Och-Ziff’s Retirement Asset Waiver Bid Illustrates Tough Road

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By Kristen Ricaurte Knebel

Investment firms like hedge fund manager Och-Ziff may face increasing delays in picking up the pieces after resolving criminal matters as the Labor Department faces pressure to crack down on firms that flout the rules.

Bloomberg BNA learned through a Freedom of Information Act request that Och-Ziff applied to the Labor Department last fall for what’s known as a prohibited transaction exemption. Och-Ziff withdrew its application this spring after the DOL told the hedge fund management firm that it wasn’t going to give tentative approval for the PTE application.

Och-Ziff is likely to reapply for the waiver, sources familiar with the matter told Bloomberg BNA.

The hedge fund management firm is the latest in a series of financial services industry heavy-hitters to seek such an exemption from the DOL. It’s common for financial firms to seek these exemptions when their subsidiaries are convicted of a felony. The exemptions allow the firms to continue operating as qualified professional asset managers. Late last year, the DOL granted temporary waivers to Deutsche Bank AG, Citigroup Inc., UBS Assets Management, JP Morgan Chase & Co., Barclays Capital Inc., Royal Bank of Canada, and Northern Trust Corp.

Och-Ziff agreed in 2016 to pay more than $400 million in fines, penalties, and disgorgements as part of the five-year bribery probe by the SEC and the DOJ, and enter into a deferred prosecution agreement with the Justice Department. Its OZ Africa Management GP unit pleaded guilty to conspiring to bribe officials of the Democratic Republic of Congo. The sentencing hearing is scheduled for Sept. 14.

Och-Ziff has $31.8 billion under management, about 1 percent of which would be subject to the QPAM waiver.

Lengthy Process

Och-Ziff’s experience in applying for a prohibited transaction exemption is all part of a lengthy process that banks and other entities managing retirement funds go through when they need to obtain an individual prohibited transaction exemption that will allow them to continue to operate as QPAMs after a criminal conviction.

Banks and others handling multitrillion-dollar U.S. 401(k) plan and retirement funds are typically allowed to rely on a class prohibited transaction exemption from 1984 in order to perform the day-to-day tasks involved with handing these funds. In that guidance, the department said that once an entity is convicted of specified crimes, the related QPAMs lose the ability to rely on the class exemption for 10 years following the conviction date, absent an individual exemption.

The five exemptions granted at the tail end of last year to Deutsche Bank, Citigroup, UBS, JP Morgan Chase, and Barclays gave them up to a year under the Employee Retirement Income Security Act to act as QPAMs. If these aren’t finalized before the year is up, the financial firms won’t be able to operate as QPAMs for another decade.

The DOL has been under increased pressure in recent years after being accused of letting too many of these exemption applications past the goal line, something that has most likely contributed to a longer and more difficult process.

Even with a more protracted process, the applications increased under the Obama administration. In addition to the seven granted last year, three exemptions were granted in 2015, and one each in 2012, 2013, and 2014. But the increase doesn’t mean the agency looked more favorably on the parties seeking exemptions. If anything, the requirements to continue to operate as a QPAM after a slipup have become more stringent.

“You could speculate that it was the political climate, the Obama administration. The bank crisis obviously put a spotlight on the banks and did not put them in a good light,” Mary E. Alcock, counsel with Cleary Gottlieb Steen & Hamilton LLP in New York, told Bloomberg BNA.

While these institutions often need to jump through hoops to continue operating as QPAMs, the way the class exemption is drafted is very problematic for companies that now operate all over the world.

The exemption allows the crimes of “one renegade employee of a financial institution in a far-flung jurisdiction” to put an institution at risk of losing its reliance on the class exemption, Erin K. Cho, a principal at Groom Law Group in Washington, told Bloomberg BNA.

Possible Changes

There has been a lot of turnover within the Employee Benefits Security Administration--the DOL subagency that oversees these exemptions--during the past several years and that has definitely affected the exemptions process, Arthur H. Kohn, a partner with Cleary Gottlieb Steen & Hamilton LLP in New York, told Bloomberg BNA.

A change in administration could alter the process again, but Labor Secretary Alexander Acosta has yet to appoint a head of EBSA. Even with a new leader, the subagency may have other priorities, such as the fiduciary rule. One of the Obama administration’s signature regulations, this rule on financial adviser conflicts-of-interest, is currently under review.

It’s impossible to know whether the DOL will ease up on the entities that need prohibited transaction exemptions. But for now the lengthy journey is a worthwhile and necessary one for those that need the exemptions.

“They need to have these exemptions, it’s necessary for them to have to do their business,” Kohn said.

Och-Ziff declined to comment for the story. The Labor Department didn’t return requests for comment.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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