Re: Proposed Amendment to PTE 84-14 (the QPAM Exemption) (Application No. D-12022) (EBSA-2022-0008): Post-Hearing Comments (Z-RIN 1210 ZA07)
Assistant Secretary Lisa M. Gomez
Office of Exemption Determinations
Employee Benefits Security Administration
U.S. Department of Labor
200 Constitution Avenue, NW
Washington, DC 20210
Dear Assistant Secretary Gomez:
The American Bankers Association (ABA) wishes to thank the Department of Labor (Department) for permitting ABA to testify at the Department's public hearing on November 17, 2022 on the proposed amendments (Proposal) to prohibited transaction class exemption (PTE) 84-14, commonly referred to as the QPAM exemption (QPAM Exemption or Exemption). ABA is pleased to provide additional comments in response to the Department of Labor's request at the hearing for certain supplementary information on (i) the average number of client plans of qualified professional asset managers (QPAMs), and (ii) the Proposal's requirement that QPAMs notify the Department of their reliance on the QPAM Exemption.
Our testimony focused on the regulatory process surrounding the Proposal. We pointed out that it would have been helpful if the Department had adhered to the procedural requirements referenced by the Biden Administration in the January 2021 Memorandum, Modernizing Regulatory Review, which affirmed the federal regulatory process as set forth in Executive Order 13563, which in turn requires federal agencies to seek the views of those parties affected by a proposed rule prior to issuing a Notice of Proposed Rulemaking. The Department did not follow the Executive Order's directive to consult beforehand with QPAMs. Consequently, the Department significantly miscalculated the number of client plans per QPAM, which in turn led to a critical error of multiple magnitudes in the Department's calculation of the estimated time, resources, and costs for QPAMs to comply with the revised Exemption, if finalized as proposed. This significant unintended consequence, together with the omission of advance input from QPAMs and other marketplace participants and stakeholders, provide compelling reasons to withdraw the Proposal.
For example, in its regulatory impact analysis of the Proposal, the Department states that a single QPAM services, on average, 32 client plans – which the Department considers an "upper limit" for the average number of client plans served by a QPAM. In our comment letter of October 10, 2022 (ABA Comment Letter), we state that the Department's method of calculating an estimated industry cost of $135,000 for QPAMs to amend, as required under the Proposal, their standard investment management agreements with client plans to incorporate indemnification language (Indemnification Requirement) was deeply flawed by its unverified assumption of 32 client plans per QPAM. We provided a conservative estimate of nearly $1 billion as the actual cost for industry compliance with the Indemnification Requirement. At the hearing, the Department asked us to provide more information on the number of client plans per QPAM that are ABA members in order to more accurately gauge the industry cost of complying with the Indemnification Requirement.
In the ABA Comment Letter, we point out that in order to comply with the Indemnification Requirement, a QPAM would need to re-open and separately review and re-negotiate each investment management contract with its client plans. We have since confirmed the approximate number of investment management contracts of QPAMs that are ABA members. The median number of contracts per QPAM from which we received data is 14,500 and the average number of contracts per QPAM is 14,180. These figures indicate a number of client plans per QPAM that is significantly higher than the 32 client plans per QPAM relied upon by the Department. If the number of client plans per QPAM for the industry as a whole reflect the data provided to ABA, the cost of implementing the Indemnification Requirement could soar exponentially from the Department estimate of $135,000 to a staggering $12.3 billion. Given this considerable cost to QPAMs and to their client plans and participants and beneficiaries, we recommend that the Department delete the Indemnification Requirement from the Proposal.
Download the letter to read the full text.