[Federal Register Volume 87, Number 179 (Friday, September 16, 2022)]
[Proposed Rules]
[Pages 56912-56920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20099]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

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


Initial Regulatory Flexibility Analysis for 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 Initial Regulatory Flexibility Analysis for the 
proposed amendment to the QPAM Exemption.

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SUMMARY: This document gives notice of the Department's Initial 
Regulatory Flexibility Analysis for a proposed amendment to prohibited 
transaction class exemption 84-14 (the QPAM Exemption).

DATES: Written comments must be submitted to the Department by October 
11, 2022.

ADDRESSES: All written comments concerning the Initial Regulatory 
Flexibility Analysis should be sent to the Office of Exemption 
Determinations through the Federal eRulemaking Portal and identified by 
Application No. D-12022:
    Federal eRulemaking Portal: https://www.regulations.gov at Docket 
ID

[[Page 56913]]

number: EBSA-2022-0008. Follow the instructions for submitting 
comments.
    See SUPPLEMENTARY INFORMATION below for additional information 
regarding comments.

FOR FURTHER INFORMATION CONTACT: James Butikofer, telephone (202) 693-
8434, Office of Research and Analysis, Employee Benefits Security 
Administration, U.S. Department of Labor (this is not a toll-free 
number).

SUPPLEMENTARY INFORMATION: 

Comment Instructions

    All comments must be received by the end of the comment period. 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 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 
will also be available online at https://www.regulations.gov, at Docket 
ID number: EBSA-2022-0008 and https://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 https://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 https://www.regulations.gov website is an ``anonymous 
access'' system, which means EBSA will not know your identity or 
contact information unless you provide it.

Reason for the Supplemental Initial Regulatory Flexibility Analysis

    The Department published a proposed amendment to PTE 84-14 (the 
QPAM Exemption) on July 27, 2022 (the Proposed QPAM Amendment).\1\ The 
Department originally provided a 60-day comment period in the Proposed 
QPAM Amendment, which was scheduled to expire on September 26, 2022. 
The Department then extended this initial comment period until October 
11, 2022, in a Federal Register notice published on September 7, 
2022.\2\ In the same notice, the Department announced that it is 
scheduling a virtual public hearing regarding the Proposed Amendment on 
November 17, 2022 (and if necessary, November 18, 2022). In connection 
with the hearing, the Department will also provide a supplementary 
comment period that will end approximately 14 days after the hearing 
transcript is posted on EBSA's website.
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    \1\ 87 FR 45204.
    \2\ 87 FR 54715.
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    Pursuant to section 605(b) of the Regulatory Flexibility Act 
(RFA),\3\ the Acting Assistant Secretary of the Employee Benefits 
Security Administration certified that the Proposed QPAM amendment 
would not have a significant economic impact on a substantial number of 
small entities. After consulting with the Small Business 
Administration's Office of Advocacy, however, the Department has 
decided to publish this Initial Regulatory Flexibility Analysis (IRFA) 
explaining its possible impact on small entities. The Department 
requests comments by October 11, 2022, the same deadline as the 
extended comment period for the Proposed QPAM amendment. Although the 
Department is aligning the deadlines for comments regarding the 
supplemental IRFA and the Proposed QPAM amendment, the Department will 
provide additional time for public input on all aspects of the Proposed 
QPAM Amendment (including the supplemental IRFA) when the comment 
period reopens on the hearing date.
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    \3\ 5 U.S.C. 601 et seq. (1980).
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Regulatory Flexibility Act (RFA)

    The RFA 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.\4\ Unless an agency determines that a proposal is not 
expected to have a significant economic impact on a substantial number 
of small entities, section 603 of the RFA requires the agency to 
present an IRFA of the Proposed QPAM Amendment.
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    \4\ 5 U.S.C. 551 et seq. (1946).
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    The Department emphasizes that the QPAM Exemption has always been 
premised on the QPAM being an entity of sufficient size to withstand 
undue influence from parties in interest. The Department clearly stated 
this position in the preamble to the initial proposal in 1982:

    The minimum capital and funds-under-management standards of the 
proposed exemption are intended to [ensure] that the eligible 
fiduciaries managing the accounts or funds (``investment funds'') . 
. . are established institutions which are large enough to 
discourage the exercise of undue influence upon their decision-
making processes by parties in interest.\5\
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    \5\ 47 FR 56945, 56947 (Dec. 21, 1982).

    When the exemption was granted in 1984, the Department declined to 
reduce or delete the minimum asset and equity thresholds as requested 
by some commenters.\6\ Furthermore, when the Department raised the 
thresholds for investment advisers in 2005, it stated that the 
thresholds had ``not been revised since 1984 and may no longer provide 
significant protections for plans in the current financial 
marketplace.'' \7\
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    \6\ See 49 FR 9494, 9502 (Mar. 13, 1984).
    \7\ See Proposed QPAM Amendment, 68 FR 52419, 52423 (Sept. 3, 
2003).
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    Despite the importance of a QPAM being sufficiently large to 
withstand undue influence from parties in interest, in an abundance of 
caution, the Department is issuing this supplemental IRFA, which 
analyzes and seeks public comment on potential economic impacts of the 
Proposed QPAM Amendment on small entities.

Need for and Objectives of the Proposed QPAM Amendment

    As noted in the preamble of the Proposed QPAM 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.
    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 56914]]

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,\8\ 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.
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    \8\ The Proposed QPAM Amendment defines ``Criminal Conviction'' 
to mean 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, 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. See 87 FR 45204, 45231-32.
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    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.\9\ The winding-down period would 
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.
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    \9\ The Proposed QPAM Amendment defines ``Prohibited 
Misconduct'' to mean: (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. 
See 87 FR at 45232.
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    The Proposed QPAM 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 Proposed QPAM Amendment 
would 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 Proposed QPAM Amendment would add a 
recordkeeping requirement to ensure QPAMs would be able to demonstrate, 
and the Department would 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, their participants and beneficiaries, and 
individual retirement account (IRA) owners as required by section 
408(a) of the Employee Retirement Income Security Act of 1974 (ERISA) 
and section 4975(c)(2) of the Internal Revenue Code (Code).

Affected Small Entities

Qualified Professional Asset Managers (QPAMs)
    The following entities generally qualify or would qualify for the 
relief set out in the QPAM Exemption and Proposed QPAM Amendment:
    (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 
(proposed increase to $2,720,000);
    (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 (proposed increase 
to $2,720,000);
    (3) Insurance companies--subject to supervision under state law, 
with net worth in excess of $1,000,000 (proposed increase to 
$2,720,000); and
    (4) Investment advisers--registered under the Investment Advisers 
Act of 1940 with total client assets under management in excess of 
$85,000,000 (proposed increase to $135,870,00) and either (1) 
shareholders' or partners' equity in excess of $1,000,000 (proposed 
increase to $2,040,000) 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 (proposed increase to 
$2,040,000).
    The Proposed QPAM Amendment also provides that the Department would 
make subsequent annual inflation adjustments to these thresholds, 
rounded to the nearest $10,000, no later than January 31 of each year 
and announce the increased thresholds in a Federal Register notice.
Estimates of QPAMs
    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

[[Page 56915]]

North American Industry Classification System (NAICS) codes start with 
the 2-digit 52, which corresponds to Finance and Insurance 
Institutions.\10\ There are about 234,440 small firms that report a 
NAICS code of 52.\11\ Because the SBA's small entity definitions are 
generally based upon revenues and not asset management or equity 
thresholds, the Department does not know how many QPAMs fit the SBA's 
small entity definitions for the finance and insurance sector nor how 
many of those would be affected by the Proposed QPAM Amendment. 
However, the Department acknowledges that it is possible that some 
small entities that meet the SBA's definitions could be significantly 
impacted by the Proposed QPAM Amendment.
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    \10\ 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.
    \11\ Source: Small Business Administration calculations of the 
number of firms reporting a NAICS code of 52 from the 2017 
Statistics of U.S. Businesses.
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    The Department expects that small entities remaining eligible to 
rely upon the amended exemption as proposed should expect to be 
impacted the same as entities described in the Department's Regulatory 
Impact Analysis for the Proposed QPAM Amendment, which begins at 87 FR 
45214. However, due to the proposed increases to asset management and 
equity thresholds in the definition of ``QPAM'' in Section VI(a) of the 
amendment, if finalized, some entities may not satisfy this definition. 
In that case, they would no longer be able to rely upon the QPAM 
Exemption. Those entities may fall within the SBA's small entity 
definitions. Additionally, to the extent plans that are small entities 
are more likely to hire a QPAM that is a small entity, the Proposed 
QPAM Amendment could also impact them. The Department requests comments 
regarding how likely this is to occur.
Plans With Assets in an Investment Fund Managed by a QPAM
    The Proposed QPAM Amendment would 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 on average, a single QPAM 
services 32 client Plans.\12\ Therefore, the Department estimates that 
there are 19,712 client Plans (616 QPAMs * 32 client Plans per QPAM) in 
total. The Department also estimates there could be approximately 60.4 
million participants in plans serviced by potential QPAMs, with most 
being in large plans.\13\
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    \12\ 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.
    \13\ The Department estimated an average of 3,151 participants 
per plan among the 10,719 Plans served by the 339 observable 
potential QPAMs. Applying this average to all estimated 19,712 
client plans leads to 60.4 million participants in affected plans 
(19,712 client Plans * 3,151 participants per client Plan).
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    The Department estimates that three percent of client Plans are 
small.\14\ The Department does not view this as a substantial number of 
small plans. For purposes of this IRFA, the Department considers a 
small entity to be an employee benefit plan with fewer than 100 
participants.\15\ The basis of this definition is found in ERISA 
section 104(a)(2), which permits the Secretary of Labor to prescribe 
simplified annual reports for pension plans that cover fewer than 100 
participants. Under section 104(a)(3), the Secretary may also provide 
for exemptions or simplified annual reporting and disclosure for 
welfare benefit plans. Pursuant to the authority of section 104(a)(3), 
the Department has previously issued certain simplified reporting 
provisions and limited exemptions from reporting and disclosure 
requirements for small plans.\16\ While some large employers may have 
small plans, in general small employers maintain small plans. Thus, 
EBSA believes that assessing the impact of the Proposed QPAM Amendment 
on small plans is an appropriate substitute for evaluating the effect 
on small entities. The definition of small entity considered 
appropriate for this purpose differs, however, from a definition of 
small business that is based on size standards promulgated by the Small 
Business Administration (SBA) \17\ pursuant to the Small Business 
Act.\18\
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    \14\ Using the 2019 Form 5500 the Department estimates that only 
three percent of the 10,719 Plans served by the 339 observable 
potential QPAMs are small plans, having less than 100 participants.
    \15\ The Department consulted with the Small Business 
Administration's Office of Advocacy before making this 
determination, as required by 5 U.S.C. 603(c) and 13 CFR 121.903(c). 
Memorandum received from the U.S. Small Business Administration, 
Office of Advocacy on July 10, 2020.
    \16\ See 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-
46, and 2520.104b-10. Such plans include unfunded or insured welfare 
plans covering fewer than 100 participants and satisfying certain 
other requirements.
    \17\ 13 CFR 121.201.
    \18\ 15 U.S.C. 631 et seq.
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    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 and other amendments.

Impacts of the Exemption

    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 Proposed QPAM 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 Proposed QPAM 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 the Proposed 
QPAM 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.

[[Page 56916]]

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] would 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 would take 15 minutes, on average, for each 
QPAM to prepare and send this electronic notification. This cost is 
estimated to be approximately $14 per entity.\19\ The Department 
requests comments on this estimate.
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    \19\ The cost is based upon the expenditure of 0.25 hours for 
each QPAM: To calculate the cost, an hourly labor rate of $55.23 is 
used for a clerical worker. Therefore, the total cost amounts to: 
(0.25 hours * $55.23) = $14 (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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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 would 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 would 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 approximately $220 per entity.\20\
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    \20\ This cost is based upon the expenditure of one hour of a 
legal professional for each QPAM using an hourly labor rate of 
$140.96. As specified in the PRA section, the Department estimates 
each QPAM serves 32 client Plans on average. The Department also 
expects each QPAM would have to append one page to their existing 
management agreements and that it would 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 (32 client Plans * 
(2/60) hours * $55.23) = $58.90 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 
32 client per Plans * 1 page * ($0.05 + $0.58) = $ 20 (rounded). The 
estimated total cost of the provision is therefore $141 + $58.90 + 
$20 = $220 (rounded).
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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.\21\ 
Therefore, the Department believes that the clarifying reference that 
includes foreign convictions within the scope of Section I(g) would not 
change the costs of the exemption as compared to the current costs.
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    \21\ 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)

    The Department estimated that eight QPAMs each year would be 
subject to the one-year winding-down period after a Criminal 
Conviction. 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. The Department's proposed 
expansion of the ineligibility provision to include Prohibited 
Misconduct that leads to an Ineligibility Notice likely would increase 
the number of QPAMs that become ineligible due to Section I(g). 
Although the Department does not have the 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 would 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 possibly have to 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. The Department also lacks data to 
estimate the number of ineligible QPAMs that would be small entities, 
and requests comments regarding this number.

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 
would incur the cost of sending notices to their client Plans for the 
first time. The Department estimates that total incremental cost 
related to ineligibility after receiving an

[[Page 56917]]

Ineligibility Notice is $135 per entity (including mailing 
expenses).\22\
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    \22\ The burden is estimated assuming each QPAM services (on 
average) 32 plans. Notice preparation and distribution is estimated 
to require 0.5 hours of professional legal time and roughly 0.85 
hours of clerical time. The Department also assumes that 80 percent 
of all notices would be delivered by regular mail and would consist 
of two pages. Therefore, the total per entity cost associated with 
this requirement is (0.5 hours legal professional labor rate of 
$140.96) + (0.85 hours * clerical labor rate of $55.23) + [80% 
mailed * (2 pages * $0.05 per page + $0.58 postage)] = $135 
(rounded). Any discrepancies in the calculations are a result of 
rounding.
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    The Department believes the cost of sending this notice to the 
Department would be negligible because the QPAM would 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 possibly have to 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 $352.\23\ The Department estimates that preparing 
a response and preparing for the conference would also require two 
total outside legal professional hours for each QPAM resulting in a 
cost of $988.\24\ Thus, the total labor cost of preparing a response 
and preparing for a conference amounts to $1,340 per entity. The 
Department requests comment on this cost estimate.
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    \23\ 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.
    \24\ 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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Requesting an Individual Exemption--Section I(k)

    Proposed new Section I(k) provides that a QPAM that is ineligible 
or anticipates that it would 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 expansion of the 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. The 
Department estimates that each of these two new applicants would spend 
12 hours of in-house legal professional and 13 hours of in-house 
clerical time preparing the required documentation for the application 
that would be used by an outside legal professional. The Department 
estimates the per entity cost associated with document preparation for 
the application at approximately $2,410.\25\ Further, the Department 
estimates that, on average, 25 hours of outside legal professional time 
would be spent preparing the documentation for the application per QPAM 
application, with a labor rate for outside legal professionals 
averaging $494.00 per hour resulting in a total of $12,350 in outside 
legal costs per application.\26\ Thus, the total labor cost of each 
application preparation amounts to nearly $15,000.
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    \25\ 12 in-house legal professional hours at $140.96 per hour 
yields $1,692 (rounded), and the 13 in-house clerical hours are 
estimated to cost $718 (rounded). This totals to $2,410 (rounded). 
Any discrepancies in the calculations are a result of rounding.
    \26\ See supra, note 24.
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    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 would 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 would 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 would require 
10 minutes for each of the 32 plans the QPAM serves, totaling 
approximately 10.67 hours at a cost of approximately $295.\27\ In 
addition, material and mailing costs for these notices totals 
approximately $55 per QPAM.\28\ Therefore, the Department estimates 
that the total costs per QPAM associated with notice distribution would 
be approximately $350.
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    \27\ The total cost is calculated as: [(10/60) hours * 32 
interested parties * $55.23 hourly clerical rate] = $295 (rounded).
    \28\ The Department estimates that 80% (26) of these notices, 
would be delivered by regular mail. The Department further assumes 
that notices and the descriptions of facts and circumstances would 
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 (26 * (15 * $0.05) + $0.58) + (26 * (5 * $0.05) + $0.58) = $55 
(rounded).
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    The Department anticipates that few small entities would be 
impacted by the ineligibility provision based on its past applicants. 
Additionally, the Department expects that a small entity would be more 
likely to fall below the average of 32 client Plans. Therefore, the 
expected cost to small entity QPAMs would be lower than the estimated 
average cost.
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

[[Page 56918]]

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, the Department estimates 
the cost associated with the additional requirement totals $2,144 per 
application, or roughly $536 per affected QPAM.\29\
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    \29\ At an hourly rate of $165.45 for financial professional 
time, the cost associated with the cost quantification requirement 
is estimated as: (4 hours * $165.45 financial professional rate) = 
$662 (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 estimated as (3 
hours * $494 outside legal professional rate) = $1,482 (rounded). 
Therefore, the total cost associated with the additional requirement 
for QPAMs ineligible due to receiving a written Ineligibility Notice 
is ($662 + $1,482) = $2,144 (rounded).
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    The eight QPAMs that would become ineligible due to a Criminal 
Conviction would only incur an incremental cost to ensure they include 
in their exemption applications 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 client Plans on less advantageous terms. For 
this requirement, the Department assumes it would require four hours of 
a financial professional's time to prepare such a report. Therefore, 
each of two applications covering the eight ineligible QPAMs due to a 
Criminal Conviction is estimated to cost $662, which amounts to $165 
per affected QPAM.\30\
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    \30\ At an hourly rate of $165.45 for financial professional 
time, the cost per application is estimated as: (4 hours * $165.45 
financial professional rate) = $662 (rounded). Assuming each 
application covers 4 QPAMs yields 165 ($662/4 = $165).
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    The impact could be less as the Department anticipates that few 
small entities would be impacted by the ineligibility provision based 
on its past applicants. Additionally, the Department expects that a 
small entity would be more likely to fall below the average of 32 
client Plans.

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

    The Department anticipates that the modifications to Section I(c) 
would not change the costs of the exemption as compared to the 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.\31\ 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, including those that meet the SBA definitions of a small entity, 
who would potentially become unable to rely upon the exemption (along 
with the number of Plans and value of Plan assets) that would be 
impacted by the increase in asset management and equity thresholds.
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    \31\ 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.
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Change in Revenue Due to Adjustments to the Asset Management and Equity 
Thresholds

    If an asset manager is no longer eligible for relief under the QPAM 
Exemption (i.e., because it no longer satisfies the asset management 
and equity thresholds), its client plans may choose to transfer assets 
and the related revenue away from the 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 plan's perspective, it may lead to lost 
revenue for small QPAMs if plans move assets away from a small QPAM or 
lead to revenue gains if a small QPAM received some of these assets 
that are moved.\32\
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    \32\ Although a QPAM's client Plans could be expected to move 
some or all of its assets to another asset manager if the QPAM that 
manages their assets 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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    The Department does not have sufficient data to quantify the likely 
size of such asset and revenue changes or the number of impacted small 
QPAMs. These revenue changes could have a significant impact on small 
QPAMs experiencing revenue gains or losses from assets that are moved. 
The Department also does not have sufficient data to estimate whether 
the assets being transferred away from small QPAMs will be transferred 
to large entities or to other small entities that are able to meet the 
proposed increases to asset management and equity thresholds. However, 
this proposed requirement would promote the protective nature of the 
exemption by ensuring a QPAM is of a sufficient size to resist undue 
influence from parties in interest (i.e., maintain independence).
    The Department is 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 if the QPAM that manages their 
assets no longer meets the asset management and equity thresholds.

[[Page 56919]]

Recordkeeping--Section VI(t)

    The Proposed QPAM 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. The Department 
requests comments about whether this may happen more frequently and the 
possible costs.

Rule Familiarization Costs

    The Department estimates that it would take 60 minutes, on average, 
for each QPAM to become familiar with the Proposed QPAM Amendment. The 
familiarization cost is estimated to be approximately $494 per 
QPAM.\33\ The Department seeks comment on this estimate.
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    \33\ The cost is based upon the expenditure of 1.0 hours for 
each QPAM to become familiar with the Proposed QPAM Amendment. 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: (1 hour * $494) = $494. 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 would review the amendment and present updates to 
their clients, which means that the costs would be spread out over 
multiple clients.
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Summary of Quantified Costs

    The total, per entity, quantified annual costs associated with the 
Proposed QPAM Amendment would be $728 in the first year and $220 in 
subsequent years for plans in compliance with the exemption. Table 1 
summarizes the per entity costs for each requirement and the estimated 
annual costs associated with the amendment for QPAMs in compliance with 
the exemption, QPAMs with prohibited misconduct, and QPAMs with 
convictions.

                 Table 1--Incremental Costs Associated With Proposed QPAM Amendment, per Entity
----------------------------------------------------------------------------------------------------------------
                                                                                  Cost for QPAMs
                                                                                       with       Cost for QPAMS
                                                                  Cost for QPAMs    prohibited        with a
                           Requirement                             in compliance    misconduct      conviction
                                                                  with exemption   (estimated 8    (estimated 8
                                                                                     per year)       per year)
----------------------------------------------------------------------------------------------------------------
Reporting Reliance on the QPAM Exemption........................             $14             $14             $14
Written Management Agreement....................................             220             220             220
Notice to Plans.................................................  ..............             135  ..............
Written Warning and Opportunity to be Heard.....................  ..............           1,340  ..............
Requesting an Individual Exemption Costs:.......................  ..............  ..............  ..............
Preparation Labor Cost..........................................  ..............  ..............  ..............
Notices Distribution............................................  ..............             350  ..............
Additional Requirement-Criminal Conviction QPAMs................  ..............  ..............             165
Additional Requirement-Prohibited Misconduct QPAMs..............  ..............             536  ..............
Rule Familiarization Costs......................................             494             494             494
                                                                 -----------------------------------------------
  First Year Total Estimated Annual Cost........................             728           3,089             893
    Subsequent Years Total Estimated Annual Cost \1\............               0           2,361             165
----------------------------------------------------------------------------------------------------------------
Notes: Only quantifiable costs are displayed.
Additionally, two individual exemption applications associated with ineligible QPAMs (caused by either
  prohibited misconduct or a conviction) are estimated each year at an estimated cost of approximately $15,000
  per entity.
\1\ Excludes rule familiarization and the initial reporting reliance costs.

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 
alternatives, as discussed below, that were considered in connection 
with the statutorily mandated exemption requirements.

Phase-In and Incremental Increases to Asset Management and Equity 
Thresholds Over Longer Period

    The Department considered a longer phase-in period and incremental 
increases for the proposed updates to the asset management and equity 
thresholds. This alternative could reduce the likelihood that a small 
entity QPAM would no longer be able to satisfy the definition of QPAM 
and lose the corresponding ability to rely upon the exemption.\34\
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    \34\ For instance, an incremental increase over a longer period 
might allow a small entity to increase the size of its business in 
tandem with the increases to the asset management and equity 
thresholds.
---------------------------------------------------------------------------

    The Department determined that a significant lag in updating the 
thresholds to current CPI-adjusted values had the potential to deprive 
Plans of the important protective nature of these aspects of the QPAM 
definition. The Department requests comments on alternative effective 
dates for the increases and/or appropriately protective incremental 
increases and time periods for such increases.

[[Page 56920]]

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. Doing so could have avoided any 
cost impact or revenue loss to small entities associated with losing 
eligibility to rely on the QPAM exemption due to the increased 
thresholds.
    The Department determined that this approach would be inconsistent 
with one of the core concepts upon which the QPAM Exemption was based 
(i.e., independence of the QPAM). As the Department noted in the 
preamble of the Proposed QPAM Amendment, the QPAM Exemption was 
originally granted, in part, on the premise that large financial 
institutions would be able to withstand undue influence from parties in 
interest.\35\ 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.\36\
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    \35\ See the Proposed QPAM Amendment, 87 FR 45213 (emphasis 
added).
    \36\ Id. at 45215.
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    In the absence of an appropriate alternative ensuring that a QPAM 
would remain an independent decision-maker, free from influence of 
other insiders to the Plan and Plan sponsor, the Department is unable 
to justify the removal of the thresholds. The Department requests 
comments on alternatives that could minimize the potential impact of 
the Proposed QPAM Amendment on small entities, especially with respect 
to the increased asset management and equity thresholds.

Duplicate, Overlapping, or Relevant Federal Rules

    The Department has attempted to avoid duplication of requirements. 
The required policies and procedures and exemption audit are unique to 
the circumstances of the particular transactions covered by the 
exemption and do not replicate any other requirements by state or 
Federal regulations.\37\ The exemption permits respondents to satisfy 
the requirements for written guidelines between the QPAM and a property 
manager with documents that are already in existence due to ordinary 
and customary business practices, provided such documents contain the 
required disclosures.\38\
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    \37\ See Section V of the current QPAM Exemption. The 
requirements of Section V were not discussed in this IRFA because 
the Proposed QPAM Amendment would not change the existing 
requirements of Section V.
    \38\ See Section I(c) of the current QPAM Exemption and Proposed 
QPAM Amendment. The amendment would not modify this aspect of 
Section I(c).

    Signed at Washington, DC, this 13th day of September, 2022.
Ali Khawar,
Acting Assistant Secretary, Employee Benefits Security Administration, 
U.S. Department of Labor.
[FR Doc. 2022-20099 Filed 9-14-22; 4:15 pm]
BILLING CODE 4510-29-P