Wall Street Asset Managers Hope Rule Delay Means Change of Heart

A yearlong delay in the US Labor Department’s plan to shake up Wall Street asset managers that advise workplace retirement plans has left the industry hoping for a substantially different policy in the coming months.

Senior Employee Benefits Security Administration officials have said they have “no plan” to withdraw the proposal that would set tougher restrictions on how banks can earn the agency’s revered qualified professional asset manager status.

The proposed regulation, first issued in July 2022 (87 Fed. Reg. 45204), has undergone two extended comment periods (87 Fed. Reg. 54715, 88 Fed. Reg. 17466) and been the subject of an in-depth public hearing.

The proposed rule would add new types of misconduct to the list of disqualifying QPAM behavior, and boost the minimum assets thresholds that companies must comply with.

Yet the DOL’s chief employee benefits regulator still hasn’t taken the critical next step of finalizing the proposed rule, introducing a note of cautious optimism for an industry wholly opposed to the new restrictions.

“We hope they heard us,” said Kristina Zanotti, a partner at K&L Gates LLP in Washington. “There are lots of traps for the unwary in this proposal, so maybe this delay means there could be significant changes on the way.”

QPAMs are widely considered the gold standard for major financial institutions that oversee employer-sponsored investments. Lobbyists in that space are painting a picture of a grim future for plans that have fewer and more expensive investment management options under the agency’s proposed rule.

But government officials say they’re trying to root out bad actors in the QPAM space and stop an alarming trend of big banks falling victim to financial crimes overseas.

Individual Exemptions

It’s been more than three months since EBSA’s latest comment extension closed. In that time, regulators have granted two additional individual exemptions under its present standards of conduct for global investment banks UBS Group AG and Pacific Investment Management Co. LLC.

EBSA has afforded at least six individual exemptions to companies convicted of financial crimes since the agency first proposed the amended QPAM regulation. That fact caught the attention of Sen. Elizabeth Warren (D-Mass.), who penned a letter to the agency in April accusing it of “granting favors to the financial industry” by repeatedly delaying the rule.

Individual exemptions allow businesses that have already run afoul of the agency’s existing, laxer standards to continue operating as a QPAM, usually despite a felony conviction in the US or overseas.

Asked about the agency’s intent for the new rule late last month, EBSA Assistant Secretary Lisa M. Gomez said her agency is taking into account the more than 200 public comments and testimony.

“We are now in the process of considering that stakeholder input that was received and deciding next steps,” Gomez said. “But there’s no plan for withdrawal of the proposed amendments at this point.”

In a more recent request for comment, Gomez disagreed with the assertion that there has been a delay finalizing the amendment. Officials are hard at work on a “robust and transparent rulemaking process” and are “actively crafting” the rule, she said in a statement to Bloomberg Law.

A department spokesperson said the repeatedly extended comment periods have been in the interest of receiving input from all interested stakeholders.

READ MORE: The Price of Holding Retirement Assets: QPAMs Explained

EBSA faces a labyrinth of potential political pitfalls in moving forward with its new rule. QPAMs aren’t ripe with abuse, despite what the agency’s public posturing might suggest, said Joshua Waldbeser, a Faegre Drinker Biddle & Reath LLP partner in Chicago.

QPAMs generally allow investment managers to oversee assets on behalf of a retirement plan and conduct trading and selling with “parties in interest,” a term defined so broadly under the Employee Retirement Income Security Act (Pub. L. No. 93-406) that it could encompass a range of people and legal entities only vaguely associated with the plan, its participants, or leaders.

That’s where the QPAM exemption becomes so important. Hire a QPAM, and a retirement plan can sit back without worrying about falling under the Labor Department’s investigative conflict-of-interest scrutiny.

‘Many, Many Steps Forward’

The regulated community fully expected the Biden administration to clarify its position that foreign felony crimes substantially similar to those in the US Criminal Code would continue to disqualify a QPAM, especially after the Trump administration had widely circulated a pro-business memo suggesting the opposite.

Instead, what stakeholders in the investment management arena got was a proposed rule that “went many, many steps forward,” Waldbeser said.

The proposed QPAM rule would not only disqualify companies with foreign and domestic felonies, but also those with prosecutorial agreements or even companies that are simply being investigated by the agency or like entities. It would set higher net-worth and assets-under-management standards, force out QPAM partner entities, and require all companies to amend their contracts with their retirement-plan customers.

“A lot of these proposed revisions would make it harder to use, less reliable, and less broad,” Zanotti said of the rule. “It defeats the purpose of a QPAM.”

Investment managers eager to flee the QPAM space to provide investment advice via other means are meeting roadblocks.

Another common retirement plan exemption under Section 408(b)(17) of ERISA allows the sale, exchange of property, or extension of credit between a plan and a service provider to the plan. But the exemption relies on the department’s definition of “adequate consideration” in a sale, a long-delayed policy with no clear regulatory relief in sight.

Waldbeser said he’s advising his money manager clients to remain calm. The department’s extended delays are undoubtedly the result of political pressure, which could foretell an outcome in their favor, he said.

“This is a response to the industry pushback and concerns that it would be met with a lot of resistance,” he said. “The delay is an issue of politics. The Biden administration would like to get something done and on the books before the election, but they have a fair amount of flexibility with timing as long as they’re following the rules on public comment.”