted?

Individual exemptions are granted on a case-by-case basis by EBSA’s Exemption Determinations Office.

The burden of proof lies with the applicant, who must provide detailed descriptions of the events in question, the contracts and agreements involved, as well as information on the assets covered by ERISA. Evaluating this evidence can take a long time, sometimes up to a year, so PAQMs tend to start the process well in advance of a planned conviction to avoid any gaps in the exemption.

EBSA granted exemptions ranging from one to 10 years, depending on the severity of the conviction and the degree of involvement of the parent company in the commission of the crime. There has been a measurable increase in the total number of individual Section I (g) exemptions granted over the past 10 years, but many of these exemptions are extensions.

To learn more:

—From Bloomberg law:

Goldman Sachs secures waiver proposal to manage pension assets

DOL offers Credit Suisse a 5-year reprieve for retirement accounts

Ministry of Labor grants relief to five banks that manage retirement money

The clock is ticking for five banks managing retirement money

Banks are right to rejoice despite naughty subsidiaries

—From Bloomberg News:

BNP Paribas announces that it will lose access to certain American pension assets

UBS receives warning and temporary green light to manage U.S. pension money

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