

[Federal Register: May 2, 2007 (Volume 72, Number 84)]
[Notices]               
[Page 24344-24346]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02my07-108]                         


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27805; 812-13186]

 
HSBC Securities (USA) Inc.; Notice of Application

April 26, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from section 
18(f)(1) of the Act.

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Applicant: HSBC Securities (USA) Inc. (``HSBC Securities'').
Summary of Application: Applicant requests an order permitting 
registered open-end management investment companies to enter into 
secured loan transactions with commercial paper and medium-term note 
conduits administered by HSBC Securities.

DATES: Filing Dates: The application was filed on May 2, 2005 and 
amended on April 26, 2007.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on May 21, 2007, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE, Washington, DC 20549-1090. Applicant, c/o Timothy P. Mohan, Esq., 
Chapman and Cutler LLP, 111 West Monroe Street, Chicago, IL 60603.

FOR FURTHER INFORMATION CONTACT: Laura L. Solomon, Senior Counsel, at 
(202) 551-6915, or Janet M. Grossnickle, Branch Chief, at (202) 551-
6821 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE, Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicant's Representations

    1. HSBC Securities is an indirectly-held, wholly-owned subsidiary 
of HSBC Holdings plc (``HSBC Holdings''), one of the largest banking 
and financial services organizations in the world. HSBC Securities has 
substantial experience and expertise as an administrator of asset-
backed commercial paper note programs. HSBC Securities has administered 
Bryant Park Funding LLC (``Bryant Park''), a commercial paper note 
program, since 2001 and has administered Abington Square Funding LLC 
(``Abington'') since 2006. As of February 28, 2007, this commercial 
paper program had assets of approximately $4.9 billion. HSBC Securities 
expects to administer additional asset-backed commercial paper and 
medium-term note programs established for additional limited purpose 
securitization entities to be formed in the future (such HSBC 
Securities administered conduits, collectively, along with Bryant Park 
and Abington, the ``Conduits''). Applicant states that several 
registered open-end investment companies have expressed interest in the 
type of loan facility described in the application.
    2. Applicant requests relief to permit any registered open-end 
management investment company or series thereof that may participate 
from time to time as a borrower (``Borrowing Fund'') in loan facilities 
administered by HSBC Securities (``Loan Facilities''). The Conduits, 
which would be the principal source of financing for each Loan 
Facility, will issue commercial paper and, in certain cases, may issue 
medium-term notes (collectively, with the commercial paper, 
``Promissory Notes'') and will use liquidity support provided by 
financial institutions that are ``banks'' within the meaning of section 
2(a)(5) of the Act (``Liquidity Providers'') in connection with a Loan 
Facility. Each of Bryant Park and Abington is organized as a limited 
liability company under the laws of Delaware. Each Conduit, other than 
Bryant Park and Abington, will likely be organized as a corporation or 
limited liability company under the laws of Delaware. The Conduits will 
issue Promissory Notes to fund loans secured by receivables or other 
financial assets of the borrowers.
    3. The Promissory Notes issued by the Conduits generally are sold 
to institutional investors that are ``accredited investors'' as defined 
in rule 501(a) of Regulation D under the Securities Act of 1933 (the 
``Securities Act'') or ``qualified institutional buyers'' as defined in 
rule 144A under the Securities Act. HSBC Securities will negotiate the 
business arrangements on behalf of a Conduit, including loan amounts, 
interest rates, and fees. HSBC Securities will act as agent for the 
Conduits and the related Liquidity Providers under the agreements 
entered into with each Borrowing Fund and in such capacity will 
exercise rights and enforce remedies on behalf of the Conduit and 
Liquidity Providers. Personnel employed by HSBC Securities have 
substantially similar levels of experience and expertise as personnel 
that administer loans backed by financial assets made by HSBC Bank USA, 
National Association, which may act as a Liquidity Provider.
    4. As security for a loan, Borrowing Funds will pledge assets 
(``Pledged Assets'') for the benefit of the Conduit and the Liquidity 
Providers. The Pledged Assets will meet eligibility criteria set by the 
Conduit and such criteria will be consistent with the Borrowing Fund's 
investment objectives and policies. For each loan transaction, HSBC 
Securities will evaluate: (a) The type and nature of a Borrowing Fund's 
Pledged Assets to determine whether they meet the Conduit's standards 
for collateral; (b) the operations and history of the Borrowing Fund; 
and (c) the financial position and operations of the Borrowing Fund's 
investment adviser.
    5. Applicant states that a Conduit would make loans to a Borrowing 
Fund on an uncommitted basis and the related Liquidity Providers would, 
subject to the terms of the Loan Facility, be obligated to make loans 
to the Borrowing Fund in the event the Conduit was unable or unwilling 
to make such loans. The Conduit at any time and for any reason may (a) 
sell an outstanding loan to a Liquidity Provider, or (b) require a 
Liquidity Provider to provide financing to a Borrowing Fund instead of 
the Conduit. HSBC Securities states that these arrangements provide 
additional assurances to the holders of Promissory Notes that the 
Promissory Notes will be paid at maturity.
    6. A Conduit purchases receivables and other assets from, and makes 
secured loans to, a broad range of sellers and borrowers in a variety 
of industries. Aggregate loans made by a Conduit to Borrowing Funds are 
not expected to be more than 20%, and usually would be considerably 
less than 20%, of the Conduit's outstanding loans and other assets.
    7. HSBC Securities represents that the revolving credit and 
security agreement of a Loan Facility, which will be negotiated by the 
parties, will contain representations, warranties, covenants

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and events of default that are customary for secured loan transactions 
involving open-end investment companies as well as such other terms 
that are specific to a particular Borrowing Fund and the conduct of its 
business. A Borrowing Fund will have the right to prepay its loans and 
terminate its participation in a Loan Facility upon prior notice at any 
time. The Pledged Assets of a Borrowing Fund will be available solely 
to secure repayment of the loans and other outstanding obligations of 
that Borrowing Fund under a Loan Facility. HSBC Securities further 
states that a Borrowing Fund would have the same rights and remedies 
under state and federal law with respect to a loan from a Conduit that 
it would have with respect to a comparable loan from a bank. HSBC 
Securities also states that the arrangements with the Liquidity 
Providers protect Borrowing Funds by providing an alternative source of 
financing in the event a Conduit is unable to continue lending funds.
    8. No Borrowing Fund will participate in a Loan Facility unless it 
has represented, in writing, to HSBC Securities, the Conduit and the 
Liquidity Providers that: (a) Its policies permit borrowing and, if 
applicable, the use of leverage; (b) all borrowing transactions 
pursuant to the Loan Facility will be subject to the requirements of 
the Act, the rules and regulations thereunder, and any other applicable 
interpretations or guidance from the Commission or its staff; and (c) 
each borrowing transaction will be conducted in accordance with all 
applicable representations and conditions of the application. Before a 
Borrowing Fund may participate in a Loan Facility, the Borrowing Fund's 
board of directors or trustees (``Board''), including a majority of the 
directors or trustees that are not ``interested persons'' within the 
meaning of section 2(a)(19) of the Act (``Disinterested Directors''), 
will determine that such participation is consistent with the Borrowing 
Fund's investment objectives and policies and in the best interests of 
the Borrowing Fund and its shareholders. Each Borrowing Fund's Board, 
including a majority of the Disinterested Directors, will also adopt 
procedures for evaluating and making certain determinations concerning 
the terms of each loan transaction between the Borrowing Fund and a 
Conduit.
    9. HSBC Securities states that the proposed Loan Facilities would 
enable Borrowing Funds to borrow money from the Conduits at lower cost 
than obtaining comparable loans from a bank. HSBC Securities states 
that a Conduit's cost of funds is lower than that of banks, and this 
advantage will be passed on to the Borrowing Funds.\1\
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    \1\ The rate at which a Liquidity Provider would make a loan to 
a Borrowing Fund would not be as favorable as that of the Conduit, 
but would be comparable to the rates on secured lines of credit from 
banks. HSBC Securities anticipates that a Conduit, rather than a 
Liquidity Provider, will be the lender to the Borrowing Funds under 
a Loan Facility, absent extenuating circumstances.
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Applicant's Legal Analysis

    1. Section 18(f)(1) of the Act prohibits an open-end investment 
company from issuing any senior security except that a company is 
permitted to borrow from any bank, if immediately after the borrowing, 
there is an asset coverage of at least 300% for all borrowings of the 
company.\2\ Section 2(a)(5) defines ``bank'' as a depository 
institution, a branch or agency of a foreign bank, a member bank of the 
Federal Reserve System, a banking institution or other trust company 
that, as a substantial portion of its business, receives deposits or 
exercises fiduciary powers similar to those permitted to national 
banks, or a receiver, conservator or liquidating agent of any of the 
foregoing. Applicant states that while a Conduit engages in many of the 
same business activities as banks, it is not a ``bank'' under this 
definition.
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    \2\ Under section 18(g) of the Act, the term ``senior security'' 
includes any bond, debenture, note, or similar obligation or 
instrument constituting a security and evidencing indebtedness.
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    2. Section 6(c) of the Act permits the Commission to exempt any 
person or transaction or any class or classes of persons or 
transactions from any provision or provisions of the Act, if and to the 
extent that such exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. HSBC 
Securities requests exemptive relief from section 18(f)(1) solely to 
the extent necessary to allow a Borrowing Fund to borrow from a Conduit 
that is not a bank. HSBC Securities believes that permitting the 
Borrowing Funds to borrow from a Conduit is fully consistent with the 
purposes and policies of section 18(f)(1) and would not implicate the 
concerns underlying that provision.
    3. HSBC Securities states that section 18(f) of the Act reflects 
Congressional concern about excessive borrowing and the issuance of 
senior securities by open-end investment companies because these 
practices could unduly increase the speculative character and 
investment risk of junior securities. HSBC Securities notes that 
Borrowing Funds would remain subject to the 300% asset coverage 
requirement in section 18(f)(1) of the Act for all borrowings, 
including those from a Conduit. HSBC Securities further represents that 
Conduit loans will not impose any restrictions on a Borrowing Fund's 
shareholders that are different from those imposed by a collateralized 
bank loan. Finally, HSBC Securities argues that permitting a Borrowing 
Fund to borrow from a Conduit rather than a bank is expected to reduce 
its costs of borrowing, which should decrease the risk that a Borrowing 
Fund's borrowing costs will exceed the return from securities purchased 
with borrowed money and lessen any related incentive to purchase more 
speculative portfolio securities to cover those costs.
    4. HSBC Securities states that section 18(f) of the Act also 
limited open-end investment companies to borrowing from traditional 
institutional lending sources out of a Congressional concern that 
public holders of senior securities might be unaware that they were 
much riskier instruments than senior securities issued by operating 
companies. Senior securities of investment companies typically were 
secured by assets that were subject to wide fluctuations in value. 
Further, common shareholders could redeem at any time, which also might 
affect an open-end investment company's ability to repay its 
outstanding debt.
    5. HSBC Securities argues that the Loan Facilities do not involve 
the type of senior security holder that section 18(f)(1) of the Act was 
designed to protect and that the structure of the Loan Facilities and 
related Conduits provide sufficient protection to the parties that face 
any risk of loss by lending to an open-end investment company. A 
Conduit is or will be administered by HSBC Securities, which has 
extensive expertise in administering loans collateralized by financial 
instruments that equals or exceeds the expertise of most banks. The 
Liquidity Providers are banks as defined by the Act and thus not the 
type of senior security holder that Congress believed needed 
protection. HSBC Securities states that the Promissory Notes are 
general obligations of a Conduit and loans to Borrowing Funds are not 
expected to exceed 20% of a Conduit's assets and loans to any 
individual Borrowing Fund are not expected to exceed 10% of a Conduit's 
assets. Any risk of loss on the Promissory Notes posed by loans to 
open-end investment companies is further reduced by HSBC Securities' 
expertise, a Conduit's ability to sell the loans to the Liquidity 
Providers, and the Conduit-wide liquidity sources.

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    6. Applicant states that section 18(f) also reflects a concern that 
complex capital structures may permit insiders to manipulate the 
allocation of expenses and profits; facilitate control of the 
investment company by junior security shareholders with little 
investment; and make it difficult for investors in the investment 
company to understand what their stock is worth. HSBC Securities states 
that borrowing from Conduits would not facilitate pyramiding of control 
or manipulative reallocation of expenses and profits. Further, HSBC 
Securities believes that borrowings from a conduit would not be any 
more difficult for shareholders of a Borrowing Fund to understand than 
bank borrowings.
    7. Applicant also states that section 18(f) reflects a concern that 
existed when the Act was adopted that borrowings by open-end investment 
companies could be used to invest in securities without being subject 
to limitations of the Board of Governors of the Federal Reserve System 
(``FRB'') on the amount of credit that could be used for these purposes 
(``margin requirements''). Under Regulations U and T under the 
Securities Exchange Act of 1934, in effect prior to enactment of the 
Act, only borrowings for such purposes made by a domestic bank or 
broker-dealer were subject to margin requirements. HSBC Securities 
states that a Conduit would be subject to the same credit restrictions 
as a bank under Regulation U as currently in effect.
    8. Finally, Applicant believes the requested relief will benefit 
Borrowing Funds by providing them with an alternative, lower-cost 
source of financing. For all of these reasons and in light of the 
protections afforded by the conditions set forth below, HSBC Securities 
believes that permitting Borrowing Funds to borrow from the Conduits 
would be in the best interests of the Borrowing Funds and their 
shareholders, appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act.

Applicant's Conditions

    The Applicant agrees that any order granting the requested relief 
will be subject to the following conditions:
    1. All Borrowing Funds will comply with the asset coverage 
requirements in section 18(f)(1) of the Act, including with respect to 
all borrowings from a Conduit.
    2. A loan by a Conduit to a Borrowing Fund will be at an interest 
rate equal to the Conduit's cost of funds (i.e., the weighted average 
Promissory Note rate plus dealer commissions).
    3. Before a Borrowing Fund may participate in a Loan Facility, the 
Borrowing Fund's Board, including a majority of the Disinterested 
Directors, will determine that participation in the Loan Facility is 
consistent with the Borrowing Fund's investment objectives and policies 
and is in the best interests of the Borrowing Fund and its 
shareholders. In addition, a Borrowing Fund will disclose in its 
statement of additional information all material facts about its 
participation in the Loan Facility.
    4. Before a Borrowing Fund may participate in a Loan Facility, its 
Board, including a majority of the Disinterested Directors, will adopt 
procedures governing the Borrowing Fund's participation in the Loan 
Facility (``Procedures''). In addition to any other provisions the 
Board may find necessary or appropriate to be included in the 
Procedures, the Procedures will require that, before a Borrowing Fund 
may enter into loan transactions with a Conduit, the Board, including a 
majority of the Disinterested Directors, will determine that:
    a. The borrowing is in the best interests of the Borrowing Fund and 
its shareholders;
    b. the borrowing and pledge of assets are consistent with the 
Borrowing Fund's investment objectives and policies;
    c. the total anticipated cost of the Loan Facility (including fees 
and interest) does not exceed the total anticipated costs of comparable 
financing alternatives that are available to the Borrowing Fund;
    d. the Borrowing Fund's asset eligibility criteria are consistent 
with its investment objectives and policies; and
    e. each Borrowing Fund's investments, consistent with the 
eligibility criteria and any other requirements of participating in the 
Loan Facility, will be in the best interests of the Borrowing Fund and 
its shareholders.
    5. If a Conduit determines (a) to require the Liquidity Providers 
to acquire from the Conduit outstanding loans made to a Borrowing Fund, 
or (b) not to extend additional loans to a Borrowing Fund, the Board of 
the Borrowing Fund, including a majority of the Disinterested 
Directors, will be notified promptly. As soon as practicable, the 
Board, including a majority of the Disinterested Directors, must 
determine whether it is in the best interests of the Borrowing Fund and 
its shareholders to continue to participate in the Loan Facility or to 
terminate the Borrowing Fund's participation in the Loan Facility in 
accordance with its terms.
    6. At each regular quarterly meeting, the Board, including a 
majority of the Disinterested Directors, will (a) review a Borrowing 
Fund's loan transactions under a Loan Facility during the preceding 
quarter, including the terms of each transaction; and (b) determine 
whether the transactions were effected in compliance with the 
Procedures and the terms and conditions of the order. At least 
annually, the Board, including a majority of the Disinterested 
Directors, will (a) with respect to a Borrowing Fund's continued 
participation in a Loan Facility, make the determinations required in 
condition 3 above and (b) approve such changes to the Procedures as it 
deems necessary or appropriate.
    7. A Borrowing Fund will maintain and preserve permanently in an 
easily accessible place a written copy of the Procedures and any 
modifications to the Procedures. The Borrowing Fund will maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which any transaction with a Loan Facility occurred, the 
first two years in an easily accessible place, a written record of each 
transaction setting forth a description of the terms of the 
transaction, including the amount, the maturity, and the rate of 
interest on the loan and all information upon which the determinations 
required by these conditions were made.
    8. The Applicant will not enter into a Loan Facility with any 
Borrowing Fund if, at the time of such transaction, the Applicant, the 
Conduit or any Liquidity Provider is an affiliated person of a 
Borrowing Fund, within the meaning of section 2(a)(3) of the Act, or an 
affiliated person of an affiliated person of a Borrowing Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
 Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-8364 Filed 5-1-07; 8:45 am]

BILLING CODE 8010-01-P
