WASHINGTON - Plan sponsors who read the fine print in a proposed exemption recently issued by the Department of Labor might find it's harder to hire a qualified professional asset manager in certain cases.
In a footnote for the proposed exemption for McLane Co. Inc.'s profit-sharing plan, the Labor Department says plan sponsors can't hire a QPAM to rubber-stamp a predisposed specific transaction.
In March 1984, the Labor Department issued the class exemption that allows plan sponsors to hire qualified money managers to make transactions that involve parties in interest to a plan. As in the McLane case, these problems mostly happen in real estate transactions.
It isn't uncommon for plan sponsors to hire a QPAM to be the middleman between two parties in interest to do a transaction that otherwise would be illegal, said Richard A. Susko, an employee benefits lawyer and partner at Cleary, Gottleib, Steen & Hamilton, New York. For example, a plan might hire a QPAM to purchase a synthetic GIC from a service provider that already is a broker to the plan.
"Hopefully, the department views this as only eliminating QPAMs who rubber-stamp transactions and not eliminating QPAMs who negotiate, approve and decide to enter into a single transaction," Mr. Susko said.
At issue in the recent opinion is a transaction made by the $772 million profit-sharing plan of McLane, Temple, Texas. In 1993, the McLane plan hired an independent fiduciary, Lucian L. Morrison, to appoint a QPAM that then would handle the sale of two properties to the company from the profit-sharing plan. McLane thought it needed a QPAM to avoid violating federal law because the buyer and seller were both parties in interest to the plan.
In its footnote, the Labor Department referred to the hirings of Mr. Morrison. The agreement between McLane and Mr. Morrison stipulated the arrangement was made to specifically "facilitate the purchase" of the two properties. The agreement added the transaction would be illegal under federal pension law unless an exemption from the prohibited transaction rules was used.
The footnote said the party in interest or its affiliate does not have the power to appoint or terminate the QPAM as a manager of any of the plans assets. In addition, neither the party in interest nor its affiliate is allowed to negotiate the terms of the management agreement with the QPAM.
"It is the view of the department that the retention of a QPAM solely to approve a specific transaction presented for its consideration by a plan sponsor at the time of its engagement is inconsistent with the underlying intent of the exemption," according to the footnote.
This is troubling because many plan sponsors hire QPAMs for a single transaction, said Lennine Occhino, a partner at the law firm of Mayer, Brown & Platt, Chicago.
QPAMs are relied on heavily because it's nearly impossible to be absolutely sure of who may or may not be a party in interest in a transaction, Ms. Occhino said.
"Any plan that hires an outside investment manager to manage a single asset would probably be expecting that investment manager to qualify as a QPAM," she said.
While the closeness of the two parties involved in McLane is obvious, Ms. Occhino said the footnote's implications might force plan sponsors to take a second look at certain transactions in which QPAMs are used. Plan sponsors might be back to where they were prior to the class exemption in 1984: dropping the transaction altogether, or going to the Labor Department and seeking an individual prohibited transaction exemption.
"The course of action may be not to do the transaction, which means losing opportunities," she said.
The issue came to the DOL's attention because after the transaction, McLane officials thought they might have made a mistake in using the QPAM exemption. They asked the department for a retroactive exemption. The Labor Department said the use of the QPAM class exemption wasn't valid, but granted the individual exemption.
Ivan Strasfeld, director of exemption determinations for the department's Pension and Welfare Benefits Administration in Washington, said McLane officials made their first mistake in making Mr. Morrison a fiduciary to the plan. Even though Mr. Morrison was independent of the company, as a fiduciary he had the authority to hire and fire managers, including the QPAM, Mr. Strasfeld said. While Mr. Morrison's independent status is in line with the class exemption, tying him to the plan as a fiduciary violates it, Mr. Strasfeld said.
"He wasn't independent for the purposes of the exemption," he said. "They ended up with a QPAM dealing with the person who hired them, which violates" the class exemption.
McLane should have discussed the matter with the Labor Department prior to the transaction, Mr. Strasfeld said.
In a roundabout way, McLane eventually did the right thing. While creating the independent fiduciary post was a mistake, the plan hired a QPAM, which in turn hired an independent real estate appraiser. The QPAM evaluated the transaction, negotiated the terms of the sale and ended up getting more than the fair market value of the two properties for the one-time cash transaction.