April 4, 2002

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: NASD and NYSE Rule Proposals Regarding Research Analyst
Conflicts of Interest (File Nos. SR-NASD-2002-21; SR-NYSE-2002-09)

Dear Mr. Katz:

We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission" or "SEC") for comments regarding rule proposals submitted to the Commission by the National Association of Securities Dealers, Inc. (the "NASD") and the New York Stock Exchange, Inc. (the "NYSE") relating to conflicts of interest of NASD and NYSE member firms ("member firms") and their research analyst employees (the "Proposed Rules").1

HSBC Securities (USA) Inc. ("HSI") is a broker-dealer registered with the Commission under Section 15(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and is a member firm of the NASD and NYSE. HSI is an indirect subsidiary of HSBC Holdings plc, one of the largest banking and financial services organizations in the world (the "HSBC Group"). The HSBC Group's international network comprises some 7,000 offices in 81 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa.

HSBC Group companies produce a great deal of equity research, the majority of which is prepared in London, Japan, Hong Kong, Germany and Canada by individuals who are employed by non-U.S. companies within the HSBC Group. The overwhelming majority of these research reports focus on non-U.S. issuers, although there may be an occasional industry report on, for example, "Banks" or "Telecoms" in which a U.S. issuer is mentioned.

Currently, research reports prepared by non-U.S. members of the HSBC Group are sent to U.S. "major U.S. institutional investors" (as such term is defined for purposes of Rule 15a-6 under the Exchange Act).2 These research reports may be distributed to major U.S. institutional investors (i) directly by the non-U.S. entities in accordance with Rule 15a-6(a)(2) ("Foreign Distributed Research), or (ii) by HSI, either in hard copy form or via the Internet or other electronic means ("HSI Distributed Research"). HSI Distributed Research bears a legend to the effect that transactions in securities mentioned in the report will be effected by HSI.3 In accordance with Rule 15a-6(a)(2), HSI is not required to, and does not, "accept responsibility" for the content of these reports. HSI Distributed Research is, however, read by an HSI compliance officer in order to review the general content of the report and to check the report against HSI's watch and restricted lists.

In connection with our review of the Proposed Rules, we requested and received a copy of the comment letter being submitted to the Commission by Cleary, Gottlieb, Steen & Hamilton (the "Cleary Letter"), which discusses, among other things, the issue of how the Proposed Rules are intended to apply to research reports prepared by non-U.S. broker-dealers ("foreign-prepared research reports") when a member firm "accepts responsibility" for them and distributes them to U.S. investors in accordance with the Research No-Action Position. We endorse the view expressed in paragraph 5 of the Cleary Letter. In particular, we believe that the Proposed Rules should not be applicable to, or in connection with, foreign-prepared research reports distributed by member firms in accordance with the Research No-Action Position, where the research relates to securities of non-U.S. issuers or is contained in industry-wide reports covering both U.S. and non-U.S. issuers. We also believe these reports should contain generic disclosure to the effect that the requirements applicable to member firms under the Proposed Rules do not apply to such foreign-prepared research reports and that the non-U.S. broker-dealer or research analyst preparing the report may have a conflict of interest due to the receipt or anticipated receipt of compensation from the issuer, securities ownership or other interaction with the issuer (the "Generic Disclosure Statement").

As noted in the Cleary Letter, we also assume the Proposed Rules would not apply at all to research, such as Foreign Distributed Research, that is prepared by a non-U.S. broker-dealer and distributed directly by the non-U.S. broker-dealer to major U.S. institutional investors. However, we believe the NASD and NYSE should clarify that the Proposed Rules are likewise inapplicable to research, such as HSI Distributed Research, that is prepared by a non-U.S. broker-dealer and distributed by a member firm to major U.S. institutional investors, provided that such research (i) relates to non-U.S. issuers or is contained in an industry-wide report covering both U.S. and non-U.S. issuers, and (ii) contains the Generic Disclosure Statement.

Clarifying that the Proposed Rules are not intended to be applied to foreign-prepared research reports that relate to non-U.S. issuers or are contained in industry-wide reports covering both U.S. and non-U.S. issuers, subject to inclusion of the Generic Disclosure Statement for reports distributed by member firms, strikes the right balance between protecting U.S. investors and maintaining their access to research regarding non-U.S. issuers and markets. We believe it is unfair and unrealistic to expect non-U.S. broker-dealers to change their research practices as a price for furnishing research to U.S. investors. The competitive disadvantages for these non-U.S. broker-dealers vis-à-vis other firms in their home market who would not be subject to the Proposed Rules are both obvious and substantial, ranging from significant incremental administrative costs to difficulty in competing for and retaining top research analysts and in accessing key personnel of covered companies. In light of these consequences, inclusion of the Generic Disclosure Statement is the appropriate approach in that it provides a context for U.S. investors to evaluate foreign-prepared research reports without imposing additional costs on the research preparer that are likely to be grossly disproportionate to the benefits of providing the research.

We appreciate the opportunity to submit this comment letter regarding the Proposed Rules. Should you wish to discuss this letter or our views generally on the Proposed Rules, please feel free to contact Ian Kirschner at 212-525-8119 or Kevin Finnegan at 212-525-5880.

Very truly yours,

HSBC Securities (USA) Inc.

1 SEC Release No. 34-45526 (March 8, 2002).
2 HSI does not at present distribute foreign-prepared research to U.S. persons other than major U.S. institutional investors though it may do so in the future under existing Commission no-action positions, pursuant to which HSI would "accept responsibility" for the report and all resulting transactions with U.S. investors would be effected with or through HSI (the "Research No-Action Position"). See SEC Release No. 34-27017 (July 11, 1989).
3 See Exchange Act Rule 15a-6(a)(2)(iii), which requires the U.S. broker-dealer to effect resulting transactions in connection with research reports distributed in accordance with Rule 15a-6(a)(2) if the non-U.S. broker-dealer and U.S. broker-dealer have previously entered into a relationship that satisfies paragraph (a)(3) of the Rule.