September 26, 2021

Volume XI, Number 269

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What Happens Abroad, Apparently Does Not Stay Abroad – DOL Revokes Trump Administration Guidance That Provided Relief to QPAMs for Convictions Under Foreign Law

On November 3, 2020, the U.S. Department of Labor’s Office of the Solicitor of Labor (the “DOL”) issued an opinion letter (the “2020 Letter”) to the Securities Industry and Financial Markets Association (“SIFMA”) stating that it would not view a conviction under foreign law as a disqualifying event under Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”).  The 2020 Letter represented a reversal of the DOL’s then longstanding position that a conviction under foreign law would disqualify a manager from being able to rely on the QPAM Exemption for a period of ten years.

However, on March 23, 2021, the DOL issued a follow-up opinion letter (the “2021 Letter”) to SIFMA withdrawing the Trump Administration DOL’s 2020 Letter because it was “issued through a flawed process and was based on a legal analysis that was inadequate to support abandoning the Department’s long standing position.”

The QPAM Exemption provides broad exemptive relief from the prohibited transaction restrictions of Section 406(a) of ERISA for transactions between a “party in interest” with respect to an ERISA plan and an investment fund or separate account holding “plan assets” of such ERISA plan (a “Plan Asset Account”), where the Plan Asset Account is managed by a “qualified professional asset manager” (a “QPAM”) and the other conditions of the QPAM Exemption are met.

At issue in the DOL’s guidance is the condition set forth in Section I(g) of the QPAM Exemption that prohibits a QPAM from relying on the exemption for a period of ten years if the QPAM (or a five percent or more owner or affiliate of the QPAM) is convicted of certain enumerated crimes that involve abuse or misuse of a position of trust or felonies described in Section 411 of ERISA[1], and whether or not a conviction under foreign law would prevent the QPAM from being able to satisfy such condition.

In the 2020 Letter, the DOL cited the plain language of Section 411 of ERISA, applicable legislative history, and persuasive Supreme Court case law, in stating its view that a conviction under foreign law would not prohibit a QPAM from relying on the QPAM Exemption if the other conditions of the exemption were satisfied.  In particular, the DOL noted that Section 411 of ERISA refers to Federal, State and local offenses, courts and prosecuting officials, but that nothing therein indicates that its listed crimes include foreign equivalents.  The DOL further noted that neither the language of the QPAM Exemption nor any associated guidance indicates that Section I(g) was intended to include foreign equivalents; in fact, the plain language of the QPAM Exemption expressly references concepts (e.g., “felonies,” “judgments” and “appeals”) that are generally only applicable to U.S. court systems.  The DOL was also not deterred by the fact that it previously took the position that convictions under foreign law would be a disqualifying event and, in light thereof, had granted administrative exemptions to Plan Asset Account managers allowing the QPAM Exemption to be available notwithstanding a conviction under foreign law.

However, in withdrawing the 2020 Letter, the DOL stated that the legal conclusions therein “were based on an inadequate analysis of the relevant issues and legal authorities as they pertain to prohibited transaction exemptions.”  In particular, the DOL stated that the 2020 Letter focused too heavily on an analysis of the reach of Section 411 of ERISA without acknowledging the differences between such provision and Section I(g) of the QPAM Exemption and their contexts.  Furthermore, the 2020 Letter “glossed over issues of substantial concern” and improperly bypassed and disregarded the Employee Benefits Security Administration’s (“EBSA”) role and expertise in administering the DOL’s prohibited transaction exemption program.  The 2020 Letter was issued directly to SIFMA and was not posted to the DOL’s website for over two months, which apparently bypassed a number of the DOL’s procedural requirements for issuing binding guidance, including EBSA’s advisory opinion process.

*           *          *

The DOL noted that it would engage in a thorough analysis of these rules while it considers additional guidance.  In the interim, Plan Asset Account managers should assume that the DOL will treat convictions under foreign law as disqualifying events under the QPAM Exemption, and be prepared to have to rely on another exemption to the extent necessary.  The 2020 Letter and the 2021 Letter do not have any impact on QPAM-related individual exemptions previously granted by the DOL.

For ERISA plan fiduciaries, it is important to recognize that ERISA’s fiduciary duties of prudence and loyalty apply in the context of hiring, monitoring and retaining/firing a Plan Asset Account manager regardless of whether the Plan Asset Account manager may utilize the QPAM Exemption.  Accordingly, in making such decisions, ERISA plan fiduciaries should continue to diligence and take into account as appropriate whether a Plan Asset Account manager has a foreign law conviction and the possibility that Congress or the DOL could in the future revise the QPAM Exemption in a manner that would allow a Plan Asset Account manager with a foreign law conviction to utilize the QPAM Exemption.

[1] Section 411 of ERISA includes references to the following crimes: robbery, bribery, extortion, embezzlement, fraud, grand larceny, burglary, arson, murder, rape, kidnapping, perjury, and assault with intent to kill.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 89
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About this Author

Ira G. Bogner, Tax, Employee Benefits, ERISA, Attorney, Proskauer, Law firm
Partner

Ira G. Bogner is Chair of the firm’s Tax Department and a member of the Employee Benefits, Executive Compensation & ERISA Litigation Group.

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including the investment of plan assets, the implementation of employee benefit plans, employee benefit issues in mergers and acquisitions, the awarding of equity-based compensation, and the negotiation and drafting of employment agreements and severance arrangements.

212-969-3947
Robert M Projansky, Employee Attorney, Proskauer Rose Law FIrm
Partner

Robert M. Projansky is a Partner in the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center. His practice covers the full spectrum of employee benefit issues, including advising clients regarding all aspects of pension and welfare plan administration, plan investment issues, health care reform, mergers and terminations, government audits, participant communications, fiduciary responsibility matters and prohibited transactions issues.

212-969-3367
Seth Safra, Proskauer Law Firm, Employee Benefits, Executive Compensation and ERISA Litigation Attorney
Partner

Seth Safra is a partner in the Employee Benefits & Executive Compensation Group, where he counsels clients on all aspects of employee benefits and executive compensation.

Seth advises clients on ERISA and other related laws with respect to the design and administration of qualified and non-qualitied retirement plans, including defined contribution (including 401(k) and ESOPs) and cash balance plans. In addition, Seth counsels clients on their health & welfare plans, including advising on issues related to health care reform.

...
202-416-5840
Steven Weinstein, Employee Benefits Attorney, Proskauer Rose Law Firm
Partner

Steven Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare plans.

Steven advises clients in all aspects of pension plan tax qualification and plan administration, including drafting of plan documents and employee communications; providing advice relating to corporate acquisitions and mergers; and negotiating investment management agreements, trust...

212-969-3362
Adam W. Scoll, Tax, Private Investment Funds Attorney, Proskauer, law firm
Senior Counsel

Adam W. Scoll is a senior Associate in the Tax Department and a member of the Private Investment Funds Group. He has been practicing in the field of employee benefits and executive compensation law since 2001.

Adam has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including the investment of plan assets, the implementation of employee benefit plans, employee benefit issues in mergers and acquisitions, the awarding of equity-based compensation, and the negotiation and drafting of employment agreements and...

617-526-9486
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