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Labor Agency Cagey on Retirement Exemption Change Under Review

June 28, 2022, 6:44 PM

The White House is reviewing a US Labor Department rule that would amend an exemption some of the world’s biggest financial firms rely on to manage American retirement assets.

Major investment banks such as JPMorgan Chase & Co., Goldman Sachs Group Inc., and UBS Group AG are free to manage US pensions and 401(k) plans largely because of their regulated status as qualified professional asset managers, or QPAMs.

That legal designation is a badge of honor in the financial services industry that protects companies sponsoring retirement benefits from conflicted transactions or investments. Now, the Labor Department seems poised to propose changing QPAM rules for only the third time since they were established nearly four decades ago, a move that has the potential to disrupt a $12 trillion industry.

“It’s one of the most important and widely used exemptions,” said Michael Kreps, principal and co-chair of the retirement services practice at Groom Law Group Chartered in Washington. “QPAMs have basically stayed the same over the years; it’s been the same kind of thing, even when the department has changed its views in other areas.”

Foreign Convictions

It’s unclear what the proposed changes would do, but the status of QPAM companies that have been convicted of foreign crimes has remained a top issue for major financial institutions lobbying the Labor Department for individual exemptions to US benefits laws.

The amendment (RIN No. 1210-ZA07) under review by the White House Office of Information and Regulatory Affairs has never appeared on a Labor Department regulatory agenda, nor have senior department officials commented publicly about it. A department spokesperson didn’t provide details about what the amendment proposes.

QPAMs immediately lose their exempted status if the company, its workers, or any of its affiliates are or have been convicted of felony-level financial crime within a 10-year time frame. The exemption doesn’t specify whether it applies to foreign or domestic crimes, but the Labor Department has historically treated any felony as disqualifying.

Before 2005, all of the QPAM exemptions tied to crimes that the Labor Department granted were for domestic felony convictions. Since then, a handful of big banks have sought exemptions for illegal misconduct that took place overseas. Roughly 40% of these criminal waivers—known as I(g) exemptions—the DOL issued were for foreign convictions, according to a Bloomberg Law analysis of QPAM exemptions published in the Federal Register.

Some of the biggest financial firms have hundreds or thousands of affiliates around the world. If any one of them gets caught up in a felony-level crime, the entire company pays for it.

That’s a “nightmare” for a financial institution handling retirement assets, said Kreps. “If you’re managing all these assets and all of a sudden, you’ve lost your relief, who knows if you’re engaging in prohibited transactions?”

Individual Relief

The Labor Department can grant companies individual exemptions after a felony conviction, but that comes with a suite of additional disclosure and auditing requirements. Companies want the DOL to change its rules so that they won’t have to apply for individual relief if they’ve got a foreign conviction on their record.

A French court in 2019 found Swiss-based multinational firm UBS guilty of illegally soliciting clients and laundering the proceeds of tax fraud. The company asked the department for an advisory opinion on whether foreign convictions were disqualifying.

Former President Donald Trump’s administration temporarily changed department policy to exclude foreign convictions against QPAMs, but the Biden administration has since reverted back, pending new guidance.

It’s feasible that the department could seek to take a lesser approach, by requiring companies to document how a foreign conviction didn’t affect their retirement business, said Kreps. Doing so could cut down on the enormous workload regulators face granting individual exemptions.

The rule may address other QPAM qualifying factors, however. The Labor Department already has proffered a proposed rule that would amend the qualifications it uses to determine the autonomy of plan fiduciaries and appraisers plans hire for other individual exemptions. Under that proposed rule (RIN No. 1210-ACO5), DOL would restrict the annual revenue a company can collect from any given plan to just 2%.

QPAMs are also considered independent plan service providers, but the department presently sets a single provider to a 20% revenue cap. Reducing it could “cut smaller, independent, and highly skilled firms out of the market to a significant degree,” Kreps said.

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editor responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com