DOL feeling heat on QPAM exemptions

The Department of Labor is under increasing pressure to get tough on money managers with U.S. retirement plan clients when their firm, or an affiliate, gets into legal trouble.

That pressure — on display recently in an unprecedented public hearing on a proposed exemption for Credit Suisse Asset Management — could change what used to be a relatively straightforward matter of approving the firms as qualified professional asset managers. Its ripples could affect BNP Paribas' bid for a similar exemption, as well as any future requests by other managers.

Most financial firms rely on a general QPAM class exemption, allowing them to engage in thousands of financial transactions daily on behalf of pension plan clients that would otherwise trigger DOL rules against prohibited transactions. But money management firms whose affiliates or parents are convicted on criminal charges are required to seek a separate QPAM exemption.

Department of Labor officials have granted exemptions to all 23 firms seeking them since 1997, imposing conditions tailored to each firm.

Now, getting that approval from the DOL “will be much more painful,” said Ivan Strasfeld, who served as director of the Employee Benefits Security Administration's Office of Exemption Determinations until February 2012 and wrote the initial QPAM exemption in 1984. “The requirements are much more extensive than in the past.”

Just ask Credit Suisse Asset Management.

Its parent, Credit Suisse AG, pleaded guilty in May to helping U.S. citizens avoid paying taxes, and the Department of Labor granted CSAM a temporary one-year exemption in November. That allowed the money management firm to keep its qualified professional asset manager status, and prevented disrupting clients' retirement plan investments as agency officials decide on a permanent exemption while the parent's 10-year criminal plea agreement is in effect.

The money management division managed $17.8 billion for U.S. institutional tax-exempt clients as of Dec. 31, 2013, according to Pensions & Investments data; more than $2 billion of that could be affected by the decision. CSAM is seeking exemptions for three strategies: credit investments, which account for $1 billion from qualified plans; commodities, which represents another $1 billion; and a small liquid alternative beta strategy.

In CSAM's temporary exemption, Labor officials imposed what many consider the most rigorous conditions to date, demanding annual training for all asset management, legal and compliance employees on ERISA compliance and consequences, and an independent auditor, among other conditions. “It is one of the most, if not the most, demanding exemption,” said Stephen Saxon, chairman of Groom Law Group.

Lyssa Hall, director of the office of exemption determinations, at the Jan. 15 hearing rebuffed criticism raised by Ralph Nader and consumer watchdog organizations that regulators grant all such requests. She said questionable candidates do not make it to the application stage.

But some members of Congress and financial watchdog groups — who called for the DOL public hearing — want DOL officials to send a broader message by denying exemptions for firms with criminal convictions, particularly those using sophisticated investment strategies.

“Pension money should be safely guarded, and invested in productive enterprise. Layer over this a QPAM connected to a criminal enterprise, and the case should be closed,” said Bartlett Naylor, financial policy advocate with Public Citizen, an advocacy group in Washington. “But the DOL not only countenances this socially dubious, high-risk investment, it sanctions it even by firms with records of criminal abuse.”

Critics of granting exemptions to firms whose banking affiliates have criminal convictions — including Rep. Maxine Waters, D-Calif., the ranking member of the House Financial Services Committee — say they will press DOL to deny the CSAM request or impose still tougher conditions, including more disclosure of the impact of the conviction and the added compliance. Critics are pressing DOL to hear from CSAM pension clients as well.

At the hearing, Bill Johnson, deputy head of Credit Suisse Asset Management, argued the exemption “is in the best interests of the department and (retirement plan) participants” because plan executives would otherwise incur significant costs finding new managers. CSAM, which was required to inform pension clients of the criminal matter, has had no clients defect and has added a client since its parent's guilty plea.

Many observers trace the DOL's tougher stance to 2013, after UBS' Japanese division pleaded guilty to criminal charges. In order to keep their QPAM status, UBS had to inform asset management clients about the case and perform annual audits for five years.

Next in the spotlight will be BNP Paribas, which is seeking a similar exemption following its parent company's June 2014 guilty plea to violating U.S. sanctions in several countries. In addition to paying an $8.97 billion settlement with U.S. and New York state authorities, the firm added compliance measures and will clear dollars through a third-party bank. BNP Paribas Investment Partners managed $3.4 billion for U.S. institutional tax-exempt clients as Dec. 31, 2013, including $1.73 billion in defined contribution assets. DOL officials declined to comment on the status of its application.

Timothy Hauser, deputy assistant secretary of Labor for program operations who was one of four officials presiding at this month's hearing, promised that CSAM's exemption, if granted as expected, “is not just boxes that are checked. We mean for this to be a serious set of requirements.”

“We will be taking a look at the rigor” of CSAM's compliance program, and sending investigators this year to verify that the outside training and auditing firms are following the conditions, he added.

Even for firms without legal troubles, the controversy over QPAMs “may be a good wake-up call,” said Laura Rosenberg, senior vice president for finance at Fiduciary Counselors Inc., Washington, where Mr. Strasfeld is a senior adviser. Ms. Rosenberg advises those money managers to revisit the conditions set forth in the general class exemption, “to make sure that they do have their policies and procedures in place, and to see if their training programs need to be refreshed,” she said. n