What it means
US retirement plans covered by the Employee Retirement Income Security Act, known as ERISA, face strict rules. One of the main rules prohibits transactions between a plan and certain related parties, such as the employer, service providers and their affiliates.
The aim is to stop plan money being used to benefit insiders. For a large asset manager, those rules create practical problems.
The manager may run many funds, and the funds may deal with banks or companies that count as related parties to some of its pension clients. Without relief, the manager might be unable to do routine trades.
The Qualified Professional Asset Manager exemption provides that relief. A manager that meets the conditions can enter into many transactions on behalf of plans, even with parties that have a relationship with the plan, as long as the manager is independent and follows safeguards.
The conditions include being a regulated institution such as a bank, insurer or registered investment adviser, and meeting minimum thresholds for assets under management and equity. There are also conduct requirements.
The manager must have discretion over the plan's assets, and the transaction must not be arranged by the related party in a way that favours it. The manager and its affiliates must also avoid certain serious criminal convictions, because a disqualifying event can strip the manager of the exemption.
For businesses that hire asset managers, the status is therefore a quality marker. Plan sponsors often require their managers to confirm QPAM status in the contract and to give notice if it is at risk.
Loss of status could force a manager to unwind positions or stop trading with some counterparties. A nuance is that the exemption is narrow and technical, and the details have been amended over time.
Legal advisers should be consulted when a plan relies on it. Managers and plan sponsors usually agree contractual protections to cover what happens if status is lost.
In practice
Real-world examples.
Example
A large asset manager runs a portfolio for a corporate pension plan. It wants to buy bonds from a bank that also provides services to the plan sponsor. As a QPAM, it can do the trade within the conditions of the exemption, provided the price is fair and the manager makes the decision independently of the bank and the sponsor.
Example
A pension plan trustee reviews the contract with a new manager. The trustee asks the manager to confirm in writing that it is a QPAM and will notify the plan if its status is threatened. The clause is added to the agreement, together with a requirement that the manager reimburse the plan for costs caused by any loss of status.
Example
A fund manager's affiliate faces a serious legal issue that could disqualify the manager from relying on the exemption. The compliance team informs its pension clients, who ask what steps will be taken. Some clients consider moving their assets, while others ask for a written plan showing how trades would be handled if the status were lost.
Case study
Seen in the real world.
Greystone Advisors is an illustrative, fictional investment manager that runs $20,000,000,000 for corporate pension plans. Many of its trades involve large banks, some of which are also lenders to its clients' employers. The firm relied on its QPAM status to carry out these trades without breaching the rules.
When a legal action was brought against a Greystone affiliate, the general counsel warned that an adverse outcome could threaten the status. The firm sought clarity from regulators and prepared contingency plans, including a list of trades that would have to be restructured.
The illustrative outcome was that the matter was resolved without loss of status, but the exercise showed clients how dependent the manager's operations were on it. Several pension plan sponsors added stronger notification clauses to their contracts, and Greystone's board asked for a regular report on the health of the status. The firm's leaders concluded that compliance was not just a legal matter but a condition of keeping its clients.
Watch out
Common mistakes.
- Assuming every investment manager has QPAM status, when only those meeting specific conditions can rely on it.
- Ignoring contract protections that apply if the manager loses status.
- Treating the exemption as permission to ignore conflicts of interest, when it comes with conduct requirements.
Questions
People also ask.
What is a QPAM?
It is an investment manager that meets the conditions of a US labour department exemption allowing certain transactions for pension plans with related parties.
Why does QPAM status matter to a plan sponsor?
It lets the manager trade more freely for the plan, and losing it could force changes to the portfolio.
Can a manager lose QPAM status?
Yes, for example if the manager or certain affiliates are convicted of specified serious crimes or fail to meet the conditions.
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