[Federal Register Volume 64, Number 167 (Monday, August 30, 1999)]
[Notices]
[Pages 47197-47201]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22374]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23963; 812-11718]


HSBC Securities (USA) Inc., et al.; Notice of Application

August 23, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under section 12(d)(1)(J) of 
the Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 12(d)(1) of the Act, under section 6(c) of the Act for an 
exemption from sections 12(d)(3) and 14(a) of the Act, and under 
section 17(b) of the Act for an exemption from section 17(a) of the 
Act.

-----------------------------------------------------------------------

    Summary of Application: HSBC Securities (USA) Inc. (``HSBC 
Securities'') and HSBC Holdings plc

[[Page 47198]]

(``HSBC Holdings,'' together with HSBC Securities, ``HSBC'') request an 
order with respect to the future HSBC Capital Funding Trusts (``HSBC 
Trusts'') and future trusts that are substantially similar to the HSBC 
Trusts and for which HSBC Securities will serve as a principal 
underwriter (collectively, the ``Trusts'') and all English limited 
partnerships, the general partner of which is a wholly owned subsidiary 
of HSBC Holdings and in which the Trusts invest (the ``(Limited 
Partnerships'') that would (i) permit other registered investment 
companies to own a greater percentage of the total outstanding voting 
stock of any Trust (the ``Securities'') than that permitted by section 
12(d)(1), (ii) exempt the Trusts from the initial net worth 
requirements of section 14(a), and (iii) permit the Trusts to purchase 
certain securities from HSBC or its affiliates at the time of a Trust's 
initial issuance of Securities.
    Applicants: HSBC Securities and HSBC Holdings.
    Filing Dates: The application was filed on July 29, 1999. 
Applicants have agreed to file an amendment to the application, the 
substance of which is reflected in this notice, during the notice 
period.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the SEC orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on 
September 13, 1999, 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 
may request notification of a hearing by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants: HSBC Securities, 140 Broadway, New York, New York 
10005; HSBC Holdings, 10 Lower Thames Street, London EC3 6AE, England.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Staff Attorney, at 
(202) 942-0634, or Mary Kay Frech, Branch Chief, at (202) 942-0564 
(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 
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549-0102 (tel. no. 202-942-8090).

Applicants' Representations

    1. Each Trust will be a limited-life, grantor trust registered 
under the Act as a non-diversified, closed-end management investment 
company. HSBC Securities will serve as a principal underwriter (as 
defined in section 2(a)(29) of the Act) of the Securities issued to the 
public by each Trust.
    2. Each Trust's assets will consist of (i) American Depositary 
Shares representing preference shares issued by HSBC Holdings 
(``Shares'') and (ii) a limited partnership interest in a Limited 
Partnership (the ``Limited Partnership Interest''). As discussed below, 
the Limited Partnership will hold subordinated debt issued by HSBC 
Holdings or a member of the HSBC Holdings group. Each Trust's assets 
will be purchased at the time of and with the proceeds of the issuance 
and sale of the Securities.
    3. Each Trust's investment objective will be to provide to the 
holders of the Securities (``Holders'') (i) fixed dollar quarterly cash 
distributions on the Securities over the term of the Trust from the 
proceeds of the Limited Partnership Interest, to the extent HSBC 
Holdings would be able to pay dividends on issued and outstanding 
preference shares, (ii) Shares in exchange for Securities upon a fixed 
termination date for the Trust, or, if earlier, upon a specified 
trigger event, and (iii) a fixed dollar amount equal to the 
subscription price per Security if the Securities are redeemed prior to 
exchange for Shares.
    4. The quarterly distributions on the Securities will be funded by 
distributions on the Trust's Limited Partnership Interest.\1\ The sole 
business of the Limited Partnerships will be the subscription for, and 
the holding of, subordinated Eurobonds paying quarterly interest and 
issued by HSBC Holdings (``Eurobonds'') or other debt with similar 
terms and conditions to the Eurobonds and issued by a member of the 
HSBC Holdings group and guaranteed by HSBC Holdings. All distributions 
on the Limited Partnership Interest will be funded by income payments 
on the Eurobonds. HSBC Holdings also will provide subordinated 
guarantees to the Trusts in respect of the Trusts' entitlement to 
payments relating to the Limited Partnership Interest (the 
``Partnership Guarantees''). The Limited Partnerships will not be 
obligated to make, and the Partnership Guarantees will not guarantee, 
any payments to the Trusts in any circumstance under which HSBC 
Holdings would not have been able to pay dividends on issued and 
outstanding preference shares.
---------------------------------------------------------------------------

    \1\ To the extent necessary to make the quarterly distributions, 
the Trust may invest distributions paid on the Limited Partnership 
Interest in short-term U.S. government obligations maturing no later 
than the business day preceding the next following distribution date 
of the Limited Partnership Interest.
---------------------------------------------------------------------------

    5. On a fixed termination date for each Trust, or, if earlier, upon 
a specified trigger event,\2\ the Limited Partnership Interest will be 
redeemed and the Trust will distribute to the Holders the number of 
Shares that is equal to the Holder's pro rata interest in the Shares. 
If the Shares are redeemed prior to any such exchange, the Holders will 
instead receive per Security a fixed dollar amount equal to the 
subscription price for each Security. The Limited Partnership 
Interests, Shares, and Partnership Guarantees will be structured so as 
to require redemption of all the securities constituting assets of a 
Trust if any are redeemed and to ensure that the Trust has sufficient 
funds to meet its cash obligations. In no event will Holders receive 
Limited Partnership Interests or Eurobonds.
---------------------------------------------------------------------------

    \2\ The specified trigger events will relate to the failure of 
HSBC Holdings to meet certain solvency conditions established by the 
United Kingdom Financial Services Authority, its principal 
regulator.
---------------------------------------------------------------------------

    6. Securities issued by the Trusts will be listed on a national 
securities exchange or traded on the Nasdaq National Market System. 
Thus, the Securities will be ``national market system'' securities 
subject to public price quotation and trade reporting requirements. 
After the Securities are issued, the trading price of the Securities is 
expected to vary from time to time based primarily upon the 
creditworthiness of HSBC Holdings, interest rates, and other factors 
affecting conditions and prices in the debt markets. HSBC Securities 
may intend, but will not be obligated, to make a market in the 
Securities of each Trust.
    7. Each Trust will be internally managed by three trustees and will 
not have any separate investment adviser. A majority of the trustees of 
each Trust will be individuals who are not interested persons, as 
defined in section 2(a)(19) of the Act, of the Trust. The trustees will 
have no power to vary the investments held by each Trust. The Trusts 
will be structured so that the trustees are not authorized to sell any 
of the underlying assets and will hold them until, in the case of 
Shares, their redemption or distribution and, in the case of the 
Limited Partnership

[[Page 47199]]

Interests, its redemption. A bank qualified to serve as a trustee under 
the Trust Indenture Act of 1939, as amended, will act as custodian for 
each Trust's assets and may act as administrator, paying agent, 
registrar, and transfer agent with respect to each Trust's Securities. 
The day-to-day administration of each Trust will be carried out by such 
bank.
    8. The trustees of each Trust will be selected initially by HSBC, 
together with any other initial Holders, or by the grantors of the 
Trust. The Holders of each Trust will have the right, upon the 
declaration in writing or vote of more than two-thirds of the 
outstanding Securities of the Trust, to remove a trustee. The Holders 
will be entitled to a vote for each Security held on all matters to be 
voted on by the Holders and will not be able to cumulate their votes in 
the election of trustees. The investment objectives and policies of 
each Trust may be changed only with the approval of all of the Trust's 
outstanding Securities. Unless the Holders so request, it is not 
expected that the Trusts will hold any meetings of Holders, or that 
Holders will ever vote.
    9. Each Trust's organizational and ongoing expenses will not be 
borne by the Holders but will be paid directly or indirectly by a third 
party (which may include HSBC Securities or HSBC Holdings), as will be 
described in the prospectus for the relevant Trust. There will be paid 
annually or quarterly to each of the administrator, the custodian, and 
the paying agent, and to each trustee, the ongoing amounts in respect 
of such agent's fee and in the case of the administrator, expenses. 
These expenses will generally be paid as incurred by a party other than 
the Trust itself (which party may be HSBC Securities or HSBC Holdings). 
The Trust agreements will be structured so that no payments in respect 
of fees and expenses relating to the Trust will be made or payable by 
the Trust.
    10. Applicants assert that the investment product offered by the 
Trusts serves a valid business purpose. The Trust, unlike most 
registered investment companies, are not marketed to provide investors 
with either professional investment asset management or the benefits of 
investment in a diversified pool of assets. Rather, applicants assert 
that the Securities are intended to provide Holders with a security 
having the equivalent payment and risk characteristics of an investment 
in preference shares of HSBC Holdings, while enabling HSBC Holdings to 
benefit from favorable regulatory capital and taxation treatments that 
would not apply were the Holders to invest directly in preference 
shares.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A)(i) of the Act prohibits any registered 
investment company from owning more than 3% of the total outstanding 
voting stock of any other investment company. Section 12(d)(1)(C) of 
the Act similarly prohibits any investment company, other investment 
companies having the same investment adviser, and companies controlled 
by such investment companies from owning more than 10% of the total 
outstanding voting stock of any closed-end investment company.
    2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt 
persons or transactions from any provision of section 12(d)(1), if, and 
to the extent that, such exemption is consistent with the public 
interest and protection of investors. Applicants request an order under 
Section 12(d)(1)(J) to permit other registered investment companies to 
own a greater percentage of the Securities of any Trust than that 
permitted by section 12(d)(1).
    3. Applicants state that, in order for the Trust to be marketed 
most successfully, and to be traded at a price that most accurately 
reflects their value, it is necessary for the Securities to be offered 
to large investment companies and investment company complexes. 
Applicants state that large investment companies and investment company 
complexes seek to spread the fixed costs of analyzing specific 
investment opportunities by making sizable investments in those 
opportunities that prove attractive. Conversely, it may not be 
economially rational for such investors, or their advisers, to take the 
time to review an investment opportunity if the amount that they would 
ultimately be permitted to purchase is immaterial in light of the total 
assets of the investment company or investment company complex. 
Therefore, applicants argue that in order for the Trusts to be 
economically attractive to large investment companies and investment 
company complexes, such investors must be able to acquire Securities in 
excess of the limitations imposed by sections 12(d)(1)(A)(i) and 
12(d)(1)(C).
    4. Applicants state that section 12(d)(1) was designed to prevent 
one investment company from buying of other investment companies and 
creating complicated pyramidal structures. Applicants also state that 
section 12(d)(1) was intended to address the layering of costs to 
investors.
    5. Applicants assert that the concerns about pyramiding and undue 
influence generally do not arise in the case of the Trusts because 
neither the trustees nor the Holders will have the power to vary the 
investments held by each Trust or to acquire or dispose of the assets 
of the Trusts. To the extent that Holders can change the composition of 
the board of trustees or the fundamental policies of each Trust by 
vote, applicants argue that any concerns regarding undue influence will 
be eliminated by a provision in the charter documents of the Trusts 
that will require any investment companies owning Securities of any 
Trust in excess of the limits imposed by sections 12(d)(1)(A)(i) and 
12(d)(1)(C) to vote their Securities in proportion to the votes of all 
other Holders. Applicants also state that the concern about undue 
influence through a threat to redeem does not arise in the case of the 
Trusts because the Securities will not be redeemable.
    6. Section 12(d)(1) also was designed to address the excessive 
costs and fees that may result from multiple layers of investment 
companies. Applicants state that these concerns do not arise in the 
case of the Trusts because of the limited ongoing fees and expenses 
incurred by the Trusts and the fact that these fees and expenses will 
be borne either directly or indirectly by HSBC Holdings or HSBC 
Securities or another third party, and not by the Holders. In addition, 
the Holders will not, as a practical matter, bear the organizational 
expenses (including underwriting expenses) of the Trusts. Applicants 
assert that the organizational expenses will be borne directly by HSBC 
Holdings, HSBC Securities, or other third parties. Thus, a Holder will 
not pay duplicative charges to purchase Securities. Finally, there will 
be no duplication of advisory fees because the Trusts will not have any 
separate investment advisers.

B. Section 12(d)(3)

    1. Section 12(d)(3) of the Act generally prohibits a registered 
investment company from acquiring any security issued by any person who 
is a broker, dealer, investment adviser, or engaged in the business of 
underwriting (collectively, ``securities-related activities''). 
Applicants state that because HSBC Holdings is engaged in securities-
related activities, the Trusts may be prohibited by section 12(d)(3) 
from purchasing the Shares and Limited Partnership Interests.
    2. Rule 12d3-1 under the Act exempts from the prohibition of 
section 12(d)(3)

[[Page 47200]]

purchases of securities of an issuer engaged in securities-related 
activities if certain conditions are met. One of these conditions, set 
forth in rule 12d3-1(c), prohibits the acquisition of a security 
issued, among other persons, by the investment company's principal 
underwriter or any affiliated person of the principal underwriter.
    3. Section 2(a)(3) of the Act defines an ``affiliated person'' of 
another person to include (i) any person directly or indirectly owning, 
controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person, (ii) any person 5% 
or more of whose voting securities are directly or indirectly owned, 
controlled, or held with the power to vote by the other person, and 
(iii) any person directly or indirectly controlling, controlled by, or 
under common control with, the other person.
    4. Applicants state that HSBC Holdings is an affiliated person of 
HSBC Securities, the Trusts' principal underwriter. Applicants thus 
state that they are unable to rely on rule 12d3-1.
    5. Applicants request an exemption under section 6(c) of the Act 
from section 12(d)(3) to permit the Trusts to purchase the Shares and 
Limited Partnership Interests, provided that the requirements of rule 
12d3-1, except paragraph (c), are met. Section 6(c) provides that the 
SEC may exempt any person or transaction from any provision of the Act 
or any rule under the Act 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 
policies and provisions of the Act. For the reasons stated below, 
applicants believe that the requested relief satisfies this standard.
    6. Applicants assert that their proposal does not raise the 
concerns about conflicts of interest that the provisions of rule 12d3-
1(c) were designed to address. Applicants state that the Shares and the 
Limited Partnership Interests will be acquired by the Trusts only at 
the time of the issuance of the Securities and a Trust's assets will 
remain fixed for the life of the Trust.

C. Section 14(a)

    1. Section 14(a) of the Act requires, in pertinent part, that an 
investment company have a net worth of a least $100,000 before making 
any public offering of its shares. The purpose of section 14(a) is to 
ensure that investment companies are adequately capitalized prior to or 
simultaneously with the sale of their securities to the public. Rule 
14a-3 under the Act exempts from section 14(a) unit investment trusts 
(``UITs'') that meet certain conditions in recognition of the fact 
that;, once the units are sold, a UIT requires much less commitment on 
the part of the sponsor than does a management investment company. Rule 
14a-3 provides that a UIT investing in eligible trust securities shall 
be exempt from the net worth requirement, provided that the UIT holds 
at least $100,000 of eligible trust securities at the commencement of a 
public offering.
    2. Applicants request an order under section 6(c) exempting the 
Trusts from the requirements of section 14(a). Applicants believe that 
the exemption is appropriate in the public interest and consistent with 
the protection of investors and the policies and provisions of the Act. 
Applicants assert that, while the Trusts are classified as management 
companies, they have the characteristics of UITs. Investors in the 
Trust, like investors in a UIT, will not be purchasing interests in a 
managed pool of securities, but rather in a fixed portfolio that is 
held until the termination of the Trust. Applicants believe therefore, 
that there is no need for an ongoing commitment on the part of the 
underwriter.
    3. Applicants state that, in order to ensure that each Trust will 
become a going concern, the Securities of each Trust will be publicly 
offered in a firm commitment underwriting, registered under the 
Securities Act of 1933, or in a transaction exempt from such 
registration, and resulting in net proceeds to each Trust of at least 
$100,000,000. Prior to the issuance and delivery of the Securities of 
each Trust to the underwriters, the underwriters will enter into an 
underwriting agreement pursuant to which they will agree to purchase 
the Securities subject to customary conditions to closing. The 
underwriters will not be entitled to purchase less than all of the 
Securities of each Trust. Accordingly, applicants state that the 
offering will not be completed at all or each Trust will have a net 
worth substantially in excess of $100,000 on the date of the issuance 
of the Securities. Applicants also do not anticipate that the net worth 
of the Trusts will fall below $100,000 before they are terminated.

D. Section 17(a)

    1. Sections 17(a)(1) and 17(a)(2) of the Act generally prohibit the 
principal underwriter, or any affiliated person of the principal 
underwriter, of a registered investment company from selling or 
purchasing any securities to or from that investment company. The 
effect of these provisions is to preclude the Trusts from purchasing 
the Shares and the Limited Partnership Interests (including the 
Partnership Guarantees) from HSBC Holdings and the Limited 
Partnerships, respectively.
    2. Section 17(b) of the Act provides that the SEC shall exempt a 
proposed transaction from section 17(a) if evidence establishes that 
the terms of the proposed transaction are reasonable and fair and do 
not involve overreaching, and the proposed transaction is consistent 
with the policies of the registered investment company involved and the 
purposes of the Act. Applicants request an exemption under section 
17(b) from sections 17(a)(1) and 17(a)(2) to permit the Trusts to 
purchase Shares and the Limited Partnership Interests (including the 
Partnership Guarantees) from HSBC Holdings and the Limited 
Partnerships.
    3. Applicants state that they are seeking relief from section 17(a) 
only with respect to the initial purchase of the Shares and Limited 
Partnership Interests and not with respect to an ongoing course of 
business. Applicants state that the terms of the Shares and the Limited 
Partnership Interests (including the terms of the associated 
Partnership Guarantees and Eurobonds) and of their purchase will be 
fully disclosed to investors in the Securities prior to the making of 
an investment decision. Applicants also state that the Securities are 
expected to be investment-grade rated securities and that their pricing 
and economic characteristics will be established by reference to 
similar investment-grade rated instruments. Applicants assert that, 
since an investment in the Securities is in effect a proxy for 
investment in the Shares, and since the Trusts will use all of the 
proceeds of the offering of the Securities to buy the requisite number 
of Shares and Limited Partnership Interests, there should be no 
potential for overreaching by HSBC Holdings or the Limited 
Partnerships.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Any investment company owning Securities of any Trust in excess 
of the limits imposed by section 12(d)(1) of the Act will be required 
by the Trust's charter documents to vote its Trust Securities in 
proportion to the vote of all other Holders.
    2. The investment objectives and policies of each Trust as recited 
in such Trust's registration statement will fully and accurately 
describe the investment objectives and policies of the Trust as

[[Page 47201]]

set forth in the trust agreement establishing the Trust and may be 
changed only with the approval of all the Holders of such Trust's 
outstanding Securities.
    3. The underlying securities to be purchased by each Trust will be 
sufficient to provide payments to Holders of Securities that are 
consistent with the investment objectives and policies of the Trust as 
recited in the Trust's registration statement and will be consistent 
with the interests of the Trust and the Holders of its Securities.
    4. The terms of the transactions will be fair to the Holders of the 
Securities issued by each Trust and will not involve overreaching of 
the Trust or the Holders of Securities thereof on the part of any 
person concerned. Prior to the sale of the Shares and the Limited 
Partnership Interest to each Trust, the trustees of such Trust, 
including a majority of trustees who are not interested persons of the 
Trust, shall have determined that the terms of the transaction, 
including the price at which the Shares and the Limited Partnership 
Interest are to be purchased by such Trust, are reasonable and fair and 
do not involve overreaching on the part of any person concerned.
    5. No fee, spread, or other remuneration shall be received by HSBC 
Securities in connection with the sale of the Shares or the Limited 
Partnership Interests to the Trust.
    6. Each Trust will comply with rule 12d-3 under the Act, except 
paragraph (c) of the rule to the extent permitted by the order.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22374 Filed 8-27-99; 8:45 am]
BILLING CODE 8010-01-M