24344 Federal Register / Vol. 72, No. 84 / Wednesday, May 2, 2007 / Notices 

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. 

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 indirectlyheld, 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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Federal Register / Vol. 72, No. 84 / Wednesday, May 2, 2007 / Notices 24345 

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. 

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. 

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

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. 

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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24346 Federal Register / Vol. 72, No. 84 / Wednesday, May 2, 2007 / Notices 

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 

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