QPAM Compliance Audit Webinar Slides

Financial Firmsas ERISA Plan Sponsors:Sponsors:The When, What and Howof the QPAM Audit o t e Q ud tRequirement

May 1 2013May 1, 2013

Mary E. Alcock – Cleary Gottlieb Steen & Hamilton LLPVirginia Bartlett – Bartlett O’Neill Consulting, Inc.Linda Haynes – Seyfarth Shaw LLPLinda Haynes Seyfarth Shaw LLPSusan Mangiero – Fiduciary Leadership, LLCHoward Pianko – Seyfarth Shaw LLP

©2013 Seyfarth Shaw LLP

Program Description

Starting in 2012 when a Department of Labor amendment of the Qualified Professional A t M (“QPAM”) hibit d t ti l ti b ff tiAsset Manager (“QPAM”) prohibited transaction class exemption became effective, a new requirement was imposed on financial firms when managing assets of ERISA plans they maintain for their own employees. These firms now must undergo an annual compliance audit with respect to their plan related investment activities if they want to b bl t l th QPAM ti f th hibit d t ti l fbe able to rely upon the QPAM exemption from the prohibited transaction rules of Section 406(a) of ERISA.

Given the newness of this requirement, and with a June 30, 2013 deadline for audit l ti ll di ff t d fi i l fi tli ithcompletion generally pending, affected financial firms are wrestling with many

questions about how the QPAM compliance audit process works. In this session, counsel and compliance officers at asset management firms will learn what needs to be done to comply with this important regulation and practical, nuts and bolts

id ti th t d t b dd d T i th t ill b d b th i tconsiderations that may need to be addressed. Topics that will be covered by the inter-disciplinary team of speakers include: (1) Why and when the QPAM audit is required (2) What are the applicable DOL requirements (3) What a compliance audit means from the accounting perspective (4) Documents and data that must be provided to the

dit t (5) S li d t ti t f th dit (6) C ti id tifi daudit team (5) Sampling and testing aspects of the audit (6) Correcting any identified deficiencies and (7) Using the results to enhance fund governance.

©2013 Seyfarth Shaw LLP2 |

Webinar Faculty

Speakers:Speakers:

Mary E. Alcock ~ Cleary Gottlieb Steen & Hamilton LLP

Vi i i B l B l O'N ill C l i IVirginia Bartlett ~ Bartlett O'Neill Consulting, Inc.

Linda Haynes ~ Seyfarth Shaw LLP

Susan Mangiero ~ Fiduciary Leadership, LLC

Moderator:

Howard Pianko ~ Seyfarth Shaw LLPHoward Pianko Seyfarth Shaw LLP

3

Webinar Faculty

MARY E. ALCOCK is counsel based in the New York office of Cleary Gottlieb Steen & Hamilton LLPHamilton LLP.

Ms. Alcock's practice focuses on employee benefits and compensation matters, including executive compensation design and regulation and the fiduciary, securities law and tax aspects of pension fund investment. She regularly advises clients on corporate governance issues as well as on disclosure issues relating to executive compensation and other benefit arrangements. Ms. Alcock also counsels financial institutions with respect to their many and varied interactions with U.S. pension and other plans, including the design and marketing of financial products.

Ms. Alcock is recognized as a leading employee benefits lawyer by The Best Lawyers in America and The Legal 500.

Ms. Alcock joined the firm in 1993 and became counsel in 2002. She received a J.D. d i 1993 f Y l L S h l d d d t d l ddegree in 1993 from Yale Law School and an undergraduate degree, summa cum laude, in 1988 from Yale University.

Ms. Alcock is a member of the New York State Bar.

Mary can be reached at [email protected] or 212-225-2998.


Webinar Faculty

VIRGINIA BARTLETT has over 30 years of experience working with all types of employee benefit programs Her background includes servings as an employee plansemployee benefit programs. Her background includes servings as an employee plans specialist with the Employee Plans/Exempt Organizations Division of the Internal Revenue Service as well as an investigator with the U.S. Department of Labor’s Pension and Welfare Benefits Administration Office of Enforcement. She has extensive experience in the design and implementation of employee benefit programs consultingexperience in the design and implementation of employee benefit programs, consulting on mergers and acquisitions issues that relate to employee benefit plan issues and conducting IRS and ERISA compliance reviews.

Prior to establishing Bartlett O’Neill Consulting, Inc., Virginia was a senior vice president i Cl k C lti ’ H C it l P ti h h b f thin Clark Consulting’s Human Capital Practice, where she was a member of the Employee Benefits Consulting group and in charge of the national Retirement Plans group.

She regularly directs tax and ERISA compliance reviews and participates in employee g y p p p p ybenefit plan audits, vendor search and selection, and vendor transition. She has also served as an independent fiduciary for employee benefit plans of major financial institution and Fortune 500 companies.

Virginia can be reached at vbartlett@bartlettoneill com or 678 735 3470Virginia can be reached at [email protected] or 678-735-3470.


Webinar Faculty

LINDA HAYNES is a partner practicing in the Employee Benefits and Executive Compensation Department of Seyfarth Shaw She has substantial experienceCompensation Department of Seyfarth Shaw. She has substantial experience counseling mid-sized to Fortune 500 clients in all elements of employee benefit plans and executive compensation. Ms. Haynes regularly counsels public and private clients in connection with the design, development and on-going compliance of their employee benefit programs including qualified and non-qualified retirement plans health plansbenefit programs, including qualified and non qualified retirement plans, health plans, cafeteria plans, and other types of welfare plans.

She has substantial experience in advising employee benefit plan fiduciaries regarding their duties and responsibilities. For numerous clients, Ms. Haynes routinely participates i th i fid i itt ti Sh f tl d t t i i f fid iin their fiduciary committee meetings. She frequently conducts training for fiduciary committees, including training regarding general fiduciary duties under ERISA, prohibited transactions and current developments. Ms. Haynes regularly advises clients regarding fiduciary issues and obligations raised by proposed plan investments. In addition, she counsels clients regarding employee benefit plan investment policies negotiatescounsels clients regarding employee benefit plan investment policies, negotiates investment management agreements, and reviews alternative investment vehicles. Ms. Haynes works closely with the firm’s Employee Benefits Litigation group in cases involving complex ERISA issues, including fiduciary issues and hybrid defined benefit plan issuesp

Linda can be reached at [email protected] or 312-460-5955.


Webinar Faculty

SUSAN MANGIERO is a managing director with Fiduciary Leadership, LLC. She provides compliance dispute and litigation support to asset managers institutionalprovides compliance, dispute and litigation support to asset managers, institutional investors and their counsel. Dr. Mangiero is a CFA charterholder, a certified Financial Risk Manager and an Accredited Investment Fiduciary Analyst®. She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offering expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation litigation and arbitration matters.

Dr. Mangiero has provided insights about asset allocation, fiduciary duties, risk g p g , y ,management, modeling, hedge effectiveness, hedge funds, private equity funds, ERISA, valuation and industry best practices for consulting clients and employers that include the General Electric Company, Prudential Retirement, PricewaterhouseCoopers, Mesirow Financial, Bankers Trust, Bank of America, Chilean pension regulator, World Bank Pension Benefit Guaranty Corporation RiskMetrics U S Department of LaborBank, Pension Benefit Guaranty Corporation, RiskMetrics, U.S. Department of Labor, Northern Trust Company and the U.S. Securities and Exchange Commission. Dr. Mangiero is the author of Risk Management for Pensions, Endowments and Foundations (John Wiley & Sons, 2005), a primer on risk and valuation issues, with an emphasis on fiduciary responsibility and best practices. She is a member of the 401(k) vendor RFP best practices committee for the Association of Financial Professionals.

Susan can be reached at [email protected] or 203-261-5519.©2013 Seyfarth Shaw LLP7 |

Webinar Faculty

HOWARD PIANKO is the head of Seyfarth Shaw's New York office benefits practice and the national chair of its Fiduciary Advisory Services practice group During his more thanthe national chair of its Fiduciary Advisory Services practice group. During his more than 35 years of experience in employee benefits law and executive compensation, he has counseled both domestic and international clients on matters running the full benefits gamut. He originated, and chaired, the PLI pension investment program in the 1980's; then began co-chairing this program annually in 1991 (21 years ago) This is the secondthen began co chairing this program annually in 1991 (21 years ago). This is the second year that he has co-chaired the PLI Basic Fiduciary Investment Program. He also has co-chaired the PLI Basic ERISA Fiduciary Investment Program for three years.

He is a Charter Fellow in the American College of Employee Benefits Counsel and a f di b f th I t ti l P i d E l B fit Lfounding member of the International Pension and Employee Benefits Lawyers Association. He has been recognized for his professional expertise by, among others, Best Lawyers in America, Chambers, Legal 500 and Super Lawyers. His current practice focuses extensively on ERISA fiduciary and plan governance matters, executive compensation including cross-border incentive equity and compensatory schemes andcompensation including cross-border incentive, equity and compensatory schemes and the benefit and employment law aspect of mergers and acquisitions.

Howard can be reached at [email protected] or 212-218-5518.


Regulatory Considerations

• Prohibited TransactionsProhibited Transactions

• Definition of QPAM

• QPAM Exemption• QPAM Exemption

• When a QPAM Manages In-House ERISA Assets

• Definition of INHAM

• INHAM Exemption

• QPAM Audit Requirements


Why a QPAMERISA’s Prohibited Transactions RulesERISA s Prohibited Transactions Rules

• ERISA contains “prohibited transaction” rulesp• prohibit specified transactions (e.g., sales, loans, leases)

involving an ERISA plan and those with certain specified relationships (including a service provider) – a “party in interest” -p ( g p ) p yto the plan

• ERISA: (i) contains statutory exemptions to these rules (e g provision of services); and (ii) authorizes the DOL(e.g., provision of services); and (ii) authorizes the DOLto issue individual or class exemptions from these prohibitions

• One such class exemption applies to a “Qualified Professional Asset Manager” or “QPAM”

© 2013 Seyfarth Shaw LLP10 |

Why a QPAMERISA Impact - Absent ReliefERISA Impact - Absent Relief

• Absent relief, a manager effecting a transaction involving ERISA “plan assets” under management and a counterparty who is a party in interest would be engaging in a prohibited transaction• applies to a separate, managed account as well as to a commingled

fund• under DOL regulations, if ERISA plan assets constitute 25% or more of

the fund, the fund is subject to ERISAthe fund, the fund is subject to ERISA• investment manager compliance with Section 406(a) may not be

feasible in terms of the possible universe of those considered to be parties in interest with respect to the ERISA plan (e.g., would need a “roster” as to who is a party in interest)“roster” as to who is a party in interest)

• QPAM relief does not apply to a breach of fiduciary rules under ERISA 406(b)

lf d li ki kb k fli t f i t t• no self-dealing, kickback or conflict of interest


What is a QPAMTh QPAM E ti PTE 84 14The QPAM Exemption - PTE 84-14

• Issued in 1984, the QPAM exemption confers relief from the party in interest prohibited transaction rules under Section 406(a) of ERISA subject to:A Status Requirements – the ManagerA. Status Requirements the Manager

• is a SEC-registered investment adviser or state or federally regulated bank or state-regulated insurance company

• has at least $85 million in assets under management as of the endhas at least $85 million in assets under management as of the end of the most recent fiscal year

• has a minimum of $1 million in owner’s equityB. Operational Requirements – ensure QPAM independenceB. Operational Requirements ensure QPAM independence

• no power to appoint - QPAM counterparty is not person (or affiliate) who has power to appoint QPAM as Manager of the plan


What is a QPAMThe QPAM Exemption PTE 84-14The QPAM Exemption – PTE 84-14

(continued)• no relation to QPAM – counterparty is not the QPAM or related to the QPAM

• no undue leverage – plan (and related plans) do not represent more th 20% f th t d b th QPAMthan 20% of the assets managed by the QPAM

C. Other Considerations• exemption not available if transaction is covered by certain other

hibit d t ti ti (“PTE ”)prohibited transaction exemptions (“PTEs”)• no relief under Section 406(b) for a fiduciary breach that is a

prohibited transaction


What is an INHAMWhat If Employer Manages Assets Of A Plan It SponsorsWhat If Employer Manages Assets Of A Plan It Sponsors

In 1996 the DOL issued the In-House Asset Manager gExemption (“INHAM”) applicable to a plan sponsor who manages the investment of assets of a plan maintained for its own employees:for its own employees:

A. Status Requirements – the INHAM• is a subsidiary (80% or more) of plan sponsor or parent• is a SEC-registered investment adviser • has at least $85 million in assets of affiliated plans under

management as of the end of the most recent fiscal yeart f l f ll ffili t d titi t b t l t $250 illi• assets of plans of all affiliated entities must be at least $250 million



B. Operational Requirements – ensure QPAM independence• INHAM independence with respect to transaction (limited plan

sponsor veto permitted)• Transaction is not covered by certain other PTEs• Counterparty is not employer or certain affiliates• Counterparty is not a fiduciary with respect to assets involved in the

transaction• Counterparty is not the INHAM or related to the INHAM



C. Governance and Audit Requirements• INHAM must adopt written policies and procedures that address

compliance with “objective requirements” as to the conditions of the exemption:• INHAM status and authority• Counterparty requirements• Transactional conditions

• INHAM must have an annual audit of compliance with policies and procedures and objective requirements by an independent and qualified auditor

T t f t ti l f t ti• Test of representative sample of transactions• Written audit report issued


Exemptive Relief When Financial Firm QPAMis Managing Assets of Plan it Sponsorsis Managing Assets of Plan it Sponsors

• Is the financial firm subject to the INHAM exemption j p(audit required) or does the QPAM exemption (no audit required) apply?• Originally the financial community generally acted as if the• Originally, the financial community generally acted as if the

QPAM exemption applied• Around 2003 DOL began to take the position that the QPAM

exemption does not extend to management of QPAM’s ownexemption does not extend to management of QPAM s own plans, but extended transitional relief

• In 2010, the DOL amended the QPAM exemption to apply governance and audit requirements to QPAM sponsored plansgovernance and audit requirements to QPAM-sponsored plans where QPAM is managing assets of the plan


The When and How of the QPAM Audit Requirementq2010 QPAM Amendment to 84-14

As amended, the QPAM exemption is available in respect , Q p pof a financial firm’s in-house managed plans if: • Policies and procedure are adopted to address

li ith “ bj ti i t ” f thcompliance with “objective requirements” of the exemption: • QPAM status and authority• Counterparty requirements• Transactional conditions

• Annual exemption audit• Annual exemption audit• Independent and qualified auditor• Must be completed (together with the auditor’s written p ( g

report) within 6 months after the end of the audited year© 2013 Seyfarth Shaw LLP18 |

The When and How of the QPAM Audit RequirementqAudit Requirements For In-House Plan Management

• Definition of “exemption audit” p• Review of written policies and procedures for consistency with

“objective requirements” of the exemption:• QPAM status and authorityQPAM status and authority• Counterparty requirements• Transaction conditions

• Test representative sample of plan transactions• Test representative sample of plan transactions • Written audit report

• Steps taken by auditor Li f fi di d i i li• List of findings and opinion on compliance


The When and How of the QPAM Audit RequirementqAudit Requirements For In-House Plan Management

• Auditor QualificationsQ• Independence

• Financial independence• Relational independence• Relational independence

• “Appropriate technical training or experience and proficiency with ERISA’s fiduciary responsibility provisions”• Audit related training or experience• Audit-related training or experience• Other training or experience• Proficiency with ERISA’s fiduciary rules


Audit Steps

• Determine scope of investment manager’s discretionp g• Determine transactions covered by QPAM audit

• Collective Investment Trusts (PTE 91-38)S ( )• Securities Lending (PTE 81-6)

• Interests in Mortgage Pools (PTE 81-7)• Certain mortgage financing arrangements (PTE 82–87)

• Document request• General background documents

Policies and procedures• Policies and procedures• Objective compliance with QPAM Requirements• Requests re specific transactions


Audit Steps (continued)

• Review of documents and identify samplingy p g• Review of sample transaction documentation• Issue report• Miscellaneous Items

• Confidentiality• Fiduciary exception to attorney client privilegeFiduciary exception to attorney client privilege

• Use of report• Not filed with the DOLImpact of adverse report• Impact of adverse report


Audit Implementation

• Auditor Skill Set

• Transaction Sampling

• Compliance ReportCompliance Report

• Investor and Private Funds

• Using QPAM Compliance Audit Results to Improve• Using QPAM Compliance Audit Results to Improve Governance


Skill Set of Audit Team

1. ERISA

2. Valuation

3 Compliance Process Mapping3. Compliance Process Mapping

4. Service Provider Contracts

5 Investment Objectives and Impediments5. Investment Objectives and Impediments

6. Transaction Sampling (statistical v. judgemental)

7 Data Quality7. Data Quality

8. Trading Practices


Transaction Sampling

1. Goal is to avoid sampling risk or the possibility that the audit sample will not detect a problem or “bad item” within a reasonable error tolerance level

2. Sample size depends on uniformity or transactions (or lack2. Sample size depends on uniformity or transactions (or lack thereof)

3. Attribute sampling to see whether internal control procedures are working results in “yes” or “no” versus “maybe answerworking results in yes or no versus maybe answer

4. Not all variables behave in a non-normal way, which in turn impacts testing


Compliance Audit Report

1. The independent auditor’s report must identify each examined transaction that did not comply with the QPAM’s policies and procedures or the QPAM Exemption as well as the specific policies, procedures, and exemption conditions that were not

ti fi dsatisfied.

2. Upon discovering noncompliant transactions, an auditor may be required to conduct additional testing in order to fully assess the q g yscope or pattern of non-compliance during the audit period.

3. The DOL expects the auditor’s written report, to the extent applicable will describe steps taken by the QPAM to remedy anyapplicable, will describe steps taken by the QPAM to remedy any prohibited transactions.


Investors and Private Funds

According to a July 2012 survey conducted by Towers Watson, assets under t i th lt ti i t t d $4 87 t illi ith imanagement in the alternative investment space exceed $4.87 trillion with pension

fund allocations to the “top 100 alternative investment managers” at more than $1.23 trillion. Pension fund monies accounted for one third of the total assets under management. Insurance company allocations represented about 7% of assets under

t ith i lth f d d t d f d ti kimanagement with sovereign wealth funds, endowments and foundations making up 5% of assets under management. Of the top 100 managers, ranked by assets under management, pension funds comprised 74% of the total dollars.

According to a recent SecondMarket and IMN Alternative Assets Survey 50% ofAccording to a recent SecondMarket and IMN Alternative Assets Survey, 50% of institutional investor respondents allocated to commodities, 44.3% allocated to private equity funds, 39.7% allocated to hard assets, 17.2% allocated to “other,” 12.6% allocated to wine, 9.8% allocated to art, 8.6% allocated to timberland and 6.3% allocated to “esoteric ABS ” Respondents were allowed to choose more than oneallocated to esoteric ABS. Respondents were allowed to choose more than one answer.

According to “Institutional Investors Come Calling With New Due Diligence Checklist For Operations” (FINAlternatives December 15 2011) surveillance proceduresFor Operations (FINAlternatives, December 15, 2011), surveillance procedures, access to capital and counterparty risk management are important.


Economics of Governance

1. NYSE CEO Duncan Niederauer recently testified before a Congressional panel that market malfunctions have made investors less interested in putting their their money at risk. Fewer dollars invested means lower revenue for private fund owners.

2. Litigation and regulatory enforcement against asset managers is on the rise.

3. QPAM compliance audit deficiencies can lead to recognition and subsequent correction of problems.

4. The cost of the QPAM compliance audit can be considered a down payment to a more thorough assessment of risks.


Questions?

• Mary Alcock: [email protected] y coc a coc @cgs co►Cleary Gottlieb Steen & Hamilton LLP, New York

• Virginia Bartlett: [email protected] @►Bartlett O’Neill Consulting, Atlanta

• Linda Haynes: [email protected] y @ y►Seyfarth Shaw LLP, Chicago

• Susan Mangiero: [email protected] @ y p►Fiduciary Leadership LLC, Trumbull CT

• Howard Pianko: [email protected]


p @ y►Seyfarth Shaw LLP, New York

QPAM Compliance Audit Webinar Slides

Documents

Transcript of QPAM Compliance Audit Webinar Slides