Martine M. Beamon, Esq.

March 16, 2020

Martine M. Beamon, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

Re:

HSBC Holdings plc – Waiver Request of Ineligible Issuer Status under Rule 405 of the

Securities Act of 1933

Dear Ms. Beamon:

This is in response to your letter dated March 13, 2020, written on behalf of HSBC Holdings

plc (“HSBC”) and constituting an application for relief from HSBC being considered an “ineligible

issuer” under clause (1)(iv) of the definition of ineligible issuer in Rule 405 of the Securities Act of

1933 (“Securities Act”). HSBC requests relief from being considered an ineligible issuer under Rule

405, due to the entry on March 16, 2020 of a Commission Order (“Order”) pursuant to Section 15(b)

of the Securities Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers

Act of 1940 (“Advisers Act”) against HSBC Securities (USA), Inc. (“HSBC Securities”), a subsidiary

of HSBC. The Order requires that, among other things, HSBC Securities cease and desist from

committing or causing any violations and any future violations of Sections 206(2) and 206(4) of the

Advisers Act and Rule 206(4)-7 thereunder.

Based on the facts and representations in your letter, we have determined that HSBC has

made a showing of good cause under clause (2) of the definition of ineligible issuer in Rule 405 and

that HSBC will not be considered an ineligible issuer by reason of the entry of the Order.

Accordingly, the relief described above from HSBC being an ineligible issuer under Rule 405 of the

Securities Act is hereby granted. Any different facts from those represented or failure to comply with

the terms of the Order would require us to revisit our determination that good cause has been shown

and could constitute grounds to revoke or further condition the waiver. The Commission reserves the

right, in its sole discretion, to revoke or further condition the waiver under those circumstances.

For the Commission, by the Division of Corporation Finance, pursuant to delegated authority.

Sincerely,

/s/

Tim Henseler

Chief, Office of Enforcement Liaison

Division of Corporation Finance

New York

Northern California

Washington DC

São Paulo

London

Paris

Madrid

Hong Kong

Beijing

Tokyo

Martine M. Beamon

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

212 450 4262 tel

martine.beamon@davispolk.com

March 13, 2020

By Electronic Mail and Overnight Courier

Re:

In the Matter of HSBC Securities (USA) Inc.

Tim Henseler, Esq.

Chief, Office of Enforcement Liaison

Division of Corporation Finance

U.S. Securities and Exchange Commission

100 F. Street, N.E.

Washington, D.C. 20549-7553

Dear Mr. Henseler:

HSBC H

. ( HSBC ),

settlement of the above-captioned administrative proceeding filed by the Securities and

E

C

(

C

SEC )

HSBC S

(USA) I .

( HSI ),

-owned subsidiary of HSBC. The settlement resulted in the entry of a

cease-and-desist order (t

O

)

HSI,

.

Pursuant to Rule 405, promulgated under the Securities Act of 1933, HSBC respectfully

requests that the Commission, or the Division of Corporation Finance acting pursuant to

delegated authority,1 determine that, for good cause shown, it is not necessary under the

HSBC

R

405.

BACKGROUND

The Enforcement Staff has engaged in settlement discussions with HSI in connection

with the above-captioned matter and has determined that HSI has violated Sections 206(2) and

206(4)

I

A

A

1940 (

A

A )

R

206(4)-7 thereunder.

O

,

C

diction

over it and the subject matter of the proceedings, HSI has consented to the entry of the Order,

which institutes administrative and cease-and-desist proceedings pursuant to Section 15(b) of

S

E

A

1934 (

E

A ) nd Sections 203(e) and Section

203(k) of the Advisers Act.

1 See 17 C.F.R. § 200.30-1(a)(10).

Tim Henseler, Esq.

2

March 13, 2020

The Order finds that, between November 2015 and August 2017, HSI made false and

( IAR )

compensated. As described in the Order, IARs are dual-registered as brokers and investment

advisers. In 2013, HSI changed how it compensated IARs: whereas IARs previously were

compensated on a commission basis, under the new framework they received a fixed salary with

the opportunity for a discretionary bonus, based on performance on several financial and nonfinancial metrics. One of those financial metrics took into consideration recurring income to HSI

,

-under-management fees that IARs

ts. Clients did not pay commissions or fees for

activity within those accounts.

HSI Customer Agreement which was provided to every customer disclosed that

conflicts of interest may arise with respect to HSI

det

. H

, HSI Form ADV and Wrap Fee Program

Brochure, which were provided only to advisory clients, stated that IARs were not compensated

based on commissions or fees from the managed program accounts. Those advisory program

documents also listed the non-financial factors used to compensate IARs, without describing the

IAR

. T O

were false and misleading and did not sufficiently disclose potential or actual conflicts of interest

concerning the factors HSI used to determine IAR compensation.

The Order requires that HSI cease and desist from committing or causing any violations

and any future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7

thereunder. Additionally, the Order censures HSI and requires payment of a civil monetary

penalty of $725,000.

HSBC is a publicly-traded company listed on the New York Stock Exchange and is a

reporting company under the Exchange Act. HSBC has identified itself in filings with the

Commission as a well( KSI )

HSI, which is a registered investment adviser and broker-dealer.

DISCUSSION

In 2005, the Commission revised the registration, communications, and offering

processes under the Securities Act.2 As part of this offering reform, the Commission revised

Securities Act Rule 405 and created a new category of issuer, the WKSI, and a new category of

offering comm

,

. A KSI

C

,

large issuers are planned and structured. These reforms include the ability to

-and(i.e.,

)

-as-you(i.e., the

ability to pay filing fees as the issuer sells securities off the shelf). These reforms have reduced

the risk of regulatory delays in connection with capital formation, without impacting the protection

afforded to investors. In addition, WKSIs are provided with greater flexibility in their

communications, including the ability to use free writing prospectuses in advance of filing a

registration statement.

2 See Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005), Exchange Act Release

No. 52,056, Investment Company Act Release No. 26,993, 70 Fed. Reg. 44,722, 44,790 (Aug. 3, 2005).

Tim Henseler, Esq.

3

March 13, 2020

T C

R

405,

. A

is ineligible to make communications by way of free writing prospectuses, except in limited

circumstances.3 As a result, an ineligible issuer that would otherwise qualify as a WKSI does not

have access to file-and-go or pay-as-you-go, and cannot use certain types of free writing

prospectuses.

Securitie A R

405

C

,

good cause, that it is not necessary under the circumstances that the issuer be considered an

. 4 The Commission has delegated the function of granting or denying such

applications to the Director of the Division of Corporation Finance.5

HSBC understands that the entry of the Order against HSI, which is an indirect subsidiary

of HSBC, would make HSBC an ineligible issuer under Rule 405. As a result, HSBC would not

be able to qualify as a WKSI, and, therefore, would not have access to file-and-go and other

reforms available to WKSIs, and would not be able to be eligible to take advantage of all of the

free writing prospectus reforms of Rules 164 and 433.

REASONS FOR GRANTING A WAIVER

C

D

C

F

R

Statement on Well-Known Seasoned Issuer Waivers issued on April 24, 2014, HSBC respectfully

submits that granting HSBC a waiver from ineligible issuer status is in the public interest and that

declaring HSBC to be an ineligible issuer is not necessary for the protection of investors. In light

of the facts and circumstances of this action and considering the conduct described in the Order,

applying the ineligibility provisions to HSBC would be disproportionately and unduly severe. For

, HSBC

granted.

Nature of the Violation

The conduct described in the Order does not pertain to activities undertaken by HSBC in

connection with its role as an issuer of securities (or any disclosure related thereto), its financial

reporting, or any of its filings with the Commission. Likewise, the Order does not find any

HSBC

maintained in connection with its role as an issuer, or its preparation and review of financial

statements and Commission filings.

The Persons Responsible For the Misconduct Described in the Order

HSI is not an issuer of securities, and the employees responsible for the disclosures

O

HSBC

of securities (or any disclosures related thereto), its financial reporting, or any of its filings with

the Commission. The HSI personnel involved in the disclosures addressed in the Order are

3

See Securities Act Rules 164(e), 405 & 433, 17 C.F.R. §§ 230.164(e), 230.405 & 230.433.

4

Securities Act Rule 405, 17 C.F.R. § 230.405.

5

17 C.F.R. § 200.30-1(a)(10).

Tim Henseler, Esq.

4

March 13, 2020

distinct from the personnel involved in HSBC

as an issuer of

HSBC

filings with the commission. Similarly, the HSI procedures governing the disclosures addressed

in the Order are distinct from the extensive Sarbanes-Oxley attestation and review process

associated with HSBC

HSBC

commission. No employee of HSBC participated in the underlying conduct, and there is no

HSBC

,

ignored warning signs or red flags regarding the conduct, or engaged in deliberate misconduct.

Further, no employee from either HSI or HSBC disregarded indications that the disclosures

were inconsistent. The Order does not suggest otherwise, nor does it identify any client who was

misled by the disclosures or otherwise harmed.

The Duration of the Misconduct Described in the Order

The conduct at issue in the Order occurred from November 2015 to August 2017. The

Order identifies two instances during this 22-mo

HSI

,

provided only to customers of managed program accounts, were false and misleading. As

described below, HSI voluntarily revised its Form ADV and Wrap Program Brochures in August

2017 to address the disclosures at issue in the Order.

The Order Does Not Involve a Scienter-Based Violation

The Order does not allege that HSBC or HSI acted with scienter or intent to defraud.

Rather, the conduct involves a non-scienter-based violation of the Advisers Act by one of

HSBC

, HSI. I

,

O

HSI

IAR

related to compensation, the Order also recognizes that HSI provided every customer with a

disclosure stating that a conflict of interest may arise in the consideration of recurring income to

the firm when determining employee compensation.

Remedial Action

HSI voluntarily revised its Form ADV and Wrap Program Brochures in August 2017 to

address the disclosures at issue in the Order and provide more information about how IARs are

compensated. As revised, the disclosures state that IARs do not receive commissions on the

products that they sell, and the disclosures provide examples of both the financial and nonfinancial factors

IAR

.6 The revised disclosures make clear that

HSI

for HSI,

which provide an incentive for the IAR to recommend that a client invest assets with HSI. These

revisions will prevent the recurrence of the conduct that is the subject of the Order.

In sum, we believe the conduct addressed in the Order does not call into question the

HSBC

HSBC

6 The financial factors described in the disclosures are discretionary compensation plan funding, asset

accumulation (including assets gathered and retained in managed accounts and recommended by the

representative), and income generation to HSI resulting from client investments (including quarterly fees from

managed accounts). The non-financial factors described in the disclosures are the effective management of risk,

compliance, quality and values, activities in meeting with clients,

.

Tim Henseler, Esq.

5

March 13, 2020

. HSBC

s and procedures as an issuer and its filings with the

Commission were, and are, not deficient, and the Commission staff has not made any allegations

to the contrary.

Finally, neither HSBC, nor any of its subsidiaries, has previously submitted a WKSI

waiver that was considered and voted on by the Commission.

Impact on Issuer

A

,

HSBC

-known seasoned

HSBC

operations, which in turn could potentially harm investors. This would be an unduly severe

consequence for the non-scienter-based violations that are the subject of the Order particularly

in light of the fact that the conduct at issue ended two years ago; the Form ADV and Wrap Fee

Program Brochure language has been revised; and the underlying conduct involved only a nonHSBC

HSBC

disclosure to investors in its securities.

HSBC is one of the largest banking and financial services organizations in the world, with

operations in 65 countries, linking developing and emerging markets and serving over 40 million

customers. HSBC regularly relies on its WKSI status to offer securities under its automatic shelf

registration statement. For HSBC, the automatic shelf registration process provides a critical

means of access to the United States capital markets, which provides essential funding for its

operations and compliance with applicable foreign, federal and state banking regulations,

HSBC

. L

KSI

HSBC

. A

, HSBC registration statements would be subject to a review period upon filing,

which could limit its flexibility to access the capital markets expeditiously as the need for

additional capital and liquidity arises and when market conditions are most advantageous. As an

ineligible issuer, HSBC would also lose the flexibility (i) to offer additional securities of the

classes covered by the registration statement without filing a new registration statement, (ii) to

register additional classes of securities not covered by the registration statement by filing a posteffective amendment that becomes immediately effective, (iii) to omit certain information from the

prospectus, (iv)

-as-you( )

under the Trust Indenture Act of 1939, as amended, should the need arise, without filing or

having the Commission declare effective a new registration statement.

In addition, the loss of WKSI status precludes issuers from using free writing

prospectuses, other than a free writing prospectus that contains only a description of the terms of

the securities in the offering. While HSBC rarely uses free writing prospectuses, this limitation

would restrict the ability of HSBC and its underwriters to communicate electronically with

investors and use certain road show or other materials, as such electronic and written

communications could be considered free writing prospectuses that contain more information

than a description of the offering. The Commission has recognized that investors and the

securities market benefit from the use of these types of materials, which, among other things,

facilitate greater transparency to investors.7 Without free writing prospectus privileges, HSBC

7 Securities Offering Reform, Securities Act Release No. 8501 (Nov. 3, 2004).

Tim Henseler, Esq.

6

March 13, 2020

and its underwriters would be extremely limited in their ability to use written communications to

market transactions in a user-friendly format and would be required to revert to the more typically

dense statutory prospectus. Not only would this have a negative impact on investors, it would

also create significant execution risk for HSBC, because the restrictions on marketing

communications could result in decreased demand and/or price tension for an offering, which

HSBC

raise the capital it needs.

HSBC issues a variety of securities that are registered under its automatically effective

shelf, including regulatory capital securities and senior debt securities (qualifying as MREL/TLAC

(as defined below))

. S

January 1,

2016, HSBC has been involved in approximately $63.69 billion of offerings using its automatically

effective shelf. The automatic shelf registration process provides HSBC a critical means of

access to the capital markets in a timely and efficient manner, including the ability to take

,

HSBC

business. The procedural and financial flexibility that the automatically effective shelf affords

HSBC is essential given the volatility of markets and the impact of macro-economic and political

,

UK

E

U

.

In addition to the uncertainty of market conditions, HSBC, like other similar institutions,

must adhere to stringent regulatory requirements, including new and proposed rules relating to

heightened risk-based and leverage capital, leverage, and liquidity requirements. Meeting these

requirements requires the ability to raise capital quickly, which will become significantly more

difficult if HSBC loses its WKSI status. Specifically, HSBC is subject to capital requirements as

set out in the EU Capital Requirements Regulation and Directive and as implemented by the UK

Prudential Regulation Authority. HSBC is also expected to serve as a source of financial

strength to its US banking subsidiaries, including HSBC North America Holdings Inc., HSBC USA

Inc. and HSBC Bank USA, which are similarly subject to capital requirements promulgated by the

US federal banking agencies. These capital requirements have been and continue to be

enhanced.

The continuing progress in the implementation of international principles and EU and

domestic rules and regulations (including such rules and regulations in the UK or in other

jurisdictions in which the HSBC group operates) around additional loss absorbing capacity (such

as TLAC and MREL (each as defined below)) are also expected to increase current capital and

leverage requirements. For example, the EU Bank Recovery and Resolution Directive requires

member states of the EU to enable their resolution authorities to set a minimum requirement for

( MREL ) for banks in their jurisdiction. The United Kingdom implemented the

MREL requirements through revisions to the Banking Act 2009 and the Bank Recovery and

Resolution (No 2) Order 2014 (which will be further amended to reflect the revisions to the EU

Capital Requirements Directive and the EU Bank Recovery and Resolution Directive, which

came into force during 2019). The current United Kingdom MREL regime, which took effect on

January 1, 2019, at a level which will incrementally increase until January 1, 2022, has been

designed to be broadly compatible with the proposed term sheet published by the Financial

Stability Board on total

( TLAC ) requirements for global systemically

important banks (referred to as G-SIIs under the EU proposals). In addition, modifications to the

EU Capital Requirements Regulation came into force during 2019 and provide new baseline

requirements for MREL/TLAC levels for EU G-SIIs, such as HSBC. This continuing evolution of

Tim Henseler, Esq.

7

March 13, 2020

the capital and loss absorbing requirements may result in HSBC having to raise additional

capital.

HSBC and its US subsidiaries are also regularly subject to supervisory stress tests

administered by regulators in a variety of jurisdictions including by the UK Prudential Regulation

Authority, the European Banking Authority and the Federal Reserve the parameters and

requirements of which change annually. These stress tests effectively require subject banking

organizations to maintain capital levels significantly in excess of minimum regulatory

requirements to demonstrate they will be able to withstand the severe economic shocks and

downturns hypothesized by regulators in their severely adverse stress scenarios. The stress

tal planning. In addition to

supervisory stress tests, HSBC and its US banking subsidiaries are also subject to various buffer

requirements, which require maintenance of additional capital above regulatory minimum levels

and are also subject to change on an annual basis. Compliance with these regulatory

requirements and buffers is premised on and facilitated by an important consideration: that

HSBC will have the ability to access the US capital markets at extremely short notice.

Since January 1, 2016, HSBC has completed 33 trades that each raised in excess of $1

billion (thus, considered jumbo in size) using the WKSI Shelf (or the predecessor WKSI shelf),

$51.77

G

-absorbing capacity

(known as MREL/TLAC instruments) and $11.92 billion of notes issued to increase the Group

regulatory capital reserves. In 2019, HSBC used its WKSI shelf to complete 6 trades,

representing approximately $10.28 billion of notes issued. To capture optimal market conditions

and decrease market risk, all issuances using the WKSI shelf including those in 2019 were

executed same-day. It is expected that material amounts of regulatory capital and other senior

and subordinated debt securities will be raised by HSBC in t

HSBC

increased capital and other regulatory requirements, and the flexibility offered by the WKSI Shelf

will be critical to achieving successful offerings.

Without WKSI status, HSBC would be required to file a new, non-WKSI shelf that would

be subject to SEC review and comment, creating potential time delays to access the market.

Further, if the amount registered on a non-WKSI shelf were for any reason insufficient, or HSBC

wished to add additional issuers or new classes of securities (including as a result of any

unforeseen changes in regulatory capital, TLAC/MREL requirements, tax laws or otherwise), it

would be required to file a post-effective amendment, which would be subject to SEC review and

approval prior to becoming effective. Accordingly, this process could lead to a delay in HSBC

accessing the US capital markets, particularly as compared to the same-day execution that it can

use for trades under its WKSI shelf,

HSBC

arket

conditions and potentially increasing market risk.

The above figures and considerations demonstrate the importance of the automatically

effective shelf to HSBC in meeting its regulatory, capital, funding, and business requirements.

*

*

*

In sum, HSBC respectfully submits that, based on the foregoing factors, the loss to

HSBC of certainty and flexibility if it were to become an ineligible issuer would be a

disproportionate hardship in light of the nature of the conduct described in the Order. More

importantly, because the conduct described in the Order does not relate to HSBC

Tim Henseler, Esq.

8

March 13, 2020

produce reliable disclosures in its role as an issuer of securities, granting a waiver in this

instance is consistent with the public interest and the protection of investors.

Please do not hesitate to contact me at the above number should you have any

questions. Thank you for your consideration.

Very truly yours,

Martine M. Beamon

cc:

Vincent Hull, SEC Division of Enforcement

Maureen Lewis, HSBC Holdings plc