[Federal Register Volume 87, Number 143 (Wednesday, July 27, 2022)]
[Proposed Rules]
[Pages 45204-45232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15702]



[[Page 45203]]

Vol. 87

Wednesday,

No. 143

July 27, 2022

Part III





Department of Labor





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 Employee Benefits Security Administration





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29 CFR Part 2550





Proposed Amendment to Prohibited Transaction Class Exemption 84-14 (the 
QPAM Exemption); Proposed Rule

  Federal Register / Vol. 87 , No. 143 / Wednesday, July 27, 2022 / 
Proposed Rules  

[[Page 45204]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application No. D-12022]
Z-RIN 1210 ZA07


Proposed Amendment to Prohibited Transaction Class Exemption 84-
14 (the QPAM Exemption)

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Notice of proposed amendment to class exemption.

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SUMMARY: This document gives notice of a proposed amendment to 
prohibited transaction class exemption 84-14 (the QPAM Exemption). The 
QPAM Exemption provides relief from certain prohibited transaction 
restrictions of Title I of the Employee Retirement Income Security Act 
of 1974, as amended (ERISA) and Title II of ERISA, as codified in the 
Internal Revenue Code of 1986, as amended (the Code).

DATES: Written comments and requests for a public hearing on the 
proposed amendment to the class exemption must be submitted to the 
Department within September 26, 2022. The Department proposes that the 
amendment, if granted, will be effective 60 days after the date of 
publication of the final amendment in the Federal Register.

ADDRESSES: All written comments and requests for a hearing concerning 
the proposed amendment to the class exemption should be sent to the 
Office of Exemption Determinations through the Federal eRulemaking 
Portal and identified by Application No. D-12022:
    Federal eRulemaking Portal: http://www.regulations.gov at Docket ID 
number: EBSA-2022-0008. Follow the instructions for submitting 
comments.
    See SUPPLEMENTARY INFORMATION below for additional information 
regarding comments.

FOR FURTHER INFORMATION CONTACT: Erin Scott Hesse, telephone (202) 693-
8546, Office of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor (this is not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Comment Instructions

    All comments and requests for a hearing must be received by the end 
of the comment period. Requests for a hearing must state the issues to 
be addressed and include a general description of the evidence to be 
presented at the hearing. In light of the current circumstances 
surrounding the COVID-19 pandemic, persons are encouraged to submit all 
comments electronically and not to submit paper copies. The comments 
and hearing requests may be available for public inspection in the 
Public Disclosure Room of the Employee Benefits Security 
Administration, U.S. Department of Labor, Room N-1513, 200 Constitution 
Avenue NW, Washington, DC 20210; however, the Public Disclosure Room 
may be closed for all or a portion of the comment period due to 
circumstances surrounding the COVID-19 pandemic. Comments and hearing 
requests will also be available online at http://www.regulations.gov, 
at Docket ID number: EBSA-2022-0008 and http://www.dol.gov/ebsa, at no 
charge.
    Warning: All comments received will be included in the public 
record without change and will be made available online at http://www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be confidential or 
other information whose disclosure is restricted by statute. If you 
submit a comment, EBSA recommends that you include your name and other 
contact information, but DO NOT submit information that you consider to 
be confidential, or otherwise protected (such as Social Security number 
or unlisted phone number), or confidential business information that 
you do not want publicly disclosed. However, if EBSA cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, EBSA might not be able to consider your comment. 
Additionally, the http://www.regulations.gov website is an ``anonymous 
access'' system, which means EBSA will not know your identity or 
contact information unless you provide it.

Background

    Title I of the Employee Retirement Income Security Act of 1974, as 
amended (ERISA), broadly prohibits transactions between plans and 
``parties in interest''--in general, people or entities closely 
connected to the plans. Title II of ERISA, codified in the Internal 
Revenue Code, as amended (the Code), includes parallel prohibitions 
applicable to tax-qualified plans \1\ and ``disqualified persons.'' 
Absent an exemption, ERISA section 406(a)(1)(A) through (D) and Code 
section 4975(c)(1)(A) through (D) prohibit, among other things, sales, 
leases, loans, and the provision of services between these parties. 
Congress enacted these prohibitions to protect plans, their 
participants and beneficiaries (including beneficiaries of IRAs), and 
IRA owners \2\ from the potential for abuse that arises when plans and 
IRAs engage in transactions with closely connected parties. Title I of 
ERISA and the Code include statutory exemptions from the prohibited 
transaction provisions, and the Department has authority to grant 
additional administrative prohibited transaction exemptions on an 
individual or class basis under ERISA section 408(a) and Code section 
4975(c)(2).\3\ Before granting an administrative exemption, these 
provisions require the Secretary of Labor to find that the exemption 
is: (i) administratively feasible, (ii) in the interests of the plans 
and their participants and beneficiaries and IRA owners, and (iii) 
protective of the rights of plan participants and beneficiaries and IRA 
owners.
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    \1\ These include employee benefit plans as well as individual 
retirement accounts and individual retirement annuities (together, 
IRAs).
    \2\ For purposes of this proposed exemption, the term ``IRA 
owner'' refers to the individual for whom an IRA (as defined in the 
proposed exemption) is established.
    \3\ Effective December 31, 1978, section 102 of Reorganization 
Plan No. 4 of 1978, 5 U.S.C. App. (2018), transferred the authority 
of the Secretary of the Treasury to issue exemptions of the type 
proposed to the Secretary of Labor. Therefore, this notice of 
proposed amendment to the QPAM Exemption is issued solely by the 
Department.
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    The QPAM Exemption permits an investment fund \4\ holding assets of 
plans and IRAs that is managed by a ``qualified professional asset 
manager'' (QPAM) to engage in transactions with ``parties in interest'' 
or ``disqualified persons'' to a plan or an IRA, subject to protective 
conditions. The proposed amendment would modify Section I(g) of the 
exemption, a provision under which a QPAM may become ineligible to rely 
on the QPAM Exemption for a period of 10 years if the QPAM, various 
affiliates, or five percent or more owners of the QPAM are convicted of 
certain crimes. The proposed amendment would: (1) require a one-time 
notice to the Department that a QPAM is relying upon the exemption, (2) 
require up-front terms in a written management agreement that apply in 
the event of ineligibility, (3) update the list of crimes in current 
Section I(g) to explicitly include foreign crimes that are 
substantially equivalent to the listed

[[Page 45205]]

crimes, (4) expand the circumstances that may lead to ineligibility, 
and (5) provide a one-year winding-down period to help plans and IRAs 
avoid or minimize possible negative impacts of terminating or switching 
QPAMs or adjusting asset management arrangements when a QPAM becomes 
ineligible. The proposed amendment would also: (1) provide clarifying 
updates to Section I(c) regarding a QPAM's authority over investment 
decisions, (2) adjust the asset management and equity thresholds in the 
QPAM definition in Section VI(a), and (3) add a new recordkeeping 
provision in Section VI(t). The amendment would affect participants and 
beneficiaries of plans, owners of IRAs, the sponsoring employers of 
such plans or IRAs (if applicable), QPAMs, and counterparties engaging 
in transactions covered under the QPAM Exemption.
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    \4\ For purposes of the QPAM Exemption, an investment fund 
includes single customer and pooled separate accounts maintained by 
an insurance company, individual trusts, and common, collective, or 
group trusts maintained by a bank, and any other account or fund 
subject to the discretionary authority of the QPAM. See Section 
VI(b) of the QPAM Exemption.
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The QPAM Exemption \5\
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    \5\ Class Exemption for Plan Asset Transactions Determined by 
Independent Qualified Professional Asset Managers, 49 FR 9494 (Mar. 
13, 1984) as corrected at 50 FR 41430 (Oct. 10, 1985), as amended at 
66 FR 54541 (Oct. 29, 2001), 70 FR 49305 (Aug. 23, 2005), and 75 FR 
38837 (July 6, 2010).
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    In 1984, the Department granted the QPAM Exemption to permit an 
investment fund managed by a QPAM to engage in a broad range of 
transactions with parties in interest with respect to a plan, subject 
to protective conditions. All references in the QPAM Exemption to 
``plan'' also include a plan described in Code section 4975(e)(1), such 
as an IRA.\6\ The reference to ``parties in interest'' includes 
``disqualified persons'' under the Code.\7\ Throughout this preamble, 
all references to ``Plan'' include IRAs, and all references to 
``parties in interest'' include ``disqualified persons.'' \8\
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    \6\ See Section VI(n) of the QPAM Exemption.
    \7\ See Section VI(f) of the QPAM Exemption.
    \8\ Although the Department is using the same definition of 
``plan'' in the proposed amendment, the Department is proposing a 
ministerial change which will capitalize this term. References 
throughout this preamble will therefore use the term ``Plan.''
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    The Department developed and granted the QPAM Exemption based on 
the premise that its broad exemptive relief from the prohibitions of 
ERISA section 406(a)(1)(A) through (D) and Code section 4975(c)(1)(A) 
through (D) could be afforded for transactions in which a Plan engages 
with a party in interest only if the commitments and investments of 
Plan assets and the negotiations leading thereto are the sole 
responsibility of an independent investment manager.
    Part I of the QPAM Exemption (the General Exemption) provides broad 
prohibited transaction relief for a QPAM-managed investment fund to 
engage in transactions with parties in interest, but it does not 
include relief for the QPAM to engage in any transactions involving its 
own self-dealing and conflicts of interest, which are prohibited under 
ERISA section 406(b)(1) through (3) and 4975(c)(1)(E) and (F). This 
important limitation on the relief in the QPAM Exemption serves as a 
key protection for Plans that are affected by the exemption. The QPAM 
Exemption also includes conditions designed to ensure that the QPAM 
does not engage in transactions with parties in interest that have the 
power to influence the QPAM's decision-making processes. Additionally, 
QPAMs remain subject to the fiduciary duties of prudence and undivided 
loyalty, set forth in ERISA section 404, with respect to their client 
Plans.
    In proposing the QPAM Exemption, the Department expressly indicated 
that any entity acting as a QPAM, and those who are in a position to 
influence the QPAM's policies, are expected to maintain a high standard 
of integrity.\9\ Accordingly, the exemption includes Section I(g), 
which provides that a QPAM is ineligible to rely on the exemption for a 
period of 10 years if the QPAM, various affiliates, or five percent or 
more owners of the QPAM are convicted of certain crimes. Ineligibility 
begins as of the date of the judgment of the trial court, regardless of 
whether the judgment remains under appeal.
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    \9\ Proposed Class Exemption for Plan Asset Transactions 
Determined by Independent Qualified Professional Asset Managers, 47 
FR 56945, 56947 (Dec. 21, 1982) (Proposed QPAM Exemption).
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The Qualified Professional Asset Manager

    As noted above, the QPAM Exemption provides relief for various 
party in interest transactions involving Plan assets that are 
transferred to a QPAM for discretionary management, subject to the 
protective conditions in the exemption. A QPAM is defined as a bank, 
savings and loan association, insurance company, or a registered 
investment adviser that meets specified standards regarding financial 
size and acknowledges in a written management agreement that it is a 
fiduciary with respect to each Plan that retains it as a QPAM. The 
Department noted in the 1982 proposed exemption that these categories 
of asset managers are subject to regulation by federal or state 
agencies and expressed the view that large financial services 
institutions would be able to withstand improper influence from parties 
in interest (i.e., maintain independence).\10\ The Department believed, 
and continues to believe that, as a general matter, transactions 
entered into on behalf of Plans with parties in interest are most 
likely to conform to ERISA's general fiduciary standards when the 
decision to enter into the transaction is made by an independent 
fiduciary.
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    \10\ Proposed QPAM Exemption, 47 FR at 56947.
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    The QPAM's independence and discretionary control over asset 
management decisions protect Plans from the danger that parties in 
interest will exercise improper influence over decision-making with 
regard to Plan assets. The QPAM acts as a fundamental protection 
against the possibility that parties in interest could otherwise favor 
their own competing financial interests at the expense of Plans, their 
participants and beneficiaries, and IRA owners. Because the Department 
relies upon the QPAM as a key protection against such improper conduct 
and the threat posed by conflicts of interest, it is critically 
important that the QPAM, and those who are in a position to influence 
its policies, maintain a high standard of integrity. Under the 
exemption, QPAMs must have the authority to make decisions on a 
discretionary basis without direct oversight for each transaction by 
other Plan fiduciaries. Given the scope of their discretion, it is 
imperative that the QPAM, its affiliates, and owners avoid engaging in 
criminal conduct and other serious misconduct that would jeopardize 
Plan assets or call into question the Department's reliance on their 
oversight as a key safeguard for Plan participants and beneficiaries 
and IRA owners.

Covered Transactions

    The QPAM Exemption consists of four separate parts. The General 
Exemption set forth in Part I provides broad exemptive relief for a 
fund managed by a QPAM to engage in a wide variety of transactions 
described in ERISA section 406(a)(1)(A) through (D) and the 
corresponding prohibitions of Code section 4975(c)(1)(A) through (D) 
with virtually all parties in interest other than those parties who are 
most likely to have the power to influence the QPAM.\11\ The General 
Exemption covers

[[Page 45206]]

many different types of transactions. For example, the exemption 
provides relief for a QPAM to use fund assets to purchase an asset from 
a party in interest to a Plan that is invested in the fund. The General 
Exemption also facilitates much more complex transactions, such as when 
a QPAM designs a fund to replicate the return of certain commodities 
indices by investing in futures, structured notes, total return swaps, 
and other derivatives where a party in interest to a Plan that invested 
in the fund is involved in the transaction.\12\
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    \11\ The QPAM Exemption does not extend to transactions 
described in PTE 2006-16 (relating to securities lending 
arrangements), PTE 83-1 (relating to acquisitions of interests in 
mortgage pools), and PTE 82-7 (relating to certain mortgage 
financing arrangements). See Section I(b).
    \12\ See, e.g., Notice of Proposed Exemption involving Credit 
Suisse AG, 79 FR 52365, 52367 (Sept. 3, 2014).
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    As a result of the prohibited transaction relief in the exemption, 
the QPAM can streamline its compliance with the prohibited transaction 
provisions of Title I of ERISA and the Code. The QPAM will generally 
not need to keep and routinely check a list of parties in interest 
before engaging in a transaction to avoid inadvertently entering into a 
prohibited transaction with potentially hundreds, if not thousands, of 
parties in interest. The QPAM also will not have to seek an individual 
exemption or, alternatively, forgo investment opportunities that would 
be in the interest of Plans invested in the investment fund merely 
because a party in interest is involved.
    In addition to the General Exemption, the QPAM Exemption also 
contains additional ``Specific Exemptions'' in Parts II, III, and IV. 
Part II of the exemption provides limited prohibited transaction relief 
for certain transactions involving those employers and certain of their 
affiliates that could not qualify for the General Exemption in Part I. 
Paragraph (a) of Part II provides conditional relief for employers and 
their affiliates to furnish limited amounts of goods and services to an 
investment fund managed by the QPAM, while paragraph (b) of Part II 
permits such employers and their affiliates to lease office or 
commercial space from an investment fund managed by the QPAM.
    Part III provides relief for an investment fund managed by the QPAM 
to lease office or commercial space to the QPAM, an affiliate of the 
QPAM, or a person who could not qualify under Part I because the person 
holds powers to appoint or terminate a QPAM as a manager of the Plan's 
assets as described in subparagraph (a)(1) of Part I of the exemption.
    Part IV provides relief for a place of public accommodation owned 
by the investment fund to furnish services and facilities to all 
parties in interest if the services and facilities are furnished on a 
comparable basis to the general public. These specific exemptions 
provide relief from the specified portions of ERISA section 406(a) and 
406(b) and the parallel provisions of Code section 4975(c)(1).
    The QPAM Exemption was amended in 2010 to add a new Part V, which 
permits a QPAM to rely upon the prohibited transaction relief in Parts 
I, III, or IV to manage an investment fund containing the assets of a 
Plan sponsored by the QPAM or an affiliate.\13\ In recognition of the 
fact that a QPAM does not have the requisite independence from itself 
or an affiliate for these transactions, paragraphs (b) and (c) of Part 
V requires the QPAM to adopt written policies and procedures designed 
to ensure compliance with the exemption conditions and submit to an 
annual independent exemption audit. The audit must address compliance 
with the required policies and procedures and the applicable objective 
requirements of the relevant parts of the exemption.
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    \13\ Amendment to Prohibited Transaction Exemption (PTE) 84-14 
for Plan Asset Transactions Determined by Independent Qualified 
Professional Asset Managers, 75 FR 38837 (July 6, 2010). The 
``Definitions and General Rules'' were redesignated as Part VI.
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Conditions

    The conditions of Part I work to ensure that the QPAM is an 
independent decision maker that will not be influenced by parties in 
interest closely linked to the Plans that are invested in the QPAM-
managed fund. Section I(a) reflects this intention by generally 
excluding transactions with parties in interest that would be able to 
appoint or terminate the QPAM or negotiate the terms of the management 
agreement with the QPAM.\14\
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    \14\ Section I(a) was amended in 2005 to permit transactions 
involving parties in interest and disqualified persons with respect 
to a Plan if the assets of the Plan managed by the QPAM in the fund, 
when combined with the assets of other Plans established by the same 
employer or an affiliate and managed in the same fund, represent 
less than 10 percent of the assets of the investment fund. 70 FR 
49305 (Aug. 23, 2005).
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    Section I(c) provides that transactions entered into pursuant to 
the exemption must be negotiated by or under the authority and general 
direction of the QPAM, and that either the QPAM or (so long as the QPAM 
retains full fiduciary responsibility with respect to the transaction) 
a property manager acting in accordance with written guidelines and 
established and administered by the QPAM, makes the decision on behalf 
of the investment fund to enter into the transaction. Further, Section 
I(c) provides that the transaction must not be part of an agreement, 
arrangement, or understanding designed to benefit a party in interest. 
This language is intended to preclude, for example, transactions that 
are negotiated by an employer but later presented to the QPAM for 
approval.\15\ Section I(d) provides that transactions with the QPAM or 
a person ``related'' to the QPAM (within the meaning of Section VI(h) 
of the exemption) are excluded from the prohibited transaction relief 
offered by the exemption. Section I(e) provides that transactions with 
a party in interest with respect to a Plan whose assets make up more 
than 20% of the total client assets managed by the QPAM are excluded 
from the prohibited transaction relief offered by the exemption.\16\ 
Section I(f) requires the terms of each transaction to be at least as 
favorable to the fund as the terms generally available in an arm's 
length transaction between unrelated parties.
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    \15\ Proposed QPAM Exemption, 47 FR at 56947.
    \16\ For purposes of Section I(e), the Plan's assets are 
combined with the assets of other Plans maintained by the same 
employer or an affiliate or the same employee organization that are 
managed by the QPAM.
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    Section I(g) provides for ineligibility under the QPAM Exemption if 
the QPAM, various affiliates, or five percent or more owners of the 
QPAM are convicted of certain crimes.\17\ Specifically, Section I(g) 
currently states:
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    \17\ See 75 FR 38837 (July 6, 2010) for the text of the QPAM 
Exemption that is in effect unless and until this proposed amendment 
is finalized.

    Neither the QPAM nor any affiliate thereof (as defined in 
section VI(d)), nor any owner, direct or indirect, of a 5 percent or 
more interest in the QPAM is a person who within the 10 years 
immediately preceding the transaction has been either convicted or 
released from imprisonment, whichever is later, as a result of: Any 
felony involving abuse or misuse of such person's employee benefit 
plan position or employment, or position or employment with a labor 
organization; any felony arising out of the conduct of the business 
of a broker, dealer, investment adviser, bank, insurance company or 
fiduciary; income tax evasion; any felony involving the larceny, 
theft, robbery, extortion, forgery, counterfeiting, fraudulent 
concealment, embezzlement, fraudulent conversion, or 
misappropriation of funds or securities; conspiracy or attempt to 
commit any such crimes or a crime in which any of the foregoing 
crimes is an element; or any other crime described in section 411 of 
ERISA. For purposes of this section (g), a person shall be deemed to 
have been ``convicted'' from the date of the judgment of the trial 
court, regardless of whether that judgment remains under appeal.\18\
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    \18\ ERISA section 411 includes: robbery, bribery, extortion, 
embezzlement, fraud, grand larceny, burglary, arson, a felony 
violation of Federal or State law involving substances defined in 
section 802(6) of title 21, murder, rape, kidnaping, perjury, 
assault with intent to kill, any crime described in section 80a-
9(a)(1) of title 15, a violation of any provision of this chapter, a 
violation of section 186 of this title, a violation of chapter 63 of 
title 18, a violation of section 874, 1027, 1503, 1505, 1506, 1510, 
1951, or 1954 of title 18, a violation of the Labor-Management 
Reporting and Disclosure Act of 1959 (29 U.S.C. 401), any felony 
involving abuse or misuse of such person's position or employment in 
a labor organization or employee benefit plan to seek or obtain an 
illegal gain at the expense of the members of the labor organization 
or the beneficiaries of the employee benefit plan, or conspiracy to 
commit any such crimes or attempt to commit any such crimes, or a 
crime in which any of the foregoing crimes is an element.


[[Page 45207]]


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    The exemption defines ``affiliate'' to include parties in control 
relationships with the QPAM; parties for which the QPAM is a five 
percent or more partner or owner; directors, relatives, or partners of 
the QPAM; and officers and employees who are highly compensated or who 
have authority with respect to Plan assets.\19\
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    \19\ See Section VI(d).
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    Additional conditions are applicable to the specific exemptions set 
forth in Parts II through V of the exemption.

Purpose and Approach for the Proposed Amendment

    Substantial changes have occurred in the financial services 
industry since the Department granted the QPAM Exemption in 1984. These 
changes include industry consolidation caused by a variety of factors 
and an increasingly global reach for financial services institutions, 
both in their affiliations and in their investment strategies, 
including those for Plan assets. In the years since 1984, the 
Department has repeatedly considered applications for individual 
exemptions after convictions for crimes causing ineligibility under 
Section I(g). The Department has gained extensive experience dealing 
with corporate convictions giving rise to QPAM ineligibility (both 
domestically and in foreign jurisdictions) pursuant to Section I(g), 
and the Department determined that an ineligibility condition tied to 
criminal convictions continues to provide necessary protection to 
Plans, their participants and beneficiaries, and IRA owners.
    In practice, Section I(g) has effectively required QPAMs that 
become ineligible but wish to continue to rely on the QPAM Exemption to 
seek an individual exemption from the Department. Since 2013, the 
Department has received an increasing number of individual exemption 
requests involving Section I(g) ineligibility as a result of criminal 
convictions occurring within the corporate family of large financial 
institutions. Among other things, applicants must fully and accurately 
disclose the conduct that led to their ineligibility, including whether 
the QPAM was involved; the specific reasons they should be permitted to 
continue acting as a QPAM notwithstanding the criminal conduct; the 
efforts they have undertaken to promote a culture of compliance; and 
the steps they are prepared to take in the future to ensure Plans, 
their participants and beneficiaries, and IRA owners are protected. In 
order to make its finding under ERISA section 408(a) and Code section 
4975(c)(2) when the Department has granted individual exemptions that 
permit continued reliance on the QPAM Exemption after a conviction, it 
has insisted on the imposition of additional protections, such as a 
comprehensive independent compliance audit, and taken action to ensure 
that Plans are permitted to withdraw from the asset management 
arrangement without penalty and will be indemnified or held harmless in 
the event of future misconduct.
    Exemption applicants have repeatedly and consistently represented 
to the Department that Plan investors would be harmed if a QPAM 
abruptly lost exemptive relief as of the conviction date, as dictated 
by Section I(g). Although ineligibility as a result of Section I(g) 
does not bar a QPAM from acting as a discretionary asset manager for 
Plan assets after a conviction, applicants have informed the Department 
that the loss of exemptive relief has the potential to disrupt Plan 
investments and investment strategies, including with respect to 
counterparties to certain transactions who are also relying upon the 
prohibited transaction relief in the QPAM Exemption.\20\ Plans may also 
experience transition costs if a Plan fiduciary needs to find an 
alternative asset manager. To avoid immediate disruption and cost to 
Plan asset management arrangements due to an expected conviction, the 
Department has granted several one-year temporary individual exemptions 
to QPAMs facing ineligibility to provide the Department with sufficient 
time to engage in a more intensive review regarding whether a longer-
term individual exemption is warranted.\21\ Moreover, since 2013, both 
the one-year and longer-term exemptions have routinely given Plans the 
right to exit the relationship with an ineligible QPAM without the 
imposition of any fees, penalties, or charges.
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    \20\ See, e.g., Notice of Proposed Exemption involving JP Morgan 
Chase & Co., 81 FR 83372, 83363 (Nov. 21, 2016).
    \21\ In such cases, the Department requires prominent notice be 
provided to client Plans along with additional protective conditions 
to ensure Plan assets are protected while longer-term prohibited 
transaction relief is considered.
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    As discussed in greater detail below, these developments have 
prompted the Department to propose this amendment to the QPAM 
Exemption, which would: (1) require a one-time notice to the Department 
that a QPAM is relying upon the exemption, (2) require up-front terms 
in a written management agreement that apply in the event of 
ineligibility, (3) update the list of crimes in current Section I(g) to 
explicitly include foreign crimes that are substantially equivalent to 
the listed crimes,\22\ (4) expand the circumstances that may lead to 
ineligibility, (5) provide a one-year winding-down period to help Plans 
avoid or minimize possible negative impacts of changing QPAMs or 
adjusting their asset management arrangements when a QPAM becomes 
ineligible, and (6) instruct entities applying for individual exemption 
relief based on ineligibility under Section I(g) to review the 
Department's most recent individual exemptions involving Section I(g) 
ineligibility with an expectation that similar conditions will be 
required if an exemption is proposed and granted.
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    \22\ This is consistent with the Department's longstanding view 
and intended to remove all doubt about foreign convictions, as 
discussed in more detail below.
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    The amendment also would: (1) make a clarifying revision to Section 
I(c) that specifies that the terms of the transaction, commitments, 
investment of fund assets, and any corresponding negotiations are the 
sole responsibility of the QPAM; (2) increase the asset management and 
equity thresholds in the QPAM definition in Section VI(a) commensurate 
with changes in the Consumer Price Index since 1984; and (3) add a 
standard recordkeeping provision in new Section VI(t).
    The Department is proposing this amendment on its own motion, 
pursuant to ERISA section 408(a) and Code section 4975(c)(2) and in 
accordance with the procedures set forth in 29 CFR part 2570 (76 FR 
66637 (October 27, 2011)).

Proposed Amendment to Section I(g)--Reporting to the Department, 
Written Management Agreement, and Ineligibility

Subsection I(g)(1)--Reporting to the Department

    To ensure that the Department is aware of entities that rely on the 
QPAM Exemption for prohibited transaction relief, the Department is 
proposing to require each QPAM to report such

[[Page 45208]]

reliance by email to the Department. Each QPAM that relies upon the 
exemption must report the legal name of each business entity relying 
upon the exemption (and any name the QPAM may be operating under) in 
the email to the Department.\23\ The QPAM must only provide this 
notification to the Department once unless there is a change to the 
legal name or operating name(s) of the QPAM relying upon the exemption. 
The Department intends to keep a current list of entities relying upon 
the QPAM Exemption on its publicly available website. The Department 
requests comment on whether it should require additional identifying 
information, such as the CRD number of a registered investment adviser 
and whether banks, savings and loan associations, and insurance 
companies have similar identifying information that they should be 
required to provide.
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    \23\ For instance, assume a corporate family is comprised of 
legal entities named: Corporate Parent A, Investment Manager B, 
Broker-Dealer C, Retail Bank D, and Institutional Bank E (doing 
business as InstiBank). Investment Manager B and Institutional Bank 
E are the only entities acting as QPAMs. Investment Manager B would 
notify the Department that it is acting as a QPAM and its legal name 
is Investment Manager B. Institutional Bank E would notify the 
Department that it is acting as a QPAM and its legal name is 
Institutional Bank E, but it is doing business as InstiBank.
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Subsection I(g)(2)--Written Management Agreement

    The fundamental premise of Section I(g) is to require QPAMs to act 
with integrity. Therefore, the proposed amendment would require QPAMs 
to include certain standards of integrity required under the exemption 
in a written management agreement with its client Plans (the Written 
Management Agreement). Specifically, the proposed amendment would 
require QPAMs to include a provision in their Written Management 
Agreement providing that in the event the QPAM, its Affiliates, and 
five percent or more owners engage in conduct resulting in a Criminal 
Conviction or receipt of a written Ineligibility Notice (described in 
more detail below), the QPAM would not restrict its client Plan's 
ability to terminate or withdraw from its arrangement with the 
QPAM.\24\ This amendment would prevent QPAMs from imposing any fees, 
penalties, or charges on client Plans in connection with terminating or 
withdrawing from a QPAM-managed investment fund.\25\
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    \24\ The terms ``Criminal Conviction'' and ``Ineligibility 
Notice'' are discussed in more detail below.
    \25\ This would not apply to reasonable fees, appropriately 
disclosed in advance, that are specifically designed to prevent 
generally recognized abusive investment practices or specifically 
designed to ensure equitable treatment of all investors in a pooled 
fund in the event such withdrawal or termination may have adverse 
consequences for all other investors would be excepted. If such 
fees, penalties, or charges occur, they must be applied consistently 
and in a like manner to all such investors.
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    The QPAM would also be required to include a provision in its 
Written Management Agreement that would require it to indemnify, hold 
harmless, and promptly restore actual losses to each client Plan for 
any damages directly resulting from a violation of applicable laws, a 
breach of contract, or any claim arising out of the failure of such 
QPAM to remain eligible for relief under the QPAM Exemption as a result 
of conduct that leads to a Criminal Conviction or Ineligibility Notice. 
Actual losses include losses and related costs arising from unwinding 
transactions with third parties and from transitioning Plan assets to 
an alternative asset manager as well as costs associated with any 
exposure to excise taxes under Code section 4975 as a result of a 
QPAM's inability to rely upon the relief in the QPAM Exemption. The 
QPAM also must agree not to employ or knowingly engage any individual 
that participated in the conduct that is the subject of a Criminal 
Conviction or Ineligibility Notice. These terms must apply for a period 
of at least 10 years from the Ineligibility Date.\26\
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    \26\ The term ``Ineligibility Date'' is discussed in more detail 
below.
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Subsection I(g)(3) and Sections VI(r) and VI(s)--Types of Misconduct 
and Entities That Cause Ineligibility

Criminal Convictions
    Although the Department has a longstanding practice of considering 
individual exemption applications from QPAMs in connection with foreign 
convictions, the proposed definition of Criminal Conviction would 
remove any doubt that Section I(g) of the QPAM Exemptions applies to 
foreign convictions that are substantially equivalent to the listed 
U.S. federal or state crimes.\27\ Moreover, the Department reiterates 
that the date of conviction (whether foreign or domestic) triggers 
ineligibility under the current QPAM Exemption and the proposed 
amendment, rather than the time any particular instance of misconduct 
occurred.\28\ The timing of ineligibility is provided in proposed 
Section I(h).
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    \27\ See, e.g., Prohibited Transaction Exemption (PTE) 2020-01, 
85 FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019); 
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147 
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE 
2004-13, 69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'') 
Final Authorization Numbers 2003-10E, 2001-02E, and 2000-30E, 
available at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.
    \28\ In this regard, the Department notes that that any foreign 
conviction within the last ten years falls within the scope of 
Section I(g). This applies even to misconduct that occurred during 
the period between the letter from the Department's Office of the 
Solicitor to the Securities Industry and Financial Markets 
Association (SIFMA) dated November 2, 2020, and the letter from the 
Department's Office of the Solicitor to SIFMA, dated March 23, 2021 
(both regarding the treatment of foreign convictions under Section 
I(g) of the QPAM Exemption).
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    As amended, proposed subsection I(g)(3)(A), covers the same U.S. 
federal and state crimes as the current QPAM Exemption, and the 
proposed definition of Criminal Conviction in Section VI(r) expressly 
covers foreign convictions. The Department's modifications also are 
intended to make clear that all crimes listed in the definition and 
applicable under Section I(g) are covered by the provision, regardless 
of whether they also are expressly referenced in ERISA section 411. 
Although the definition of Criminal Conviction broadly includes the 
convictions listed in ERISA section 411, the modified text makes clear 
that the listed convictions are not limited by any other part or aspect 
of ERISA section 411.
    Proposed subsection VI(r)(2) makes clear that relevant convictions 
include specified foreign convictions. Specifically, Section I(g)'s 
ineligibility provision, as amended, would apply to convictions ``by a 
foreign court of competent jurisdiction for any crime . . . however 
denominated by the laws of the relevant foreign government, that is 
substantially equivalent to'' one of the U.S. federal or state crimes 
identified in subsection VI(r)(1).
    The Department includes the specific reference to foreign 
convictions in the proposed amendment to eliminate any ambiguity 
regarding whether the identified crimes in current Section I(g) extend 
to foreign convictions.\29\ Given that financial services institutions 
increasingly have a global reach, both in their affiliations and in 
their investment strategies, transactions involving Plan assets are 
increasingly likely to involve entities that reside and operate in 
foreign jurisdictions. An ineligibility provision that is limited to 
U.S. federal and state convictions would ignore these realities and 
provide insufficient protection for Plans investing through a QPAM's 
international affiliates. Moreover, the Department continues to

[[Page 45209]]

believe that criminal convictions for the types of crimes identified in 
the QPAM Exemption are relevant to a QPAM's ability to manage Plan 
assets with integrity, care, and undivided loyalty, regardless of 
whether the crime occurs in a domestic or foreign jurisdiction. Foreign 
crimes of the sort described in the proposed amendment call into 
question a firm's culture of compliance just as much as domestic 
crimes. Fraud, embezzlement, tax evasion, and the other listed crimes 
are signs of potential serious compliance and integrity failures, 
whether prosecuted domestically or in foreign jurisdictions.
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    \29\ Questions regarding the applicability of foreign 
convictions have been raised in advisory opinion requests and in 
connection with individual exemption requests.
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    In addition, if foreign convictions were not included in Section 
I(g), the exemption would potentially impose more lenient conditions on 
foreign-based conglomerates than U.S.-based entities, which was not the 
Department's intent. In order to make the statutory findings for 
issuing exemptions dictated by ERISA section 408(a) and Code section 
4975(c)(2), the Department must find that an exemption is in the 
interest of and protective of the rights of Plans, their participants 
and beneficiaries, and IRA owners. The Department believes that it 
could not make these statutorily mandated findings if foreign 
convictions were not included within the scope of Section I(g). The 
Department requests comments on this section, including whether there 
are certain types or aspects of criminal behavior that deserve 
additional focus.
Prohibited Misconduct--Generally
    The Department is also proposing to add a new category of 
misconduct that may lead to ineligibility under Section I(g), which is 
described in proposed subsection I(g)(3)(B) as ``participating in 
Prohibited Misconduct.'' Proposed Section VI(s) defines Prohibited 
Misconduct as (1) any conduct that forms the basis for a non-
prosecution or deferred prosecution agreement that, if successfully 
prosecuted, would have constituted a crime described in Section VI(r); 
(2) any conduct that forms the basis for an agreement, however 
denominated by the laws of the relevant foreign government, that is 
substantially equivalent to a non-prosecution agreement or deferred 
prosecution agreement described in subsection VI(s)(1); (3) engaging in 
a systematic pattern or practice of violating the conditions of this 
exemption in connection with otherwise non-exempt prohibited 
transactions; (4) intentionally violating the conditions of this 
exemption in connection with otherwise non-exempt prohibited 
transactions; or (5) providing materially misleading information to the 
Department in connection with the conditions of the exemption.
    For purposes of proposed Section VI(s), the term ``participating 
in'' refers not only to actively participating in the Prohibited 
Misconduct but also to knowingly approving of the conduct or having 
knowledge of such conduct without taking appropriate and proactive 
steps to prevent such conduct from occurring, including reporting the 
conduct to appropriate compliance personnel. When a QPAM's 
ineligibility is linked to Prohibited Misconduct under any portion of 
Section VI(s), the Department will provide affected entities with a 
written warning and an opportunity to be heard.\30\ These due process 
protections are discussed in more detail below.
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    \30\ The Department notes that QPAMs, their Affiliates, and 5% 
or more owners that are criminally convicted receive due process 
through the formal judicial process.
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    Overall, in the Department's view, QPAMs and those in a position to 
influence or control a QPAM's policies that repeatedly engage in 
criminal conduct or other egregious misconduct in connection with 
compliance with the conditions of the exemption do not display the 
requisite standards of integrity to rely on the relief provided in the 
exemption.
Prohibited Misconduct--Deferred Prosecution and Non-Prosecution 
Agreements
    The Department's intention in proposing to add subsections VI(s)(1) 
and (2) is to ensure that QPAMs are not able to avoid the conditions 
related to integrity and ineligibility under Section I(g) simply by 
entering into non-prosecution and deferred prosecution agreements with 
prosecutors to side-step the consequences that otherwise would result 
from a Criminal Conviction. Plans may suffer significant harm if they 
are exposed to serious misconduct committed by unscrupulous firms or 
individuals that ultimately results in a deferred or non-prosecution 
agreement rather than a Criminal Conviction and its consequent 
ineligibility under Section I(g).
Prohibited Misconduct--Violations of the Exemption and Misleading 
Statements to the Department
    The Department is proposing in subsections VI(s)(3) through (5) to 
condition eligibility for the exemption on the following additional 
components: (i) engaging in a systematic pattern or practice of 
violating the conditions of this exemption, (ii) intentionally 
violating the conditions of this exemption, or (iii) providing 
materially misleading information to the Department in connection with 
the exemption. These categories of misconduct weigh against the QPAM 
operating with integrity, which is necessary for the QPAM to continue 
relying on the broad prohibited transaction relief in the class 
exemption.
    Engaging in such activities potentially exposes Plans, their 
participants and beneficiaries, and IRA owners to risk of harm and 
raises serious questions about the Department's reliance on the QPAM as 
a key protective component of the exemption. The Department believes 
that these components of the eligibility provision will encourage QPAMs 
to maintain an appropriate focus on compliance with legal requirements 
related to the exemption and the protection of Plans, their 
participants and beneficiaries, and IRA owners. In connection with a 
robust compliance infrastructure, a minor number of isolated violations 
of the conditions of the exemption would not constitute a systemic 
pattern or practice.
    The Department determined that including these components in the 
Prohibited Misconduct definition strikes the appropriate balance of 
protecting Plans (and ultimately, participants, beneficiaries, and IRA 
owners) while not imposing a condition that is overly broad. The 
Department has determined that limiting eligibility in this manner 
serves as an important safeguard in connection with the broad 
discretion that a QPAM must have to utilize the relief in the exemption 
for itself and its client Plans.
    With respect to these provisions, the Department intends to rely on 
its enforcement authority and program to detect a QPAM's participation 
in the types of misconduct included in subsections VI(s)(3) through 
(5). These components are constructed so that ineligibility occurs only 
in limited circumstances, and even in these circumstances, only after: 
(1) an investigation by the appropriate field office, and (2) the QPAM 
thereafter receives a written warning that the Department is 
considering issuing a written Ineligibility Notice. This written 
Ineligibility Notice process gives the QPAM the opportunity to be heard 
before the Department issues the notice, which would make the QPAM 
ineligible to use the exemption from the date the Department issues the 
notice, except that the mandatory one-year winding down period would be 
applicable, as discussed below.

[[Page 45210]]

Prohibited Misconduct--Request for Comments
    The Department requests comment on the extent to which Section 
VI(s) is appropriately tailored to target the types of conduct that 
implicates integrity issues that should affect a QPAM's eligibility to 
use the exemption in circumstances where it or its five percent or more 
owners or Affiliates participate in non-criminal activity that has the 
potential to harm Plans and whether additional or alternative elements 
may be warranted. The Department also requests comments regarding 
whether it should treat any additional activities as Prohibited 
Misconduct. To the extent commenters believe additional activities 
should be added to the proposed list, the Department request comments 
explaining how such actions implicate the QPAM's integrity. The 
Department also requests comments as to whether any of the listed 
activities should not be included in the list of Prohibited Misconduct. 
To the extent commenters believe action(s) should be removed from the 
proposed list, the Department requests an explanation of why such 
action(s) do not implicate the QPAM's integrity and are not 
appropriately included. The Department also requests comments on 
whether the due process provisions that apply to the Prohibited 
Misconduct ineligibility events also should apply to the Criminal 
Conviction events--in whole or in part. The Department is particularly 
interested in receiving comments regarding whether and how the process 
should apply to foreign Criminal Convictions. For instance, should the 
process provide an opportunity for a QPAM to request the Department's 
determination regarding whether a foreign conviction is substantially 
equivalent to a domestic conviction? Should the Department consider 
particular factors such as the elements of the crime and the nature of 
the tribunal or investigating entity in making such a determination?
Entities Whose Criminal Convictions or Prohibited Misconduct May Cause 
Ineligibility of the QPAM
    Section I(g) ineligibility currently applies upon convictions of 
QPAMs, their Affiliates, and five percent or more owners of the QPAM. 
The Department is not proposing any changes to this aspect of Section 
I(g). Therefore, the exemption retains this scope, including the 
``control'' definition that pertains to part of the definition for 
establishing when an entity is considered an ``Affiliate'' of the QPAM, 
which specifically is defined as ``[a]ny person directly or indirectly 
through one or more intermediaries, controlling, controlled by, or 
under common control with'' the QPAM.\31\ This means that a QPAM's 
ineligibility is generally tied to convictions of entities that own 
five percent or more of the QPAM or are in control-based relationships 
with a QPAM. The Department notes that meaningful control can exist 
even with small ownership interests, such as when the entity with the 
ownership interest is in a position to influence the QPAM to act or 
refrain from acting in a certain manner, including being involved as a 
knowing or unknowing participant or benefactor in the conduct that 
forms the basis for a Criminal Conviction or Ineligibility Notice.
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    \31\ The definition of affiliate also includes directors, 
relatives, or partners of those in control-based relationships as 
well as employees or officers that are highly compensated or have 
direct or indirect authority, responsibility, or control regarding 
custody, management, or disposition of plan assets. See Section 
VI(d) for a complete definition.
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    QPAMs should be careful when entering into joint ventures or other 
passive investment ventures where another entity's ownership interest 
could jeopardize the QPAM's ability to rely upon the QPAM Exemption. 
Such QPAMs should also be cognizant that another entity with an 
ownership interest in the QPAM could be using the QPAM, knowingly or 
not, to further its own criminal conduct or Prohibited Misconduct. 
Ultimately, any such conduct that results in a Criminal Conviction or 
Ineligibility Notice will cause the QPAM to become ineligible for the 
relief offered under the QPAM Exemption, implicate the terms of the 
Written Management Agreement (discussed above), and the conditions of 
the mandatory one-year winding-down period (discussed below) and may 
impact the QPAM's ability to obtain supplemental individual exemption 
relief.
Scope of ``Substantially Equivalent'' Foreign Crimes and Foreign 
Prohibited Misconduct and Requesting Review by the Department
    If a foreign Criminal Conviction or foreign Prohibited Misconduct 
occurs, impacted QPAMs should interpret the scope of this provision 
broadly and consistent with the Department's statutorily mandated focus 
on the protection of plans in ERISA section 408(a) and Code section 
4975(c)(2). In situations where a crime or foreign conduct raises 
particularly unique issues related to the substantial equivalence of 
the foreign Criminal Conviction or Prohibited Misconduct, the QPAM may 
seek the Department's view regarding whether the foreign crime, 
conviction, or misconduct is substantially equivalent to a U.S. federal 
or state crime or Prohibited Misconduct.
    The QPAM will have an opportunity to present its position and have 
an opportunity to be heard. However, any QPAM submitting a request for 
review should do so promptly, and whenever possible in the case of a 
foreign conviction, before a judgment is entered so that the QPAM has 
sufficient time to complete the notice obligations under the proposed 
mandatory one-year winding-down period, discussed below.
    The Department is interested in receiving comments regarding: (1) 
whether this process should be formalized in any way, such as by 
integrating this review with the process proposed in connection with an 
Ineligibility Notice (discussed below); and (2) whether the Department 
should consider particular factors, such as the elements of the crime 
and the nature of the tribunal or investigating entity in making its 
determination.

Proposed Section I(h)--Timing of Ineligibility

    The proposed amendment would not change the ten-year ineligibility 
period under current Section I(g). Thus, under proposed subsection 
I(g)(3), a QPAM would remain ineligible to rely upon the QPAM Exemption 
for a period of ten years from the date of ineligibility (the 
Ineligibility Date). For Prohibited Misconduct, the ineligibility 
period begins as of the date of an Ineligibility Notice, whereas, for a 
Criminal Conviction, it begins on the date the trial court enters its 
judgment.\32\ The proposed amendment makes it clear that for a foreign 
conviction, ineligibility would begin on ``the date of the judgment of 
any court in a foreign jurisdiction that is the equivalent of a U.S. 
federal or state trial court. . . .'' This refers to a trial court of 
original or primary jurisdiction, such as a court of first 
instance.\33\ The period of ineligibility would begin on the conviction 
date, regardless of whether the judgment is appealed. Only upon a 
subsequent final judgment reversing the conviction would a person no 
longer be considered ``convicted'' under proposed subsection 
I(g)(3)(A).
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    \32\ For convictions that also result in imprisonment of a 
person, the end of the ten-year period is counted from the date of 
release from imprisonment.
    \33\ This is generally considered to be the lowest level court 
in a particular jurisdiction that has the power to render a judgment 
of conviction.
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    With respect to Prohibited Misconduct, the QPAM would become

[[Page 45211]]

ineligible to rely upon the QPAM Exemption for a period of ten years 
from the date the Department issues the Ineligibility Notice. The 
Department seeks comments on the timing of ineligibility.
    The Department believes that the approach originally contained in 
the QPAM Exemption and retained in the proposal for Criminal 
Convictions provides a consistent, administrable, and protective 
standard for determining the timing of ineligibility, including for 
convictions in foreign jurisdictions. A trial court's determination of 
wrongdoing is a more than adequate reason to trigger the conditions for 
the Written Management Agreement and initiate the winding-down period 
in the absence of an individual exemption permitting continued reliance 
on the QPAM Exemption after the Department's full consideration of the 
misconduct and steps taken by the firm to redress compliance concerns. 
This is true regardless of whether the parties have chosen to appeal 
the judgment. In the absence of an individual exemption, the loss of 
the ability to rely on the QPAM Exemption simply requires the firm to 
conduct its business in a manner that complies with the statutory 
prohibitions in Title I of ERISA and the Code. Permitting a firm to 
continue to rely on the QPAM Exemption--possibly for years--even after 
it has been found guilty by a trier of fact of serious criminal 
misconduct is inconsistent with the Department's responsibility to 
ensure that the exemption is in the interest of and sufficiently 
protects Plans, their participants and beneficiaries, and IRA owners, 
as required for the Department to make its findings under ERISA section 
408(a) and Code section 4975(c)(2). At a minimum, in such 
circumstances, ineligible firms should be required to seek an 
individual exemption--based on a public record and full consideration 
of the implications of their criminal misconduct. This will ensure that 
the substantial relief from the statutory prohibitions that has been 
afforded to Plans through the QPAM Exemption is appropriately designed 
for the protection of Plans, their participants and beneficiaries, and 
IRA owners under a corresponding individual exemption.

Proposed Section I(i)--Warning and Opportunity To Be Heard in 
Connection With Prohibited Misconduct--Written Ineligibility Notice

    Before issuing a written Ineligibility Notice in connection with 
Prohibited Misconduct, the Department will issue a written warning to 
the QPAM identifying the conduct implicating subsection I(g)(3)(B) and 
providing 20 days for the QPAM to respond. As noted above, the 
Department intends to rely on its enforcement authority and program to 
detect conduct that would lead to a written warning. If the QPAM does 
not respond to the written warning within 20 days, the Department will 
issue the written Ineligibility Notice. However, if the QPAM responds 
within the 20-day timeframe, the Department will provide the QPAM with 
the opportunity to be heard, in person (including by phone or 
videoconference on an internet-based platform), or in writing, or a 
combination, before the Department decides whether to issue the written 
Ineligibility Notice. The opportunity to be heard will be limited to 
one conference, which the Department will schedule within 30 days of 
the QPAM's response to the written warning, unless the Department 
determines in its sole discretion to allow additional conferences. The 
written Ineligibility Notice will articulate the basis for the 
Department's determination that the conduct described in subsection 
I(g)(3)(B) has occurred.
    The Department requests comment on this process, specifically 
including the length of time to respond to a written warning and 
whether additional procedural protections should be incorporated.

Proposed Section I(j)--Mandatory One-Year Winding-Down Period

    As part of this proposed amendment, the Department has included a 
mandatory one-year winding-down period that begins on the Ineligibility 
Date. The winding-down period is designed to accommodate a Plan's 
ability to wind down its relationship with the QPAM. Satisfaction of 
the conditions of the winding-down period would affect the availability 
of relief for all transactions covered by this exemption and directly 
implicates the requirements for the Written Management Agreement. This 
includes relief for past transactions and any transaction continued 
during the one-year winding-down period. Additionally, prohibited 
transaction relief during the winding-down period would be subject to 
compliance with all of the exemption's conditions other than Section 
I(g).
    Once the winding-down period begins, relief under the QPAM 
Exemption would only be available for existing clients of the QPAM--
i.e., client Plans of the QPAM that had a pre-existing Written 
Management Agreement (as required under Section VI(a)) on the 
Ineligibility Date for transactions entered into before the 
Ineligibility Date. Thus, after the Ineligibility Date, the QPAM would 
be prohibited from engaging in new transactions in reliance on the QPAM 
Exemption for existing client Plans. Additionally, if the QPAM obtains 
new clients during the winding-down period, the exemption would not 
apply to transactions entered into on their behalf, unless such relief 
is granted in a separate individual exemption.
    The Department designed the proposed winding-down period to 
mitigate the cost and disruption to Plans, their participants and 
beneficiaries, and IRA owners that can occur when a QPAM becomes 
ineligible for relief based on proposed subsection I(g)(3). The one-
year winding-down period would provide a QPAM's client Plans with time 
to decide whether to hire an alternative discretionary asset manager 
that is eligible to operate as a QPAM or continue their relationship 
with the ineligible QPAM, which could only provide discretionary asset 
management services to them by engaging in transactions in a non-
prohibited manner, relying on alternative exemptions, or pursuing 
alternative investment strategies. The Department believes that a one-
year winding-down period would be necessary to ensure that Plans have 
sufficient time to engage in a search for an alternative QPAM or 
discretionary asset manager if they decide it is in the Plan's best 
interest to do so. The Department understands that searching for and 
hiring a new QPAM or discretionary asset manager can be complex and 
expensive and require care and time, including development of a request 
for proposal and an appropriate transition plan to transfer millions of 
dollars of investments from one manager to another without causing harm 
and losses, including lost opportunity costs, to the Plan.
    The winding-down conditions would require the QPAM to provide 
notice of its ineligibility under subsection I(g)(3) to its existing 
client Plans and the Department (via [email protected]) within 30 days after 
the Ineligibility Date. This notice must include an objective 
description of the facts and circumstances upon which the Criminal 
Conviction or Ineligibility Notice is based and be written with 
sufficient detail, consistent with the QPAM's duties of prudence and 
undivided loyalty, to fully inform a Plan fiduciary of the nature and 
severity of the criminal conduct or Prohibited Misconduct so that such 
Plan fiduciary is able to satisfy, as applicable, its own

[[Page 45212]]

fiduciary duties of prudence and loyalty under Title I of ERISA in the 
context of hiring, monitoring, evaluating, and retaining the QPAM.
    Within 30 days after the Ineligibility Date, the QPAM must also 
notify its client Plans that, as required by subsection I(g)(2)(A) and 
(B), the QPAM will not restrict the client's ability to terminate or 
withdraw from its arrangement with the QPAM. Thus, the QPAM may not 
impose any fees, penalties, or charges on client Plans in connection 
with the process of terminating or withdrawing from a QPAM-managed 
investment fund except for reasonable fees, appropriately disclosed in 
advance, that are specifically designed to prevent generally recognized 
abusive investment practices or specifically designed to ensure 
equitable treatment of all investors in a pooled fund in the event such 
withdrawal or termination may have adverse consequences for all other 
investors. If such fees, penalties, or charges occur, they must be 
applied consistently and in a like manner to all such investors.
    The notice would also indicate that as required by proposed 
subsection I(g)(2)(C), the QPAM will indemnify, hold harmless, and 
promptly restores losses to each client Plan for any damages resulting 
from a violation of applicable laws, a breach of contract, or any claim 
arising out the QPAM's ineligibility under subsection I(g)(3). For 
purposes of this provision, actual losses specifically include losses 
and costs arising from unwinding transactions with third parties and 
from transitioning Plan assets to an alternative discretionary asset 
manager.
    Additionally, to ensure Plans are protected from bad actors, the 
QPAM must not employ or knowingly engage any individual that 
participated in conduct that is the subject of a Criminal Conviction or 
Ineligibility Notice. For Criminal Convictions, this applies regardless 
of whether the individual is separately convicted in connection with 
the criminal conduct. The QPAM must adhere to this requirement no later 
than the Ineligibility Date.
    Because the Ineligibility Date commences the 30-day notice period, 
any financial services institution that has remote relationships with 
another institution should communicate with that institution to ensure 
that it is able to satisfy the notice and indemnity conditions of the 
winding-down period if the financial services institution is acting as 
a QPAM and will also become ineligible.
    Finally, after the one-year period expires, the QPAM could not rely 
on the relief provided in the QPAM Exemption unless the Department 
grants the QPAM an individual exemption to continue relying upon the 
QPAM Exemption. The winding-down period would not be suspended while an 
individual exemption application is pending with the Department. The 
Department requests comments on the winding-down period, including 
whether one year is the appropriate length of time and whether there 
are additional protections for Plan participants and beneficiaries and 
IRA owners that the Department should consider.

Proposed Section I(k)--Requesting an Individual Exemption

    The proposed amendment also would add new Section I(k) to the 
exemption, which provides that a QPAM that is ineligible or anticipates 
becoming ineligible may, consistent with the exemption procedures at 
set forth in 29 CFR part 2570, subpart B, apply for supplemental 
individual exemption relief. Section I(k) instructs an applicant, as 
part of such a request, to review the Department's most recently 
granted individual exemptions involving section I(g) ineligibility with 
the expectation that similar conditions will be required if an 
exemption is proposed and granted. If an applicant requests the 
Department to exclude any term or condition from its exemption that is 
included in a recently issued similar individual exemption, the 
applicant must accompany such request with a detailed explanation of 
the reason such change is necessary and in the interest of and 
protective of the Plan, its participants and beneficiaries, and IRA 
owners. The Department will review such requests consist with the 
requirements of ERISA section 408(a) and Code section 4975(c)(2).
    Such applicants also should provide detailed information in their 
applications quantifying the specific cost or harms in dollar amounts, 
if any, Plans would suffer if a QPAM could not rely on the exemption 
after the winding-down period, including the specific dollar amounts of 
investment losses resulting from foregone investment opportunities and 
any evidence supporting the proposition that investment opportunities 
would only be available to Plans on less advantageous terms.
    An applicant should not construe the Department's acceptance of an 
individual exemption application as a guarantee that the Department 
will grant an individual exemption. Therefore, a QPAM that submits an 
individual exemption application must ensure that it manages Plan 
assets prudently and loyally during the winding-down period with the 
expectation that the Department may not grant further exemptive relief.
    The Department notes that, in order for it to make the necessary 
statutory findings under ERISA section 408(a) and Code section 
4975(c)(2), applicants also should anticipate that the Department may 
condition individual exemptive relief on a certification by a senior 
executive officer of the QPAM (or comparable person) that: (1) all of 
the conditions of the winding-down period were met, and (2) an 
independent audit reviewing the QPAM's compliance with the conditions 
of the one-year winding-down period has been completed.
    Applicants may also request more limited relief than is otherwise 
available under the QPAM Exemption. For instance, a QPAM may only need 
prohibited transaction relief for a particular limited category of 
transactions, such as an on-going lease that was entered into on behalf 
of an investment fund which is expected to continue past the one-year 
winding-down period. In such circumstances, due to the limited nature 
of the transaction(s) for which relief is sought, applicants should 
discuss the terms and conditions of prior individual exemptions 
involving Section I(g) in connection with a request for more limited 
prohibited transaction relief. The applicant also should include a 
detailed explanation in its application regarding how Plans will be 
otherwise protected and why the transaction cannot be unwound prior to 
the end of the winding-down period without harm or losses to such 
Plans.
    Finally, the Department notes that an applicant anticipating that 
it will need relief beyond the end of the winding-down period should 
apply to the Department for an individual exemption as soon as 
practicable. As a fiduciary, the QPAM has obligations with respect to 
Plans beyond those required by the QPAM Exemption and should approach 
the Department at the earliest point at which it appears a conviction 
will occur, such as when a plea agreement has been entered into--even 
if the conviction date has not yet occurred--to ensure that appropriate 
steps can be taken by or on behalf of its client Plans who ultimately 
would be impacted by the QPAM's loss of exemptive relief. QPAMs 
affected by a conviction also should not wait until late in the 
winding-down period to apply for an individual exemption.

[[Page 45213]]

Proposed Amendment to Section I(c)--Involvement in Investment Decisions 
by Parties in Interest

    The Department is proposing to modify the language in Section I(c) 
consistent with its original intent when granting the QPAM Exemption. 
In the 1984 grant notice, the Department stated that an essential 
premise of the exemption is that broad prohibited transaction relief 
can be afforded:

    [O]nly if the commitments and investments of plan assets and the 
negotiations leading thereto, are the sole responsibility of an 
independent investment manager. It appears to the Department that, 
if exemptive relief were to be provided where the QPAM has less than 
ultimate discretion over acquisitions for an investment fund that it 
manages, the potential for decision making with regard to plan 
assets that would inure to the benefit of a party in interest would 
be increased.\34\
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    \34\ 49 FR at 9497.

    The proposed amendatory language in Section I(c) is intended to 
make clear that a QPAM must not permit other parties in interest to 
make decisions regarding Plan investments under the QPAM's control. 
Therefore, the Department is proposing to include in the opening of 
Section I(c) a statement providing that the terms of the transaction, 
``commitments, investment of fund assets, and any corresponding 
negotiations on behalf of the Investment Fund are the sole 
responsibility of the QPAM . . . .'' The Department also proposes to 
add additional amendatory language at the end of Section I(c) stating 
that the prohibited transaction relief in the exemption applies ``only 
in connection with an Investment Fund that is established primarily for 
investment purposes'' and that ``[n]o relief is provided under this 
exemption for any transaction that has been planned, negotiated, or 
initiated by a Party in Interest, in whole or in part, and presented to 
a QPAM for approval because the QPAM would not have sole responsibility 
with respect to the transaction as required by this section I(c).'' 
This language aligns with the following language from the original 1982 
---------------------------------------------------------------------------
proposal for the QPAM Exemption:

    Party in interest transactions that are negotiated by, e.g., an 
employer which sponsors a plan, and are then presented to a QPAM for 
approval would not qualify for the class exemption as proposed. 
However, the exemption, as proposed, would be available even though 
the transfer of assets by a plan to a QPAM is subject to general 
investment guidelines, so long as there is no arrangement, direct or 
indirect, for the QPAM to negotiate, or engage in, any specific 
transaction or to benefit any specific person.\35\
---------------------------------------------------------------------------

    \35\ 47 FR at 56947.

    The Department has determined that adding this additional 
clarifying language in Section I(c) would eliminate any possible 
ambiguity regarding the extent to which a party in interest may be 
involved in a transaction with an investment fund managed by a QPAM. A 
party in interest should not be involved in any aspect of a 
transaction, aside from certain ministerial duties and oversight 
associated with plan transactions, such as providing general investment 
guidelines to the QPAM. The role of the QPAM under the terms of the 
exemption is not to act as a mere independent approver of transactions. 
Rather, the QPAM must have and exercise discretion over the commitments 
and investments of Plan assets and the related negotiations with 
respect to a fund that is established primarily for investment purposes 
in order for the relief provided under the exemption to apply.\36\
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    \36\ For example, the QPAM Exemption is unavailable if a plan 
sponsor hires a QPAM to engage a plan in transactions that do not 
include an investment component, such as hiring a party in interest 
service provider for a welfare plan. It is also unavailable when a 
plan sponsor desires to enter into a party in interest transaction 
with its plan but leaves the ultimate determination and review to a 
QPAM.
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Proposed Amendment to Section VI(a)--Asset Management and Equity 
Thresholds

    The QPAM Exemption was originally granted, in part, on the premise 
that large financial services institutions would be able to withstand 
improper influence from parties in interest. The asset management and 
equity thresholds were included to set minimum size thresholds that 
would help ensure a QPAM would be able to withstand that influence. In 
2005, the Department finalized an amendment to the QPAM Exemption that 
included updating the asset management and shareholders' and partners' 
equity thresholds for registered investment advisers in the QPAM 
definition in subsection VI(a)(4) of the exemption. In connection with 
that amendment, the Department indicated that the original thresholds 
``may no longer provide significant protections for plans in the 
current financial marketplace'' and adjusted the figures based on 
changes in the Consumer Price Index.\37\ The Department has determined 
that the same rationale necessitates further updates to the registered 
investment adviser thresholds and those of other types of QPAMs, such 
as banks and insurance companies, which have not been updated since 
1984. The Department determined to adjust all the thresholds in Section 
VI(a) based on the original published figures in the 1984 grant notice. 
This will ensure that changes to the thresholds for all types of 
financial institutions reflect the same baseline change to the Consumer 
Price Index (i.e., 1984 vs. 2021).\38\ By publication through notice in 
the Federal Register, the Department will also make subsequent annual 
adjustments for inflation to the Equity Capital, Net Worth, and asset 
management thresholds in subsection VI(a)(1) through (4), rounded to 
the nearest $10,000, no later than January 31st of each year.
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    \37\ Proposed Amendment to PTE 84-14, 68 FR 52419, 52423 (Sept. 
3, 2003).
    \38\ For purposes of these changes, the Department used March 
1984 and December 2021 as the relevant dates in the U.S. Bureau of 
Labor Statistics CPI Inflation Calculator available at: https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

    Therefore, in all places in subsection VI(a)(1) through (3) that 
currently indicate a $1,000,000 threshold, the Department is proposing 
to adjust those figures to $2,720,000. In subsection VI(a)(4), the 
Department is proposing to adjust the current assets under management 
threshold of $85,000,000 to $135,870,000, and the shareholders' and 
partners' equity and the broker-dealer net worth thresholds of 
$1,000,000 to $2,040,000.
    As a minor ministerial change, the Department is also proposing to 
replace ``Federal Savings and Loan Insurance Corporation'' with 
``Federal Deposit Insurance Corporation'' in subsection VI(a)(2) 
because the Federal Savings and Loan Insurance Corporation was 
abolished by Congress in 1989, and its responsibilities were 
transferred to the Federal Deposit Insurance Corporation.\39\
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    \39\ See Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989, Public Law 101-73 (1989).
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Proposed Amendment Adding Section VI(t)--Recordkeeping

    The proposed amendment also includes a new recordkeeping 
requirement in Section VI(t), which would require QPAMs to maintain 
records for six years demonstrating compliance with this exemption. The 
Department is proposing this amendment to ensure that evidence of 
compliance is available for review and to make the QPAM Exemption 
consistent with other exemptions that generally impose a recordkeeping 
requirement on parties relying on an exemption to ensure they will be 
able to demonstrate, and that the Department

[[Page 45214]]

will be able to verify, compliance with the exemption conditions.
    Section VI(t) would require that the records be kept in a manner 
that is reasonably accessible for examination. The records must be made 
available, to the extent permitted by law, to any authorized employee 
of the Department or the Internal Revenue Service or another federal or 
state regulator; any fiduciary of a plan invested in an investment fund 
managed by the QPAM; any contributing employer and any employee 
organization whose members are covered by a Plan invested in an 
investment fund managed by the QPAM; and any participant or beneficiary 
of a Plan or IRA owner invested in an investment fund managed by the 
QPAM.
    QPAMs also would be required to make such records reasonably 
available for examination at their customary location during normal 
business hours. Participants and beneficiaries of a Plan, IRA owners, 
plan fiduciaries, and contributing employers/employee organizations 
would be able to request only information applicable to their own 
transactions, and not a QPAM's privileged trade secrets or privileged 
commercial or financial information, or confidential information 
regarding other individuals. If the QPAM refuses to disclose 
information to a party other than the Department on the basis that the 
information is exempt from disclosure, the Department would require the 
QPAM to provide a written notice, within 30 days, advising the 
requestor of the reasons for the refusal and that the Department may 
request such information. The requestor would then be able to contact 
the Department if it believes it would be useful for the Department to 
request the information.
    Any failure to maintain the records necessary to determine whether 
the conditions of the exemption have been met would result in the loss 
of the relief provided under the exemption only for the transaction or 
transactions for which such records are missing or have not been 
maintained. Such failure would not affect the relief for other 
transactions if the QPAM maintains required records for such 
transactions.

Other Ministerial Changes

    The Department is also proposing a few ministerial changes to the 
QPAM Exemption that would not substantively alter the conditions or 
relief provided under the exemption. Specifically, the Department 
proposes to: (1) change the headings of each portion of the exemption 
from ``Part'' to ``Section'', (2) remove many internal cross-references 
to definitional provisions and instead capitalize the terms used in 
those definitional provisions throughout the exemption,\40\ and (3) add 
internal references to ``above'' and ``below'' throughout to direct 
readers where to find certain cross-referenced provisions.
---------------------------------------------------------------------------

    \40\ However, for the sake of clarity, cross-references have 
been retained for the term ``Affiliate'' because it is defined in 
different ways under Section VI(c) and (d) of the exemption.
---------------------------------------------------------------------------

    The Department has corrected two minor typographical errors by 
changing: (1) ``assure'' to ``ensure'' in Section V and the related 
audit provision in Section VI(q), and (2) ``INHAM'' to ``QPAM'' in 
Section VI(p). All references to ``ERISA'' and the ``Code'' have been 
updated so that they come before the sections referenced, and 
references to the term ``employee benefit plan'' have been removed so 
that the exemption uses only the term ``Plan.'' Finally, the 
definitional term ``Control'' in Section VI(e) has been amended to 
specifically refer to variations of the word ``control'' used 
throughout the exemption. Therefore, Section VI(e) now defines the 
terms ``Controlling,'' Controlled by,'' ``under Common Control,'' and 
``Controls'' in the same manner as the prior single term ``control.''

Regulatory Impact Analysis

Executive Orders 12866, 13563, and Administrative Laws

    The Department has examined the effects of this proposed amendment 
as required by Executive Order 12866,\41\ Executive Order 13563,\42\ 
the Paperwork Reduction Act of 1995,\43\ the Regulatory Flexibility 
Act,\44\ section 202 of the Unfunded Mandates Reform Act of 1995,\45\ 
Executive Order 13132,\46\ and the Congressional Review Act.\47\
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    \41\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
    \42\ Improving Regulation and Regulatory Review, 76 FR 3821 
(Jan. 18, 2011).
    \43\ 44 U.S.C. 3506(c)(2)(A) (1995).
    \44\ 5 U.S.C. 601 et seq. (1980).
    \45\ 2 U.S.C. 1501 et seq. (1995).
    \46\ Federalism, 64 FR 153 (Aug. 4, 1999).
    \47\ 5 U.S.C. 804(2) (1996).
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    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, select regulatory approaches that maximize net 
benefits (including potential economic, environmental, and public 
health and safety effects; distributive impacts; and equity). Executive 
Order 13563 emphasizes the importance of quantifying costs and 
benefits, reducing costs, harmonizing rules, and promoting flexibility.
    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to review by the Office of Management and Budget (OMB).\48\ 
Section 3(f) of the Executive Order defines a ``significant regulatory 
action'' as an action that is likely to result in a rule that may (1) 
have an annual effect on the economy of $100 million or more, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local, or tribal governments or communities (also 
referred to as ``economically significant''); (2) create a serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency; (3) materially alter the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raise novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
---------------------------------------------------------------------------

    \48\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
---------------------------------------------------------------------------

    OMB, informed by the Department's analysis, has determined that 
this proposed amendment is economically significant within the meaning 
of section 3(f)(1) of the Executive Order because it may have an annual 
effect of $100 million or more on the economy, as discussed in the 
Transfers section, below.
    The Department has quantified the impact of the proposed amendment 
based on the best available data and provides an assessment of its 
benefits, costs, and transfers below. Based on this assessment, the 
Department concludes that the proposed amendment's benefits would 
justify its costs. Pursuant to the Congressional Review Act, OMB 
anticipates designating a revised QPAM amendment, if finalized as 
proposed, as a ``major rule,'' as defined by 5 U.S.C. 804(2).

Need for Regulation

    Substantial changes have occurred in the financial services 
industry since the Department granted the QPAM Exemption in 1984. These 
changes include industry consolidation caused by a variety of factors 
and an increasingly global reach for financial services institutions, 
both in their affiliations and in their investment strategies, 
including those for Plan assets.
    An amendment to the QPAM Exemption is needed to address ambiguity 
as to whether foreign convictions are included in the scope of the 
ineligibility provision under Section I(g). QPAMs today often have 
corporate

[[Page 45215]]

or relationship ties to a broad range of entities, some of which are 
located internationally. Additionally, some global financial service 
institutions are headquartered or have parent entities that reside in 
foreign jurisdictions. These entities may have significant control and 
influence over the operation and management of all entities within a 
large financial institution's organizational structure, including those 
operating as QPAMs for some Plans. Additionally, the international ties 
of QPAMs come not just from their affiliations and parent entities, but 
also their investment strategies, including those involving Plan 
assets.
    The Department is also concerned about corporate families and 
entities that engage in significant misconduct of a similar type and 
quality as the conduct that might lead to a Criminal Conviction, but 
which ultimately does not result in a conviction. The amendment is 
needed to ensure that QPAMs are not able to avoid the conditions 
related to integrity and ineligibility under Section I(g) simply by 
entering into non-prosecution and deferred prosecution agreements with 
prosecutors to side-step the consequences that otherwise would result 
from a Criminal Conviction. Plans may suffer significant harm if they 
are exposed to serious misconduct committed by unscrupulous firms or 
individuals that ultimately results in a deferred or non-prosecution 
agreement rather than Criminal Conviction and consequent ineligibility 
under Section I(g). Likewise, intentionally or systematically violating 
the conditions of the exemption exposes Plans to significant potential 
harm at the hands of those with influence or control over their assets. 
In the Department's view, QPAMs and those in a position to influence or 
control a QPAM's policies that repeatedly engage in these types of 
serious misconduct do not display the requisite standards of integrity 
necessary to provide the protection intended for Plans under the 
exemption.
    Through its administration of the individual exemption program, the 
Department also determined that certain aspects of the QPAM Exemption 
would benefit from a focus on mitigating potential costs and disruption 
to Plans when a QPAM becomes ineligible for the exemptive relief 
because of a conviction under Section I(g). Two major ways in which the 
amendment would reduce the harmful impact on Plans is by requiring 
penalty-free withdrawal and indemnification terms to be included in the 
QPAM's Written Management Agreement with its client Plans and including 
a one-year winding-down period to avoid unnecessary disruptions to 
Plans upon a Criminal Conviction or receipt of an Ineligibility Notice 
due to other Prohibited Misconduct. The winding-down period will help 
bridge the gap between the QPAM Exemption and the Department's 
administration of its individual exemption program in connection with 
Section I(g) ineligibility.
    The amendment is also needed to update asset management and equity 
thresholds to current values in the definition of ``QPAM'' in Section 
VI(a). Some of the thresholds that establish the requisite independence 
upon which the QPAM Exemption is based have not been updated since 
1984, and the thresholds for registered investment advisers have not 
been updated since 2005. The amendment will standardize all the 
thresholds to current values using the Bureau of Labor Statistics 
Consumer Price Index.
    Finally, the QPAM Exemption currently lacks a recordkeeping 
requirement which the Department generally includes in its 
administrative exemptions. The amendment would add a recordkeeping 
requirement to ensure QPAMs will be able to demonstrate, and the 
Department will be able to verify, compliance with the exemption 
conditions.
    Together, the Department believes these updates are necessary to 
ensure the QPAM Exemption remains in the interest of and protective of 
the rights of Plans and their participants and beneficiaries and IRA 
owners as required by ERISA section 408(a) and Code section 4975(c)(2).

Affected Entities

Qualified Professional Asset Managers (QPAMs)

    The following entities generally qualify for the relief set out in 
the current text of the QPAM Exemption:
    (1) Banks--as defined in section 202(a)(2) of the Investment 
Advisers Act of 1940, with equity capital in excess of $1,000,000.
    (2) Savings and loan associations--the accounts of which are 
insured by the Federal Savings and Loan Insurance Corporation, with 
equity capital or net worth in excess of $1,000,000;
    (3) Insurance companies--subject to supervision under state law, 
with net worth in excess of $1,000,000; and
    (4) Investment advisers--registered under the Investment Advisers 
Act of 1940 with total client assets under management in excess of 
$85,000,000 and either (1) shareholders' or partners' equity in excess 
of $1,000,000 or (2) payment of liabilities guaranteed by an affiliate, 
another entity that could qualify as a QPAM, or a broker-dealer with 
net worth of more than $1,000,000.
    Additionally, the entity must acknowledge that it is a fiduciary 
for each Plan it manages in a written management agreement.
    QPAMs that meet the current thresholds, but who otherwise will not 
meet the new threshold requirements, will also be affected by the 
amendment, as they would no longer be able to rely on the QPAM 
Exemption.
    The Department estimated there are 616 potential QPAMs by 
approximating the total number of providers who in 2019 provided 
services of ``Investment Management'' and ``Named Fiduciary'' 
simultaneously to at least one plan, as reported in Schedule C of the 
2019 Form 5500, and whose NAICS codes start with the 2-digit 52, which 
corresponds to Finance and Insurance Institutions.\49\
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    \49\ Using 2019 Form 5500 data, the Department counted in total 
1390 service providers who provided services of ``Investment 
Management'' and ``Named Fiduciary,'' of which only 765 reported 
their business code. Out of these 765 providers, 339 reported their 
business code starting with the 2-digit NAICS code 52, yielding a 
ratio of 0.44 of potential QPAMs to other providers. Therefore, the 
Department estimates that there were 0.44*1390=616 potential QPAMs 
in 2019.
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Loss of Ability To Rely on the QPAM Exemption

    According to past QPAM Section I(g) individual exemption 
applicants, the broad exemptive relief in the QPAM Exemption provides 
client Plans access to one of the Department's most advantageous 
trading exemptions while ensuring that they are insulated from the 
influence of bad actors. According to these past applicants, if an 
entity is no longer able to represent that it is a QPAM, client Plans 
are far less likely to retain the QPAM as their manager, even in 
situations where the client technically does not need the relief 
provided by the exemption. Although a QPAM that fails to satisfy 
Section I(g) may continue to operate as an asset manager for Plans, the 
Department understands that some entities use their QPAM status as an 
indicator of their size and/or sophistication to potential client 
Plans. Therefore, loss of the ability to rely upon the QPAM Exemption 
may create perceived or actual costs in the form of lost opportunities 
for the QPAM.
    Additionally, the Department understands that many QPAMs perceive 
the QPAM Exemption to be one of the simplest exemptions to comply with. 
Therefore, even if QPAMs believe alternative exemptions are available, 
they may seek QPAM status as an

[[Page 45216]]

additional protection from the risk, even if limited, of exposure to 
excise taxes under Code sections 4975(a) and (b) for engaging in non-
exempt prohibited transactions as a result of failing the conditions of 
those exemptions.
    Some of the costs and transfers associated with the loss of 
reliance on the QPAM Exemption are not added costs or transfers imposed 
by this proposed amendment, but rather costs attributable to the 
criminal behavior of a QPAM or its affiliate. Additionally, the 
Department has ultimately granted many applicants individual exemption 
relief, which has minimized the costs associated with loss of the QPAM 
Exemption. The Department has quantified or qualitatively discussed 
costs and transfers that would result from the proposed amendment, 
below. Many of the benefits that flow through to Plans, their 
participants and beneficiaries, and IRA owners stem from proposed 
amendment provisions which impose minimal or no costs but generally 
benefit them by providing more certainty, protection, and transitional 
support, such as the provision clarifying that foreign convictions are 
included in the crimes enumerated in Section I(g), clarification that 
QPAMs must not permit other parties in interest to make decisions 
regarding Plan investments under the QPAM's control, and the addition 
of a mandatory one-year winding-down period.

Plans With Assets in an Investment Fund Managed by a QPAM

    The proposed amendment will affect Plans whose assets are held by 
an Investment Fund that is managed by a QPAM. The Department does not 
collect data on Plans that use QPAMs to manage their assets. 
Nevertheless, the Department estimates that a single QPAM services, on 
average, 32 client Plans.\50\ Therefore, the Department estimates that 
in total there are 19,712 client Plans (616 QPAMs times 32 client Plans 
per QPAM). The Department requests comment on the number of Plans that 
may need to find an alternative asset manager or investment fund(s) as 
a result of the proposed increased thresholds.
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    \50\ Although the Department estimates there are 616 QPAMs, it 
can only observe and count the number of client Plans corresponding 
to 339 QPAMs. The Department counted 10,719 Plans served by these 
339 observable QPAMs, yielding an average of 32 client Plans per 
QPAM in 2019. The Department acknowledges that these entities do not 
necessarily act as QPAMs to their client Plans, and, therefore, 
considers this average as an upper limit for the number of client 
Plans served by a QPAM.
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Benefits

    As noted above, many of the benefits from this proposal to Plans, 
their participants, beneficiaries, and IRA owners would stem from new 
and amended conditions that would not significantly increase costs, but 
would provide more clarity, certainty, protection, and transitional 
support. In particular, the Department expects that the proposed 
amendment would provide the specific benefits described below.

Written Management Agreement--Subsection I(g)(2)

    The proposed terms for the Written Management Agreement will 
benefit Plans by providing them with additional certainty that the Plan 
and its assets will be insulated from losses if a Criminal Conviction 
or Prohibited Misconduct that results in an Ineligibility Notice 
occurs. The proposed Written Management Agreement conditions also would 
benefit client Plans by ensuring they can terminate the arrangement or 
withdraw from a QPAM-managed Investment Fund without penalty, further 
ensuring that Plans are not exposed to unnecessary costs when relief 
under the exemption is lost through no fault of their own. The 
Department also believes requiring a QPAM to agree to these terms 
before misconduct occurs establishes a more prominent indication that 
the QPAM will operate with integrity throughout its dealings with 
client Plans, which provides additional certainty and assurances to 
such clients that a Plan's assets will be properly and prudently 
managed and protected. Similarly, the Department expects these proposed 
conditions will increase the overall value and attractiveness to Plans 
of retaining an asset manager that meets the requirements of the QPAM 
Exemption.

Ineligibility Due to Foreign Criminal Convictions--Subsection 
I(g)(3)(A) and Subsection VI(r)(2)

    The QPAM Exemption was issued, in part, based on the principle that 
any entity acting as a QPAM--and those who are in a position to 
influence a QPAM's policies--should maintain a high standard of 
integrity.\51\ This principle is called into question when a QPAM, or 
an entity that may be in a position to influence its policies, is 
convicted of certain crimes. The Department sought to address this 
issue by making entities ineligible for the prohibited transaction 
relief in the QPAM Exemption as of the date of the trial court judgment 
for any of the crimes listed in Section I(g).
---------------------------------------------------------------------------

    \51\ Proposed QPAM Exemption, 47 FR at 56947.
---------------------------------------------------------------------------

    Since the initial grant of the QPAM Exemption, the Department has 
granted nine individual exemption requests from QPAM applicants in 
connection with a foreign conviction; the first being in 2000.\52\ The 
specific reference to foreign-equivalent crimes modernizes the QPAM 
Exemption to align with the realities of modern investment practices 
engaged in by many Plans. In this regard, removing all doubt that 
foreign-equivalent crimes are a basis for ineligibility provides 
necessary protections for Plans, as required by ERISA section 408(a) 
and Code section 4975(c)(2). This ultimately provides a benefit to 
Plans that rely upon QPAMs with strong ties to entities operating in 
foreign jurisdictions by not depriving them of the protection provided 
by the proposed amendment to Section I(g).
---------------------------------------------------------------------------

    \52\ See Prohibited Transaction Exemption (PTE) 2020-01, 85 FR 
8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019); PTE 
2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147 (Oct. 
28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE 2004-13, 
69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'') Final 
Authorization Numbers 2003-10E, 2001-02E, and 2000-30E, available at 
https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.
---------------------------------------------------------------------------

Ineligibility Due to Participating in Prohibited Misconduct--Subsection 
I(g)(3)(B) and Section VI(s)

    As noted above, the QPAM Exemption is in large part premised on any 
entity acting as a QPAM, and those who are in a position to influence 
the QPAM's policies, maintaining a high standard of integrity. To 
reinforce this standard, the Department proposes to expand the 
circumstances that lead to ineligibility to avoid unfair and unequal 
treatment of entities and corporate families that have a record of 
engaging in malfeasance that ultimately may not result in a Criminal 
Conviction. Therefore, this extension of the ineligibility provision of 
current Section I(g) provides a benefit to Plans that rely upon QPAMs 
that are a part of corporate families with significant compliance 
failures by not depriving them of the protections provided under the 
proposed amendment to Section I(g).

Mandatory One-Year Winding-Down Period--Section I(j)

    The winding-down period benefits Plans because it is designed to 
accommodate a Plan's ability to wind-down its relationship with the 
QPAM, if necessary. The winding-down period ensures that responsible 
Plan fiduciaries have the time and ability to choose an

[[Page 45217]]

alternative discretionary asset manager or investment strategy without 
undue cost to the Plan. Under the current text of Section I(g), the 
immediate ineligibility of a QPAM upon a judgment of conviction may 
expose Plans to potential costs and losses without the necessary time 
to make alternative investment arrangements.
    Immediate loss of relief under the QPAM Exemption could place Plans 
in the difficult position of either: (1) searching for a new asset 
manager for the services previously provided by the ineligible QPAM; or 
(2) being forced to liquidate assets at inopportune times, incur 
transaction costs to sell and repurchase assets, and lose returns while 
the assets are in transition. Searching for a new asset manager could 
require a particularly resource- and time-intensive process for Plan 
fiduciaries.
    The proposed amendment benefits Plans by providing Plan fiduciaries 
with time and flexibility to determine the best path forward. This 
includes the benefit of ensuring Plans can mitigate any potential for 
disruption and losses by implicating the terms required in the Written 
Management Agreement under proposed subsection I(g)(2). If Plan 
fiduciaries decide to retain an ineligible QPAM as a discretionary 
asset manager, the one-year winding-down period will give the Plan 
fiduciaries time to determine and prepare for any changes that may be 
necessary for Plan investments.
    Finally, the winding-down period benefits QPAMs by providing 
additional time for them to request an individual exemption from the 
Department. This will allow QPAMs, consistent with their applicable 
fiduciary obligations, to communicate with and assist their client 
Plans in determining an appropriate path forward for the management of 
Plan assets.

Requesting an Individual Exemption--Section I(k)

    In addition to providing more certainty to QPAMs and Plans, the 
proposed amendment would also require QPAMs that seek individual 
exemption relief to review the Department's most recently granted 
individual exemptions with the expectation that similar conditions will 
be required if an exemption is proposed and granted. If an applicant 
requests the Department to exclude any term or condition from its 
exemption that is included in a recently issued similar individual 
exemption, the applicant must accompany such request with a detailed 
explanation of the reason such change is necessary, in the interest of, 
and protective of the Plan, its participants and beneficiaries, and IRA 
owners. Applicants also should provide detailed information in their 
applications quantifying the specific cost in dollar amounts, if any, 
of the harms Plans would suffer if a QPAM could not rely on the 
exemption after the winding-down period.
    The Department generally requests such information from an 
applicant if it is not included in its application. Therefore, the 
Department believes that the benefit of this provision will be reduced 
costs due to a more streamlined exemption application process because 
clearer standards for how an applicant should formulate its application 
would be established. The Department requests comment on this 
assumption.

Involvement in Investment Decisions by Parties in Interest--Section 
I(c)

    The proposed modification to the language in Section I(c) will 
benefit Plans, their participants and beneficiaries, and IRA owners by 
ensuring that the Plan is not engaging in harmful prohibited 
transactions that are orchestrated by parties in interest. The 
Department understands that some Plan fiduciaries, in conjunction with 
hiring a QPAM, may be engaging in abuses of the exemption. The 
amendatory language should help ensure that Plans, their participants 
and beneficiaries, and IRA owners are not exposed to conflicts of 
interest that the QPAM Exemption was not designed to address and for 
which the Department should not provide prohibited transaction relief.

Asset Management and Equity Thresholds--Section VI(a)

    The Department expects that the benefit associated with the 
proposed updates to the asset management and equity thresholds is the 
preservation of the underlying intent of the size conditions, which is 
to ensure the use of an asset manager that is sufficiently large to be 
able to withstand improper influence from parties in interest (i.e., 
maintain independence).

Costs

    All QPAMs must acknowledge that they are fiduciaries within the 
meaning of Title I of ERISA and/or the Code with respect to each Plan 
that has retained the QPAM. In analyzing compliance costs associated 
with the amendment, the Department considers the regulatory baseline 
that QPAMs already are required to comply with--primarily ERISA's 
fiduciary duty requirements (to the extent applicable), the other 
existing conditions in the QPAM Exemption, and the individual exemption 
process as well as related individual exemptions granted in connection 
with Section I(g) ineligibility. The Department does not expect the 
amendment to increase, more than marginally, existing costs associated 
with QPAM ineligibility and individual exemption requests related to 
Criminal Convictions. The Department is uncertain, however, regarding 
the number of QPAMs that would become ineligible under the proposed 
expansion of the ineligibility provision related to participating in 
Prohibited Misconduct. The Department is also uncertain about the 
extent to which the proposed changes in asset management and equity 
thresholds would give rise to new costs because some QPAMs that meet 
the current thresholds no longer would be able to rely on the exemption 
if they do not meet the proposed increased thresholds.
    The following analysis considers the impact on all QPAMs, except 
that the analysis of the cost of the winding-down provision is only 
considered for ineligible QPAMs. Although the Department has provided a 
cost analysis below, the heightened standards proposed in this 
amendment may result in entities being more careful about ensuring that 
their compliance programs are sufficiently robust to prevent Prohibited 
Misconduct or Convictions from occurring. In this respect, the proposed 
exemption would provide clear guardrails that would make the costs 
associated with QPAMs becoming ineligible clearly avoidable.

Reporting Reliance on the QPAM Exemption--Subsection I(g)(1)

    The Department believes that the one-time requirement to report 
reliance on the QPAM Exemption via email to [email protected] will result in 
a minor additional clerical cost. The information required under 
subsection I(g)(1) is limited to the legal name of the entity relying 
upon the exemption and any name the QPAM may be operating under.
    This notification would occur only once for most QPAMs. Therefore, 
the Department expects it will take 15 minutes, on average, for each 
QPAM to prepare and send this electronic notification. This cost is 
estimated to be $8,505.\53\ The Department seeks comment on this 
estimate.
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    \53\ The cost is based upon the expenditure of 0.25 hours for 
each QPAM: (616 QPAMs * 0.25 hours = 154 hours in total). To 
calculate the cost, an hourly labor rate of $55.23 is used for a 
clerical worker. Therefore, the total cost amounts to: (616 QPAMs * 
0.25 hours * $55.23) = $8,505 (rounded). The Department estimates of 
labor costs by occupation reflect estimates of total compensation 
and overhead costs. Estimates for total compensation are based on 
mean hourly wages by occupation from the 2020 Occupational 
Employment Statistics and estimates of wages and salaries as a 
percentage of total compensation by occupation from the 2020 
National Compensation Survey's Employee Cost for Employee 
Compensation. Estimates for overhead costs for services are imputed 
from the 2017 Service Annual Survey. To estimate overhead cost on an 
occupational basis, the Office of Research and Analysis allocates 
total industry overhead cost to unique occupations using a matrix of 
detailed occupational employment for each NAICS industry. All values 
are presented in 2020 dollars.

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[[Page 45218]]

Written Management Agreement--Subsection I(g)(2)

    The Department believes that the cost associated with adding the 
required terms under subsection I(g)(2) to a QPAM's Written Management 
Agreement only would impose costs related to updating existing 
management agreements. QPAMs will need to send the update to each of 
their client Plans, but the QPAM likely would be able to prepare a 
single standard form with identical language and then send it to each 
client Plan. For each QPAM, the Department estimates it will take one 
hour of in-house legal professional time to update and supplement their 
existent standard management agreements, and two minutes of clerical 
time to prepare and mail a one-page addition to the agreement to each 
client Plan. Including mailing costs, the total estimated cost of this 
requirement amounts to $135,540.\54\
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    \54\ This cost is based upon the expenditure of one hour of a 
legal professional for each of the 616 estimated QPAMs using an 
hourly labor rate of $140.96. This labor cost is estimated as (616 
QPAMs * 1 hour * $140.96) = $86,831 for legal professional time 
(rounded). As specified in the PRA section, the Department estimates 
each QPAM serves 32 client Plans on average. The Department also 
expects each QPAM will have to append one page to their existing 
management agreements and that it will take each QPAM two minutes of 
clerical time to prepare and mail this one-page addition to each 
client Plan. This labor cost is then estimated as (616 QPAMs * 32 
client Plans * (2/60) hours * $55.23) = $36,290 for clerical time 
(rounded). The Department estimates that the costs of printing and 
mailing one page are $0.05 and $0.58, respectively. Therefore, 
adding one page to all management agreements amounts the total 
printing and mailing cost to (616 QPAMs * 32 client Plans) * 1 page 
* ($0.05 + $0.58) = $12,419 (rounded). The estimated total cost of 
the provision is therefore $86,831 + $36,290 + $12,419 = $135,540.
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Ineligibility Due to Foreign Convictions--Subsection I(g)(3)(A) and 
Subsection VI(r)(2)

    The Department and QPAMs have treated foreign convictions as 
causing ineligibility under Section I(g) since at least 2000.\55\ 
Therefore, the Department believes that the clarifying reference that 
includes foreign convictions within the scope of Section I(g) will not 
change the costs of the exemption as compared to the current costs.
---------------------------------------------------------------------------

    \55\ See, e.g., Prohibited Transaction Exemption (PTE) 2020-01, 
85 FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019); 
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147 
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE 
2004-13, 69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (``EXPRO'') 
Final Authorization Numbers 2003-10E, 2001-02E, and 2000-30E, 
available at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.
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Mandatory One-Year Winding-Down Period--Section I(j)

    To estimate the number of future ineligible QPAMs, the Department 
first referred to individual exemptions the Department granted to QPAMs 
facing ineligibility under current Section I(g) in connection with 14 
separate convictions or possible convictions since 2013.\56\ The 
Department believes the individual exemptions granted since 2013 
provide the best basis for estimating the number of future ineligible 
QPAMs. The Department lacks data regarding the actual number of QPAMs 
covered by each individual exemption before 2013; therefore, the 
exemptions issued since 2013 best reflect the current legal and 
prosecutorial environment that ultimately leads to convictions covered 
by current Section I(g). Each individual exemption may affect multiple 
QPAMs, so the Department considers the number of affected entities to 
be the number of QPAMs covered by each individual exemption. The 
Department then estimated the number of QPAMs that might be captured by 
the proposed expansion of the ineligibility provision that applies to 
participating in Prohibited Misconduct.
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    \56\ Ineligible QPAMs that request individual exemptions 
generally request relief for the entire ten-year ineligibility 
period. However, to engage in thorough fact-finding process and to 
verify compliance with certain audit provisions in the individual 
exemptions, the Department has granted exemptions that include less 
than ten years of relief in many situations. Ineligible QPAMs then 
typically apply for an extension of relief even though no additional 
conviction has occurred. Additionally, in situations where an 
ineligible QPAM is impacted by a subsequent conviction before the 
expiration of the ten-year ineligibility period for the initial 
conviction, the winding-down period would also not be implicated, so 
there is no additional cost burden associated with subsequent 
convictions. The Department notes that there were a total of three 
subsequent convictions after an initial conviction for some entities 
in 2017, 2018, and 2019.
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    As shown in the table below, the Department estimates that eight 
QPAMs each year would be subject to the one-year winding-down period 
after a Criminal Conviction.\57\ The number of QPAMs affected in any 
given year is a function of the number of convictions covered by 
Section I(g) and the number of entities within a corporate family 
operating as QPAMs. Therefore, in some years, the number of affected 
QPAMs impacted by ineligibility due to a Criminal Conviction could be 
higher than eight, and in other years it could be lower. These 
calculations are broken down in the table below.
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    \57\ The Department did not include in this estimate any of the 
possible QPAMs that have remote relationships with a convicted 
entity, identified in the individual exemptions as ``Related 
QPAMs.'' The Department has never received comments, questions, 
requests for guidance, or separate individual exemption applications 
from any entities that would fall into that definition, and 
therefore, assumes such entities are not operating as QPAMs. The 
Department welcomes input on this assumption.

 Table 1--Summary of Past Convictions That Would Implicate the Proposed
                           Winding-Down Period
                               [By year] *
------------------------------------------------------------------------
                                          Number of         Number of
                                         convictions     affected QPAMs
------------------------------------------------------------------------
2013................................                 1                 4
2014................................                 1                 3
2015................................                 1                20
2016................................                 6                25
2017................................  ................  ................
2018................................  ................  ................
2019................................  ................  ................
2020................................  ................  ................
2021................................                 1                13
                                     -----------------------------------
    Total...........................                10                65

[[Page 45219]]

 
    Average.........................               1.1               7.2
    Estimated Yearly Average **                      2                 8
     (rounded)......................
------------------------------------------------------------------------
* The average number of affected QPAMs includes zeros for years without
  convictions that would implicate the winding-down period. There were
  three convictions during the period from 2017 through 2020 that would
  not implicate the winding-down period and associated costs.
** The corresponding calculated averages include decimals; therefore, to
  err on the side of caution and inclusion the estimated yearly average
  is rounded to the upper integer.

    The Department's proposed expansion of the ineligibility provision 
to include Prohibited Misconduct that leads to an Ineligibility Notice 
likely will increase the number of QPAMs that become ineligible due to 
Section I(g). Although the Department does not have precise data to 
determine the exact number of QPAMs that would become ineligible due to 
this proposed expansion, the Department has assumed the additional 
number of ineligible QPAMs to be equal to the eight QPAMs that 
experience ineligibility due to a conviction under current Section 
I(g), resulting in a total of 16 ineligible QPAMs. The Department 
requests comments on this assumption and data or other information that 
would allow the Department to more precisely estimate the number of 
QPAMs that would lose eligibility due to this proposed expansion.
    Because the conditions of the winding-down provision borrow from 
the conditions included in the Department's existing individual Section 
I(g) exemptions, the Department does not believe there will be any 
added cost with respect to the proposed winding-down period for QPAMs 
that become ineligible due to a Criminal Conviction relative to the 
current baseline of obtaining an individual exemption covering this 
same time period. However, an additional eight QPAMs, on average, may 
become ineligible each year for participating in Prohibited Misconduct, 
implicating the winding-down period and the conditions related to 
proposed provisions that are required to be included in the Written 
Management Agreement. As a result, QPAMs would have to possibly bear 
the costs associated with indemnifying their client Plans for losses 
that would occur if they move to a new asset manager. The Department 
lacks sufficient data at this time to estimate these costs associated 
with the winding-down period and requests comments regarding these 
costs. The Department welcomes comments that would provide data to 
assist in calculating an estimate.

Notice to Plans--Subsection I(j)(1)

    Within 30 days after the conviction date, the QPAM must provide 
notice to the Department at [email protected] and each of its client Plans 
stating (i) its failure to satisfy subsection I(g)(3); and (ii) that it 
agrees, as required by subsection I(g)(2), not to restrict the ability 
of a client Plan to terminate or withdraw from its arrangement with the 
QPAM. QPAMs that violate Section I(g) under the current QPAM Exemption 
are required to provide this type of notice when they obtain an 
individual exemption, so no incremental burden is attributed to this 
requirement for QPAMs that become ineligible due to a Criminal 
Conviction. However due to the expanded proposed scope of 
ineligibility, QPAMs that become ineligible after receiving an 
Ineligibility Notice due to participating in Prohibited Misconduct will 
incur the cost of sending notices to their client Plans for the first 
time. With an average of 32 client Plans per QPAM, the Department 
estimates that, in total, four hours of in-house legal professional 
time will be required to prepare all notices as well as seven hours of 
clerical time for distribution. Including mailing costs, the Department 
estimates that the total incremental cost related to ineligibility 
after receiving an Ineligibility Notice is $1,090.\58\
---------------------------------------------------------------------------

    \58\ The burden is estimated assuming 8 QPAMs will need to send 
the notice: 8 QPAMs * 0.5 hours of professional legal time = 4 hours 
to prepare all notices. The Department also assumes that 80 percent 
of all notices will be delivered by regular mail, requiring 
approximately two minutes of clerical time to prepare the notices 
for mailing, that is, (8 QPAMs * 32 Plans * 0.80 sent by paper) * 
(2/60) hours of clerical time = 7 hours (rounded). The Department 
also estimates that the cost burden for preparing and mailing the 
notices will be approximately equal to $139, that is, 205 * ((2 * 
$0.05) + $0.58) = $139 (rounded). Therefore, the total cost 
associated with this requirement is (4 * legal professional labor 
rate of $140.96) + (7 * clerical labor rate of $55.23) + $139 = 
$1,090 (rounded). Any discrepancies in the calculations are a result 
of rounding.
---------------------------------------------------------------------------

    The Department believes the cost of sending this notice to the 
Department will be negligible because the QPAM will have already 
prepared and sent the notice to client Plans and the notice to the 
Department is required to be sent electronically.

Warning and Opportunity To Be Heard in Connection With Prohibited 
Misconduct--Section I(i)

    As described above, the Department estimates eight QPAMs could 
experience ineligibility due to participating in Prohibited Misconduct. 
Before QPAMs become ineligible, they would be provided with a written 
warning and an opportunity to be heard under Section I(i). As a result, 
QPAMs would have to possibly bear the costs associated with this 
process. The Department estimates that this process would occur twice 
each year, with each process covering four QPAMs that are part of the 
same corporate family. The Department estimates that preparing a 
response to the ineligibility notice and for a conference with the 
Department would require 10 in-house legal professional hours (two 
preparations * 10 hours) resulting in 20 total hours at an equivalent 
cost of approximately $2,819.\59\ The Department estimates that 
preparing a response and preparing for the conference will also require 
16 total outside legal professional hours (2 preparations times 8 
hours) at a cost of $7,904.\60\ Thus, the total labor cost of preparing 
a response and preparing for a conference amounts to $10,723. The 
Department requests comment on this cost estimate.
---------------------------------------------------------------------------

    \59\ This cost is based upon an hourly labor rate of $140.96 for 
an in-house legal professional. 2020 National Compensation Survey's 
Employee Cost for Employee Compensation.
    \60\ The outside legal professional labor rate is a composite 
weighted average of the Laffey Matrix for Wage Rates (http://www.laffeymatrix.com/see.html, Year: 6/01/21-5/31/22): ($381 * 0.4) 
+ ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) = $494.

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[[Page 45220]]

Requesting an Individual Exemption--Section I(k)

    Proposed new Section I(k) provides that a QPAM that is ineligible 
or anticipates that it will become ineligible due to an actual or 
possible Criminal Conviction may apply for an individual exemption from 
the Department to continue to rely on the relief provided in the QPAM 
Exemption for a longer period than the one-year winding-down period. In 
such an event, the exemption provides that an applicant should review 
the Department's most recently granted individual exemptions involving 
Section I(g) ineligibility. If an applicant requests the Department to 
exclude any term or condition from its exemption that is included in a 
recently granted individual exemption, the applicant must include a 
detailed statement with its exemption application explaining the 
reason(s) why the proposed variation is necessary and in the interest 
and protective of affected Plans, their participants and beneficiaries, 
and IRA owners. Such applicants also should provide detailed 
information in their applications quantifying the specific cost in 
dollar amounts, if any, of any harm its client Plans would suffer if a 
QPAM could not rely on the exemption after the winding-down period, 
including the specific dollar amounts of investment losses resulting 
from foregone investment opportunities and any evidence supporting the 
proposition that investment opportunities would only be available to 
Plans on less advantageous terms.
    Due to the proposed expanded scope of ineligibility to include 
participating in Prohibited Misconduct, the Department estimates that 
two additional applicants each year would apply for an individual 
exemption, each covering four ineligible QPAMs. Each of these two new 
applicants will spend 12 hours of in-house legal professional and 13 
hours of in-house clerical time preparing the required documentation 
for the application that will be used by an outside legal professional. 
The Department estimates that total labor costs (wages plus benefits 
plus overhead) for an in-house legal professional would average $140.96 
per hour and $55.23 per hour for clerical staff.\61\ Therefore, the 
Department estimates that preparing this documentation would require 24 
in-house legal professional hours (2 applications * 12 hours) and 26 
clerical hours (2 applications * 13 hours) resulting in 50 total hours 
at an equivalent cost of approximately $4,819.\62\ Further, the 
Department estimates that, on average, 25 hours of outside legal 
professional time will be spent preparing the documentation for the 
application, with a total labor cost for outside legal professionals 
estimated to average $494.00 per hour.\63\ The Department estimates 
that preparing the applications will also require 50 total outside 
legal professional hours (2 applications * 25 hours) at a cost of 
$24,700. Thus, the total labor cost of application preparation amounts 
to $29,519.
---------------------------------------------------------------------------

    \61\ See supra, notes 53 and 59. 2020 National Compensation 
Survey's Employee Cost for Employee Compensation.
    \62\ The 24 in-house legal professional hours are estimated to 
cost $3,383 (rounded), and the 26 in-house clerical hours are 
estimated to cost $1,436 (rounded). This totals to $4,819 (rounded). 
Any discrepancies in the calculations are a result of rounding.
    \63\ See supra, note 60.
---------------------------------------------------------------------------

    For applications that reach the stage of publication of a proposed 
exemption in the Federal Register, a notice must be prepared and 
distributed to interested parties. If both applications are published 
annually, approximately 256 notices will be distributed (this 
corresponds to 32 client Plans per each of the eight QPAMs affected by 
two applications). Similarly, if the proposed exemptions are ultimately 
granted, each of these eight QPAMs will be required to send an 
objective description of the facts and circumstances upon which the 
misconduct is based to each client Plan. The Department estimates that 
the distribution for notices and objective descriptions will require 10 
minutes for each one of the 256 interested parties, totaling 
approximately 42 hours at a cost of approximately $2,357.\64\ In 
addition, material and mailing costs for all of these notices totals 
approximately $443.\65\ Therefore, the Department estimates that the 
total costs associated with notice distribution would be $2,800.
---------------------------------------------------------------------------

    \64\ The total cost is calculated as: ((10/60) hours * 256 
interested parties * $55.23 hourly clerical rate) = $2,357 
(rounded).
    \65\ The Department estimates that 80% of these notices, that 
is, 205 notices, will be delivered by regular mail. The Department 
further assumes that notices and the descriptions of facts and 
circumstances will be delivered separately, comprising 15 and 5 
pages, respectively. Therefore, with a printing cost of $0.05 per 
page and a mailing cost of $0.58 per notice, the Department 
estimates the total mailing cost as 205 * ((15 * $0.05) + $0.58) + 
205 * ((5 * $0.05) + $0.58) = $443 (rounded).
---------------------------------------------------------------------------

Additional Requirement for QPAMs Requesting an Individual Exemption
    If an applicant requests the Department to exclude any term or 
condition from its exemption that is included in a recently granted 
individual exemption, the applicant must include a detailed statement 
with its exemption application explaining the reason(s) why the 
proposed variation is necessary and in the interest and protective of 
affected Plans, their participants and beneficiaries, and IRA owners. 
In these applications, detailed information would be required 
quantifying the specific cost to Plans, in dollar amounts, of the harm 
its client Plans would suffer if a QPAM could not rely on the exemption 
after the winding-down period. This should include dollar amounts of 
investment losses resulting from foregone investment opportunities and 
any evidence supporting the proposition that investment opportunities 
would only be available to Plans on less advantageous terms.
    The Department assumes the eight QPAMs that are estimated to become 
ineligible due to the receipt of a written Ineligibility Notice would 
incur incremental costs due to the cost quantification requirement 
described above and also the requirement to review the Department's 
most recently granted individual exemptions involving Section I(g) 
ineligibility. To satisfy the requirement to review the Department's 
most recently granted individual exemptions, the Department estimates 
that it would require three hours of outside legal professional time to 
review past individual exemptions and draft this addition to the 
individual exemption application. Therefore, for the two applications 
covering the eight ineligible QPAMs receiving a written Ineligibility 
Notice, the cost associated with the additional requirement totals 
$4,288.\66\
---------------------------------------------------------------------------

    \66\ The burden is estimated assuming 8 QPAMs experience 
ineligibility that will need to include this information in their 
individual exemption application. Because the average number of 
QPAMs covered by a single exemption is four, the cost estimation is 
made assuming 2 applications. At an hourly rate of $165.45 for 
financial professional time, the cost associated with the cost 
quantification requirement is estimated as: (2 applications * 4 
hours * $165.45 financial professional rate) = $1,324 (rounded). For 
the cost associated with the review of past exemptions, a composite 
wage rate is used for the outside legal professional by employing a 
weighted average of the legal fees reported in the Laffey Matrix for 
Wage Rates (http://www.laffeymatrix.com/see.html, Year: 6/01/21-5/
31/22): ($381 * 0.4) + ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) 
= $494. The total cost associated with reviewing past exemptions is 
then (2 applications * 3 hours * $494 outside legal professional 
rate) = $2,964 (rounded). Therefore, the total cost associated with 
the additional requirement for QPAMs ineligible due to receiving a 
written Ineligibility Notice is ($1,324 + $2,964) = $4,288 
(rounded).
---------------------------------------------------------------------------

    The eight QPAMs that would become ineligible due to a Criminal 
Conviction will only incur an incremental cost to ensure they include 
in their exemption applications the specific dollar amounts

[[Page 45221]]

of investment losses resulting from foregone investment opportunities 
and any evidence supporting the proposition that investment 
opportunities would only be available to client Plans on less 
advantageous terms. For this requirement, the Department assumes it 
would require four hours of a financial professional time to prepare 
such a report. Therefore, for the two applications covering the eight 
ineligible QPAMs due to a Criminal Conviction, the cost associated with 
the additional requirement totals $1,324.\67\
---------------------------------------------------------------------------

    \67\ The burden is estimated assuming 8 QPAMs experience 
ineligibility that will need to include this information in their 
individual exemption application. Because the average number of 
QPAMs covered by a single exemption is four, the cost estimation is 
made assuming 2 applications. At an hourly rate of $165.45 for 
financial professional time, this cost is estimated as: (2 
applications * 4 hours * $165.45 financial professional rate) = 
$1,324 (rounded).
---------------------------------------------------------------------------

Involvement in Investment Decisions by Parties in Interest--Section 
I(c)

    The Department anticipates that the modifications to Section I(c) 
will not change the costs of the exemption as compared to cost of the 
current QPAM Exemption because the types of transactions that were 
intended to be excluded by current Section I(c) are the same types of 
transactions intended to be excluded by modified Section I(c).

Asset Management and Equity Thresholds--Section VI(a)

    As a result of the proposed adjustments to the asset management and 
equity thresholds to the QPAM definition in Section VI(a), the 
Department acknowledges some QPAMs may not meet the new threshold 
requirements, and, consequently, would no longer be able to rely on the 
QPAM Exemption. The Department expects QPAMs and Plans that utilize 
these QPAMs to incur costs due to this transition but lacks strong data 
to estimate the impact.\68\ The Department has requested similar data 
in connection with individual applications for exemptions following 
convictions covered by Section I(g), but the data provided by 
applicants has been limited, as have been the costs identified by the 
applicants. The Department seeks comments and data on the number of 
QPAMs who will potentially become unable to rely upon the exemption 
(along with the number of Plans and value of Plan assets) that will be 
impacted by the increase in asset management and equity thresholds.
---------------------------------------------------------------------------

    \68\ Some QPAMs have suggested in the past that there could be 
costs associated with unwinding transactions that relied on the QPAM 
Exemption and reinvesting assets in other ways. The loss of QPAM 
status could also require an asset manager to keep lists of parties 
in interest to its client Plans to ensure the asset manager does not 
engage in prohibited transactions. However, even without the QPAM 
Exemption, a wide variety of investments are available that do not 
involve non-exempt prohibited transactions.
---------------------------------------------------------------------------

Recordkeeping--Section VI(t)

    The amendment would also add a new recordkeeping provision that 
would apply to all QPAMs. Due to the fiduciary status of QPAMs and the 
existing regulatory environment, the Department assumes that QPAMs 
already maintain such records as part of their regular business 
practices. In addition, the recordkeeping requirements correspond to 
the six-year period in ERISA sections 107 and 413. Therefore, the 
Department expects that the recordkeeping requirement would impose a 
negligible burden. The Department welcomes comments regarding the 
burden associated with the recordkeeping requirement.
    If a QPAM refuses to disclose information to any of the parties 
listed in Section VI(t), on the basis that information is exempt from 
disclosure, the QPAM must provide a written notice advising the 
requestor of the reason for the refusal and that the Department may 
request such information. The Department does not have data on how 
often such a refusal is likely to occur; however, the Department 
believes such instances would be rare. As a result, the Department 
believes this requirement would impose negligible cost and requests 
comments about whether this may happen more frequently and the possible 
costs.

Rule Familiarization Costs

    The Department estimates that it will take 60 minutes, on average, 
for each QPAM to become familiar with the proposed amendment. The 
familiarization cost is estimated to be $304,304.\69\ The Department 
seeks comment on this estimate.
---------------------------------------------------------------------------

    \69\ The cost is based upon the expenditure of 1.0 hours for 
each of the 616 estimated QPAMs to become familiar with the proposed 
amendments: (616 QPAMs * 1 hour = 616 hours in total). To calculate 
the cost a composite wage rate is used by employing a weighted 
average of the legal fees reported in the Laffey Matrix for Wage 
Rates (http://www.laffeymatrix.com/see.html, Year: 6/01/21-5/31/22): 
($381 * 0.4) + ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) = $494. 
This amounts to: (616 QPAMs * 1 hour * $494) = $304,304. Note that 
QPAMs likely rely on outside specialized legal counsel to help keep 
them in compliance with the QPAM Exemption. The specialized outside 
legal counsel likely will review the amendment and present updates 
to their clients, which means that the costs will be spread out over 
multiple clients.
---------------------------------------------------------------------------

Summary of Costs

    The total estimated annual costs associated with the proposal will 
be $487,370 in the first year and $183,066 in subsequent years. Table 2 
summarizes the costs for each requirement.

                          Table 2--Cost Summary
------------------------------------------------------------------------
                                                         Aggregate cost
                      Requirement                          change (in
                                                            dollars)
------------------------------------------------------------------------
Reporting Reliance on the QPAM Exemption..............            $8,505
Written Management Agreement..........................           135,540
Notice to Plans.......................................             1,090
Written Warning and Opportunity to be Heard...........            10,723
Requesting an Individual Exemption Costs:
    Preparation Labor Cost............................            29,519
    Notices Distribution..............................             2,800
    Additional Requirement-Criminal Conviction QPAMs..             1,324
    Additional Requirement-Prohibited Misconduct QPAMs             4,288
Rule Familiarization Costs............................           304,304
                                                       -----------------
    First Year Total Estimated Annual Cost............           498,093
    Subsequent Years Total Estimated Annual Cost \1\..           193,789
------------------------------------------------------------------------
Note: Only quantifiable costs are displayed.
\1\ Excludes Rule Familiarization Costs.


[[Page 45222]]

Transfers

    If an asset manager becomes ineligible for relief under the QPAM 
Exemption (e.g., because of its participation in Prohibited 
Misconduct), its client Plans may choose to transfer assets and revenue 
away from the ineligible asset manager to its competitors. From the 
Plan's perspective, the reduction in assets entrusted to the original 
asset manager (and associated revenue reduction) are offset by the 
increase in assets managed by another asset manager or managers (and 
associated revenue increase). Even if the impact of the switch is 
minimal or neutral from the point of view of the Plan, it is 
nevertheless appropriately characterized as a transfer from a societal 
perspective.\70\
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    \70\ Although a QPAM's client Plans could be expected to move 
some or all of its assets to another asset manager if the QPAM is 
convicted of an enumerated crime, this discussion does not address 
these transfers. The Department has long viewed both domestic and 
foreign convictions as causing ineligibility under the existing 
exemption. Consequently, the regulatory baseline already includes 
the impact of such convictions.
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    Although the Department does not have sufficient data to quantify 
the likely size of such revenue transfers, they could have an annual 
effect that exceeds $100 million due to the significant pool of Plan 
assets that QPAMs manage. To the extent the proposed amendment results 
in the movement of assets from asset managers that become ineligible to 
rely on the exemption because of their Prohibited Misconduct to asset 
managers that have not engaged in such misconduct, the associated 
revenue transfers promote the Department's objectives in proposing this 
amendment to the QPAM Exemption and enhance the security of Plan 
investments.
    The Department seeks comments on transfers that could result from 
the proposed expansion of the QPAM Exemption's ineligibility provision. 
The Department is particularly interested in receiving comments 
addressing whether a QPAM's client Plans would be likely to move all or 
some their assets to an alternative asset manager after a QPAM becomes 
ineligible due to the proposed expansion of the ineligibility 
provision. The Department also specifically requests comments on the 
likely size of the transaction costs associated with searching for and 
hiring new asset managers.

Regulatory Alternatives

    In order to make the statutory findings for issuing exemptions 
dictated by ERISA section 408(a) and Code section 4975(c)(2), the 
Department must find that an exemption is in the interest of and 
protective of the rights of Plans, their participants and 
beneficiaries, and IRA owners. Therefore, the Department provides 
several qualitative alternatives to the proposed amendment, as 
discussed below, that were considered in connection with the 
statutorily mandated exemption requirements.
    Do not amend the QPAM Exemption--Continue status quo of addressing 
ineligibility under current Section I(g) and only through 
administration of the individual exemption program.
    The Department considered not expanding the scope of Section I(g) 
and maintaining its practice of addressing ineligibility under Section 
I(g) only through the individual exemption process. However, immediate 
ineligibility under Section I(g) has become a source of uncertainty and 
potential disruption to Plans. As the financial services industry has 
become increasingly consolidated, the number of entities becoming 
ineligible for relief under the QPAM Exemption has grown, prompting 
more entities to face ineligibility. Through the individual exemption 
process, client Plans would continue to be exposed to the potential for 
immediate disruption and transition costs that might otherwise be 
avoided through this proposed amendment.
    The Department decided against this alternative in favor of this 
proposed amendment, relying on its experience processing individual 
exemption applications to create a smoother transition between the QPAM 
Exemption and the individual exemption program so that a QPAM's client 
Plans have certainty regarding their rights after an ineligibility 
event occurs.
    Amend the QPAM Exemption to expressly exclude foreign convictions.
    The Department considered expressly limiting the scope of 
convictions to only those in a U.S. federal or state trial courts. 
However, given the increasingly global reach of asset managers and 
investment strategies, the Department determined such a limitation 
would leave Plans less protected and be inconsistent with the ERISA 
section 408(a) and Code section 4975(c)(2) required findings. An 
affiliated entity's criminal or other misconduct in a foreign 
jurisdiction is an important indicator of the integrity of the entire 
corporate organization and casts doubt on a QPAM's ability to act in a 
manner that will properly protect Plans and their participants and 
beneficiaries from the related damages, losses, and other harm that 
often result from such criminal or other misconduct.
    Amend the QPAM Exemption to remove asset management and equity 
thresholds.
    As an alternative to updating the asset management and equity 
thresholds, the Department revisited whether such thresholds could be 
removed entirely from the exemption. The Department determined that 
this approach would be inconsistent with one of the core concepts upon 
which the QPAM Exemption was based. In the absence of an appropriate 
alternative ensuring that a QPAM will remain an independent decision-
maker, free from influence of other Plan fiduciaries, the Department is 
unable to justify the removal of the thresholds.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department conducts a preclearance consultation program to 
allow the general public and federal agencies to comment on proposed 
and continuing collections of information in accordance with the 
Paperwork Reduction Act of 1995 (PRA).\71\ This helps to ensure that 
the public understands the Department's collection instructions, 
respondents can provide the requested data in the desired format, 
reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the Department can 
properly assess the impact of collection requirements on respondents.
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    \71\ 44 U.S.C. 3506(c)(2)(A) (1995).
---------------------------------------------------------------------------

    Currently, the Department is soliciting comments concerning the 
proposed information collection request (ICR) included in the proposed 
QPAM Exemption amendment. To obtain a copy of the ICR, contact the PRA 
addressee shown below or go to https://www.reginfo.gov/public/.
    The Department has submitted a copy of the proposed amendment to 
the Office of Management and Budget (OMB), in accordance with 44 U.S.C. 
3507(d), for review of its information collections. The Department and 
OMB are particularly interested in comments that:
     Evaluate whether the collection of information is 
necessary for the functions of the agency, including whether the 
information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;

[[Page 45223]]

     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Help minimize the burden of the collection of information 
on those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology (e.g., permitting 
electronically delivered responses).
    Commenters may send their views on the Department's PRA analysis in 
the same way they send comments in response to the NPRM as a whole 
(e.g., through the www.regulations.gov website), including as part of a 
comment responding to the broader NPRM. In addition to having an 
opportunity to file comments with the Department, comments about the 
paperwork implications of the proposed regulation may also be addressed 
to the OMB. Comments should be sent to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Room 10235, New 
Executive Office Building, Washington, DC 20503 and marked ``Attention: 
Desk Officer for the Employee Benefits Security Administration.'' OMB 
requests that comments be received by September 26, 2022, which is 60 
days from publication of the proposed amendment to ensure their 
consideration.
    PRA Addressee: Address requests for copies of the ICR to James 
Butikofer, Office of Research and Analysis, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue NW, 
Room N-5718, Washington, DC 20210 or by email at: [email protected]. 
ICRs also are available at https://www.reginfo.gov (https://www.reginfo.gov/public/do/PRAMain).
    Prohibited Transaction Exemption 84-14, 49 FR 9494 (March 13, 
1984), as corrected at 50 FR 41430 (October 10, 1985) and amended at 70 
FR 49305 (August 23, 2005) and at 75 FR 38837 (July 6, 2010) (the QPAM 
Exemption) permits various parties related to Plans to engage in 
transactions involving Plan assets if, among other conditions, the 
assets are managed by a QPAM.
    The following analysis considers the existing paperwork burden 
associated with the existing QPAM Exemption. The Department estimates 
that there were 616 QPAMs in 2019.\72\
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    \72\ Using Form 5500 data for 2019, the Department counted in 
total 1390 service providers who provided services of ``Investment 
Management'' and ``Named Fiduciary,'' of which only 765 reported 
their business code. Out of these 765 providers, 339 reported their 
business code starting with the 2-digit NAICS code 52, yielding a 
ratio of 0.44 of potential QPAMs to other providers. Therefore, the 
Department estimates that there were 0.44 * 1390 = 616 potential 
QPAMs in 2019.
---------------------------------------------------------------------------

Paperwork Burden Associated With the QPAM Exemption Information 
Collection Requirements

    Using 2019 Form 5500 data, the Department estimated there are 616 
potential QPAMs by approximating the total number of providers who in 
2019 provided services of ``Investment Management'' and ``Named 
Fiduciary'' simultaneously to at least one plan, as reported on 
Schedule C of the 2019 Form 5500, and whose NAICS codes start with the 
2-digit 52, which corresponds to Finance and Insurance 
Institutions.\73\ Furthermore, using the same data, the Department 
estimates that a single QPAM services, on average, 32 client Plans.\74\ 
Therefore, the Department estimates that in total there are 19,712 
client Plans (616 QPAMs times 32 client Plans per QPAM).
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    \73\ The Department counted in total 1390 service providers who 
provided services of ``Investment Management'' and ``Named 
Fiduciary,'' of which only 765 reported their business code. Out of 
these 765 providers, 339 reported their business code starting with 
the 2-digit NAICS code 52, yielding a ratio of 0.44 of potential 
QPAMs to other providers. Therefore, the Department estimates that 
there were potentially 0.44 * 1390 = 616 QPAMs in 2019.
    \74\ Although the Department estimates there are 616 QPAMs, it 
can only observe and count the number of client Plans corresponding 
to 339 QPAMs. The Department counted 10,719 Plans served by these 
339 observable QPAMs, yielding an average of 32 client Plans per 
QPAM in 2019. The Department acknowledges that these entities do not 
necessarily act as QPAMs to their served client Plans, and therefore 
considers this average as an upper limit for the number of client 
Plans served by a QPAM.
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QPAM-Sponsored Plans--Policies and Procedures--Section V(b)
    The existing information collection requirements of the QPAM 
Exemption require in-house QPAMs to develop written policies and 
procedures designed to ensure compliance with the conditions of the 
exemption. Existing in-house QPAMs will have already prepared their 
policies and procedures in accordance with the QPAM Exemption, however 
some in-house QPAMs may also update their policies and procedures in a 
given year. The Department estimates that the burden associated with 
preparing policies and procedures will affect ten percent of all in-
house QPAMs, including all new in-house QPAMs and some existing in-
house QPAMs.
    The latest Form 5500 estimates from the year 2019 indicate that 
there are approximately 118 in-house QPAMs.\75\ Therefore, the 
Department estimates that about 12 QPAMs will need to update their 
policies and procedures each year.\76\ The Department estimates that 
the costs associated with new QPAMs meeting the policies and procedures 
requirements of the QPAM Exemption is $1,663.\77\
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    \75\ The Department estimated the number of in-house QPAMs in 
2019 using the estimated fraction of QPAMs who also sponsored a Plan 
in 2019.
    \76\ 0.1 * 118 QPAMs = 12 QPAMs (rounded). Any discrepancies may 
occur from rounding figures in this summary but not in the actual 
calculations.
    \77\ The burden is estimated as follows: (0.1 * 118 * 1 hour) = 
12 hours (rounded). A labor rate of $140.96 is used for legal 
counsel and applied in the following calculation: (0.1 * 118 * 1 
hour * $140.96) = $1,663 (rounded).
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QPAM-Sponsored Plans--Independent Audit--Section V(c)
    Additionally, the exemption requires in-house QPAMs to engage an 
independent auditor to conduct an annual exemption audit and issue an 
audit report to the Plan. The Department estimates that each of the 118 
in-house QPAMs will use in-house legal professionals, financial 
managers, and clerical time to provide documents and respond to 
questions from the auditor. The Department assumes QPAMs use either a 
law firm or a consulting firm to conduct the exemption audits, and the 
Department assumes that the average cost of an exemption audit is 
$25,000.\78\ This results in a total estimated cost of $2,950,000.\79\ 
Additionally, each exemption audit is assumed to require about five 
hours of a legal professional's time, 13 hours of a financial manager's 
time, and six hours of clerical time for each of the 118 QPAMs to 
provide needed materials for the audit. This amounts to an approximate 
cost of $3,187 per in-house QPAM, therefore resulting in a total 
equivalent cost of $376,070.\80\ The Department requests comment on the 
cost and time estimates to conduct the audits.
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    \78\ The Department has received information from industry 
representatives that the cost of a similar annual audit required by 
PTE 96-23 (the INHAM Exemption) may range from approximately $10,000 
to $25,000, depending on asset size and how many years the INHAM has 
used the auditing firm. Because of the type of audit required for an 
in-house QPAM, the Department has assumed that the average cost of 
an exemption audit required by the QPAM Exemption would be $25,000.
    \79\ Assuming that the average cost of an exemption audit would 
be $25,000, 118 QPAMs * $25,000 = $2,950,000.
    \80\ The burden is estimated as follows: (118 * 5 hours) + (118* 
13 hours) + (118 * 6 hours) = 2,832 hours. A labor rate of $140.96 
is used for legal counsel, a labor rate of $165.45 is used for a 
financial professional, and a labor rate of $55.23 is used for a 
clerical worker. These labor rates are applied in the following 
calculation: (118 * 5 hours * $140.96) + (118 * 13 hours * $165.45) 
+ (118 * 6 hours * $55.23) = $376,070 (rounded). All labor rates 
reflect EBSA estimates.

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[[Page 45224]]

Property Manager Written Guidelines--Section I(c)
    The exemption also contains a requirement for written guidelines 
when, in certain instances, a property manager acts on behalf of a 
QPAM. In this case, the QPAM is required to establish and administer 
the guidelines. Because agreements between an institution and a 
property manager are customary, the Department estimates that this 
requirement will impose no additional burden on QPAMs.
Reporting Reliance on the QPAM Exemption--Subsection I(g)(1)
    QPAMs will have to report their reliance on the QPAM Exemption via 
email to [email protected]. This notification would occur only once for most 
QPAMs. The information required under subsection I(g)(1) is limited to 
the legal name of the entity relying upon the exemption and any name 
the QPAM may be operating under. The Department expects it will take 15 
minutes, on average, for each QPAM to both prepare and send this 
electronic notification. This burden is estimated to amount to 154 
hours with an equivalent cost of $8,505.\81\ The Department seeks 
comment on this estimate.
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    \81\ The cost is based upon the expenditure of 0.25 hours for 
each QPAM: (616 QPAMs * 0.25 hours) = 154 hours in total. To 
calculate the equivalent cost, an hourly labor rate of $55.23 is 
used for a clerical worker. Therefore, the total equivalent cost 
amounts to: (616 QPAMs * 0.25 hours * $55.23) = $8,505 (rounded).
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Notice to Plans--Subsection I(j)(1)
    Within 30 days after the conviction date or receipt of an 
Ineligibility Notice due to participating in Prohibit Misconduct, the 
QPAM must provide notice to the Department at [email protected] and each of 
its client Plans stating (i) its failure to satisfy subsection I(g)(3); 
and (ii) that it agrees, as required by subsection I(g)(2), not to 
restrict the ability of a client Plan to terminate or withdraw from its 
arrangement with the QPAM. With 16 ineligible QPAMs and an average of 
32 client Plans per QPAM, the Department estimates that in total eight 
in-house legal professional hours will be required to prepare all 
notices as well as 13.7 hours of clerical time for distribution. In 
addition, mailing costs for all 16 QPAMs amount to $279.\82\
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    \82\ The burden is estimated assuming 16 QPAMs will need to send 
the notice: 16 QPAMs * 0.5 hours of professional legal time = 8 
hours to prepare all notices. The Department also assumes that 80 
percent of all notices will be delivered by regular mail, requiring 
approximately two minutes of clerical time to prepare the notices 
for mailing, that is, (16 QPAMs * 32 Plans * 0.80 sent by paper) * 
(2/60) hours of clerical time = 13.7 hours (rounded). The Department 
also estimates that the cost burden for preparing and mailing the 
notices will be approximately equal to $279, that is, 410 * ((2 * 
$0.05) + $0.58) = $279 (rounded). Therefore, the total cost 
associated with this requirement is (8* legal professional labor 
rate of $140.96) + (13.7* clerical labor rate $55.23) + $279 = 
$2,180 (rounded). Any discrepancies in the calculations are a result 
of rounding.
---------------------------------------------------------------------------

    The Department believes the cost of sending this notice to the 
Department will be negligible since the QPAM will already prepare and 
send the notice to their client Plans and the notice is required to be 
sent electronically.
Recordkeeping--Section VI(t)
    The amendment would also add a new recordkeeping provision that 
would apply to all 616 QPAMs. Due to the fiduciary status of QPAMs and 
the existing regulatory environment in which they exist, the Department 
assumes that QPAMs already maintain many of the required records as 
part of their regular business practices. In addition, the 
recordkeeping requirements correspond to the six-year period in ERISA 
sections 107 and 413. The Department expects that the recordkeeping 
requirement would impose, on average, a burden of five minutes per 
QPAM. Therefore, the Department estimates that the overall hour burden 
of this recordkeeping requirement for all 616 QPAMs will be 51 hours 
with an equivalent cost of $2,835.\83\ The Department welcomes comments 
regarding the burden associated with the recordkeeping requirement.
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    \83\ The burden is estimated for the 616 QPAMs as follows: (616 
* (5/60) hours) = 51 hours (rounded). A labor rate of $55.23 is used 
for clerical workers. These labor rates are applied in the following 
calculation: (616 * (5/60) hours * $55.23) = $2,835 (rounded). All 
labor rates reflect EBSA estimates.
---------------------------------------------------------------------------

    If a QPAM refuses to disclose information to any of the parties 
listed in proposed Section VI(t) on the basis that such information is 
exempt from disclosure, the QPAM must provide a written notice advising 
the requestor of the reason for the refusal and that the Department may 
request such information. The Department does not have data on how 
often such a refusal is likely to occur; however, the Department 
believes such instances would be rare and impose negligible cost. The 
Department requests comments about whether this may happen more 
frequently and the possible costs.
Requesting an Individual Exemption--Section I(k)
    The receipt of an Ineligibility Notice due to Prohibited Misconduct 
could lead a QPAM to request an individual exemption. The burden for 
filing an application requesting an individual exemption is included in 
the ICR for the Exemption Procedure Regulation, which has been approved 
under OMB Control Number 1210-0060. Instead of amending that ICR, the 
estimated burden for applications from QPAMs receiving an Ineligibility 
Notice due to Prohibited Misconduct is included here.\84\ The 
Department estimates that applications for this type of individual 
exemption would be submitted by, on average, four entities, and require 
12 hours of in-house legal professional time and 13 hours of in-house 
clerical time to prepare the documentation for the application that 
will be used by the outside counsel. The Department estimates that 
total labor costs (wages plus benefits plus overhead) for an in-house 
legal professional would average $140.96 per hour and $55.23 per hour 
for clerical staff.\85\ Therefore, the Department estimates that 
preparing the documentation for the application would require 24 in-
house legal professional hours (2 applications * 12 hours) and 26 
clerical hours (2 applications * 13 hours) resulting in 50 total hours 
at an equivalent cost of approximately $4,819.\86\
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    \84\ In three years when control number 1210-0060 is extended, 
the increase in requests for individual exemptions will be captured 
in the historical data used for the renewal and the burden going 
forward will be captured there.
    \85\ The Department estimates of labor costs by occupation 
reflect estimates of total compensation and overhead costs. 
Estimates for total compensation are based on mean hourly wages by 
occupation from the 2020 Occupational Employment Statistics and 
estimates of wages and salaries as a percentage of total 
compensation by occupation from the 2020 National Compensation 
Survey's Employee Cost for Employee Compensation. Estimates for 
overhead costs for services are imputed from the 2017 Service Annual 
Survey. To estimate overhead cost on an occupational basis, the 
Office of Research and Analysis allocates total industry overhead 
cost to unique occupations using a matrix of detailed occupational 
employment for each NAICS industry. All values are presented in 2020 
dollars.
    \86\ The 24 in-house legal professional hours are estimated to 
cost $3,383 (rounded), and the 26 in-house clerical hours are 
estimated to cost $1,436 (rounded). This totals to $4,819 (rounded). 
Any discrepancies in the calculations are a result of rounding.
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    The Department expects that an exemption application related to 
QPAM ineligibility generally is prepared by or under the direction of 
attorneys with specialized knowledge of ERISA. The Department assumes 
that these same attorneys will also prepare and distribute the notice 
of the application to interested parties.
    Applications for Section I(g) average approximately 25 pages. Due 
to the somewhat focused nature of developing an application related to 
Section I(g) ineligibility, the Department estimates that, on average, 
25 hours of outside

[[Page 45225]]

legal professional time will be spent preparing the documentation for 
the application. The Department requests comment on the accuracy of 
this assumption. Total labor costs (wages plus benefits plus overhead) 
for outside legal professionals are estimated to average $494.00 per 
hour.\87\ Therefore, the Department estimates that preparing the 
applications will require 50 outside legal professional hours (2 
applications * 25 hours) with an equivalent cost of $24,700. This 
estimate includes potential meetings with Department personnel as well 
as preparation of supplementary documents that are requested by the 
Department following some of these meetings.
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    \87\ The outside legal professional labor rate is a composite 
weighted average of the Laffey Matrix for Wage Rates (http://www.laffeymatrix.com/see.html, Year: 6/01/21-5/31/22): ($381 * 0.4) 
+ ($468 * 0.35) + ($676 * 0.15) + ($764 * 0.1) = $494.
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    For applications that reach the proposed exemption stage, the QPAM 
must prepare and distribute a notice to interested parties. If both 
applications result in a published proposed exemption each year, 
approximately 256 notices to interested parties will be distributed to 
the QPAMs' client Plans, and, if the proposed exemption is granted, an 
objective description also must be distributed to interested parties 
that describes the facts and circumstances upon which the misconduct is 
based.\88\
---------------------------------------------------------------------------

    \88\ 32 client Plans * 8 QPAMs.
---------------------------------------------------------------------------

    The distribution of the notices to interested persons is estimated 
to require about five minutes of in-house clerical time per notice. 
Therefore, distribution of notices will require approximately 21 hours 
at an equivalent cost of approximately $1,178 ((5 minutes/60 minutes) * 
256 notices * $55.23 hourly clerical rate). The Department estimates 
that 256 notices to interested persons will be sent, and that 205 of 
the notices (80 percent) will be distributed via first class mail with 
a material cost of $0.05 per page and distribution costs of $0.58 per 
notice. The Department estimates that each notice will contain 
approximately 15 pages. The foregoing generates an estimated cost of 
approximately $273.\89\ The Department further estimates that 
approximately 51 (20 percent of the total number of notices) will be 
distributed electronically.
---------------------------------------------------------------------------

    \89\ Through regular mail this cost is estimated as 205 * ((15 * 
$0.05) + $0.58) = $273 (rounded).
---------------------------------------------------------------------------

    If the proposed exemption is ultimately granted, the requirement 
for each QPAM to send an objective description of the facts and 
circumstances upon which the misconduct is based is estimated to 
require about five minutes of in-house clerical time per notice. 
Therefore, distribution of notices will require approximately 21 hours 
at an equivalent cost of approximately $1,178 ((five minutes/60 
minutes) * 256 notices * $55.23 hourly clerical rate). This will result 
in an additional distribution cost for 256 notices of which 205 (80 
percent) will distributed via first class mail with a material cost of 
$0.05 per page and distribution costs of $0.58 per notice. The 
Department estimates that each notice will contain approximately five 
pages. This generates an estimated cost of approximately $170.\90\
---------------------------------------------------------------------------

    \90\ Through regular mail this cost is estimated as 205 * ((5 * 
$0.05) + $0.58) = $170 (rounded).
---------------------------------------------------------------------------

Additional Requirement for QPAMs Requesting an Individual Exemption
    The Department proposed new Section I(k) which indicates that a 
QPAM that is ineligible or anticipates that it will become ineligible 
due to an actual or possible Criminal Conviction may apply for an 
individual exemption from the Department to continue to rely on the 
relief provided in this exemption for a longer period than the one-year 
winding-down period. In such an event, an applicant should review the 
Department's most recently granted individual exemptions involving 
Section I(g) ineligibility. If an applicant requests the Department to 
exclude any term or condition from its exemption that is included in a 
recently granted individual exemption, the applicant must include a 
detailed statement with its exemption application explaining the 
reason(s) why the proposed variation is necessary and in the interest 
and protective of affected Plans, their participants and beneficiaries, 
and IRA owners. Such applicants also should provide detailed 
information in their applications quantifying the specific cost or 
harms in dollar amounts, if any, Plans would suffer if a QPAM could not 
rely on the exemption after the winding-down period, including the 
specific dollar amounts of investment losses resulting from foregone 
investment opportunities and any evidence supporting the proposition 
that investment opportunities would only be available to Plans on less 
advantageous terms.
    All 16 QPAMs would need to include this information if they submit 
an exemption application. The Department estimates that it will require 
three hours of outside legal professional time to review past 
individual exemptions and draft this addition to the individual 
exemption application and four hours of a financial professional time. 
The estimated total hour burden of this requirement is thus estimated 
to total 12 hours of outside legal professional time and 16 hours of 
financial professional time, altogether resulting in an equivalent cost 
of $8,575.\91\ The Department seeks comments on these estimates and 
assumptions.
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    \91\ The burden is estimated assuming 16 QPAMs experience 
ineligibility that will need to include this in their individual 
exemption application. The average number of QPAMs covered by a 
single exemption is four. This amounts to: (4 applications * 3 
hours) = 12 hours of outside legal professional time, and (4 
applications * 4 hours) = 16 hours of a financial professional time. 
For an outside legal professional, a composite wage rate is used by 
employing a weighted average of the legal fees reported in the 
Laffey Matrix for Wage Rates (http://www.laffeymatrix.com/see.html, 
Year: 6/01/21-5/31/22): ($381 * 0.4) + ($468 * 0.35) + ($676 * 0.15) 
+ ($764 * 0.1) = $494. This amounts to: (4 applications * 3 hours * 
$494 outside legal professional rate) = $5,928. Additionally, at an 
hourly rate of $165.45 for financial professional time, this cost is 
estimated as: (4 applications * 4 hours * $165.45 financial 
professional rate) = $2,647 (rounded). Therefore, the total 
estimated equivalent cost of this requirement amounts to: ($5,928 + 
$2,647) = $8,575 (rounded).
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    Based on the foregoing, the PRA burden associated with the 
information collection requirements contained in the QPAM Exemption are 
summarized below:
    Agency: DOL-EBSA.
    Type of Review: Revision.
    Title of Collection: Plan Asset Transactions Determined by 
Independent Qualified Professional Asset Managers under Prohibited 
Transaction Exemption 1984-14.
    OMB Control Number: 1210-0128.
    Affected Public: Business or other for-profits.
    Estimated Number of Respondents: 616.
    Estimated Number of Annual Responses: 2,404.\92\
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    \92\ The Department estimates that in each year, 12 QPAMs will 
need to update their policies and procedures, 118 QPAMs will need to 
conduct an audit and issue an audit report, 16 ineligible QPAMs will 
need to send the notice to 32 plans each within 30 days after the 
Ineligibility Date, all 616 QPAMs will have report their reliance on 
the QPAM exemption, all 616 QPAMs will need to maintain the records, 
two applicants will request an individual exemption, 8 QPAMs will 
distribute notices to their 32 interested parties each for 
applications that reach the stage of publication, 8 QPAMs will 
distribute objective description of the facts to their 32 interested 
parties if the correspondent proposed exemption is ultimately 
granted, 16 QPAMs will need to add the review of recently granted 
exemptions, along with the potential costs to Plans quantification. 
This results in a three-year average of 2,404 = (12 + 118 + (16 * 
32) + 616 + 616 + 2 + (8 * 32) + (8 * 32) + 16) responses each year.
---------------------------------------------------------------------------

    Frequency of Response: Annual or as needed.
    Estimated Total Annual Burden Hours: 3,241.\93\
---------------------------------------------------------------------------

    \93\ To satisfy the conditions of the existing QPAM Exemption, 
the Department estimates that in each subsequent year, there will be 
an hour burden of 3,241. This burden is calculated as follows: (12 
hours for a fraction of QPAMs to update their policies and 
procedures internally) + (2,832 hours for QPAMs to provide needed 
materials for the audit) + (8 hours for ineligible QPAMs to prepare 
the notice to Plans) + (13.7 hours for ineligible QPAMs to send by 
regular mail the notice to Plans) + (154 hours for reporting the 
reliance on the QPAM Exemption) + (51 hours for recordkeeping) + (50 
hours for applicant QPAMs to prepare the documentation for the 
application) + (50 hours for applicant QPAMs to prepare the 
documentation for the application with an outside legal 
professional) + (42 hours for the distribution of notices and 
objective descriptions for applications that reach the stage of 
publication) + (28 hours for QPAMs to include the addition for the 
individual exemption application) = 3,241 hours (rounded).

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[[Page 45226]]

    Estimated Total Annual Burden Cost: $2,950,722.\94\
---------------------------------------------------------------------------

    \94\ To satisfy the conditions of the QPAM Exemption, the 
Department estimates that in each year, there will be a cost of 
$2,950,722. This accounts for the cost of $2,950,000 associated with 
hiring a firm to conduct the audit, $279 for the ineligible QPAMs to 
send paper notices, $273 for the distribution of notices for 
applications that reach the stage of publication via regular mail, 
and $170 for the distribution of objective description of the facts 
and circumstances via regular mail if the correspondent proposed 
exemptions are granted. Any discrepancies in the calculations are a 
result of rounding.
---------------------------------------------------------------------------

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \95\ imposes certain 
requirements with respect to federal rules that are subject to the 
notice and comment requirements of section 553(b) of the Administrative 
Procedure Act and are likely to have a significant economic impact on a 
substantial number of small entities.\96\ Unless an agency determines 
that a proposal is not likely to have a significant economic impact on 
a substantial number of small entities, section 603 of the RFA requires 
the agency to present an initial regulatory flexibility analysis (IRFA) 
of the proposed amendment.
---------------------------------------------------------------------------

    \95\ 5 U.S.C. 601 et seq. (1980).
    \96\ 5 U.S.C. 551 et seq. (1946).
---------------------------------------------------------------------------

    The Department estimates that there are 616 potential QPAMs by 
approximating the total number of service providers who in 2019 
provided ``Investment Management'' and ``Named Fiduciary'' services 
simultaneously to at least one plan as reported on Schedule C of the 
2019 Form 5500, and whose NAICS codes start with the 2-digit 52, which 
corresponds to Finance and Insurance Institutions.\97\ There are about 
234,440 small firms that report a NAICS code of 52.\98\ The Department 
does not know how many QPAMs fit the SBA's small entity definition for 
the finance and insurance sector. However, if the Department assumes 
that all 616 potential QPAMs are small entities, they will comprise 
only 0.3 percent of small firms in this industry (616 possible QPAMS 
out of 234,440 small firms with NAICS code 52), which is not a 
substantial number of small entities.\99\
---------------------------------------------------------------------------

    \97\ Using 2019 Form 5500 data, the Department counted in total 
1390 service providers who provided services of ``Investment 
Management'' and ``Named Fiduciary,'' of which only 765 reported 
their business code. Out of these 765 providers, 339 reported their 
business code starting with the 2-digit NAICS code 52, yielding a 
ratio of 0.44 of potential QPAMs to other providers. Therefore, the 
Department estimates that there were 0.44 * 1390 = 616 potential 
QPAMs in 2019.
    \98\ Source: Small Business Administration calculations of the 
number of firms reporting a NAICS code of 52 from the 2017 
Statistics of U.S. Businesses.
    \99\ The Department also notes that the asset and equity 
thresholds were included in the QPAM Exemption as an important 
protection to ensure a QPAM is large enough to withstand the 
influence of other Plan fiduciaries and parties in interest. The 
exemption, by design, was not intended for smaller entities. Without 
updates to the size thresholds, this protective aspect of the 
exemption will continually erode due to inflation.
---------------------------------------------------------------------------

    Based on the foregoing, pursuant to section 605(b) of RFA, the 
Acting Assistant Secretary of the Employee Benefits Security 
Administration hereby certifies that the proposed rule, if promulgated, 
will not have a significant economic impact on a substantial number of 
small entities. The Department invites comments on this certification.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 requires each 
federal agency to prepare a written statement assessing the effects of 
any federal mandate in a proposed or final agency rule that may result 
in an expenditure of $100 million or more (adjusted annually for 
inflation with the base year 1995) in any one year by state, local, and 
tribal governments, in the aggregate, or by the private sector.\100\ 
For purposes of the Unfunded Mandates Reform Act, as well as Executive 
Order 12875, this proposal does not include any federal mandate that 
the Department expects would result in such expenditures by state, 
local, or tribal governments, or the private sector.\101\
---------------------------------------------------------------------------

    \100\ 2 U.S.C. 1501 et seq. (1995).
    \101\ Enhancing the Intergovernmental Partnership, 58 FR 58093 
(Oct. 28, 1993).
---------------------------------------------------------------------------

Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism, and requires adherence by federal agencies to specific 
criteria in the process of their formulation and implementation of 
policies that have ``substantial direct effects'' on the states, the 
relationship between the national government and states, or on the 
distribution of power and responsibilities among the various levels of 
government.\102\ Federal agencies promulgating regulations that have 
federalism implications must consult with state and local officials and 
describe the extent of their consultation and the nature of the 
concerns of state and local officials in the preamble to the final 
rule.
---------------------------------------------------------------------------

    \102\ Federalism, supra note 46.
---------------------------------------------------------------------------

    In the Department's view, this proposed amendment would not have 
federalism implications because it would not have direct effects on the 
states, on the relationship between the national government and the 
states, nor on the distribution of power and responsibilities among 
various levels of government. The Department welcomes input from 
affected states regarding this assessment.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve 
a fiduciary, or other party in interest or disqualified person with 
respect to a Plan, from certain other provisions of ERISA and the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
ERISA section 404 which require, among other things, that a fiduciary 
act prudently and discharge their duties respecting the Plan solely in 
the interests of the participants and beneficiaries of the Plan. 
Additionally, the fact that a transaction is the subject of an 
exemption does not affect the requirement of Code section 401(a) that 
the Plan must operate for the exclusive benefit of the employees of the 
employer maintaining the Plan and their beneficiaries;
    (2) Before the amendment to the exemption may be granted under 
ERISA section 408(a) and Code section 4975(c)(2), the Department must 
find that it is administratively feasible, in the interests of Plans, 
their participants and beneficiaries, and IRA owners, and protective of 
the rights of participants and beneficiaries of the Plan and IRA 
owners;
    (3) If granted, the amended exemption is applicable to a particular 
transaction only if the transaction satisfies the conditions specified 
in the exemption; and
    (4) The proposed amendment, if granted, is supplemental to, and not 
in derogation of, any other provisions of ERISA and the Code, including 
statutory or administrative exemptions and

[[Page 45227]]

transitional rules. Furthermore, the fact that a transaction is subject 
to an administrative or statutory exemption is not dispositive of 
whether the transaction is in fact a prohibited transaction.

Proposed Amendment

Section I--General Exemption

    The restrictions of ERISA section 406(a)(1)(A) through (D) and the 
taxes imposed by Code section 4975(a) and (b), by reason of Code 
section 4975(c)(1)(A) through (D), shall not apply to a transaction 
between a Party in Interest with respect to a Plan and an Investment 
Fund (as defined in Section VI(b)) in which the Plan has an interest, 
and which is managed by a Qualified Professional Asset Manager (QPAM) 
(as defined in Section VI(a)), if the following conditions are 
satisfied:
    (a) At the Time of the Transaction (as defined in Section VI(i)), 
the Party in Interest, or its Affiliate (as defined in Section VI(c)), 
does not have the authority to--
    (1) Appoint or terminate the QPAM as a manager of the Plan assets 
involved in the transaction, or
    (2) Negotiate on behalf of the Plan the terms of the management 
agreement with the QPAM (including renewals or modifications thereof) 
with respect to the Plan assets involved in the transaction;
    Notwithstanding the foregoing, in the case of an Investment Fund in 
which two or more unrelated Plans have an interest, a transaction with 
a Party in Interest with respect to a Plan will be deemed to satisfy 
the requirements of this Section I(a) if the assets of the Plan managed 
by the QPAM in the Investment Fund, when combined with the assets of 
other Plans established or maintained by the same employer (or 
Affiliate thereof described in Section VI(c)(1) below) or by the same 
employee organization, and managed in the same Investment Fund, 
represent less than ten (10) percent of the assets of the Investment 
Fund;
    (b) The transaction is not described in--
    (1) Prohibited Transaction Exemption 2006-16 (71 FR 63786; October 
31, 2006) (relating to securities lending arrangements) (as amended or 
superseded),
    (2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7, 
1983) (relating to acquisitions by plans of interests in mortgage 
pools) (as amended or superseded), or
    (3) Prohibited Transaction Exemption 82-87 (47 FR 21331; May 18, 
1982) (relating to certain mortgage financing arrangements) (as amended 
or superseded);
    (c) The terms of the transaction, commitments, and investment of 
fund assets, and any associated negotiations on behalf of the 
Investment Fund are the sole responsibility of the QPAM. Either the 
QPAM, or (so long as the QPAM retains full fiduciary responsibility 
with respect to the transaction) a property manager acting in 
accordance with written guidelines established and administered by the 
QPAM, makes the decision on behalf of the Investment Fund to enter into 
the transaction, provided that the transaction is not part of an 
agreement, arrangement, or understanding designed to benefit a Party in 
Interest. The prohibited transaction relief provided under this 
exemption applies only in connection with an Investment Fund that is 
established primarily for investment purposes. No relief is provided 
under this exemption for any transaction that has been planned, 
negotiated, or initiated by a Party in Interest, in whole or in part, 
and presented to a QPAM for approval because the QPAM would not have 
sole responsibility with respect to the transaction as required by this 
Section I(c);
    (d) The Party in Interest dealing with the Investment Fund is 
neither the QPAM nor a person Related to the QPAM;
    (e) The transaction is not entered into with a Party in Interest 
with respect to any Plan whose assets managed by the QPAM, when 
combined with the assets of other Plans established or maintained by 
the same employer (or Affiliate thereof described in subsection 
VI(c)(1) below) or by the same employee organization, and managed by 
the QPAM, represent more than twenty (20) percent of the total client 
assets managed by the QPAM at the time of the transaction; and
    (f) At the Time of the Transaction, and at the time of any 
subsequent renewal or modification thereof that requires the consent of 
the QPAM, the terms of the transaction are at least as favorable to the 
Investment Fund as the terms generally available in arm's length 
transactions between unrelated parties;
    (g) Integrity.
    (1) Reporting reliance on the exemption to the Department. Any QPAM 
that relies upon this exemption must notify the Department via email at 
[email protected]. Each QPAM that relies upon the exemption must report the 
legal name of each business entity relying upon the exemption in the 
email to the Department and any name the QPAM may be operating under. 
This notification needs to be reported only once unless there is a 
change to the legal name or operating name(s) of the QPAM relying upon 
the exemption or the QPAM no longer is relying on the exemptive relief 
provided in the exemption.
    (2) Written Management Agreement. In its Written Management 
Agreement with clients (as required under Section VI(a)), the QPAM must 
include a statement that, in the event of a Criminal Conviction 
(described in subsection I(g)(3)(A)) or a Written Ineligibility Notice 
(described in subsection I(g)(3)(B)) and for at least a period of 10 
years, the QPAM:
    (A) agrees not to restrict the ability of a client Plan to 
terminate or withdraw from its arrangement with the QPAM;
    (B) will not impose any fees, penalties, or charges on client Plans 
in connection with the process of terminating or withdrawing from an 
Investment Fund managed by the QPAM except for reasonable fees, 
appropriately disclosed in advance, that are specifically designed to: 
(i) prevent generally recognized abusive investment practices or (ii) 
ensure equitable treatment of all investors in a pooled fund in the 
event such withdrawal or termination may have adverse consequences for 
all other investors, provided that such fees are applied consistently 
and in a like manner to all such investors;
    (C) agrees to indemnify, hold harmless, and promptly restore actual 
losses to the client Plans for any damages that directly result to them 
from a violation of applicable laws, a breach of contract, or any claim 
arising out of the conduct that is the subject of a Criminal Conviction 
or Written Ineligibility Notice of the QPAM or an Affiliate (as defined 
in Section VI(d)) or an owner, direct or indirect, of a five (5) 
percent or more interest in the QPAM. Actual losses specifically 
include losses and costs arising from unwinding transactions with third 
parties and from transitioning Plan assets to an alternative asset 
manager as well as costs associated with any exposure to excise taxes 
under Code section 4975 as a result of a QPAM's inability to rely upon 
the relief in the QPAM Exemption; and
    (D) will not employ or knowingly engage any individual that 
participated in the conduct that is the subject of a Criminal 
Conviction or Written Ineligibility Notice regardless of whether the 
individual is separately convicted in connection with the criminal 
conduct.
    (3) Ineligibility due to a Criminal Conviction or Written 
Ineligibility Notice. Subject to the Ineligibility Date

[[Page 45228]]

provision set forth in Section I(h), a QPAM is ineligible to rely on 
this exemption for 10 years following:
    (A) A Criminal Conviction, as defined in Section VI(r), of the QPAM 
or any Affiliate thereof (as defined in Section VI(d))--or any owner, 
direct or indirect, of a five (5) percent or more interest in the QPAM; 
or
    (B) Receipt by the QPAM or any Affiliate thereof (as defined in 
Section VI(d))--or any owner, direct or indirect, of a five (5) percent 
or more interest in the QPAM of a Written Ineligibility Notice issued 
by the Department for participating in Prohibited Misconduct. For 
purposes of this exemption, ``participating in'' refers not only to 
active participation in the Prohibited Misconduct, but also to knowing 
approval of the conduct, or knowledge of such conduct without taking 
active steps to prohibit such conduct, including reporting the conduct 
to the appropriate compliance personnel.
    (h) Ineligibility Date. A QPAM shall become ineligible:
    (1) as of the ``Conviction Date,'' which is the date of the 
judgment of the trial court (or the date of the judgment of any court 
in a foreign jurisdiction that is the equivalent of a U.S. federal or 
state trial court), regardless of whether that judgment is appealed; or
    (2) the date of the written ``Ineligibility Notice'' described in 
Section I(i), below. A person will become eligible to rely on this 
exemption again only upon a subsequent judgment reversing such person's 
conviction or the expiration of the 10-year ineligibility period.
    (i) Written Ineligibility Notice--Warning and Opportunity to be 
Heard. Before issuing a Written Ineligibility Notice, the Department 
will issue a written warning to the QPAM identifying specific conduct 
implicating subsection I(g)(3)(B). The Department will provide the QPAM 
with the opportunity to be heard, in person (including by phone or 
videoconference), or in writing, or a combination, before the 
Department makes a decision about whether to issue the Written 
Ineligibility Notice. The QPAM will have 20 days from the date of the 
warning letter to respond with a request for a conference. If a 
response is not received by the Department within 20 days after the 
date of the warning letter, the Department will issue a written 
Ineligibility Notice. The opportunity to be heard will be limited to 
one conference, which will be scheduled within 30 days of the QPAM's 
response to the written warning, unless the Department determines in 
its sole discretion to allow additional conferences. The written 
Ineligibility Notice will articulate the basis for the Department's 
determination that the conduct described in subsection I(g)(3)(B) has 
occurred.
    (j) One-Year Winding-Down Period Due to Ineligibility. Any QPAM 
that becomes ineligible under subsection I(g)(3) must engage in a 
winding-down period during which relief is available under this 
exemption only for the QPAM's client Plans that had a pre-existing 
Written Management Agreement required under subsection I(g)(2) above on 
the Ineligibility Date. Relief during the winding-down period is 
available for a period of one year after the Ineligibility Date and the 
QPAM must fully comply with each condition of the exemption during the 
one-year period. A QPAM must ensure that it manages plan assets 
prudently and loyally during the winding-down period. During the 
winding-down period, the QPAM must comply with the following additional 
conditions:
    (1) Within 30 days after the Ineligibility Date the QPAM must 
provide notice to the Department at [email protected] and each of its client 
Plans stating:
    (A) its failure to satisfy subsection I(g)(3) and the resulting 
initiation of this one-year winding-down period;
    (B) that in accordance with subsections I(g)(2)(A) and (B), it will 
not restrict the ability of its client Plans to terminate or withdraw 
from its arrangement with the QPAM nor impose fees, penalties, or 
charges on the client Plan in connection with terminating or 
withdrawing from a QPAM-managed Investment Fund; and agrees to 
indemnify, hold harmless, and promptly restore losses to the client 
Plan in accordance with subsection I(g)(2)(C);
    (C) an objective description of the facts and circumstances upon 
which the Criminal Conviction or Written Ineligibility Notice is based, 
written with sufficient detail to fully inform the client Plan's 
fiduciary of the nature and severity of the conduct so that such 
fiduciary can satisfy its fiduciary duties of prudence and loyalty with 
respect to hiring, monitoring, evaluating, and retaining the QPAM in a 
non-QPAM capacity;
    (2) No later than the Ineligibility Date under Section I(h), the 
QPAM must not employ or knowingly engage any individual that 
participated in the conduct that is the subject of a Criminal 
Conviction or Written Ineligibility Notice causing ineligibility of the 
QPAM under subsection I(g)(3);
    (3) The QPAM may not engage in new transactions after the 
Ineligibility Date in reliance on this exemption for existing client 
Plans; and
    (4) After the one-year winding-down period expires, the entity may 
not rely on the relief provided in this exemption until the expiration 
of the 10-year ineligibility period unless it obtains an individual 
exemption permitting it to continue relying upon this exemption.
    (k) Requests for an Individual Exemption. A QPAM that is ineligible 
or anticipates that it will become ineligible due to an actual or 
possible Criminal Conviction may apply for an individual exemption from 
the Department to continue to rely on the relief provided in this 
exemption for a longer period than the one-year winding-down period. An 
applicant should review the Department's most recently granted 
individual exemptions involving Section I(g) ineligibility with the 
expectation that similar conditions will be required if the Department 
proposes and grants an exemption. If an applicant requests the 
Department to exclude any term or condition from its exemption that is 
included in a recently granted individual exemption, the applicant must 
include a detailed statement with its exemption application explaining 
the reason(s) why the proposed variation is necessary and in the 
interest and protective of affected Plans, their participants and 
beneficiaries, and individuals for whose benefit a Plan described in 
Code section 4975(e)(1)(B) or (C) is established (IRA owners). The 
Department will review such requests consist with the requirements of 
ERISA section 408(a) and Code section 4975(c)(2). Such applicants also 
should provide detailed information in their applications quantifying 
the specific cost or harms in dollars amounts, if any, their client 
Plans would suffer if the QPAM could not rely on the exemption after 
the winding-down period, including the specific dollar amounts of 
investment losses resulting from foregone investment opportunities and 
any evidence supporting the proposition that investment opportunities 
would be available to client Plans on less advantageous terms. An 
applicant should not construe the Department's acceptance of an 
individual exemption application as a guarantee that the Department 
will grant an individual exemption. A QPAM that submits an individual 
exemption application must ensure that it manages Plan assets prudently 
and loyally during the winding-down period.

Section II--Specific Exemption for Employers

    The restrictions of ERISA sections 406(a), 406(b)(1), and 407(a) 
and the

[[Page 45229]]

taxes imposed by Code section 4975(a) and (b), by reason of Code 
section 4975(c)(1)(A) through (E), shall not apply to:
    (a) The sale, leasing, or servicing of Goods or the furnishing of 
services, to an Investment Fund managed by a QPAM by a Party in 
Interest with respect to a Plan having an interest in the fund, if--
    (1) The Party in Interest is an employer any of whose employees are 
covered by the Plan or is a person who is a Party in Interest by virtue 
of a relationship to such an employer (described in Section VI(c) 
below),
    (2) The transaction is necessary for the administration or 
management of the Investment Fund,
    (3) The transaction takes place in the ordinary course of a 
business engaged in by the Party in Interest with the general public,
    (4) The amount attributable in any taxable year of the Party in 
Interest to transactions engaged in with an Investment Fund pursuant to 
this Section II(a) does not exceed one (1) percent of the gross 
receipts derived from all sources for the prior taxable year of the 
Party in Interest, and
    (5) The requirements of Sections I(c) through (g) above are 
satisfied with respect to the transaction.
    (b) The leasing of office or commercial space by an Investment Fund 
maintained by a QPAM to a Party in Interest with respect to a Plan 
having an interest in the Investment Fund, if--
    (1) The Party in Interest is an employer any of whose employees are 
covered by the Plan or is a person who is a Party in Interest by virtue 
of a relationship to such an employer (described in Section VI(c) 
below);
    (2) No commission or other fee is paid by the Investment Fund to 
the QPAM or to the employer, or to an Affiliate of the QPAM or employer 
(as defined in Section VI(c) below), in connection with the 
transaction;
    (3) Any unit of space leased to the Party in Interest by the 
Investment Fund is suitable (or adaptable without excessive cost) for 
use by different tenants;
    (4) The amount of space covered by the lease does not exceed 
fifteen (15) percent of the rentable space of the office building, 
integrated office park, or of the commercial center (if the lease does 
not pertain to office space);
    (5) In the case of a Plan that is not an eligible individual 
account plan (as defined in ERISA section 407(d)(3)), immediately after 
the transaction is entered into, the aggregate fair market value of 
employer real property and employer securities held by the Investment 
Funds of the QPAM in which the Plan has an interest does not exceed ten 
(10) percent of the fair market value of the assets of the Plan held in 
those Investment Funds. In determining the aggregate fair market value 
of employer real property and employer securities as described herein, 
a Plan shall be considered to own the same proportionate undivided 
interest in each asset of the Investment Fund or funds as its 
proportionate interest in the total assets of the Investment Fund(s). 
For purposes of this requirement, the term ``employer real property'' 
means real property leased to, and the term ``employer securities'' 
means securities issued by an employer any of whose employees are 
covered by the Plan or a Party in Interest of the Plan by reason of a 
relationship to the employer described in ERISA section 3(14)(E) or 
(G); and
    (6) The requirements of Sections I(c) through (g) above are 
satisfied with respect to the transaction.

Section III--Specific Lease Exemption for QPAMs

    The restrictions of ERISA section 406(a)(1)(A) through (D), 
406(b)(1) and (2), and the taxes imposed by Code section 4975(a) and 
(b), by reason of Code section 4975(c)(1)(A) through (E), shall not 
apply to the leasing of office or commercial space by an Investment 
Fund managed by a QPAM to the QPAM, a person who is a Party in Interest 
of a Plan by virtue of a relationship to such QPAM described in ERISA 
section 3(14)(G), (H), or (I), or a person not eligible for the General 
Exemption of Section I above by reason of Section I(a), if--
    (a) The amount of space covered by the lease does not exceed the 
greater of 7,500 square feet or one (1) percent of the rentable space 
of the office building, integrated office park, or of the commercial 
center in which the Investment Fund has the investment;
    (b) The unit of space subject to the lease is suitable (or 
adaptable without excessive cost) for use by different tenants;
    (c) At the Time of the Transaction, and at the time of any 
subsequent renewal or modification thereof that requires the consent of 
the QPAM, the terms of the transaction are not more favorable to the 
lessee than the terms generally available in arm's length transactions 
between unrelated parties; and
    (d) No commission or other fee is paid by the Investment Fund to 
the QPAM, any person possessing the disqualifying powers described in 
Section I(a), or any Affiliate of such persons (as defined in Section 
VI(c) below), in connection with the transaction.

Section IV--Transactions Involving Places of Public Accommodation

    The restrictions of ERISA section 406(a)(1)(A) through (D) and 
406(b)(1) and (2) and the taxes imposed by Code section 4975(a) and 
(b), by reason of Code section 4975(c)(1)(A) through (E), shall not 
apply to the furnishing of services and facilities (and Goods 
incidental thereto) by a place of public accommodation owned by an 
Investment Fund managed by a QPAM to a Party in Interest with respect 
to a Plan having an interest in the Investment Fund, if the services 
and facilities (and incidental Goods) are furnished on a comparable 
basis to the general public.

Section V--Specific Exemption Involving QPAM-Sponsored Plans

    The relief in Sections I, III, or IV above from the applicable 
restrictions of ERISA section 406(a), section 406(b)(1) and (2), and 
the taxes imposed by Code section 4975(a) and (b), by reason of Code 
section 4975(c)(1)(A) through (E), shall apply to a transaction 
involving the assets of a Plan sponsored by the QPAM or an Affiliate 
(as defined in Section VI(c)) of the QPAM if:
    (a) The QPAM has discretionary authority or control with respect to 
the Plan assets involved in the transaction;
    (b) The QPAM adopts Written Policies and Procedures that are 
designed to ensure compliance with the conditions of the exemption;
    (c) 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 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 with: (1) the 
Written Policies and Procedures adopted by the QPAM in accordance with 
Section V(b) above, and (2) the objective requirements of this 
exemption. The written report shall also contain the auditor's overall 
opinion regarding whether the QPAM's program complied with: (1) the 
Written Policies and Procedures adopted by the QPAM, and (2) the 
objective requirements of the 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
    (d) The transaction meets the applicable requirements set forth in 
Sections I, III, or IV above.

[[Page 45230]]

Section VI--Definitions and General Rules

    For purposes of this exemption:
    (a) The term ``Qualified Professional Asset Manager'' or ``QPAM'' 
means an Independent Fiduciary which is--
    (1) A bank, as defined in section 202(a)(2) of the Investment 
Advisers Act of 1940 that has the power to manage, acquire or dispose 
of assets of a Plan, which bank has, as of the last day of its most 
recent fiscal year, Equity Capital in excess of $2,720,000; or
    (2) A savings and loan association, the accounts of which are 
insured by the Federal Deposit Insurance Corporation that has made 
application for and been granted trust powers to manage, acquire or 
dispose of assets of a Plan by a State or Federal authority having 
supervision over savings and loan associations, which savings and loan 
association has, as of the last day of its most recent fiscal year, 
Equity Capital or Net Worth in excess of $2,720,000; or
    (3) An insurance company which is qualified under the laws of more 
than one State to manage, acquire, or dispose of any assets of a Plan, 
which company has, as of the last day of its most recent fiscal year, 
Net Worth in excess of $2,720,000 and which is subject to supervision 
and examination by a State authority having supervision over insurance 
companies; or
    (4) An investment adviser registered under the Investment Advisers 
Act of 1940 that has total client assets under its management and 
control in excess of $135,870,000 as of the last day of its most recent 
fiscal year, and either (A) Shareholders' or Partners' Equity in excess 
of $2,040,000, or (B) payment of all of its liabilities including any 
liabilities that may arise by reason of a breach or violation of a duty 
described in ERISA sections 404 and 406 is unconditionally guaranteed 
by--(i) A person with a relationship to such investment adviser 
described in subsection VI(c)(1) below if the investment adviser and 
such Affiliate have Shareholders' or Partners' Equity, in the 
aggregate, in excess of $2,040,000; or (ii) A person described in 
(a)(1), (a)(2) or (a)(3) of Section VI above; or (iii) A broker-dealer 
registered under the Securities Exchange Act of 1934 that has, as of 
the last day of its most recent fiscal year, Net Worth in excess of 
$2,040,000;
    Provided that such bank, savings and loan association, insurance 
company, or investment adviser has acknowledged in a ``Written 
Management Agreement'' that it is a fiduciary with respect to each Plan 
that has retained the QPAM and which complies with subsection I(g)(2).
    (5) By publication through notice in the Federal Register, the 
Department will make subsequent annual adjustments for inflation to the 
Equity Capital, Net Worth, and asset management thresholds in 
subsection VI(a)(1) through (4), rounded to the nearest $10,000, no 
later than January 31 of each year.
    (b) An ``Investment Fund'' includes single customer and pooled 
separate accounts maintained by an insurance company, individual trusts 
and common, collective or group trusts maintained by a bank, and any 
other account or fund to the extent that the disposition of its assets 
(whether or not in the custody of the QPAM) is subject to the 
discretionary authority of the QPAM.
    (c) For purposes of Section I(a) and Sections II and V above, an 
``Affiliate'' of a person means--
    (1) Any person directly or indirectly, through one or more 
intermediaries, Controlling, Controlled by, or under Common Control 
with the person;
    (2) Any corporation, partnership, trust or unincorporated 
enterprise of which such person is an officer, director, ten (10) 
percent or more partner (except with respect to Section II this figure 
shall be five (5) percent), or highly compensated employee as defined 
in Code section 4975(e)(2)(H) (but only if the employer of such 
employee is the Plan sponsor); and
    (3) Any director of the person or any employee of the person who is 
a highly compensated employee, as defined in Code section 
4975(e)(2)(H), or who has direct or indirect authority, responsibility 
or control regarding the custody, management or disposition of Plan 
assets involved in the transaction. A named fiduciary (within the 
meaning of ERISA section 402(a)(2)) of a Plan with respect to the Plan 
assets involved in the transaction and an employer any of whose 
employees are covered by the Plan will also be considered Affiliates 
with respect to each other for purposes of Section I(a) above if such 
employer or an Affiliate of such employer has the authority, alone or 
shared with others, to appoint or terminate the named fiduciary or 
otherwise negotiate the terms of the named fiduciary's employment 
agreement.
    (d) For purposes of Section I(g) above an ``Affiliate'' of a person 
means--
    (1) Any person directly or indirectly through one or more 
intermediaries, Controlling, Controlled by, or under Common Control 
with the person;
    (2) Any director of, Relative of, or partner in, any such person;
    (3) Any corporation, partnership, trust or unincorporated 
enterprise of which such person is an officer, director, or a five (5) 
percent or more partner or owner; and
    (4) Any employee or officer of the person who--
    (A) Is a highly compensated employee (as defined in Code section 
4975(e)(2)(H) or officer (earning ten (10) percent or more of the 
yearly wages of such person); or
    (B) Has direct or indirect authority, responsibility, or control 
regarding the custody, management or disposition of Plan assets.
    (e) The terms ``Controlling,'' ``Controlled by,'' ``under Common 
Control with,'' and ``Controls'' means the power to exercise a 
controlling influence over the management or policies of a person other 
than an individual.
    (f) The term ``Party in Interest'' means a person described in 
ERISA section 3(14) and includes a ``disqualified person,'' as defined 
in Code section 4975(e)(2).
    (g) The term ``Relative'' means a relative as that term is defined 
in ERISA section 3(15), or a brother, a sister, or a spouse of a 
brother or sister.
    (h) A QPAM is ``Related'' to a Party in Interest for purposes of 
Section I(d) above if, as of the last day of its most recent calendar 
quarter: (i) The QPAM owns a ten (10) percent or more Interest in the 
Party in Interest; (ii) a person Controlling, or Controlled by, the 
QPAM owns a twenty (20) percent or more Interest in the Party in 
Interest; (iii) the Party in Interest owns a ten (10) percent or more 
Interest in the QPAM; or (iv) a person Controlling, or Controlled by, 
the Party in Interest owns a twenty (20) percent or more Interest in 
the QPAM. Notwithstanding the foregoing, a Party in Interest is 
``Related'' to a QPAM if: (i) A person Controlling, or Controlled by, 
the Party in Interest has an ownership Interest that is less than 
twenty (20) percent but greater than ten (10) percent in the QPAM and 
such person exercises Control over the management or policies of the 
QPAM by reason of its ownership Interest; (ii) a person Controlling, or 
Controlled by, the QPAM has an ownership Interest that is less than 
twenty (20) percent but greater than ten (10) percent in the Party in 
Interest and such person exercises Control over the management or 
policies of the Party in Interest by reason of its ownership Interest. 
For purposes of this definition:
    (1) The term ``Interest'' means with respect to ownership of an 
entity--
    (A) The combined voting power of all classes of stock entitled to 
vote or the total value of the shares of all classes of stock of the 
entity if the entity is a corporation,

[[Page 45231]]

    (B) The capital interest or the profits interest of the entity if 
the entity is a partnership, or
    (C) The beneficial interest of the entity if the entity is a trust 
or unincorporated enterprise; and
    (2) A person is considered to own an ``Interest'' if, other than in 
a fiduciary capacity, the person has or shares the authority--
    (A) To exercise any voting rights or to direct some other person to 
exercise the voting rights relating to such interest, or
    (B) To dispose or to direct the disposition of such interest.
    (i) ``At the Time of the Transaction'' means the date upon which 
the transaction is entered into. In addition, in the case of a 
transaction that is continuing, the transaction shall be deemed to 
occur until it is terminated. If any transaction is entered into on or 
after December 21, 1982, or a renewal that requires the consent of the 
QPAM occurs on or after December 21, 1982, and the requirements of this 
exemption are satisfied at the time the transaction is entered into or 
renewed, respectively, the requirements will continue to be satisfied 
thereafter with respect to the transaction. Notwithstanding the 
foregoing, this exemption shall cease to apply to a transaction exempt 
by virtue of Section I or Section II above at such time as the 
percentage requirement contained in Section I(e) is exceeded, unless no 
portion of such excess results from an increase in the assets 
transferred for discretionary management to a QPAM. For this purpose, 
assets transferred do not include the reinvestment of earnings 
attributable to those Plan assets already under the discretionary 
management of the QPAM. Nothing in this paragraph shall be construed as 
exempting a transaction entered into by an Investment Fund which 
becomes a transaction described in ERISA section 406 or Code section 
4975 while the transaction is continuing, unless the conditions of this 
exemption were met either at the time the transaction was entered into 
or at the time the transaction would have become prohibited but for 
this exemption.
    (j) The term ``Goods'' includes all things which are movable or 
which are fixtures used by an Investment Fund but does not include 
securities, commodities, commodities futures, money, documents, 
instruments, accounts, chattel paper, contract rights, and any other 
property, tangible or intangible, which, under the relevant facts and 
circumstances, is held primarily for investment.
    (k) For purposes of subsection VI(a)(1) and (2) above, the term 
``Equity Capital'' means stock (common and preferred), surplus, 
undivided profits, contingency reserves, and other capital reserves.
    (l) For purposes of subsection VI(a)(2), (3), and (4) above, the 
term ``Net Worth'' means capital, paid-in and contributed surplus, 
unassigned surplus, contingency reserves, group contingency reserves, 
and special reserves.
    (m) For purposes of subsection VI(a)(4) above, the term 
``Shareholders' or Partners' Equity'' means the equity shown in the 
most recent balance sheet prepared within the two years immediately 
preceding a transaction undertaken pursuant to this exemption, in 
accordance with generally accepted accounting principles.
    (n) The term ``Plan'' refers to an employee benefit plan described 
in ERISA section 3(3) and/or a plan described in Code section 
4975(e)(1).
    (o) For purposes of Section VI(a) above, the term ``Independent 
Fiduciary'' means a fiduciary managing the assets of a Plan in an 
Investment Fund that is independent of and unrelated to the employer 
sponsoring such Plan. For purposes of this exemption, the fiduciary 
will not be deemed to be independent of and unrelated to the employer 
sponsoring the Plan if such fiduciary directly or indirectly Controls, 
is Controlled by, or is under Common Control with the employer 
sponsoring the Plan. Notwithstanding the foregoing: (1) for the period 
from December 21, 1982, through November 3, 2010, a QPAM managing the 
assets of a Plan in an Investment Fund will not fail to satisfy the 
requirements of this section solely because such fiduciary is the 
employer sponsoring the Plan or directly or indirectly Controls, is 
Controlled by, or is under Common Control with the employer sponsoring 
the Plan; and (2) effective after November 3, 2010 a QPAM acting as a 
manager for its own Plan or the Plan of an Affiliate (as defined in 
subsection VI(c)(1) above) will be deemed to satisfy the requirements 
of this section if the requirements of Section V above are met.
    (p) An ``Exemption Audit'' of a Plan must consist of the following:
    (1) A review of the Written Policies and Procedures adopted by the 
QPAM pursuant to Section V(b) above for consistency with each of the 
objective requirements of this exemption (as described in Section VI(q) 
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 Written Policies and Procedures adopted by the 
QPAM pursuant to Section VI(q) below and (ii) the objective 
requirements of this exemption, and
    (B) To render an overall opinion regarding the level of compliance 
of the QPAM's program with subsection VI(p)(2)(A)(i) and (ii) above;
    (3) A determination as to whether the QPAM has satisfied the 
definition of a QPAM under the exemption; and
    (4) Issuance of a written report describing the steps performed by 
the auditor during the course of its review and the auditor's findings.
    (q) For purposes of Section VI(p), the Written Policies and 
Procedures must describe the following objective requirements of this 
exemption and the steps adopted by the QPAM to ensure compliance with 
each of these requirements:
    (1) The definition of a QPAM in Section VI(a);
    (2) The requirement of Sections V(a) and I(c) 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 the transaction;
    (3) For a transaction described in Section I above:
    (A) That the transaction is not entered into with any person who is 
excluded from relief under Section I(a), Section I(d), or Section I(e) 
above;
    (B) That the transaction is not described in any of the class 
exemptions listed in Section I(b) above;
    (4) If the transaction is described in Section III above:
    (A) That the amount of space covered by the lease does not exceed 
the limitations described in Section III(a) above, and
    (B) That no commission or other fee is paid by the Investment Fund 
as described in Section III(d) above.
    (r) ``Criminal Conviction'' means the person or entity:
    (1) is convicted in a U.S. federal or state court or released from 
imprisonment, whichever is later, as a result of any felony involving 
abuse or misuse of such person's Plan position or employment, or 
position or employment with a labor organization; any felony arising 
out of the conduct of the business of a broker, dealer, investment 
adviser, bank, insurance company or fiduciary; income tax evasion; any 
felony involving the larceny, theft, robbery, extortion, forgery, 
counterfeiting, fraudulent concealment,

[[Page 45232]]

embezzlement, fraudulent conversion, or misappropriation of funds or 
securities; conspiracy or attempt to commit any such crimes or a crime 
in which any of the foregoing crimes is an element; or a crime 
identified in ERISA section 411; or
    (2) is convicted by a foreign court of competent jurisdiction as a 
result of a crime, however denominated by the laws of the relevant 
foreign government, that is substantially equivalent to an offense 
described in (1), above.
    (s) ``Prohibited Misconduct'' means:
    (1) any conduct that forms the basis for a non-prosecution or 
deferred prosecution agreement that, if successfully prosecuted, would 
have constituted a crime described in Section VI(r);
    (2) any conduct that forms the basis for an agreement, however 
denominated by the laws of the relevant foreign government, that is 
substantially equivalent to a non-prosecution agreement or deferred 
prosecution agreement described in (1);
    (3) engaging in a systematic pattern or practice of violating the 
conditions of this exemption in connection with otherwise non-exempt 
prohibited transactions;
    (4) intentionally violating the conditions of this exemption in 
connection with otherwise non-exempt prohibited transactions; or
    (5) providing materially misleading information to the Department 
in connection with the conditions of the exemption.
    (t) The QPAM maintains the records necessary to enable the persons 
described in subsection (t)(2) below to determine whether the 
conditions of this exemption have been met with respect to a 
transaction for a period of six years from the date of the transaction 
in a manner that is reasonably accessible for examination. No 
prohibited transaction will be considered to have occurred solely on 
the basis of the unavailability of such records if they are lost or 
destroyed due to circumstances beyond the control of the QPAM before 
the end of the six-year period.
    (1) No party, other than the QPAM responsible for complying with 
this Section VI(r), will be subject to the civil penalty that may be 
assessed under ERISA section 502(i) or the excise tax imposed by Code 
section 4975(a) and (b), if applicable, if the records are not 
maintained or available for examination as required by this Section 
VI(t) below.
    (2) Except as provided in subsection (3) or precluded by 12 U.S.C. 
484 (regarding limitations on visitorial powers for national banks), 
and notwithstanding any provisions of ERISA section 504(a)(2) and (b), 
the records are reasonably available at their customary location during 
normal business hours for examination by:
    (A) Any authorized employee of the Department or the Internal 
Revenue Service or another state or federal regulator,
    (B) Any fiduciary of a Plan invested in an Investment Fund managed 
by the QPAM,
    (C) Any contributing employer and any employee organization whose 
members are covered by a Plan invested in an Investment Fund managed by 
the QPAM, or
    (D) Any participant or beneficiary of a Plan invested in an 
Investment Fund managed by the QPAM.
    (3) None of the persons described in subsection (2)(B) through (D) 
above are authorized to examine records regarding an Investment Fund 
that they are not invested in, privileged trade secrets or privileged 
commercial or financial information of the QPAM, or information 
identifying other individuals.
    (4) Should the QPAM refuse to disclose information to a person 
described in subsection (2)(A) through (D) above on the basis that the 
information is exempt from disclosure, the QPAM must provide a written 
notice advising the requestor of the reasons for the refusal and that 
the Department may request such information by the close of the 
thirtieth (30th) day following the request.
    (5) A QPAM's failure to maintain the records necessary to determine 
whether the conditions of this exemption have been met will result in 
the loss of the relief provided under this exemption only for the 
transaction or transactions for which such records are missing or have 
not been maintained. Such failure does not affect the relief for other 
transactions if the QPAM maintains required records for such 
transactions in compliance with this Section VI(t).

    Signed at Washington, DC, this 18th day of July, 2022.
Ali Khawar,
Acting Assistant Secretary, Employee Benefits Security Administration, 
U.S. Department of Labor.
[FR Doc. 2022-15702 Filed 7-26-22; 8:45 am]
BILLING CODE 4510-29-P