Originally published August 2005
Managers that rely on the exemption for qualified professional asset managers, or the "QPAM Exemption," should be aware of certain amendments published by the Department of Labor on August 23, 2005 changing the conditions and scope of the exemption.
Management of In-House Plans
The amendments add a new requirement that the QPAM be independent of the sponsoring employer of the plan. As a result, managers may no longer rely on the QPAM Exemption for the management of in-house plan assets. In response to significant industry concerns expressed after this amendment was proposed, the Department of Labor deferred the effective date of this amendment until a separate specific exemption for the management of in-house plans could be finalized. The conditions of this specific exemption were published by the Department in proposed form on the same date the amendments were published.
The specific in-house QPAM exemption proposed by the Department includes, in addition to the general conditions of the QPAM exemption, conditions that are necessary to provide additional protection in light of the lack of independence of the QPAM. The proposed in-house QPAM exemption requires the QPAM to (i) adopt written policies and procedures that are designed to assure compliance with the conditions of the exemption; and (ii) engage an independent auditor to conduct an annual audit and issue a report regarding the QPAM’s level of compliance with its policies and procedures.
There may be some overlap between the in-house QPAM exemption and the class exemption that has been granted for in-house asset managers, or "INHAM exemption." Certain QPAMs may also be able to rely on the INHAM exemption and visa versa. The principal differences in the scope of the two exemptions to the management of in-house plan assets are:
- The INHAM exemption is only available for registered investment advisers that are wholly-owned subsidiaries of the plan sponsor or the parent of the plan sponsor. It is not available for QPAMs that are insurance companies, banks or trust companies, or for in-house plans that are sponsored by the QPAM itself or any affiliate other than those described above.
- The QPAM exemption is not available unless the assets of the in-house plan managed by the QPAM do not exceed 20% of the total client assets managed by the QPAM. As a result, the QPAM exemption is available only for plan sponsors that are in the asset management business.
The qualifications of a QPAM that is a registered investment adviser have been changed in two ways.
First, the amendments increase the minimum assets under management requirement from $50 million to $85 million, and increase the minimum required shareholders’ or partners’ equity from $750,000 to $1 million. These increases go into effect as of the last day of the first fiscal year of the QPAM that starts after August 23, 2005.
Second, the amendments clarify that the determination of whether the minimum equity requirement has been satisfied is based on the QPAM’s most recent balance sheet prepared within the two years immediately preceding a transaction in accordance with GAAP. It was previously thought that the equity requirement had to be satisfied as of the last day of the QPAM’s most recent fiscal year, so that a new manager could not qualify as a QPAM until after its first fiscal year. The minimum assets under management requirement must still be satisfied as of the last day of the QPAM’s most recent fiscal year.
Exclusions from QPAM Exemption
The amendments make it easier to determine which parties in interest are excluded from exemptive relief and narrow the scope of persons excluded in a number of respects.
- A person would not be disqualified from relief under the QPAM exemption unless it has the authority to appoint or terminate the QPAM with respect to the assets actually involved in the transaction. In addition, a person’s ability to cause a plan to invest in a commingled fund managed by the QPAM would not disqualify that person from the exemption if the plan’s interest in the fund is less than 10% of the fund. The proposal would also narrow the definition of "affiliate" for the purpose of this condition.
- If the the one-year look-back which previously made the exemption unavailable to a transaction with a person if that person or its affiliate had exercised the power to appoint the QPAM within the one-year period preceding the transaction has been deleted.
- The scope of relationship between a party-in-interest and the QPAM that would cause the QPAM exemption not to apply to transactions with such party-in-interest would be narrowed by:
- increasing the percentage interest that the QPAM may have in the party-in-interest from 5% to 10%;
- increasing the percentage interest that persons controlling or controlled by the QPAM may have in the party-in-interest from 5% to 20% (or 10% if such persons actually exercise control over the party-ininterest);
- increasing the interest that the party-in-interest may have in the QPAM from 5% to 10%; and
- increasing the interest that persons controlling or controlled by the party-in-interest may have in the QPAM from 5% to 20% (or 10% if such persons actually exercise control over the QPAM).
The amendments further ease administration of this condition by clarifying that shares held or controlled in a fiduciary capacity need not be considered in determining affiliation, and by limiting the date as of which affiliations must be determined to the last day of the QPAM’s most recent fiscal quarter.
Notice Pursuant to IRS Circular 230
The discussion and conclusions of any federal tax matters in this newsletter are limited to the specific federal tax issues addressed herein. Additional federal tax issues may exist that could affect the federal tax treatment of any transaction that is the subject of this newsletter. This newsletter does not consider or provide any conclusion with respect to any such additional issues. With respect to any federal tax issues that are not addressed by this newsletter, this newsletter was not written, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on any taxpayer under U.S. tax law.
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