The denials were an unusual step for the DOL. The last denial was made in 2013 against UBS after a Japanese division pleaded guilty to criminal charges. The firm later won a QPAM exemption, after agreeing to conditions to protect affected pension plans, such as additional training and independent plan audits.
On Sept. 4, DOL officials granted a temporary, nine-month exemption for Deutsche Bank as its Deutsche Securities Korea Co. affiliate awaits sentencing in a market manipulation criminal case. Deutsche Bank also entered a deferred prosecution agreement with the Department of Justice.
UBS and RBS, whose sentencings on the criminal convictions have not been scheduled, were not offered a temporary exemption.
Five major banks — Citicorp, J.P. Morgan Chase & Co., Barclays PLC, RBS and UBS — pleaded guilty in May to foreign exchange manipulation and will pay $2.5 billion in criminal fines. Citigroup, J.P. Morgan and Barclays also applied for QPAM exemptions.
Deutsche Bank in April pleaded guilty to wire fraud and paid $775 million in criminal penalties.
For financial watchdog groups frustrated with other regulators' responses to these high-profile criminal convictions, the DOL's action was a welcome change.
Bartlett Naylor, financial policy advocate with Congress Watch in Washington, applauded the DOL “for demonstrating spine regarding these applications. QPAM status allows financial firms to steer clients into hazardous investments riven with conflicts. Only firms with spotless records should be allowed such freedom,” he said.
The point of both denying applications and granting temporary ones is to have more control over how the asset manager divisions work in pension plans' interests, DOL officials say. “Every single exemption contains conditions that protects plans and participants,” DOL spokesman Michael Trupo said in an interview.
Conditions in an exemption granted in April to BNP Paribas Investment Partners, which managed $3.62 billion for U.S. institutional tax-exempt clients as of Dec. 31, “would provide much or all of the deterrent effect that would have been achieved through outright denial,” the exemption notice said.
BNP Paribas sought the exemption following its parent company's June 2014 guilty plea to violating U.S. sanctions in several countries. Along with an $8.97 billion settlement with U.S. and New York state authorities, the firm added compliance measures and agreed to clear dollars through a third-party bank.
Between more stringent conditions and the recent trend of issuing exemptions on a temporary basis, the DOL is “holding the applicant's feet to the fire,” said Stephen Saxon, chairman of the Groom Law Group in Washington, who as a junior associate in the early 1980s worked with the department to develop the QPAM exemption. “QPAMs have become more complicated in the level and complexity of the conditions they set, and they are more difficult to get,” Mr. Saxon said.
Pension plan consultants say that while their clients don't like headline risk, it is pretty rare for asset managers to get dropped unless there is a direct connection to the misdeeds.
“The client perspective seems to be "wait to see if something happens,'” said Mr. Barron of Segal Rogerscasey.
“We always reach out to asset managers and see what's going on here. One of the things you do is make sure that risk controls are in place. The next question should be, how is this going to impact asset management? Are employees going to be affected or are assets going to flow out? You don't want be part of an asset stampede.”
Some institutional investors aware of the DOL's temporary denial said they are just starting to determine how it might affect their portfolios, and declined to comment while the affected companies have a chance to respond. “We will continue to monitor and assess their business practices and engage them on issues of concern,” said David Barrett, spokesman for Connecticut Treasurer Denise L. Nappier, principal fiduciary for the $29.6 billion Connecticut Retirement Plans & Trust Funds, Hartford.
