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

Major international asset managers such as Barclays, Citigroupand JPMorgan Chase have also grown. One of the consequences of this interconnected web of financial institutions holding pension assets is the risk of conflicts of interest, which are governed by the Employees Retirement Income Security Act 1974. The Pensions Act private sector prohibits dealings with any “interested party,” including plan participants, sponsors, trustees, and anyone who administers the plan. Institutions often use a qualified professional asset manager exemption to help them do business.

1. What is a QPAM?

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

Registered investment advisers who manage at least $85 million in client assets or companies that hold at least $1 million in equity or shareholders can generally be classified as QPAM. Sponsors may appoint QPAMs to manage pension assets to avoid breaches of interest and avoid direct fiduciary liability.

The idea behind the block exemption is that as long as the plans are protected by an independent and respectable asset manager who negotiates away from interested parties, the pension plans are more or less open to the whole market. .

2. Why are QPAMs important?

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

QPAM status has become so important, in fact, that it has replaced the conventional understanding of an exemption to become a kind of badge of honor, industry leaders say. Nearly all of the major fund managers operating in the ERISA-managed space qualify as QPAMs and must retain this class status to maintain these industry contracts.

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

3. What is an individual exemption?

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

This Section I(g) tort provision applies not only to the Asset Manager itself, but also to “Affiliates”, including employees or other entities in which QPAM has a 5%. In a global financial market, this can involve many individuals and corporations.

If a large US investment bank has a small South Korean subsidiary, for example, a felony conviction there could jeopardize the firm’s entire US pension assets.

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

4. How are individual exemptions granted?

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

The burden of proof rests with the applicant, who must provide detailed descriptions of the events in question, the contracts and agreements in question, and information on the assets covered by ERISA. Assessing this evidence can take time – sometimes over a year – so QPAMs tend to start the process well in advance of an expected conviction to avoid any gaps in the waiver.

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

To learn more:

—According to Bloomberg’s law:

Goldman Sachs gets proposed waiver to manage pension assets

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

Labor Department grants relief to five banks handling pension money

The clock is ticking for five banks handling retirement money

Banks have reason to rejoice despite naughty affiliates

—From Bloomberg News:

BNP Paribas says it will lose access to some US retirement assets

UBS gets temporary warning and nod to handle US pension money