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Federal Register / Vol. 86, No. 130 / Monday, July 12, 2021 / Rules and Regulations Permissible investments may be held in individual fixed-income securities or in commingled funds, such as Exchange Traded Funds ETFs, mutual funds, pooled trusts, or other commingled securities which are defined in the regulation as permissible fund vehicles.
To ensure the quality of the securities that may be invested with SFA, the regulation provides that permissible investments are considered investment grade if a fiduciary, within the meaning of section 321 of ERISA, who is or seeks the advice of an experienced investor such as an Investment Advisor registered under section 203 of the Investment Advisors Act of 1940
makes such a determination.
For purposes of the regulation, 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. Adequate capacity 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. These definitions are consistent with other Federal agency regulations that make reference to investment grade securities in compliance with Section 939A of the Dodd Frank Act of 2010.16 Further, the requirement that securities be considered investment grade by an experienced investor acknowledges that plans receiving SFA, and their advisors, have the requisite investment knowledge and experience to make sound investment decisions.
Plans may be able to access fixedincome securities from overseas so long as the securities are denominated in U.S. dollars. In practice, this would mean that such securities are accessible mainly within publicly traded markets.
To acknowledge that securities held in ETFs, mutual funds, other commingled funds, or directly through a portfolio of individual securities, often are supplemented by derivatives that replicate exposure to physical bonds or that implement hedging strategies to protect against downside risk, the regulation permits investment in vehicles allowing for such strategies so long as any derivative or leveraging strategy does not increase the interest rate risk or credit risk of the investments beyond the risk in a similar portfolio of physical securities i.e., non-derivative securities with the same market value.
Further, any notional derivative exposure 17 on permissible investments 16 See,
e.g., 12 CFR 16.2.
value is a term often used to value the underlying asset in a derivatives trade. It can be the 17 Notional
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that are held in separate accounts i.e., not through a permissible fund vehicle, must be supported by liquid assets that are cash or cash equivalents denominated in U.S. dollars. This will ensure that the plan or the investment manager will be able to cover the derivative exposure with little risk to SFA assets.
In listening sessions with interested parties, PBGC heard concerns about how overly restrictive requirements on how SFA assets could be invested could have significant adverse impacts on overall plan financial health. For instance, with interest rates on fixed income securities remaining at historically extremely low levels, both SFA and other plan assets could be depleted and be unable to pay plan benefits long before 2051. PBGC agrees with such concerns. Because PBGC
thought it important for plans exploring whether to apply for SFA to know what restrictions could be placed on investment of SFA funds, PBGC is providing a starting point for discussion on permissible investments of SFA
assets in this interim final rule. With an eye toward finding a more appropriate balance between certainty and safety of investments on the one hand, and the opportunity for plans to have flexibility to decide appropriate overall investment policies on the other, PBGC seeks public input for refining 4262.14. In particular, PBGC requests responses, with corresponding data, on the following:
1 PBGC is interested in understanding the potential benefits and risks of investing SFA assets in other vehicles that are or have the nature of fixed income. These might include synthetic replications of fixed income securities, insurance contracts, hybrid securities, preferred stock or other vehicles. In this regard, the following questions are of interest:
What are the advantages of investing in such vehicles, relative to a portfolio of investment grade fixed income, in terms of expected returns, reduced risk or other improved outcomes?
What are the disadvantages of investing in such vehicles relative to a portfolio of investment grade fixed income, including lower returns, higher risk, inequitable outcomes amongst participants or other issues?
What are the implementation and management costs of investing in such vehicles?
total value of a position, how much value a position controls, or an agreed-upon amount in the contract.
Definition provided on Investopedia at https
www.investopedia.com/terms/n/notionalvalue.asp.

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Which organizations are qualified to manage and advise on these vehicles?
Can the vehicles, as they might be used in multiemployer plan portfolios or in the pool of SFA assets, be clearly defined and easily used?
2 Should permissible investments of SFA assets be limited to fixed income securities? For instance, should the rule permit investment of a percentage of SFA assets in certain stock ETFs or mutual funds that have investment profiles that are not materially riskier than fixed income-based investment grade securities?
3 What is the appropriate amount of SFA assets that may be permitted to be invested in non-investment grade securities?
4 What is the proper relationship to restrictions on SFA asset investments to other plan asset allocations?
Conditions for Special Financial Assistance To ensure that SFA is used for the purpose of paying benefits and the expenses related to those benefit payments, section 4262m1 of ERISA
gives PBGC authority, in consultation with the Secretary of the Treasury, to impose reasonable conditions on an eligible multiemployer plan that receives SFA. Conditions may relate to increases in future accrual rates and any retroactive benefit improvements, allocation of plan assets, reductions in employer contribution rates, diversion of contributions to, and allocation of expenses to, other benefit plans, and withdrawal liability. In determining what conditions to impose, in consultation with the Treasury Department, PBGC considered, among other things, the potential actions of contributing employers and the security of the accrued benefits of plan participants. These considerations are discussed in greater detail in the regulatory impact analysis section of the rule.
Under certain circumstances, a plan sponsor may request approval from PBGC for an exception to conditions relating to reductions in employer contribution rates, transfers or mergers, and settlement of withdrawal liability.
These exceptions are explained later in this section of the preamble. PBGC is soliciting public comment on whether there are other circumstances relating to the conditions described under 4262.16 where PBGC should consider providing approval for exceptions.
a Benefit Increases Section 4262.16b imposes reasonable conditions on a plan that receives SFA with respect to the types
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