Last month, the Department of Labor (DOL) adopted an amendment to Prohibited Transaction Exemption (PTE) 84-14.  The amendment introduces new conditions that QPAMs must meet in order to stay within the QPAM exemption when managing assets of a qualified plan that is sponsored by the QPAM or sponsored by an affiliate of the QPAM.  It is important to note that the new conditions will apply when the QPAM is directly managing the assets of the affiliated plan or when the QPAM is managing an investment fund in which the affiliate plan has invested.  By way of background, PTE 84-14 is a class exemption that is commonly relied upon by large institutions, including SEC-registered investment advisers that manage ERISA assets.  PTE 84-14 permits parties that are related to employee benefit plans to engage in transactions involving plan assets if, among other things, the assets are managed by a Qualified Professional Asset Manager (QPAM) that is independent of the parties in interest and that meet specified financial standards.  One way for a hedge fund manager to qualify for the QPAM exemption (in accordance with the August 2005 amendment to PTE-84-14) is for the manager to: (i) be a SEC-registered investment adviser; (ii) manage more than $85 million in client assets; and (iii) have at least $1 million in shareholders’ or partners’ equity (measured at the QPAM level).  If a hedge fund manager can meet the QPAM definition, then there may be an opportunity to rely on PTE 84-14, which permits QPAMs to engage in a broad range of transactions on behalf of qualified plans that would otherwise be prohibited by ERISA or the Internal Revenue Code if the transaction is with a “party in interest” or a “disqualified person”.

The amendment to PTE 84-14 that the DOL recently adopted introduces new conditions that a QPAM must meet when managing assets of its own plan (or a plan sponsored by an affiliate of the QPAM).  Effective after November 3, 2010, the relief provided by PTE 84–14 will apply to a transaction involving the assets of a plan sponsored by the QPAM, or a plan sponsored by an affiliate of the QPAM, if: (a) the QPAM has discretionary authority or control with respect to the plan assets involved in the transaction; (b) the QPAM adopts written policies and procedures that are designed to assure compliance with the conditions of the exemption; and (c) an independent auditor conducts an exemption audit (on an annual basis) and following completion of such audit, issues a written report to the plan presenting its specific findings regarding the level of compliance and the auditor’s overall opinion regarding whether the QPAM’s program complied with the policies and procedures adopted by the QPAM; and with the objective requirements of the exemption.  The exemption audit and the written report must be completed within six months following the end of the year to which the audit relates.  Without going into specifics, it is also noted that the transaction must meet all other applicable requirements of PTE 84-14.

As is always the case, and perhaps even more so when it comes to ERISA and Internal Revenue Code matters, readers are encouraged to discuss specific questions with their ERISA and/or tax counsel.  The above is intended to serve only as a summary of the most recent PTE 84-14 amendment.