After first saying that the proposed changes to the Qualified Professional Asset Manager (QPAM) Exemption would not have a significant impact on a substantial number of small firms, the Department of Labor (DOL) has now changed its position.
After consulting with the Small Business Administration, the DOL notes that it has decided to publish its Initial Regulatory Flexibility Analysis (IRFA) along with a supplemental analysis explaining its possible impact on small entities.
“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,” the DOL says.
The DOL further notes that, despite the importance of a QPAM being sufficiently large to withstand undue influence from parties in interest, out of an abundance of caution it is issuing the supplemental IRFA. Embedded within the 25-page document are numerous questions seeking public comment on potential economic impacts of the proposed QPAM amendment on small entities.
When the proposal was issued in July, the DOL explained that, since the exemption was created in 1984, substantial changes have occurred in the financial services industry, including industry consolidation and the increasing global reach of financial services institutions in their affiliations and investment strategies, including those for plan assets.
As such, the proposed amendment—in seeking to provide protections for plans and individual retirement account owners—would expand the types of misconduct that disqualify plan asset managers from using the exemption and seeks to clarify that foreign convictions would disqualify firms from utilizing the QPAM.
Estimates of QPAMs
The DOL estimates that there are 616 potential QPAMs. The department notes that it 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. However, due to the proposed increases to asset management and equity thresholds in the definition of “QPAM,” if finalized, some entities may not satisfy this definition and would no longer be able to rely upon the exemption.
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 DOL notes. Consequently, it is requesting comments regarding how likely this is to occur.
To that end, the department is seeking comments and data on the number of QPAMs—including those that meet the SBA definitions of a small entity—that could become unable to rely upon the exemption (along with the number of plans and value of plan assets) and would be impacted by the increase in asset management and equity thresholds.
While the DOL notes that it does not collect data on plans that use QPAMs to manage their assets, it nevertheless estimates that, on average, a single QPAM services 32 client plans. The department further estimates that there are 19,712 client plans (616 QPAMs x 32 client plans per QPAM) in total and approximately 60.4 million participants in plans serviced by potential QPAMs, with most being in large plans. The department estimates that 3% of client plans are small and notes that it does not view this as a substantial number of small plans. For purposes of this analysis, the DOL considers a small entity to be an employee benefit plan with fewer than 100 participants.
Thus, EBSA believes that assessing the impact of the proposal on small plans is an “appropriate substitute” for evaluating the effect on small entities and 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.
Winding-down Period
Meanwhile, the DOL does not believe there would be any “added cost” regarding the proposed winding-down period for QPAMs that become ineligible due to a criminal conviction relative to the current baseline. However, it notes that 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 the proposed provisions. As a result, QPAMs could have to bear the costs associated with indemnifying their client plans for losses that would occur if they moved to a new asset manager.
Comments Requested
The DOL is still requesting comments by Oct. 11, 2022—the same deadline as the extended comment period for the proposed QPAM amendment.
The DOL published the proposed amendment to PTE 84-14 (the QPAM Exemption) on July 27, 2022, with a 60-day comment period and later extended the comment period to Oct. 11. The DOL has also announced that it is scheduling a public hearing regarding the proposed amendment on Nov. 17, 2022, and, if necessary, Nov. 18. In connection with the hearing, the department will also provide a supplementary comment period that will end 14 days after the hearing transcript is posted on EBSA’s website.
Noting that it lacks sufficient data to estimate costs associated with the winding-down period, the department is also requesting comments regarding these costs, as well as 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.
Additional requests for comments include:
- 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; and
- whether there are 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.
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