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Rental Agreement

A Qualified Professional Asset Manager, or PAM/QPAM, is a person or institution that is registered to manage or advise clients on investments. QPAMs are crucial to the management of assets in their clients’ portfolio, but there is one asset in particular that they play an important role in overseeing: retirement plans.

By allowing a QPAM to manage and conduct transactions in an account that comprises retirement plans, such as pension funds, investment funds can draft a PAM rental agreement. Under such agreements, they are entitled to a wider variety of transactions than the law would otherwise allow.

What a QPAM Is

The definition of a QPAM, as well as the criteria that govern its qualification, has evolved throughout the years as the financial sector has become more dynamic. The original definition was codified in the Employee Retirement Income Security Act (ERISA) of 1974, which outlines the standards for fiduciary accountability and beneficiary disclosure.

The ERISA lays the legal groundwork for certain regulated institutions, such as insurance companies, banks and savings and loan associations, to act as QPAMa. Certain amendments, such as one that took hold in 2005, have since expanded the definition to include registered investment advisers that manage assets of $85 million or more, and equity of at least $1 million.

PAM Rental Agreement Exemptions

With regard to pensions and other retirement funds, the most important aspect of a QPAM is the PAM rental agreement. The ERISA prohibits almost all transactions between a retirement plan and the fiduciary trusted with managing the plan. It also bars such transactions that involve “parties in interest,” that is, parties other than the fiduciary itself.

Utilizing a PAM rental agreement, the aforementioned parties are exempt from the ERISA’s prohibitions against these kinds of transactions. The trustee and the beneficiaries of a retirement plan agree to let a QPAM “rent” (i.e. manage) the assets in the plan. In return, the QPAM assumes any and all fiduciary liabilities that would normally be the burden of the trustee.

PAM rental agreements provide for this exemption for two reasons. First, QPAMs are always people or institutions that are, by definition, regulated. The government oversight implicit in their professional functions thus endows them with a degree of accountability prima facie. Secondly, QPAMS are also qualified institutions and individuals by definition. They must be qualified according to the provisions of the US Department of Labor’s Prohibited Transaction Class Exemption 84-14.

The Benefits of a PAM Rental Agreement

Given the exemptions on prohibited transactions they provide, PAM rental agreements allow for a much more flexible exercise of financial conduct. The “interested parties” specified in the ERISA, which include sponsors and fiduciaries, are entitled to sales, leases and exchanges of the investment fund.

The one caveat in PAM rental agreements and their ERISA exemptions regards the QPAM itself. The same transactions that “interested parties” may engage in may not be conducted by the QPAM. Neither can they be conducted by parties that might have any influence over the QPAM, such as the bank’s shareholders. This one stipulation ensures the objectivity of the QPAM and its vested interest in protecting only the assets of the plan’s retirees.

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