§ 4262.14 - Permissible investments of special financial assistance.

§ 4262.14 Permissible investments of special financial assistance.

(a) In general. A plan that receives special financial assistance may invest must segregate special financial assistance assets and earnings thereon (“amounts attributable to special financial assistance”) in an account that is separate from the plan's non-special financial assistance assets and that is invested consistent with the investment requirements of this section.

(b) Permissible investments for amounts attributable to

such assistance monies only in fixed income securities

special financial assistance are -

(1) Investments in return-seeking assets as described under paragraph (c) of this section, not to exceed 33 percent of amounts attributable to special financial assistance measured using fair market value as of -

(i) Each day the plan purchases return-seeking assets, other than through the automatic re-purchase of capital gains and reinvestment of dividends; and

(ii) At least one day during every rolling period of 12 consecutive months beginning from the date the plan receives special financial assistance.

(2) Investments in investment grade fixed income securities and cash as described in paragraph (d) of this section for all other amounts attributable to special financial assistance.

(c) For purposes of this section, investments in return-seeking assets are investments in -

(1) Common stock that is denominated in U.S. dollars and

in accordance with this section. For purposes of this section, such securities are referred to as permissible investments.

(b) Other definitions. For purposes of this section -

(1) Adequate capacity to meet financial commitments means that the risk of default by the obligor is low and the full and timely repayment of principal and interest on the security is expected.

(2) Permissible fund vehicles mean exchange traded funds, mutual funds, pooled trusts, or other commingled securities whose investible assets are invested solely in fixed income securities

registered under section 12(b) of the Securities Exchange Act of 1934.

(2) Shares held in a permissible fund vehicle described in paragraph (g) of this section that abides by an investment policy that restricts investment predominantly to equity securities registered under section 12(b) of the Securities Exchange Act of 1934, U.S. Treasury securities with less than one year to maturity date, cash and cash equivalents described in paragraph (d)(5) of this section, and money market funds described in paragraph (d)(6) of this section.

(3) A debt security that has been resold in an offering pursuant to 17 CFR 230.144A (Rule 144A under the Securities Act of 1933), is investment grade as described under paragraph (f) of this section, and has not been issued by a foreign issuer as defined under 17 CFR 240.3b-4(b).

(4) A debt instrument, as described under paragraph (d) of this section, that is no longer investment grade if it was investment grade as described under paragraph (f) of this section when purchased by the plan for the portion of special financial assistance invested in investment grade fixed income securities.

(d) For purposes of this section, investments in investment grade fixed income securities and cash are investments in -

(1) A bond or other debt security that pays a fixed amount or fixed rate of interest, is denominated in U.S. dollars,

with an average credit quality, weighted by market value, that meets the definition of investment grade.

(3) Investment grade means publicly traded securities for which the issuer has at least adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure.

(4) Leverage means the right to a return on a capital base that exceeds the investment which was contributed to the entity or instrument achieving a return.

(c) Holdings. A plan must hold permissible investments in either -

(1) Individual bonds, securities, or other debt securities; or

(2) Permissible fund vehicles.

(d) Quality of permissible investments. Permissible investments must be considered investment grade

sold in an offering registered under the Securities Act of 1933, and is investment grade as described under paragraph (f) of this section.

(2) Shares held in a permissible fund vehicle described under paragraph (g) of this section that abides by an investment policy that restricts investment predominantly to securities described in this paragraph (d) that are denominated in U.S. dollars and are investment grade as defined under paragraph (f) of this section.

(3) Securities issued, guaranteed or sponsored by the U.S. Government or its designated agencies as required to be entered as government securities on the Form 5500 Schedule H.

(4) Municipal securities defined in section 3(a)(29) of the Securities Exchange Act of 1934 that are investment grade as defined under paragraph (f) of this section.

(5) Noninterest-bearing cash and interest-bearing cash equivalents as required to be entered on the Form 5500 Schedule H.

(6) Money market funds regulated pursuant to 17 CFR 270.2a-7 (Rule 2a-7 under the Investment Company Act of 1940).

(e) Fixed income securities described under paragraph (d) of this section must be considered investment grade (as described under paragraph (f) of this section) by a fiduciary, within the meaning of section 3(21) of ERISA, who is or seeks the advice of an experienced investor (such as an Investment

Advisor

Adviser registered under section 203 of the Investment

Advisor's

Advisers Act of 1940)

, except that up to 5 percent of the aggregate market value of a plan's assets attributable to special financial assistance may be invested in securities or permissible fund vehicles that were investment grade at the time of purchase but are no longer investment grade.

(e) Leverage and derivative limitations on permissible fund vehicles or portfolio of individual securities held by the plan.

(1) Permissible investments, whether held through permissible fund vehicles or directly through a portfolio of individual securities may not be supplemented by derivatives or otherwise

.

(f) Investment grade means securities for which the issuer (or obligor) has at least adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure. For purposes of this paragraph (f), adequate capacity to meet financial commitments means that the risk of default by the issuer (or obligor) is low and the full and timely repayment of principal and interest on the security is expected.

(g) Permissible fund vehicle means an investment company or collective trust, that is -

(1) An open-end investment company registered on Form N-1A under section 8 of the Investment Company Act of 1940; or

(2) A unit investment trust (as defined in section 4(2) of the Investment Company Act of 1940 and registered under section 8 of such Act) the shares of which are listed and traded on a national securities exchange, and that has been formed and operates under an exemptive order granted by the U.S. Securities and Exchange Commission; or

(3) A collective trust fund that is maintained by a bank or trust company and that has been formed and operates pursuant to an exemption under section 3(c)(11) of the Investment Company Act of 1940.

(h) Permissible investments must not be supplemented by, and permissible fund vehicles cannot include, derivatives or otherwise be leveraged in a way that could increase the

interest rate risk or credit risk in the fund vehicle or portfolio beyond the risk in a portfolio of physical securities, meeting the definition of permissible investments in paragraph (a) of this section, equal to the market value of the portfolio; and (2)

risk of the permissible investment beyond the risk associated with the market value of the un-leveraged permissible investment. Any notional derivative exposure, other than exposure gained through a permissible fund vehicle described under paragraph (g) of this section, must be supported by liquid assets that are cash or cash equivalents denominated in U.S. dollars.

(i) This section is applicable to a plan that applies or has applied for special financial assistance under this part. Notwithstanding the preceding sentence, for a plan that received special financial assistance under this part in effect before August 8, 2022, this section will not apply unless and until the plan files a supplemented application under this part. Before the date that the plan files a supplemented application under this part, the rules under this section in effect before August 8, 2022 apply.