DOL Drafts Rules for IRA Asset Managers With Foreign Criminal Convictions

The U.S. Department of Labor wants to be able to crack down on retirement asset managers that get into trouble outside the United States.

Labor has included provisions for asset managers with “foreign criminal convictions that are substantially equivalent” to a conviction for a U.S. federal or U.S. state crime in a new draft amendment to Prohibited Transaction Class Exemption 84-14.

The exemption, better known as the “qualified professional asset manager” exemption, determines whether asset managers can get enough relief from the usual Employee Retirement Income Security Act conflict-of-interest rules to manage assets for employee benefit plans, individual retirement accounts and individual retirement annuities.

In the new proposed amendment, Labor officials sketch out the process they might use to decide whether they should stop a QPAM from managing benefit plan assets and IRA assets because the QPAM has been convicted of serious foreign crimes.

What It Means

DOL might end up paying more attention to what the companies managing your clients’ annuity assets and other retirement assets are doing outside the United States.

The Nuts and Bolts

The new draft amendment is in the hands of the Employee Benefits Security Administration, the DOL arm that oversees health plans, pension plans, 401(k) plans and other plans and arrangements governed, at least in part, by ERISA.

DOL is preparing to publish the draft in the Federal Register. At press time, the draft had not yet appeared in the Federal Register.

The department is putting the draft through a public comment period that will end 60 days after the official Federal Register publication date.

The department lists Erin Scott Hesse, an employee in the EBSA Office of Exemption Determinations, as the contact person.

The Draft

The QPAM class exemption normally blocks asset managers from acting as QPAMs if they have been convicted of serious crimes in the past 10 years.

The new draft as a whole:

• Makes it clear that regulators can look at foreign convictions when deciding whether to cut asset managers out of the QPAM program.
• Lets regulators consider forms of “serious misconduct” that are not necessarily state or federal crimes.
• Suggests that Labor may create an informal or formal process QPAMs can use to find out what the department thinks about a QPAM’s foreign legal issues.

The current crime list includes:

• Any felony involving abuse or misuse of a person’s position or employment, or employment with a labor organization.
• Any felony arising out of the conduct of the business of a broker, dealer investment adviser, bank, insurance company or fiduciary.
• Income tax evasion.
• Any felony involving larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities.

The draft also proposes this definition of “prohibited misconduct”:

(1) any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a crime described in [another section of the draft];

(2) any conduct that forms the basis for an agreement, however denominated by the laws of the relevant foreign government, that is substantially equivalent to a non-prosecution agreement or deferred prosecution agreement described in (1);

(3) engaging in a systematic pattern or practice of violating the conditions of this exemption in connection with otherwise non-exempt prohibited transactions;

(4) intentionally violating the conditions of this exemption in connection with otherwise non-exempt prohibited transactions; or

(5) providing materially misleading information to the department [DOL] in connection with the conditions of the exemption.

The History

Traditionally, asset management compliance advisors were not sure how the Labor Department would treat foreign convictions when evaluating QPAMs.

In November 2020, while former President Donald Trump was in office, Labor said it would not include foreign legal problems in QPAM exemption eligibility proceedings.

In March 2021, Labor officials in the Biden administration said the department would consider foreign convictions when evaluating the fitness of asset managers. Officials noted then that they would provide guidance to explain how they would handle consideration of foreign crimes.

The U.S. Labor Department building in Washington. (Photo: Mike Scarcella/ALM)