DOL Opines That Foreign Criminal Convictions Are Not Fatal Under QPAM Exemption

On November 3, 2020, the Department of Labor’s Office of the Solicitor of Labor (the “DOL”) issued to the Securities Industry and Financial Markets Association (“SIFMA”) an opinion letter (the “Solicitor’s Letter”) in response to SIFMA’s December 18, 2018 request for guidance regarding the impact of foreign criminal convictions on asset managers’ reliance on Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”).

Citing the underlying text of the QPAM Exemption, ERISA Section 411, and relevant Supreme Court decisions regarding statutory interpretation, the DOL affirmed that, in its view, a conviction under foreign law is not a disqualifying event under the QPAM Exemption.

The QPAM Exemption

The QPAM Exemption is a heavily relied upon source of relief from party-in-interest prohibited transaction restrictions under ERISA and the Internal Revenue Code for many financial institutions that manage assets of ERISA plans and IRAs (“QPAMs”). A “party-in-interest” generally means an individual or entity that is a fiduciary to a plan, an employer sponsoring or participating in a plan, or a service provider to a plan. Among other conditions, Section I(g) of the QPAM Exemption requires that, for a period of ten years, none of the QPAM, a five percent or more owner of the QPAM, or an affiliate of the QPAM are convicted of felonies involving an abuse or misuse of a position of trust, felonies in which fraud is an element, and crimes described in ERISA Section 411. The failure to satisfy this requirement means the loss of the QPAM Exemption for the manager in question, with often profound consequences for its business model.

The Solicitor’s Letter

SIFMA asked the DOL to opine that foreign criminal convictions are not disabling conduct for purposes of Section I(g) of the QPAM Exemption. In the Solicitor’s Letter, the DOL responded accordingly. The DOL based its determination on the underlying text of the QPAM Exemption, ERISA Section 411, and various Supreme Court decisions that address statutory interpretation.

From a regulatory perspective, the DOL focused on Section I(g)’s incorporation by reference of ERISA Section 411, which, for the most part, identifies the same crimes included in Section I(g) of the QPAM Exemption. The DOL noted that ERISA Section 411’s application extends only to domestic criminal convictions, as its text only references offenses, courts, and prosecuting officials at U.S. federal, state and local levels. Further, the DOL noted that ERISA Section 411 lacks the type of language that Congress has used elsewhere in ERISA to denote extraterritorial effect. Accordingly, the DOL opined that the textual and contextual considerations of Section 411 support the conclusion that Section I(g) of the QPAM Exemption is limited to domestic criminal convictions, to the same extent as ERISA Section 411.

The DOL also drew support from the Supreme Court’s decisions in Small v. United States, Equal Employment Opportunity Commission v. Arabian American Oil Co., and Morrison v. National Australia Bank Ltd., in which the Court declined to interpret statutes to reach beyond a domestic context absent explicit indication to the contrary. The DOL reasoned that there is no language in the text or context of the QPAM Exemption indicating that Section I(g) should extend to foreign criminal convictions. Also, the DOL noted the overall incompatibility of the American legal system’s concept of “felony,” as discussed in the QPAM Exemption, with foreign legal systems.

Implications for Asset Managers and ERISA Plans

In one sense, the Solicitor’s Letter is intended to ease concerns of QPAMs, especially those affiliated with global financial institutions. Historically, an asset manager could not rely on the QPAM Exemption in the event that its affiliate had a foreign criminal conviction, even if the relevant criminal conduct was unrelated to the QPAM’s business. Such an extension of Section I(g)’s disabling condition to foreign criminal convictions hindered global asset managers’ access to ERISA plans and IRA capital and their overall ability to efficiently accommodate these investors, as managers would instead need to rely on other, potentially less helpful prohibited transaction exemptions (if any) to provide comparable relief. (In some transactions, the QPAM Exemption is often the only viable prohibited transaction exemption strategy for asset managers.) These concerns often led certain large asset managers to seek and obtain from the DOL individual exemptions patterned on the QPAM Exemption. The Solicitor’s Letter provides asset managers with comfort that they may now rely on the QPAM Exemption, notwithstanding a foreign criminal conviction.

Yet, there is still a level of uncertainty due to the timing of the Solicitor’s Letter. The Solicitor’s Letter was issued one day before the 2020 presidential election—an election that resulted in a shift from a Republican administration to a Democratic administration. While the DOL’s stance in the Solicitor’s Letter is a seemingly objective conclusion, uncertainty remains as to whether a new DOL under the Biden administration will adhere to the Solicitor’s Letter, or whether foreign convictions will continue to be viewed as disqualifying under Section I(g) of the QPAM Exemption. Moreover, regardless, the DOL notes in the Solicitor’s Letter that ERISA plan fiduciaries have duties of prudence and loyalty in hiring, monitoring, evaluating, and retaining asset managers for their plans, suggesting that a foreign criminal conviction may be a relevant consideration in fulfilling these activities, notwithstanding an asset manager’s technical ability to rely on the QPAM Exemption in light of the Solicitor’s Letter.