Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto Relating to iShares(r) MSCI EAFE Growth Fund and iShares MSCI EAFE Value Fund, 46244-46252 [E5-4274]
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46244
Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52178; File No. SR–NYSE–
2005–41]
Self–Regulatory Organizations; New
York Stock Exchange, Inc.; Notice of
Filing and Order Granting Accelerated
Approval of Proposed Rule Change
and Amendment No. 1 Thereto
Relating to iShares(r) MSCI EAFE
Growth Fund and iShares MSCI EAFE
Value Fund
July 29, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 16,
2005 the New York Stock Exchange, Inc.
(‘‘NYSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. On July 29,
2005, NYSE filed Amendment No. 1 to
the proposed rule filing.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons and is approving the proposal
on an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The NYSE proposes to list and trade
the iShares MSCI EAFE Value Index
Fund and iShares MSCI EAFE Growth
Index Fund (collectively, the ‘‘Funds’’),4
both exchange traded funds, which are
a type of Investment Company Unit
(‘‘ICU’’).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
NYSE included statements concerning
the purpose of, and basis for, the
proposed rule change. The text of these
statements may be examined at the
places specified in Item III, below, and
is set forth in Sections A, B, and C
below.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Amendment No. 1, the Exchange clarified
and supplemented certain aspects of its proposal.
Amendment No. 1 supplements the information
provided in various sections, as indicated, of the
Exchange’s Form 19b–4.
4 iShares is a registered trademark of Barclays
Global Investors, N.A.
2 17
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange has adopted listing
standards applicable to ICUs which are
consistent with the listing criteria
currently used by other national
securities exchanges, and trading
standards pursuant to which the
Exchange may either list and trade ICUs,
or trade such ICUs on the Exchange on
an unlisted trading privileges (‘‘UTP’’)
basis.5
The Exchange now proposes to list
and trade under Section 703.16 of the
NYSE Listed Company Manual
(‘‘Manual’’) and NYSE Rule 1100 et seq.
shares of the Funds, each a series of the
iShares Trust (the ‘‘Trust’’).6 Because
the Funds invest in non-U.S. securities
5 In 1996, the Commission approved Section
703.16 of the NYSE Listed Company Manual
(‘‘Manual’’), which sets forth the rules related to the
listing of ICUs. See Securities Exchange Act Release
No. 36923 (March 5, 1996), 61 FR 10410 (March 13,
1996) (SR–NYSE–95–23). In 2000, the Commission
also approved the Exchange’s generic listing
standards for listing and trading, or the trading
pursuant to UTP, of ICUs under Section 703.16 of
the Manual and NYSE Rule 1100. See Securities
Exchange Act Release No. 43679 (December 5,
2000), 65 FR 77949 (December 13, 2000) (SR–
NYSE–00–46).
6 The Trust is registered under the Investment
Company Act of 1940 (15 U.S.C. 80a) (the
‘‘Investment Company Act’’). On April 15, 2005, the
Trust filed with the Commission a Registration
Statement for the Funds on Form N–1A under the
Securities Act of 1933 (15 U.S.C. 77a), and under
the Investment Company Act relating to the Funds
(File Nos. 333–92935 and 811–09729) (as amended,
the ‘‘Registration Statement’’).
On March 3, 2004, the Trust filed with the
Commission an Amended and Restated Application
for an Amended Order under Sections 6(c) and
17(b) of the Investment Company Act and on
September 8, 2004, the Trust filed with the
Commission a Second Amended and Restated
Application to Amend Orders under Sections 6(c)
and 17(b) of the Investment Company Act, for the
purpose of exempting the Fund from various
provisions of the Investment Company Act and the
rules thereunder (the ‘‘Application’’). Applicants
requested that the Commission amend a prior order
received by the Advisor, the Trust and the
Distributor on August 15, 2001, as amended (the
‘‘Prior Order’’). On October 5, 2004, the SEC acted
on the Application by approving an order amending
certain prior orders under Section 6(c) of the
Investment Company Act for an exemption from
Sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the
Investment Company Act and Rule 22c–1 under the
Investment Company Act, and under Sections 6(c)
and 17(b) of the Investment Company Act for an
exemption from Sections 17(a)(1) and (a)(2) thereof.
Investment Company Act Release No. 26626
(October 5, 2004) (‘‘Amended Order’’). See also In
the Matter of iShares Trust, et al., Investment
Company Act Release No. 25111 (August 15, 2001)
as amended by In the Matter of iShares, Inc., et al.,
Investment Company Act Release No. 25623 (June
25, 2002) and In the Matter of iShares Trust, et al.,
Investment Company Act Release No. 26006 (April
15, 2003). The Amended Order permits the Trust
to offer the Funds and permits the Funds to invest
in certain depositary receipts.
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not listed on a national securities
exchange or the Nasdaq Stock Market,
the Funds do not meet the ‘‘generic’’
listing requirements of Section 703.16 of
the Manual applicable to listing of ICUs
(permitting listing in reliance upon Rule
19b–4(e) under the Act and cannot be
listed without a filing pursuant to Rule
19b–4 under the Act).7 Therefore, to list
the Funds (or trade pursuant to UTP),
the Exchange must file, and obtain
Commission approval of, a proposed
rule change pursuant to Rule 19b–4
under the Act.8
As set forth in detail below, the Funds
will hold certain securities
(‘‘Component Securities’’) selected to
correspond generally to the performance
of the MSCI EAFE Value Index and the
MSCI EAFE Growth Index (the
‘‘Underlying Indexes’’).9 Each Fund
intends to qualify as a ‘‘regulated
investment company’’ (a ‘‘RIC’’) under
the Internal Revenue Code (the ‘‘Code’’).
Barclays Global Fund Advisors (the
‘‘Advisor’’ or ‘‘BGFA’’) is the investment
advisor to the Funds. The Advisor is
registered under the Investment
Advisers Act of 1940.10 The Advisor is
the wholly owned subsidiary of
Barclays Global Investors, N.A. (‘‘BGI’’),
a national banking association. BGI is an
indirect subsidiary of Barclays Bank
PLC of the United Kingdom. SEI
Investments Distribution Co. (‘‘SEI’’ or
‘‘Distributor’’), a Pennsylvania
corporation and broker-dealer registered
under the Act, is the principal
underwriter and distributor of Creation
Unit Aggregations of iShares (see
‘‘Issuance of Creation Units
Aggregations,’’ below.) The Distributor
is not affiliated with the Exchange or the
Advisor. The Trust has appointed
Investors Bank & Trust Co. (‘‘IBT’’) to
act as administrator (‘‘Administrator’’),
custodian, fund accountant, transfer
agent, and dividend disbursing agent for
the Funds. The Exchange expects that
performance of the Administrator’s
duties and obligations will be
conducted within the provisions of the
Investment Company Act and the rules
thereunder. There is no affiliation
between the Administrator and the
Trust, the Advisor or the Distributor.
MSCI, the sponsor and compiler of the
Underlying Indexes, is not affiliated
7 17
CFR 240.19b–4.
8 Id.
9 Each Underlying Index for the MSCI EAFE
Value and Growth Index Fund is a subset of the
MSCI EAFE Index. The MSCI EAFE Index is an
Underlying Index of an index fund of the Trust
subject to the Prior Order. At present, the iShares
MSCI EAFE Index Fund trades on the Exchange
pursuant to UTP. Securities Exchange Act Release
No. 50142 (August 3, 2004), 69 FR 48539 (August
10, 2004) (SR–NYSE–2004–27).
10 15 U.S.C. 80b.
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with the Trust, the Administrator, the
Distributor, or with the Advisor or its
affiliates. The Funds are not sponsored,
offered, or sold by MSCI.
(a) Operation of the Funds.11 The
investment objective of the Funds will
be to provide investment results that
correspond generally to the price and
yield performance of the Underlying
Index. In seeking to achieve their
investment objective, the Funds will
utilize ‘‘passive’’ indexing investment
strategies. The Funds may fully
replicate their respective Underlying
Index, but currently intend to use a
‘‘representative sampling’’ strategy to
track the applicable Underlying Index.
A Fund utilizing a representative
sampling strategy generally will hold a
basket of the Component Securities of
its Underlying Index, but it may not
hold all of the Component Securities of
its Underlying Index. The Application
states that the representative sampling
techniques that will be used by the
Advisor to manage the Funds do not
differ from the representative sampling
techniques it uses to manage the funds
that were the subject of the Prior Order.
(See note 6, supra.)
From time to time, adjustments may
be made in the portfolio of the Funds in
accordance with changes in the
composition of the Underlying Indexes
or to maintain compliance with
requirements applicable to a RIC under
the Code.12 For example, if at the end
11 The Exchange states that the information
provided herein is based on information included
in the Application, Prior Order and the Prior
Application. (See note 6, supra.) While the Advisor
would manage the Funds, the Funds’ Board of
Directors would have overall responsibility for the
Funds’ operations. The composition of the Board is,
and would be, in compliance with the requirements
of Section 10 of the Investment Company Act. The
Funds are subject to and must comply with Section
303A.06 of the Manual, which requires that the
Funds have an audit committee that complies with
SEC Rule 10A–3, 17 CFR 240.10A–3.
12 In order for the Funds to qualify for tax
treatment as a RIC, they must meet several
requirements under the Code. Among these is a
requirement that, at the close of each quarter of the
Funds’ taxable year, (i) at least 50% of the market
value of the Funds’ total assets must be represented
by cash items, U.S. government securities,
securities of other RICs and other securities, with
such other securities limited for the purpose of this
calculation with respect to any one issuer to an
amount not greater than 5% of the value of the
Funds’ assets and not greater than 10% of the
outstanding voting securities of such issuer; and (ii)
not more than 25% of the value of their total assets
may be invested in securities of any one issuer, or
two or more issuers that are controlled by the Funds
(within the meaning of Section 851(b)(4)(B) of the
Code) and that are engaged in the same or similar
trades or business (other than U.S. government
securities of other RICs).
Compliance with the above referenced RIC asset
diversification requirements are monitored by the
Advisor, and any necessary adjustments to portfolio
issuer weights will be made on a quarterly basis or
as necessary to ensure compliance with RIC
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46245
of a calendar quarter, a Fund would not
comply with the RIC diversification
tests, the Advisor would make
adjustments to the portfolio to ensure
continued RIC status.
The Exchange states that an index is
a theoretical financial calculation while
each Fund is an actual investment
portfolio. The performance of the Funds
and the Underlying Indexes will vary
somewhat due to transaction costs,
market impact, corporate actions (such
as mergers and spin-offs) and timing
variances. As stated in the Application,
it is expected that, over time, the
correlation between each Fund’s
performance and that of its respective
Underlying Index, before fees and
expenses, will be 95% or better. A figure
of 100% would indicate perfect
correlation. Any correlation of less than
100% is called ‘‘tracking error.’’ Thus,
the Funds are expected to have a
tracking error relative to the
performance of the applicable
Underlying Index of no more than 5%.13
The Funds’ investment objectives,
policies and investment strategies will
be fully disclosed in their prospectus
(‘‘Prospectus’’) and statement of
additional information (‘‘SAI’’). The
Funds’’ board of directors reviews the
tracking error of the Funds on a
quarterly basis and, based upon its
review, will consider whether any
action might be appropriate.
The Funds will not concentrate their
investments (i.e., hold 25% or more of
their assets) in a particular industry or
group of industries, except that the
Funds will concentrate their
investments to approximately the same
extent that the respective Underlying
Index is so concentrated. For purposes
of this limitation, securities of the U.S.
Government (including its agencies and
instrumentalities), repurchase
agreements collateralized by U.S.
Government securities, and securities of
the United States government and their
political subdivisions are not
considered to be issued by members of
any industry.
Each of the MSCI EAFE Value and
Growth Index Funds (i) will invest at
least 90% of its assets in Component
Securities of its respective Underlying
Index and in Depositary Receipts
(defined below) representing such
securities and (ii) may invest up to 10%
of its assets in certain futures, options
and swap contracts, cash and cash
equivalents, including money market
mutual funds advised by BGFA,14 other
exchange-traded funds, including other
iShares Funds,15 and stocks not
included in the Underlying Index but
which the Advisor believes will help
the Fund track its Underlying Index. For
example, each of these Funds may
invest in securities not included in the
relevant Underlying Index in order to
reflect prospective changes in the
relevant Underlying Index (such as
future corporate actions and index
reconstitutions, additions, and
deletions).
To the extent the Funds invest in
American Depositary Receipts,16 they
will be listed on a national securities
exchange or Nasdaq, and to the extent
the Funds invest in other Depositary
Receipts, they will be listed on a foreign
exchange. The Funds will not invest in
any unlisted Depositary Receipts or any
listed Depositary Receipts that the
Advisor deems to be illiquid or for
which pricing information is not readily
available. In addition, all Depositary
Receipts must be sponsored (with the
exception of certain pre-1984 ADRs that
are listed and unsponsored because they
are grandfathered).
The Exchange believes that these
requirements and policies prevent the
Funds from being excessively weighted
in any single security or small group of
securities and significantly reduce
concerns that trading in the Funds
could become a surrogate for trading in
unregistered securities.
(b) Description of the Funds and the
Underlying Indexes. Index Description.
The Funds’ Underlying Indexes, the
MSCI EAFE Growth Index and MSCI
EAFE Value Index, are subsets of the
requirements. When an iShares Fund’s Underlying
Index itself is not RIC compliant, the Advisor
generally employs a representative sampling
indexing strategy (as described in the Funds’
prospectus) in order to achieve the Fund’s
investment objective. The Funds’ prospectus also
gives the Funds additional flexibility to comply
with the requirements of the Code and other
regulatory requirements and to manage future
corporate actions and index changes in smaller
markets by investing a percentage of fund assets in
securities that are not included in the Fund’s
Underlying Index or in American Depositary
Receipts and Global Depositary Receipts
representing such securities.
13 The Web site for the Funds, www.iShares.com,
contains detailed information on the performance
and the tracking error for each Fund.
14 In the Matter of Master Investment Portfolio, et
al., Investment Company Act Release No. 25158
(September 18, 2001).
15 The Fund, as well as any existing iShares Fund,
is permitted to invest in shares of another iShares
Fund to the extent that such investment is
consistent with the Fund’s investment objective, its
Registration Statement, and any applicable
investment restrictions.
16 For the purposes of this proposed rule filing,
‘‘Depositary Receipts’’ are American Depositary
Receipts (‘‘ADRs’’), Global Depositary Receipts
(‘‘GDRs’’), and Euro Depositary Receipts (‘‘EDRs’’)
(collectively, ‘‘Depositary Receipts’’). Telephone
conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation,
Commission, and Michael Cavalier, Assistant
General Counsel, NYSE, on July 7, 2005.
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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Notices
MSCI EAFE Index. The MSCI EAFE
Index, in turn, is a composite of certain
MSCI single country equity indices.17
Constituents of the MSCI EAFE Index
include securities from Europe,
Australasia (Australia and Asia), and the
Far East. Each Underlying Index
generally represents approximately 50%
of the free float-adjusted market
capitalization of the MSCI EAFE Index
and consists of those securities
classified by MSCI as most representing
the growth or value style, respectively.
Securities classified as growth style
generally tend to have higher forecasted
growth rates, lower book value to price
ratios, lower forward earnings to price
ratios and lower dividend yields than
securities representing the value style.
Securities classified as value style
generally tend to have higher book value
to price ratios, higher forward earnings
to price ratios, higher dividend yields
and lower forecasted growth rates than
securities representing the growth style.
MSCI uses a specialized framework to
attribute both value and growth style
characteristics to each security within
the MSCI EAFE Index. Each security is
evaluated based on certain value factors
and growth factors, which are then used
to calculate a value score and growth
score. Based upon these two scores,
MSCI determines the extent to which
each security is assigned to the value or
growth style. It is possible for a single
security to have representation in both
the value and growth style indices;
however, no more than 100% of a
security’s float-adjusted market
capitalization will be included within
the combined style framework.18
Therefore, the combined market
capitalization of the value and growth
style indices would be equivalent to the
market capitalization of the MSCI
EAFE.19 The Funds’ top portfolio
holdings can be found at https://
www.iShares.com.
MSCI defines the free float of a
security as the proportion of shares
outstanding that are deemed to be
available for purchase in the public
equity markets by international
investors. In practice, limitations on free
float available to international investors
include: (i) Strategic and other
shareholdings not considered part of
available free float; and (ii) limits on
share ownership for foreigners.
As of March 31, 2005, the MSCI EAFE
Growth Index’s top three holdings were
the Vodafone Group, GlaxoSmithKline,
Novartis. Its top three industries were
Financials, Energy and Consumer
Discretionary.
As of March 31, 2005, the MSCI EAFE
Growth Index components had a total
market capitalization of approximately
$4.4 trillion.20 The average total market
capitalization was approximately $7.3
billion. The 10 largest constituents
represented approximately 21.2% of the
index weight. The five highest weighted
stocks, which represented 13.2% of the
Index weight, had an average daily
trading volume in excess of 347 million
shares during the past two months.
99.3% of the component stocks traded
at least 250,000 shares in each of the
previous six months.
As of March 31, 2005, the MSCI EAFE
Value Index’s top three holdings were
HSBC Holdings (GB), BP and Nestle. Its
17 Thus, the Underlying Indexes are subsets of
various MSCI single country equity indices, each
representing approximately 50% of the free float
adjusted market capitalization of each underlying
single country equity index and consists of those
securities classified by MSCI as most representing
the value style or growth style, respectively. The
MSCI single country standard equity indices target
an 85% free float-adjusted market representation
level within each industry group, within each
country. According to MSCI, the security selection
process within each industry group is based on the
careful analysis of (i) each company’s business
activities and the diversification that its securities
would bring to the index, (ii) the size (based on free
float-adjusted market capitalization) and liquidity
of the securities of the company; and (iii) the
estimated free float for the company and its
individual share classes. MSCI targets for inclusion
the most sizable and liquid securities in an industry
group. MSCI generally does not consider securities
with inadequate liquidity, and/or securities that do
not have an estimated free float greater than 15%.
Exceptions to this general rule are made only in
significant cases, where exclusion of a security of
a large company would compromise the index’s
ability to fully and fairly represent the
characteristics of the underlying market.
18 The Underlying Indexes are compiled by
Morgan Stanley Capital International (‘‘MSCI’’).
MSCI is a partially owned subsidiary of Morgan
Stanley. When a broker-dealer, or a broker-dealer’s
affiliate such as MSCI, is involved in the
development and maintenance of a stock index
upon which a product such as iShares is based, the
broker-dealer or its affiliate should have procedures
designed specifically to address the improper
sharing of information. The Exchange states that
MSCI has implemented procedures to prevent the
misuse of material, non-public information
regarding changes to component stocks in the MSCI
EAFE Value and Growth Indices and has provided
Commission staff with a letter filed under the
Freedom of Information Act, 5 U.S.C. 552,
describing such procedures. Telephone
conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation,
Commission, and Michael Cavalier, Assistant
General Counsel, NYSE, on July 7, 2005.
19 Telephone conversation between Florence
Harmon, Senior Special Counsel, Division of
Market Regulation, Commission, and Michael
Cavalier, Assistant General Counsel, NYSE, on July
7, 2005. Additionally, the MSCI EAFE Index is a
capitalization-weighted index that aims to capture
85% of the publicly available, total market
capitalization of European, Australian, and Far
Eastern markets. Id., on July 29, 2005.
20 As of June 30, 2005, both the MSCI EAFE Value
and Growth Indices continued to each have a total
market capitalization of over $4.4 trillion, and both
Indices each contained over 600 component
securities. See Exhibit A to Amendment No. 1.
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top three industries were Financials,
Energy, and Consumer Discretionary.
As of March 31, 2005, the MSCI EAFE
Value Index components had a total
market capitalization of approximately
$4.5 trillion. The average total market
capitalization was approximately $7.5
billion. The ten largest constituents
represented approximately 21.2% of the
index weight. The five highest weighted
stocks, which represented 13.6% of the
Index weight, had an average daily
trading volume in excess of 191 million
shares during the past two months.
99.9% of the component stocks traded
at least 250,000 shares in each of the
previous six months.
Additional information regarding the
Funds’ holdings is available at https://
www.iShares.com.21
(c) Changes to the Underlying Indexes
for the Funds. As described in the SAI
for the Funds, overall index
maintenance can be described by three
broad categories of implementation of
changes: (i) Annual full country index
reviews, conducted on a fixed annual
timetable, that systematically re-assess
the various dimensions of the equity
universe for all countries; (ii) quarterly
index reviews, aimed at promptly
reflecting other significant market
events; and (iii) ongoing event-related
changes, such as mergers and
acquisitions, which generally are
rapidly implemented in the indices as
they occur.22
Potential changes in the status of
countries (stand-alone, emerging, or
developed) follow their own separate
timetables. These changes are normally
implemented in one or more phases at
the regular annual full country index
review and quarterly index review
dates.
The annual full country index review
for all the MSCI single country standard
equity indices is carried out once every
12 months and implemented as of the
close of the last business day of May.
The implementation of changes
resulting from a quarterly index review
occurs only on three dates throughout
the year: as of the close of the last
business day of February, August, and
November. Any single country indices
may be impacted at the quarterly index
review. MSCI Index additions and
deletions due to quarterly index
rebalancings are announced at least two
weeks in advance.
21 Telephone conversation between Florence
Harmon, Senior Special Counsel, Division of
Market Regulation, Commission, and Michael
Cavalier, Assistant General Counsel, NYSE, on July
7, 2005.
22 See MSCI Standard Index Series Methodology,
available at https://www.msci.com.
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(d) Issuance of Creation Unit
Aggregations
The Exchange notes that, according to
the Application, the issuance and
redemption of Creation Unit
Aggregations will operate in a manner
identical to that of the funds that are the
subject of the Prior Order.23
(i) In General. Shares of the Funds
(the ‘‘iShares’’) will be issued on a
continuous offering basis in groups of
400,000 iShares, or multiples thereof.24
These ‘‘groups’’ of shares are called
‘‘Creation Unit Aggregations.’’ The
Funds will issue and redeem iShares
only in Creation Unit Aggregations.25
As with other open-end investment
companies, iShares will be issued at the
net asset value (‘‘NAV’’) per share next
determined after an order in proper
form is received. The anticipated price
at which the iShares will initially trade
is approximately $50.
The NAV per share of the Funds is
determined as of the close of the regular
trading session on the Exchange on each
day that the Exchange is open. The
Trust sells Creation Unit Aggregations of
the Funds only on business days at the
next determined NAV of the Funds.
Creation Unit Aggregations generally
will be issued by the Funds in exchange
for the in-kind deposit of equity
securities designated by the Advisor to
correspond generally to the price and
yield performance of the Fund’s
Underlying Index (the ‘‘Deposit
Securities’’) and a specified cash
payment. Creation Unit Aggregations
generally will be redeemed by the Fund
in exchange for portfolio securities of
the Fund (‘‘Fund Securities’’) and a
specified cash payment. Fund Securities
received on redemption may not be
identical to Deposit Securities deposited
in connection with creations of Creation
Unit Aggregations for the same day.
All orders to purchase iShares in
Creation Unit Aggregations must be
placed through an Authorized
Participant. An Authorized Participant
23 See
supra note 6.
Exchange notes that, while this Creation
Unit size is significantly larger than that of most
other iShares Funds, the iShares Trust recently
implemented a split for a number of iShares Funds,
which began trading on a split-adjusted basis on
June 9, 2005. The iShares MSCI EAFE Index Fund,
for example, implemented a 3-for-1 split, and the
size of a Creation Unit for that Fund increased from
200,000 iShares to 600,000 iShares as of June 9,
2005, in order to provide for a comparable post-split
Creation Unit dollar value. The Exchange does not
expect that the Creation Unit size for the Funds will
adversely impact arbitrage opportunities and that
the potential for arbitrage should keep the market
price of shares of the Funds comparable to their net
asset values.
25 Each Creation Unit Aggregation will have an
estimated initial value of approximately
$20,000,000.
24 The
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must be either a ‘‘Participating Party,’’
i.e., a broker-dealer or other participant
in the clearing process through the
National Securities Clearing Corporation
(‘‘NSCC’’) Continuous Net Settlement
System (the ‘‘Clearing Process’’), a
clearing agency that is registered with
the SEC, or a Depository Trust Company
(‘‘DTC’’) participant, and in each case,
must enter into a Participant Agreement.
The Funds impose a transaction fee in
connection with the issuance and
redemption of iShares to offset transfer
and other transaction costs. The
transaction fee in connection with the
issuance and redemption of Creation
Unit Aggregations of the Funds are
estimated to be approximately between
$10,000 and $15,000.
(ii) In-Kind Deposit of Portfolio
Securities. Payment for Creation Unit
Aggregations will be made by the
purchasers generally by an in-kind
deposit with the applicable Fund of the
Deposit Securities together with an
amount of cash (‘‘Balancing Amount’’)
specified by the Advisor in the manner
described below. The Balancing
Amount is an amount equal to the
difference between (1) the NAV (per
Creation Unit Aggregation) of the Fund
and (2) the total aggregate market value
(per Creation Unit Aggregation) of the
Deposit Securities (such value referred
to herein as the ‘‘Deposit Amount’’). The
Balancing Amount serves the function
of compensating for differences, if any,
between the NAV per Creation Unit
Aggregation and that of the Deposit
Amount. The deposit of the requisite
Deposit Securities and the Balancing
Amount are collectively referred to
herein as a ‘‘Fund Deposit.’’ The
Advisor will make available to the
market through the NSCC on each
business day, prior to the opening of
trading on the Exchange (currently 9:30
a.m. Eastern Time), the list of the names
and the required number of shares of
each Deposit Security included in the
current Fund Deposit (based on
information at the end of the previous
business day) for each Fund. The Fund
Deposit will be applicable to the
relevant Fund (subject to any
adjustments to the Balancing Amount,
as described below) in order to effect
purchases of Creation Unit Aggregations
of such Fund until such time as the
next-announced Fund Deposit
composition is made available.
The identity and number of shares of
the Deposit Securities required for the
Fund Deposit for each Fund will change
from time to time. The composition of
the Deposit Securities may change in
response to adjustments to the
weighting or composition of the
Component Securities in the Underlying
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46247
Index. In addition, the Trust reserves
the right to permit or require the
substitution of an amount of cash—i.e.,
a ‘‘cash in lieu’’ amount—to be added to
the Balancing Amount to replace any
Deposit Security that may not be
available in sufficient quantity for
delivery or that may not otherwise be
eligible for transfer. The Trust also
reserves the right to permit or require a
‘‘cash in lieu’’ amount where the
delivery of the Deposit Security by the
Authorized Participant would be
restricted under the securities laws or
where the delivery of the Deposit
Security to the Authorized Participant
would result in the disposition of the
Deposit Security by the Authorized
Participant becoming restricted under
the securities laws, or in certain other
situations. The adjustments described
above will reflect changes known to the
Advisor on the date of announcement to
be in effect by the time of delivery of the
Fund Deposit, in the composition of the
applicable Underlying Index or
resulting from certain corporate actions.
(e) Redemption of iShares. Creation
Unit Aggregations of the Funds will be
redeemable at the NAV next determined
after receipt of a request for redemption.
Creation Unit Aggregations of the Funds
generally will be redeemed in-kind,
together with a balancing cash payment
(although, as described below, Creation
Unit Aggregations may sometimes be
redeemed for cash). The value of the
Funds’ redemption payments on a
Creation Unit Aggregation basis will
equal the NAV per the appropriate
number of Fund shares. Owners of
iShares may sell their iShares in the
secondary market, but must accumulate
enough iShares to constitute a Creation
Unit Aggregation in order to redeem
through the Fund. Redemption orders
must be placed by or through an
Authorized Participant. Creation Unit
Aggregations of the Funds generally will
be redeemable on any business day in
exchange for applicable Fund Securities
and the Cash Redemption Payment
(defined below) in effect on the date a
request for redemption is made. The
Advisor will publish daily through
NSCC the list of securities which a
creator of Creation Unit Aggregations
must deliver to the Fund (‘‘Creation
List’’) and which a redeemer will
receive from the Funds (‘‘Redemption
List’’). The Creation List is identical to
the list of the names and the required
numbers of shares of each Deposit
Security included in the current Fund
Deposit.
In addition, just as the Balancing
Amount is delivered by the purchaser of
Creation Unit Aggregations to the
Funds, the Trust will also deliver to the
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redeeming beneficial owner in cash the
‘‘Cash Redemption Payment.’’ The Cash
Redemption Payment on any given
business day will be an amount
calculated in the same manner as that
for the Balancing Amount, although the
actual amounts may differ if the Fund
Securities received upon redemption are
not identical to the Deposit Securities
applicable for creations on the same
day.26 To the extent that the Fund
Securities have a value greater than the
NAV of iShares being redeemed, a cash
payment equal to the differential is
required to be paid by the redeeming
beneficial owner to the applicable Fund.
The Trust may also make redemptions
in cash in lieu of transferring one or
more Fund Securities to a redeemer if
the Trust determines, in its discretion,
that such method is warranted due to
unusual circumstances. An unusual
circumstance could arise, for example,
when a redeeming entity is restrained
by regulation or policy from transacting
in certain Fund Securities, such as the
presence of such Fund Securities on a
redeeming investment banking firm’s
restricted list.
(f) Availability of Information
Regarding iShares and the Underlying
Index. On each business day, the list of
names and amount of each security
constituting the current Deposit
Securities of the Fund Deposit and the
Balancing Amount effective as of the
previous business day, per outstanding
share of each Fund, will be made
available. An amount per iShare
representing the sum of the estimated
Balancing Amount effective through and
including the previous business day,
plus the current value of the Deposit
Securities in U.S. dollars, on a per
iShare basis (the ‘‘Intra-day Optimized
Portfolio Value’’ or ‘‘IOPV’’) will be
calculated by an independent third
party (the ‘‘IOPV Calculator’’), such as
Bloomberg L.P., every 15 seconds
during the Exchange’s regular trading
hours and disseminated every 15
seconds on the Consolidated Tape.
The IOPV reflects the current value of
the Deposit Securities and the Balancing
Amount. The IOPV also reflects changes
in currency exchange rates between the
U.S. dollar and the applicable home
foreign currency.27
26 See
discussion under Section II.A.1(d)(ii) ‘‘InKind Deposit of Portfolio Securities,’’ above.
27 The IOPV ticker is available at
www.iShares.com and Intra-day IOPV is publicly
available utilizing this ticker through various
financial Web sites such as https://
finance.yahoo.com. Telephone conversation
between Florence Harmon, Senior Special Counsel,
Division of Market Regulation, Commission, and
Michael Cavalier, Assistant General Counsel, NYSE,
on July 7, 2005.
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Since the Funds will utilize a
representative sampling strategy, the
IOPV may not reflect the value of all
securities included in the Underlying
Indexes. In addition, the IOPV does not
necessarily reflect the precise
composition of the current portfolio of
securities held by the Funds at a
particular point in time. Therefore, the
IOPV on a per-Fund-share basis
disseminated during the Exchange’s
trading hours should not be viewed as
a real time update of the NAV of the
Fund, which is calculated only once a
day.
While the IOPV disseminated by the
Exchange at 9:30 a.m. New York Time
is expected to be generally very close to
the most recently calculated Fund NAV
on a per-Fund-share basis, it is possible
that the value of the portfolio of
securities held by each Fund may
diverge from the Deposit Securities
values during any trading day. In such
case, the IOPV will not precisely reflect
the value of each Fund’s portfolio.
However, during the trading day, the
IOPV can be expected to closely
approximate the value per Fund share of
the portfolio of securities for each Fund,
except under unusual circumstances
(e.g., in the case of extensive
rebalancing of multiple securities in a
Fund at the same time by the Advisor).
The Exchange believes that
dissemination of the IOPV based on the
Deposit Securities provides additional
information regarding the Funds that is
not otherwise available to the public
and is useful to professionals and
investors in connection with Fund
shares trading on the Exchange or the
creation or redemption of Fund shares.
There is an overlap in trading hours
between the foreign and U.S. markets
with respect to the Funds. Therefore,
the IOPV Calculator will update the
applicable IOPV every 15 seconds to
reflect price changes in the applicable
foreign market or markets and convert
such prices into U.S. dollars based on
the currency exchange rate. When the
foreign market or markets are closed but
U.S. markets are open, the IOPV will be
updated every 15 seconds to reflect
changes in currency exchange rates after
the foreign market closes. The IOPV will
also include the applicable cash
component for each Fund.
In addition, there will be
disseminated a value for the Underlying
Indexes once each trading day, based on
closing prices in the relevant exchange
market. In each MSCI Index, the prices
used to calculate the MSCI Indices are
the official exchange closing prices or
those figures accepted as such. MSCI
reserves the right to use an alternative
pricing source on any given day.
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To convert the foreign exchange
closing price into U.S. dollars, MSCI
uses the FX rates published by WM/
Reuters at 4 p.m. London time. MSCI
uses WM/Reuters rates for all developed
and emerging markets. Exchange rates
are taken daily at 4 p.m. London time
by the WM Company and are sourced
whenever possible from multicontributor quotes on Reuters.
Representative rates are selected for
each currency based on a number of
‘‘snapshots’’ of the latest contributed
quotations taken from the Reuters
service at short intervals around 4 p.m.
WM Reuters provides closing bid and
offer rates. MSCI uses these rates to
calculate the mid-point to 5 decimal
places.
The NAV for the Fund will be
calculated and disseminated daily. The
Funds’ NAV will be calculated by IBT.
IBT will disseminate the information to
BGI, SEI and others, including the
NYSE. The Funds’ NAV will be
published in a number of places,
including https://www.iShares.com and
on the Consolidated Tape.28
The Exchange states that closing
prices of the Funds’ Deposit Securities
are readily available from, as applicable,
the relevant exchanges, automated
quotation systems, published or other
public sources in the relevant country,
or on-line information services such as
Bloomberg or Reuters. The exchange
rate information required to convert
such information into U.S. dollars is
also readily available in newspapers and
other publications and from a variety of
on-line services.
(g) Dividends and Distributions. The
Exchange notes that dividends are
accrued daily from net investment
income and will be declared and paid
to beneficial owners of record at least
annually by the Funds. Distributions of
realized securities gains, if any,
generally will be declared and paid once
a year, but the Funds may make
distributions on a more frequent basis to
comply with the distribution
requirements of the Code and consistent
with the Investment Company Act.
Dividends and other distributions on
iShares of the Funds will be distributed
on a pro rata basis to beneficial owners
of such iShares. Dividend payments will
28 In addition, the Web site for the Trust,
https://www.iShares.com, which will be publicly
accessible at no charge, will contain the following
information, such as: (i) The prior business day’s
NAV and the mid-point of the bid-ask price at the
time of calculation of such NAV (‘‘Bid/Ask Price’’),
and a calculation of the premium or discount of
such price against such NAV; and (ii) data in chart
format displaying the frequency distribution of
discounts and premiums of the Bid/Ask Price
against the NAV, within appropriate ranges, for
each of the four previous calendar quarters.
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be made through the DTC and the DTC
Participants to beneficial owners then of
record with amounts received from the
Fund.
The Trust currently does not intend to
make the DTC book-entry Dividend
Reinvestment Service (‘‘Service’’)
available for use by beneficial owners
for reinvestment of their cash proceeds,
but certain individual brokers may make
the Service available to their clients.
The SAI will inform investors of this
fact and direct interested investors to
contact such investor’s broker to
ascertain the availability and a
description of the Service through such
broker. The SAI will also caution
interested beneficial owners that they
should note that each broker may
require investors to adhere to specific
procedures and timetables in order to
participate in the Service and such
investors should ascertain from their
broker such necessary details. The
Funds acquired pursuant to the Service
will be held by the beneficial owners in
the same manner, and subject to the
same terms and conditions, as for
original ownership of the Funds.
Beneficial owners of the Funds will
receive all of the statements, notices,
and reports required under the
Investment Company Act and other
applicable laws. They will receive, for
example, annual and semi-annual
reports, written statements
accompanying dividend payments,
proxy statements, annual notifications
detailing the tax status of distributions,
IRS Form 1099-DIVs, etc. Because the
Trust’s records reflect ownership of
iShares by DTC only, the Trust will
make available applicable statements,
notices, and reports to the DTC
Participants who, in turn, will be
responsible for distributing them to the
beneficial owners.
(h) Other Issues
(i) Criteria for Initial and Continued
Listing. The Funds are subject to the
criteria for initial and continued listing
of ICUs in Section 703.16 of the Manual.
A minimum of one Creation Unit
(400,000 iShares) will be required to be
outstanding at the start of trading. This
minimum number of shares of each
Fund required to be outstanding at the
start of trading will be comparable to
requirements that have been applied to
previously traded series of ICUs.
The Exchange believes that the
proposed minimum number of shares of
each Fund outstanding at the start of
trading is sufficient to provide market
liquidity and to further each Fund’s
investment objective to seek to provide
investment results that correspond
generally to the price and yield
performance of its Underlying Index.
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15:52 Aug 08, 2005
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(ii) Original and Annual Listing Fees.
The original listing fees applicable to
the Funds for listing on the Exchange is
$5,000 for each Fund, and the annual
continuing listing fees will be $2,000 for
each Fund.
(iii) Stop and Stop Limit Orders.
Commentary .30 to NYSE Rule 13
provides that stop and stop limit orders
in an ICU shall be elected by a
quotation, but specifies that if the
electing bid on an offer is more than
0.10 points away from the last sale and
is for the specialist’s dealer account,
prior Floor Official approval is required
for the election to be effective. This rule
applies to ICUs generally.
(iv) Rule 460.10. Rule 460.10
generally precludes certain business
relationships between an issuer and the
specialist or its affiliates in the issuer’s
securities.29 Exceptions in the Rule
permit specialists in Fund shares to
enter into Creation Unit transactions
through the Distributor to facilitate the
maintenance of a fair and orderly
market. A specialist Creation Unit
transaction may only be effected on the
same terms and conditions as any other
investor, and only at the net asset value
of the Fund shares. A specialist may
acquire a position in excess of 10% of
the outstanding issue of the Funds’
shares, provided, however, that a
specialist registered in a security issued
by an investment company may
purchase and redeem the investment
company unit or securities that can be
subdivided or converted into such unit,
from the investment company as
appropriate to facilitate the maintenance
of a fair and orderly market in the
subject security in accordance with the
terms of Rule 460.10.30
(v) Prospectus Delivery. The
Commission has granted the Trust an
exemption from certain prospectus
delivery requirements under Section
24(d) of the Investment Company Act.31
Any product description used in
reliance on the Section 24(d) exemptive
order will comply with all
representations made therein and all
conditions thereto. The Exchange, in an
Information Memo to Exchange
members and member organizations,
will inform members and member
29 Telephone conversation between Florence
Harmon, Senior Special Counsel, Division of
Market Regulation, Commission, and Michael
Cavalier, Assistant General Counsel, NYSE, on July
7, 2005.
30 Telephone conversation between Florence
Harmon, Senior Special Counsel, Division of
Market Regulation, Commission, and Michael
Cavalier, Assistant General Counsel, NYSE, on July
29, 2005 (as to specific terms of Rule 460.10).
31 15 U.S.C. 80a–24. See In the Matter of iShares,
Inc., et al., Investment Company Act Release No.
25623 (June 25, 2002).
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46249
organizations, prior to commencement
of trading, of the prospectus or product
description delivery requirements
applicable to the Funds and will refer
members and member organizations to
NYSE Rule 1100(b). The Information
Memo will also advise members and
member organizations that delivery of a
prospectus to customers in lieu of a
product description would satisfy the
requirements of Rule 1100(b).
(vi) Information Memo. The Exchange
will distribute an Information Memo to
its members in connection with the
trading of the Funds. The Memo will
discuss the special characteristics and
risks of trading this type of security.
Specifically, the Memo, among other
things, will discuss what the Funds are,
how the Funds’ shares are created and
redeemed, the requirement that
members and member firms deliver a
prospectus or product description to
investors purchasing shares of the
Funds prior to or concurrently with the
confirmation of a transaction, applicable
Exchange rules, dissemination
information, trading information and
the applicability of suitability rules
(including NYSE Rule 405). The memo
will also discuss exemptive, no-action
and interpretive relief granted by the
Commission from Section 11(d)(1) and
certain rules under the Act.
(vii) Trading Halts. In order to halt the
trading of the Funds, the Exchange may
consider, among other things, factors
such as the extent to which trading is
not occurring in underlying security(s)
and whether other unusual conditions
or circumstances detrimental to the
maintenance of a fair and orderly
market are present. In addition, trading
in the Funds’ shares is subject to trading
halts caused by extraordinary market
volatility pursuant to NYSE Rule 80B.
(viii) Due Diligence. The Exchange
represents that the Information Memo to
members will note, for example,
Exchange responsibilities including that
before an Exchange member, member
organization, or employee thereof
recommends a transaction in the Funds,
a determination must be made that the
recommendation is in compliance with
all applicable Exchange and federal
rules and regulations, including due
diligence obligations under NYSE Rule
405 (Diligence as to Accounts).
(ix) Purchases and Redemptions in
Creation Unit Size. In the Memo
referenced above, members and member
organizations will be informed that
procedures for purchases and
redemptions of shares of the Funds in
Creation Unit Size are described in the
Funds’ Prospectus and SAI, and that
shares of the Funds are not individually
redeemable but are redeemable only in
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Creation Unit size aggregations or
multiples thereof.
(x) Surveillance. The Exchange will
utilize its existing surveillance
procedures applicable to ICUs to
monitor trading in the Funds. The
Exchange believes that these procedures
are adequate to monitor Exchange
trading of the Funds.
The Exchange states that its
surveillance procedures applicable to
trading in the proposed iShares are
comparable to those applicable to other
ICUs currently trading on the Exchange.
The Exchange represents that its
surveillance procedures, which the
Exchange has filed with the
Commission, are adequate to properly
monitor the trading of the Funds. The
Exchange’s current trading surveillances
focus on detecting securities trading
outside their normal patterns. When
such situations are detected,
surveillance analysis follows and
investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations. The Exchange is able
to obtain information regarding trading
in both the Fund shares and the
component securities through NYSE
members, in connection with such
members’ proprietary or customer
trades, on any relevant market on which
such members may trade; in addition,
the Exchange may obtain trading
information via the Intermarket
Surveillance Group (‘‘ISG’’) from other
exchanges who are members or affiliates
of the ISG.
(xi) Hours of Trading/Minimum Price
Variation. The Funds will trade on the
Exchange until 4:15 p.m. (Eastern time)
each business day. The minimum price
variation for quoting will be $.01.
1. Statutory Basis
NYSE believes that the proposed rule
change is consistent with Section 6(b)(5)
of the Act 32 requiring that an exchange
have rules that are designed, among
other things, to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to, and
perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
32 15
U.S.C. 78f(b)(5).
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15:52 Aug 08, 2005
Jkt 205001
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the
proposed rule change is consistent with
The Exchange has neither solicited
the requirements of the Act and the
nor received written comments on the
rules and regulations thereunder,
proposed rule change.
applicable to a national securities
III. Solicitation of Comments
exchange.33 In particular, the
Commission finds that the proposed
Interested persons are invited to
rule change is consistent with Section
submit written data, views and
6(b)(5) of the Act 34 and will promote
arguments concerning the foregoing,
just and equitable principles of trade,
including whether the proposed rule
and facilitate transactions in securities,
change, as amended, is consistent with
the Act. Comments may be submitted by and, in general, protect investors and
the public interest.
any of the following methods:
The Commission believes that the
Electronic Comments
NYSE’s proposal should advance the
public interest by providing investors
• Use the Commission’s Internet
with increased flexibility in satisfying
comment form (https://www.sec.gov/
their investment needs and by allowing
rules/sro.shtml); or
them to purchase and sell Fund shares
• Send an e-mail to ruleat negotiated prices throughout the
comments@sec.gov. Please include File
business day that generally track the
Number SR–NYSE–2005–41 on the
price and yield performance of the
subject line.
targeted Underlying Index.35
Paper Comments
Furthermore, the Commission
believes that the proposed rule change
• Send paper comments in triplicate
raises no issues that have not been
to Jonathan G. Katz, Secretary,
previously considered by the
Securities and Exchange Commission,
Commission. The Fund is similar in
Station Place, 100 F Street, NE.,
structure and operation to exchangeWashington, DC 20549–9303.
traded index funds that the Commission
All submissions should refer to File
has previously approved for listing and
Number SR–NYSE–2005–41. This file
trading on national securities exchanges
number should be included on the
subject line if e-mail is used. To help the under Section 19(b)(2) of the Act.36
Further, with respect to each of the
Commission process and review your
following key issues, the Commission
comments more efficiently, please use
only one method. The Commission will believes that the Fund satisfies
post all comments on the Commission’s established standards.
Internet Web site (https://www.sec.gov/
A. Fund Characteristics
rules/sro.shtml). Copies of the
Similar to other previously-approved,
submission, all subsequent
exchange-listed index fund shares, the
amendments, all written statements
Commission believes that the proposed
with respect to the proposed rule
Funds are reasonably designed to
change that are filed with the
provide investors with an investment
Commission, and all written
vehicle that substantially reflects in
communications relating to the
value the performance of the respective
proposed rule change between the
Commission and any person, other than Underlying Index and will provide
investors with an alternative to trading
those that may be withheld from the
a range of securities on an individual
public in accordance with the
basis. The estimated cost of individual
provisions of 5 U.S.C. 552, will be
shares in the Fund, approximately $50,
available for inspection and copying in
the Commission’s Public Reference
33 In approving this proposal, the Commission has
Room. Copies of such filing also will be
considered its impact on efficiency, competition,
available for inspection and copying at
and capital formation. 15 U.S.C. 78c(f).
the principal office of the NYSE. All
34 15 U.S.C. 78f(b)(5).
35 The Commission notes that, as is the case with
comments received will be posted
similar previously approved exchange traded funds,
without change; the Commission does
investors in the Fund can redeem shares in
not edit personal identifying
Creation-Unit-size aggregations only. See, e.g.,
information from submissions. You
Securities Exchange Act Release Nos. 43679
should submit only information that
(December 5, 2000), 65 FR 77949 (December 13,
you wish to make available publicly. All 2000) (File No. SR–NYSE–00–46); 50505 (October 8,
2004), 69 FR 61280 (October 15, 2004) (File No. SR–
submissions should refer to File
NYSE–2004–55); 50189 (August 12, 2004), 69 FR
Number SR–NYSE–2005–41 and should 51723 (August 20, 2004) (File No. SR–Amex–2004–
be submitted on or before August 30,
05).
36 15 U.S.C. 78s(b)(2).
2005.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
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should make them attractive to
individual retail investors who wish to
hold a security representing the
performance of a portfolio of stocks. In
addition, investors will be able to trade
shares in the Fund continuously
throughout the business day in
secondary market transactions at
negotiated prices.37 Accordingly, the
proposed Fund will allow investors to:
(1) Respond quickly to market changes
through intra-day trading opportunities;
(2) engage in hedging strategies similar
to those used by institutional investors;
and (3) reduce transaction costs for
trading a portfolio of securities.
Moreover, the Commission finds that,
although the value of the Fund’s shares
will be derived from and based on the
value of the securities and cash held in
the Fund, the Fund is not leveraged.
Accordingly, the level of risk involved
in the purchase or sale of Fund shares
is similar to the risk involved in the
purchase or sale of traditional common
stock, with the exception that the
pricing mechanism for shares in the
Fund is based on a portfolio of
securities.
The Commission notes that the MSCI
EAFE Value and Growth Index Funds (i)
will invest at least 90% of its assets in
Component Securities of its respective
Underlying Index and in Depositary
Receipts (defined above) representing
such securities and (ii) may invest up to
10% of its assets in certain futures,
options and swap contracts, cash and
cash equivalents, including money
market mutual funds advised by
BGFA,38 other exchange-traded funds,
including other iShares Funds,39 and
stocks not included in the Underlying
Index but which the Advisor believes
will help the Fund track its Underlying
Index.40 It is expected that the Fund
will have a tracking error relative to the
performance of its Underlying Index of
no more than 5%. As described above,
each Index generally represents
approximately 50% of the free float37 Because of the potential arbitrage
opportunities, the Commission believes that Fund
shares will not trade at a material discount or
premium in relation to their NAV.
38 In the Matter of Master Investment Portfolio, et
al., Investment Company Act Release No. 25158
(September 18, 2001).
39 The Fund, as well as any existing iShares Fund,
is permitted to invest in shares of another iShares
Fund to the extent that such investment is
consistent with the Fund’s investment objective,
registration statement, and any applicable
investment restrictions.
40 The Commission notes that the Funds may
invest in sponsored ADRs and other Depositary
Receipts, but will not invest in any unlisted
depositary receipts or any listed depositary receipts
that the Advisor deems to be illiquid or for which
pricing information is not readily available. See
note 16 supra.
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15:52 Aug 08, 2005
Jkt 205001
adjusted market capitalization of the
MSCI EAFE Index, itself consisting of
various MSCI EAFE country indices,
and consists of those securities
classified by MSCI as most representing
the growth or value style.
Given the market capitalization and
liquidity of the Underlying Indexes and
Funds’ Component Securities, the
Commission does not believe that the
Fund shares should be susceptible to
manipulation.41
The Exchange further represents that
the Fund will not concentrate its
investments in any particular industry
or group of industries, except to the
extent that the Underlying Index
concentrates in the stocks of a particular
industry or industries. Because each
Fund’s Underlying Index is broad-based
and well diversified, the Commission
does not believe that the Fund will be
so highly concentrated such that it
becomes a surrogate for trading
unregistered foreign securities on the
Exchange.
While the Commission believes that
these requirements should help to
reduce concerns that the Fund could
become a surrogate for trading in a
single or a few unregistered stocks, if
the Fund’s characteristics changed
materially from the characteristics
described herein, the Fund would not
be in compliance with the listing and
trading standards approved herein, and
the Commission would expect the NYSE
to file a proposed rule change pursuant
to Rule 19b–4 of the Act.
B. Disclosure
The Exchange represents that it will
circulate an information memo detailing
applicable prospectus and product
description delivery requirements. The
memo will also discuss exemptive, noaction and interpretive relief granted by
the Commission from certain rules
under the Act. The memo also will
address NYSE members’ responsibility
to deliver a prospectus or product
description to all investors (in
accordance with NYSE Rule 1100(b))
and highlight the characteristics of the
Funds. The memo will also remind
members of their suitability obligations,
41 The Exchange states that as of March 31, 2005,
the ten largest constituents represented
approximately 21.2% of the index weight for both
the MSCI EAFE Growth Index and the MSCI EAFE
Value Index. The 5 highest weighted stocks, which
represented 13.2% of the MSCI EAFE Growth Index
weight and 13.6% of the MSCI EAFE Value Index
weight, had an average daily trading volume in
excess of 347 million shares and 191 million,
respectively, during the past two months. 99.3% of
the MSCI EAFE Growth Index and 99.9% of the
MSCI EAFE Value Index of the component stocks
traded at least 250,000 shares in each of the
previous 6 months. Both Indices each contain over
600 component securities.
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
46251
including NYSE Rule 405 (Diligence as
to Accounts).42 For example, the
information memo will also inform
members and member organizations that
Fund shares are not individually
redeemable, but are redeemable only in
Creation-Unit-size aggregations or
multiples thereof as set forth in the
Fund Prospectus and SAI.43 The
Commission believes that the disclosure
included in the information memo is
appropriate and consistent with the Act.
C. Dissemination of Fund Information
With respect to pricing, once each
day, the NAV for the Fund will be
calculated and disseminated by IBT, to
various sources, including the NYSE,
and made available on https://
www.iShares.com and the Consolidated
Tape.44 Also, during the Exchange’s
regular trading hours, the IOPV
Calculator will determine and
disseminate every 15 seconds the IOPV
for each Fund. The IOPV will reflect
price changes in the applicable foreign
market or markets and changes in
currency exchange rates.
The Commission notes that a variety
of additional information about each
Fund will be readily available.
Information with respect to recent NAV,
shares outstanding, estimated cash
amount and total cash amount per
Creation Unit Aggregation will be made
available prior to the opening of the
Exchange. In addition, the Web site for
the Trust, https://www.iShares.com,
which will be publicly accessible at no
charge, will contain the following
information, on a per iShare basis, for
the Fund: (1) The prior business day’s
NAV and the mid-point of the bid-ask
price 45 at the time of calculation of such
NAV (‘‘Bid/Ask Price’’), and a
calculation of the premium or discount
of such price against such NAV; and (2)
data in chart format displaying the
frequency distribution of discounts and
premiums of the Bid/Ask Price against
the NAV, within appropriate ranges, for
each of the four previous calendar
42 NYSE Rule 405 generally requires that
members use due diligence to learn the essential
facts relative to every customer, order or account
accepted.
43 See discussion under Section II.A.1(a)
‘‘Operation of Fund,’’ above. The Exchange has
represented that the information memo will also
discuss exemptive, no-action, and interpretive relief
granted by the Commission from certain rules under
the Act.
44 The index currently uses the Reuters foreign
exchange rate at the close of the index (4 p.m.
London Time) to compute final index values. The
Fund intends to use Reuters/WM foreign exchange
rates at 4:00 p.m. London Time.
45 The Bid-Ask Price of the Fund is determined
using the highest bid and lowest offer on the
Exchange as of the time of calculation of the Fund’s
NAV.
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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Notices
quarters. Also, the closing prices of the
Fund’s Deposit Securities are available
from, as applicable, the relevant
exchanges, automated quotation
systems, published or other public
sources in the relevant country, or online information services such as
Bloomberg or Reuters. The exchange
rate information required to convert
such information into U.S. dollars is
also readily available in newspapers and
other publications and from a variety of
on-line services.
Based on the representations made in
the NYSE proposal, the Commission
believes that pricing and other
important information about the Fund is
adequate and consistent with the Act.
D. Listing and Trading
The Commission finds that adequate
rules and procedures exist to govern the
listing and trading of the Fund’s shares.
Fund shares will be deemed equity
securities subject to NYSE rules
governing the trading of equity
securities, including, among others,
rules governing trading halts,46
responsibilities of the specialist,
account opening and customer
suitability requirements,47 and the
election of stop and stop limit orders.
In addition, the Exchange states that
iShares are subject to the criteria for
initial and continued listing of ICUs in
Section 703.16 of the NYSE Manual.
The Commission believes that the
listing and delisting criteria for Fund
shares should help to ensure that a
minimum level of liquidity will exist in
the Fund to allow for the maintenance
of fair and orderly markets.
Accordingly, the Commission believes
that the rules governing the trading of
Fund shares provide adequate
safeguards to prevent manipulative acts
and practices and to protect investors
and the public interest.
As noted above, the NYSE expects to
require that a minimum of one Creation
Units (400,000 iShares) will be required
to be outstanding at the start of trading.
The Commission believes that this
minimum number is sufficient to help
46 In order to halt the trading of the Fund, the
Exchange may consider, among others, factors
including: (i) The extent to which trading is not
occurring in stocks underlying the index; or (ii)
whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly
market are present. In addition, trading in Fund
shares is subject to trading halts caused by
extraordinary market volatility pursuant to NYSE
Rule 80B.
47 Prior to commencement of trading, the
Exchange states that it will issue an Information
Memo informing members and member
organizations of the characteristics of the Fund and
of applicable Exchange rules, as well as of the
requirements of NYSE Rule 405 (Diligence as to
Accounts).
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15:52 Aug 08, 2005
Jkt 205001
to ensure that a minimum level of
liquidity will exist at the start of
trading.48
E. Surveillance
The Commission finds that NYSE’s
surveillance procedures are reasonably
designed to monitor the trading of the
proposed iShares, including concerns
with specialists purchasing and
redeeming Creation Units. The NYSE
represents that its surveillance
procedures applicable to trading in the
proposed iShares are comparable to
those applicable to other ICUs currently
trading on the Exchange. The Exchange
also represents that its surveillance
procedures are adequate to properly
monitor the trading of the Funds. The
Exchange is also able to obtain
information regarding trading in both
the Fund shares and the Component
Securities by its members on any
relevant market; in addition, the
Exchange may obtain trading
information via the Intermarket
Surveillance Group (‘‘ISG’’) from other
exchanges who are members or affiliates
of the ISG.
As stated, when a broker-dealer, or a
broker-dealer’s affiliate such as MSCI, is
involved in the development and
maintenance of a stock index upon
which a product such as iShares is
based, the broker-dealer or its affiliate
should have procedures designed
specifically to address the improper
sharing of information. The Commission
notes that MSCI has implemented
procedures to prevent the misuse of
material, non-public information
regarding changes to component stocks
in the MSCI EAFE Value and Growth
Indices. The Commission believes that
the information barrier procedures put
in place by MSCI address the
unauthorized transfer and misuse of
material, non-public information.
F. Accelerated Approval
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,49 for approving the proposed rule
change, as amended, prior to the
thirtieth day after the date of
publication of notice in the Federal
Register. The Commission notes that the
proposal is consistent with the listing
and trading standards in NYSE Rule
703.16 (ICUs), and the Commission has
previously approved similar products
based on foreign indices.50 The Funds
48 This minimum number of shares required to be
outstanding at the start of trading is comparable to
requirements that have been applied to previously
listed series of ICUs.
49 15 U.S.C. 78s(b)(2).
50 See supra note 35. See also, e.g., Securities
Exchange Act Release Nos. 44990 (October 25,
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
are substantially identical in structure to
other iShares Funds based on foreign
stock indexes, including the iShares
MSCI EAFE Index Fund, which have an
established and active trading history on
the NYSE and other exchanges. The
Commission does not believe that the
proposed rule change, as amended,
raises novel regulatory issues.
Consequently, the Commission believes
that it is appropriate to permit investors
to benefit from the flexibility afforded
by trading these products as soon as
possible.
Accordingly, the Commission finds
that there is good cause, consistent with
Section 6(b)(5) of the Act,51 to approve
the proposal on an accelerated basis.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2005–
41), is hereby approved on an
accelerated basis.52
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.53
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–4274 Filed 8–8–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52188; File No. SR–NYSE–
2005–53]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Extend for
Additional Six Months the Pilot
Program Permitting a Floor Broker To
Use an Exchange Authorized and
Provided Portable Telephone on the
Exchange Floor
August 1, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘the
Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 22,
2005, the New York Stock Exchange,
Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
2001), 66 FR 56869 (November 13, 2001) (SR–
Amex–2001–45); 42748 (May 2, 2000), 65 FR 30155
(May 10, 2000) (SR–Amex–98–49); and 36947
(March 8, 1996), 61 FR 10606 (March 14, 1996) (SR–
Amex–95–43).
51 15 U.S.C. 78s(b)(5).
52 15 U.S.C. 78s(b)(2).
53 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
E:\FR\FM\09AUN1.SGM
09AUN1
]]>Agencies
[Federal Register Volume 70, Number 152 (Tuesday, August 9, 2005)]
[Notices]
[Pages 46244-46252]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4274]
[[Page 46244]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52178; File No. SR-NYSE-2005-41]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendment No. 1 Thereto Relating to iShares(r) MSCI
EAFE Growth Fund and iShares MSCI EAFE Value Fund
July 29, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 16, 2005 the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
On July 29, 2005, NYSE filed Amendment No. 1 to the proposed rule
filing.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons and is
approving the proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange clarified and supplemented
certain aspects of its proposal. Amendment No. 1 supplements the
information provided in various sections, as indicated, of the
Exchange's Form 19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to list and trade the iShares[reg] MSCI EAFE
Value Index Fund and iShares MSCI EAFE Growth Index Fund (collectively,
the ``Funds''),\4\ both exchange traded funds, which are a type of
Investment Company Unit (``ICU'').
---------------------------------------------------------------------------
\4\ iShares is a registered trademark of Barclays Global
Investors, N.A.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NYSE included statements
concerning the purpose of, and basis for, the proposed rule change. The
text of these statements may be examined at the places specified in
Item III, below, and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange has adopted listing standards applicable to ICUs which
are consistent with the listing criteria currently used by other
national securities exchanges, and trading standards pursuant to which
the Exchange may either list and trade ICUs, or trade such ICUs on the
Exchange on an unlisted trading privileges (``UTP'') basis.\5\
---------------------------------------------------------------------------
\5\ In 1996, the Commission approved Section 703.16 of the NYSE
Listed Company Manual (``Manual''), which sets forth the rules
related to the listing of ICUs. See Securities Exchange Act Release
No. 36923 (March 5, 1996), 61 FR 10410 (March 13, 1996) (SR-NYSE-95-
23). In 2000, the Commission also approved the Exchange's generic
listing standards for listing and trading, or the trading pursuant
to UTP, of ICUs under Section 703.16 of the Manual and NYSE Rule
1100. See Securities Exchange Act Release No. 43679 (December 5,
2000), 65 FR 77949 (December 13, 2000) (SR-NYSE-00-46).
---------------------------------------------------------------------------
The Exchange now proposes to list and trade under Section 703.16 of
the NYSE Listed Company Manual (``Manual'') and NYSE Rule 1100 et seq.
shares of the Funds, each a series of the iShares Trust (the
``Trust'').\6\ Because the Funds invest in non-U.S. securities not
listed on a national securities exchange or the Nasdaq Stock Market,
the Funds do not meet the ``generic'' listing requirements of Section
703.16 of the Manual applicable to listing of ICUs (permitting listing
in reliance upon Rule 19b-4(e) under the Act and cannot be listed
without a filing pursuant to Rule 19b-4 under the Act).\7\ Therefore,
to list the Funds (or trade pursuant to UTP), the Exchange must file,
and obtain Commission approval of, a proposed rule change pursuant to
Rule 19b-4 under the Act.\8\
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\6\ The Trust is registered under the Investment Company Act of
1940 (15 U.S.C. 80a) (the ``Investment Company Act''). On April 15,
2005, the Trust filed with the Commission a Registration Statement
for the Funds on Form N-1A under the Securities Act of 1933 (15
U.S.C. 77a), and under the Investment Company Act relating to the
Funds (File Nos. 333-92935 and 811-09729) (as amended, the
``Registration Statement'').
On March 3, 2004, the Trust filed with the Commission an Amended
and Restated Application for an Amended Order under Sections 6(c)
and 17(b) of the Investment Company Act and on September 8, 2004,
the Trust filed with the Commission a Second Amended and Restated
Application to Amend Orders under Sections 6(c) and 17(b) of the
Investment Company Act, for the purpose of exempting the Fund from
various provisions of the Investment Company Act and the rules
thereunder (the ``Application''). Applicants requested that the
Commission amend a prior order received by the Advisor, the Trust
and the Distributor on August 15, 2001, as amended (the ``Prior
Order''). On October 5, 2004, the SEC acted on the Application by
approving an order amending certain prior orders under Section 6(c)
of the Investment Company Act for an exemption from Sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the Investment Company Act and
Rule 22c-1 under the Investment Company Act, and under Sections 6(c)
and 17(b) of the Investment Company Act for an exemption from
Sections 17(a)(1) and (a)(2) thereof. Investment Company Act Release
No. 26626 (October 5, 2004) (``Amended Order''). See also In the
Matter of iShares Trust, et al., Investment Company Act Release No.
25111 (August 15, 2001) as amended by In the Matter of iShares,
Inc., et al., Investment Company Act Release No. 25623 (June 25,
2002) and In the Matter of iShares Trust, et al., Investment Company
Act Release No. 26006 (April 15, 2003). The Amended Order permits
the Trust to offer the Funds and permits the Funds to invest in
certain depositary receipts.
\7\ 17 CFR 240.19b-4.
\8\ Id.
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As set forth in detail below, the Funds will hold certain
securities (``Component Securities'') selected to correspond generally
to the performance of the MSCI EAFE Value Index and the MSCI EAFE
Growth Index (the ``Underlying Indexes'').\9\ Each Fund intends to
qualify as a ``regulated investment company'' (a ``RIC'') under the
Internal Revenue Code (the ``Code''). Barclays Global Fund Advisors
(the ``Advisor'' or ``BGFA'') is the investment advisor to the Funds.
The Advisor is registered under the Investment Advisers Act of
1940.\10\ The Advisor is the wholly owned subsidiary of Barclays Global
Investors, N.A. (``BGI''), a national banking association. BGI is an
indirect subsidiary of Barclays Bank PLC of the United Kingdom. SEI
Investments Distribution Co. (``SEI'' or ``Distributor''), a
Pennsylvania corporation and broker-dealer registered under the Act, is
the principal underwriter and distributor of Creation Unit Aggregations
of iShares (see ``Issuance of Creation Units Aggregations,'' below.)
The Distributor is not affiliated with the Exchange or the Advisor. The
Trust has appointed Investors Bank & Trust Co. (``IBT'') to act as
administrator (``Administrator''), custodian, fund accountant, transfer
agent, and dividend disbursing agent for the Funds. The Exchange
expects that performance of the Administrator's duties and obligations
will be conducted within the provisions of the Investment Company Act
and the rules thereunder. There is no affiliation between the
Administrator and the Trust, the Advisor or the Distributor. MSCI, the
sponsor and compiler of the Underlying Indexes, is not affiliated
[[Page 46245]]
with the Trust, the Administrator, the Distributor, or with the Advisor
or its affiliates. The Funds are not sponsored, offered, or sold by
MSCI.
---------------------------------------------------------------------------
\9\ Each Underlying Index for the MSCI EAFE Value and Growth
Index Fund is a subset of the MSCI EAFE Index. The MSCI EAFE Index
is an Underlying Index of an index fund of the Trust subject to the
Prior Order. At present, the iShares MSCI EAFE Index Fund trades on
the Exchange pursuant to UTP. Securities Exchange Act Release No.
50142 (August 3, 2004), 69 FR 48539 (August 10, 2004) (SR-NYSE-2004-
27).
\10\ 15 U.S.C. 80b.
---------------------------------------------------------------------------
(a) Operation of the Funds.11 The investment objective of the Funds
will be to provide investment results that correspond generally to the
price and yield performance of the Underlying Index. In seeking to
achieve their investment objective, the Funds will utilize ``passive''
indexing investment strategies. The Funds may fully replicate their
respective Underlying Index, but currently intend to use a
``representative sampling'' strategy to track the applicable Underlying
Index. A Fund utilizing a representative sampling strategy generally
will hold a basket of the Component Securities of its Underlying Index,
but it may not hold all of the Component Securities of its Underlying
Index. The Application states that the representative sampling
techniques that will be used by the Advisor to manage the Funds do not
differ from the representative sampling techniques it uses to manage
the funds that were the subject of the Prior Order. (See note 6,
supra.)
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\11\ The Exchange states that the information provided herein is
based on information included in the Application, Prior Order and
the Prior Application. (See note 6, supra.) While the Advisor would
manage the Funds, the Funds' Board of Directors would have overall
responsibility for the Funds' operations. The composition of the
Board is, and would be, in compliance with the requirements of
Section 10 of the Investment Company Act. The Funds are subject to
and must comply with Section 303A.06 of the Manual, which requires
that the Funds have an audit committee that complies with SEC Rule
10A-3, 17 CFR 240.10A-3.
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From time to time, adjustments may be made in the portfolio of the
Funds in accordance with changes in the composition of the Underlying
Indexes or to maintain compliance with requirements applicable to a RIC
under the Code.\12\ For example, if at the end of a calendar quarter, a
Fund would not comply with the RIC diversification tests, the Advisor
would make adjustments to the portfolio to ensure continued RIC status.
---------------------------------------------------------------------------
\12\ In order for the Funds to qualify for tax treatment as a
RIC, they must meet several requirements under the Code. Among these
is a requirement that, at the close of each quarter of the Funds'
taxable year, (i) at least 50% of the market value of the Funds'
total assets must be represented by cash items, U.S. government
securities, securities of other RICs and other securities, with such
other securities limited for the purpose of this calculation with
respect to any one issuer to an amount not greater than 5% of the
value of the Funds' assets and not greater than 10% of the
outstanding voting securities of such issuer; and (ii) not more than
25% of the value of their total assets may be invested in securities
of any one issuer, or two or more issuers that are controlled by the
Funds (within the meaning of Section 851(b)(4)(B) of the Code) and
that are engaged in the same or similar trades or business (other
than U.S. government securities of other RICs).
Compliance with the above referenced RIC asset diversification
requirements are monitored by the Advisor, and any necessary
adjustments to portfolio issuer weights will be made on a quarterly
basis or as necessary to ensure compliance with RIC requirements.
When an iShares Fund's Underlying Index itself is not RIC compliant,
the Advisor generally employs a representative sampling indexing
strategy (as described in the Funds' prospectus) in order to achieve
the Fund's investment objective. The Funds' prospectus also gives
the Funds additional flexibility to comply with the requirements of
the Code and other regulatory requirements and to manage future
corporate actions and index changes in smaller markets by investing
a percentage of fund assets in securities that are not included in
the Fund's Underlying Index or in American Depositary Receipts and
Global Depositary Receipts representing such securities.
---------------------------------------------------------------------------
The Exchange states that an index is a theoretical financial
calculation while each Fund is an actual investment portfolio. The
performance of the Funds and the Underlying Indexes will vary somewhat
due to transaction costs, market impact, corporate actions (such as
mergers and spin-offs) and timing variances. As stated in the
Application, it is expected that, over time, the correlation between
each Fund's performance and that of its respective Underlying Index,
before fees and expenses, will be 95% or better. A figure of 100% would
indicate perfect correlation. Any correlation of less than 100% is
called ``tracking error.'' Thus, the Funds are expected to have a
tracking error relative to the performance of the applicable Underlying
Index of no more than 5%.\13\ The Funds' investment objectives,
policies and investment strategies will be fully disclosed in their
prospectus (``Prospectus'') and statement of additional information
(``SAI''). The Funds'' board of directors reviews the tracking error of
the Funds on a quarterly basis and, based upon its review, will
consider whether any action might be appropriate.
---------------------------------------------------------------------------
\13\ The Web site for the Funds, www.iShares.com, contains
detailed information on the performance and the tracking error for
each Fund.
---------------------------------------------------------------------------
The Funds will not concentrate their investments (i.e., hold 25% or
more of their assets) in a particular industry or group of industries,
except that the Funds will concentrate their investments to
approximately the same extent that the respective Underlying Index is
so concentrated. For purposes of this limitation, securities of the
U.S. Government (including its agencies and instrumentalities),
repurchase agreements collateralized by U.S. Government securities, and
securities of the United States government and their political
subdivisions are not considered to be issued by members of any
industry.
Each of the MSCI EAFE Value and Growth Index Funds (i) will invest
at least 90% of its assets in Component Securities of its respective
Underlying Index and in Depositary Receipts (defined below)
representing such securities and (ii) may invest up to 10% of its
assets in certain futures, options and swap contracts, cash and cash
equivalents, including money market mutual funds advised by BGFA,\14\
other exchange-traded funds, including other iShares Funds,\15\ and
stocks not included in the Underlying Index but which the Advisor
believes will help the Fund track its Underlying Index. For example,
each of these Funds may invest in securities not included in the
relevant Underlying Index in order to reflect prospective changes in
the relevant Underlying Index (such as future corporate actions and
index reconstitutions, additions, and deletions).
---------------------------------------------------------------------------
\14\ In the Matter of Master Investment Portfolio, et al.,
Investment Company Act Release No. 25158 (September 18, 2001).
\15\ The Fund, as well as any existing iShares Fund, is
permitted to invest in shares of another iShares Fund to the extent
that such investment is consistent with the Fund's investment
objective, its Registration Statement, and any applicable investment
restrictions.
---------------------------------------------------------------------------
To the extent the Funds invest in American Depositary Receipts,\16\
they will be listed on a national securities exchange or Nasdaq, and to
the extent the Funds invest in other Depositary Receipts, they will be
listed on a foreign exchange. The Funds will not invest in any unlisted
Depositary Receipts or any listed Depositary Receipts that the Advisor
deems to be illiquid or for which pricing information is not readily
available. In addition, all Depositary Receipts must be sponsored (with
the exception of certain pre-1984 ADRs that are listed and unsponsored
because they are grandfathered).
---------------------------------------------------------------------------
\16\ For the purposes of this proposed rule filing, ``Depositary
Receipts'' are American Depositary Receipts (``ADRs''), Global
Depositary Receipts (``GDRs''), and Euro Depositary Receipts
(``EDRs'') (collectively, ``Depositary Receipts''). Telephone
conversation between Florence Harmon, Senior Special Counsel,
Division of Market Regulation, Commission, and Michael Cavalier,
Assistant General Counsel, NYSE, on July 7, 2005.
---------------------------------------------------------------------------
The Exchange believes that these requirements and policies prevent
the Funds from being excessively weighted in any single security or
small group of securities and significantly reduce concerns that
trading in the Funds could become a surrogate for trading in
unregistered securities.
(b) Description of the Funds and the Underlying Indexes. Index
Description. The Funds' Underlying Indexes, the MSCI EAFE Growth Index
and MSCI EAFE Value Index, are subsets of the
[[Page 46246]]
MSCI EAFE Index. The MSCI EAFE Index, in turn, is a composite of
certain MSCI single country equity indices.\17\
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\17\ Thus, the Underlying Indexes are subsets of various MSCI
single country equity indices, each representing approximately 50%
of the free float adjusted market capitalization of each underlying
single country equity index and consists of those securities
classified by MSCI as most representing the value style or growth
style, respectively. The MSCI single country standard equity indices
target an 85% free float-adjusted market representation level within
each industry group, within each country. According to MSCI, the
security selection process within each industry group is based on
the careful analysis of (i) each company's business activities and
the diversification that its securities would bring to the index,
(ii) the size (based on free float-adjusted market capitalization)
and liquidity of the securities of the company; and (iii) the
estimated free float for the company and its individual share
classes. MSCI targets for inclusion the most sizable and liquid
securities in an industry group. MSCI generally does not consider
securities with inadequate liquidity, and/or securities that do not
have an estimated free float greater than 15%. Exceptions to this
general rule are made only in significant cases, where exclusion of
a security of a large company would compromise the index's ability
to fully and fairly represent the characteristics of the underlying
market.
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Constituents of the MSCI EAFE Index include securities from Europe,
Australasia (Australia and Asia), and the Far East. Each Underlying
Index generally represents approximately 50% of the free float-adjusted
market capitalization of the MSCI EAFE Index and consists of those
securities classified by MSCI as most representing the growth or value
style, respectively. Securities classified as growth style generally
tend to have higher forecasted growth rates, lower book value to price
ratios, lower forward earnings to price ratios and lower dividend
yields than securities representing the value style. Securities
classified as value style generally tend to have higher book value to
price ratios, higher forward earnings to price ratios, higher dividend
yields and lower forecasted growth rates than securities representing
the growth style. MSCI uses a specialized framework to attribute both
value and growth style characteristics to each security within the MSCI
EAFE Index. Each security is evaluated based on certain value factors
and growth factors, which are then used to calculate a value score and
growth score. Based upon these two scores, MSCI determines the extent
to which each security is assigned to the value or growth style. It is
possible for a single security to have representation in both the value
and growth style indices; however, no more than 100% of a security's
float-adjusted market capitalization will be included within the
combined style framework.\18\ Therefore, the combined market
capitalization of the value and growth style indices would be
equivalent to the market capitalization of the MSCI EAFE.\19\ The
Funds' top portfolio holdings can be found at https://www.iShares.com.
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\18\ The Underlying Indexes are compiled by Morgan Stanley
Capital International (``MSCI''). MSCI is a partially owned
subsidiary of Morgan Stanley. When a broker-dealer, or a broker-
dealer's affiliate such as MSCI, is involved in the development and
maintenance of a stock index upon which a product such as iShares is
based, the broker-dealer or its affiliate should have procedures
designed specifically to address the improper sharing of
information. The Exchange states that MSCI has implemented
procedures to prevent the misuse of material, non-public information
regarding changes to component stocks in the MSCI EAFE Value and
Growth Indices and has provided Commission staff with a letter filed
under the Freedom of Information Act, 5 U.S.C. 552, describing such
procedures. Telephone conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation, Commission, and
Michael Cavalier, Assistant General Counsel, NYSE, on July 7, 2005.
\19\ Telephone conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation, Commission, and
Michael Cavalier, Assistant General Counsel, NYSE, on July 7, 2005.
Additionally, the MSCI EAFE Index is a capitalization-weighted index
that aims to capture 85% of the publicly available, total market
capitalization of European, Australian, and Far Eastern markets.
Id., on July 29, 2005.
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MSCI defines the free float of a security as the proportion of
shares outstanding that are deemed to be available for purchase in the
public equity markets by international investors. In practice,
limitations on free float available to international investors include:
(i) Strategic and other shareholdings not considered part of available
free float; and (ii) limits on share ownership for foreigners.
As of March 31, 2005, the MSCI EAFE Growth Index's top three
holdings were the Vodafone Group, GlaxoSmithKline, Novartis. Its top
three industries were Financials, Energy and Consumer Discretionary.
As of March 31, 2005, the MSCI EAFE Growth Index components had a
total market capitalization of approximately $4.4 trillion.\20\ The
average total market capitalization was approximately $7.3 billion. The
10 largest constituents represented approximately 21.2% of the index
weight. The five highest weighted stocks, which represented 13.2% of
the Index weight, had an average daily trading volume in excess of 347
million shares during the past two months. 99.3% of the component
stocks traded at least 250,000 shares in each of the previous six
months.
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\20\ As of June 30, 2005, both the MSCI EAFE Value and Growth
Indices continued to each have a total market capitalization of over
$4.4 trillion, and both Indices each contained over 600 component
securities. See Exhibit A to Amendment No. 1.
---------------------------------------------------------------------------
As of March 31, 2005, the MSCI EAFE Value Index's top three
holdings were HSBC Holdings (GB), BP and Nestle. Its top three
industries were Financials, Energy, and Consumer Discretionary.
As of March 31, 2005, the MSCI EAFE Value Index components had a
total market capitalization of approximately $4.5 trillion. The average
total market capitalization was approximately $7.5 billion. The ten
largest constituents represented approximately 21.2% of the index
weight. The five highest weighted stocks, which represented 13.6% of
the Index weight, had an average daily trading volume in excess of 191
million shares during the past two months. 99.9% of the component
stocks traded at least 250,000 shares in each of the previous six
months.
Additional information regarding the Funds' holdings is available
at https://www.iShares.com.\21\
---------------------------------------------------------------------------
\21\ Telephone conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation, Commission, and
Michael Cavalier, Assistant General Counsel, NYSE, on July 7, 2005.
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(c) Changes to the Underlying Indexes for the Funds. As described
in the SAI for the Funds, overall index maintenance can be described by
three broad categories of implementation of changes: (i) Annual full
country index reviews, conducted on a fixed annual timetable, that
systematically re-assess the various dimensions of the equity universe
for all countries; (ii) quarterly index reviews, aimed at promptly
reflecting other significant market events; and (iii) ongoing event-
related changes, such as mergers and acquisitions, which generally are
rapidly implemented in the indices as they occur.\22\
---------------------------------------------------------------------------
\22\ See MSCI Standard Index Series Methodology, available at
https://www.msci.com.
---------------------------------------------------------------------------
Potential changes in the status of countries (stand-alone,
emerging, or developed) follow their own separate timetables. These
changes are normally implemented in one or more phases at the regular
annual full country index review and quarterly index review dates.
The annual full country index review for all the MSCI single
country standard equity indices is carried out once every 12 months and
implemented as of the close of the last business day of May. The
implementation of changes resulting from a quarterly index review
occurs only on three dates throughout the year: as of the close of the
last business day of February, August, and November. Any single country
indices may be impacted at the quarterly index review. MSCI Index
additions and deletions due to quarterly index rebalancings are
announced at least two weeks in advance.
[[Page 46247]]
(d) Issuance of Creation Unit Aggregations
The Exchange notes that, according to the Application, the issuance
and redemption of Creation Unit Aggregations will operate in a manner
identical to that of the funds that are the subject of the Prior
Order.\23\
---------------------------------------------------------------------------
\23\ See supra note 6.
---------------------------------------------------------------------------
(i) In General. Shares of the Funds (the ``iShares'') will be
issued on a continuous offering basis in groups of 400,000 iShares, or
multiples thereof.\24\ These ``groups'' of shares are called ``Creation
Unit Aggregations.'' The Funds will issue and redeem iShares only in
Creation Unit Aggregations.\25\
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\24\ The Exchange notes that, while this Creation Unit size is
significantly larger than that of most other iShares Funds, the
iShares Trust recently implemented a split for a number of iShares
Funds, which began trading on a split-adjusted basis on June 9,
2005. The iShares MSCI EAFE Index Fund, for example, implemented a
3-for-1 split, and the size of a Creation Unit for that Fund
increased from 200,000 iShares to 600,000 iShares as of June 9,
2005, in order to provide for a comparable post-split Creation Unit
dollar value. The Exchange does not expect that the Creation Unit
size for the Funds will adversely impact arbitrage opportunities and
that the potential for arbitrage should keep the market price of
shares of the Funds comparable to their net asset values.
\25\ Each Creation Unit Aggregation will have an estimated
initial value of approximately $20,000,000.
---------------------------------------------------------------------------
As with other open-end investment companies, iShares will be issued
at the net asset value (``NAV'') per share next determined after an
order in proper form is received. The anticipated price at which the
iShares will initially trade is approximately $50.
The NAV per share of the Funds is determined as of the close of the
regular trading session on the Exchange on each day that the Exchange
is open. The Trust sells Creation Unit Aggregations of the Funds only
on business days at the next determined NAV of the Funds. Creation Unit
Aggregations generally will be issued by the Funds in exchange for the
in-kind deposit of equity securities designated by the Advisor to
correspond generally to the price and yield performance of the Fund's
Underlying Index (the ``Deposit Securities'') and a specified cash
payment. Creation Unit Aggregations generally will be redeemed by the
Fund in exchange for portfolio securities of the Fund (``Fund
Securities'') and a specified cash payment. Fund Securities received on
redemption may not be identical to Deposit Securities deposited in
connection with creations of Creation Unit Aggregations for the same
day.
All orders to purchase iShares in Creation Unit Aggregations must
be placed through an Authorized Participant. An Authorized Participant
must be either a ``Participating Party,'' i.e., a broker-dealer or
other participant in the clearing process through the National
Securities Clearing Corporation (``NSCC'') Continuous Net Settlement
System (the ``Clearing Process''), a clearing agency that is registered
with the SEC, or a Depository Trust Company (``DTC'') participant, and
in each case, must enter into a Participant Agreement. The Funds impose
a transaction fee in connection with the issuance and redemption of
iShares to offset transfer and other transaction costs. The transaction
fee in connection with the issuance and redemption of Creation Unit
Aggregations of the Funds are estimated to be approximately between
$10,000 and $15,000.
(ii) In-Kind Deposit of Portfolio Securities. Payment for Creation
Unit Aggregations will be made by the purchasers generally by an in-
kind deposit with the applicable Fund of the Deposit Securities
together with an amount of cash (``Balancing Amount'') specified by the
Advisor in the manner described below. The Balancing Amount is an
amount equal to the difference between (1) the NAV (per Creation Unit
Aggregation) of the Fund and (2) the total aggregate market value (per
Creation Unit Aggregation) of the Deposit Securities (such value
referred to herein as the ``Deposit Amount''). The Balancing Amount
serves the function of compensating for differences, if any, between
the NAV per Creation Unit Aggregation and that of the Deposit Amount.
The deposit of the requisite Deposit Securities and the Balancing
Amount are collectively referred to herein as a ``Fund Deposit.'' The
Advisor will make available to the market through the NSCC on each
business day, prior to the opening of trading on the Exchange
(currently 9:30 a.m. Eastern Time), the list of the names and the
required number of shares of each Deposit Security included in the
current Fund Deposit (based on information at the end of the previous
business day) for each Fund. The Fund Deposit will be applicable to the
relevant Fund (subject to any adjustments to the Balancing Amount, as
described below) in order to effect purchases of Creation Unit
Aggregations of such Fund until such time as the next-announced Fund
Deposit composition is made available.
The identity and number of shares of the Deposit Securities
required for the Fund Deposit for each Fund will change from time to
time. The composition of the Deposit Securities may change in response
to adjustments to the weighting or composition of the Component
Securities in the Underlying Index. In addition, the Trust reserves the
right to permit or require the substitution of an amount of cash--i.e.,
a ``cash in lieu'' amount--to be added to the Balancing Amount to
replace any Deposit Security that may not be available in sufficient
quantity for delivery or that may not otherwise be eligible for
transfer. The Trust also reserves the right to permit or require a
``cash in lieu'' amount where the delivery of the Deposit Security by
the Authorized Participant would be restricted under the securities
laws or where the delivery of the Deposit Security to the Authorized
Participant would result in the disposition of the Deposit Security by
the Authorized Participant becoming restricted under the securities
laws, or in certain other situations. The adjustments described above
will reflect changes known to the Advisor on the date of announcement
to be in effect by the time of delivery of the Fund Deposit, in the
composition of the applicable Underlying Index or resulting from
certain corporate actions.
(e) Redemption of iShares. Creation Unit Aggregations of the Funds
will be redeemable at the NAV next determined after receipt of a
request for redemption. Creation Unit Aggregations of the Funds
generally will be redeemed in-kind, together with a balancing cash
payment (although, as described below, Creation Unit Aggregations may
sometimes be redeemed for cash). The value of the Funds' redemption
payments on a Creation Unit Aggregation basis will equal the NAV per
the appropriate number of Fund shares. Owners of iShares may sell their
iShares in the secondary market, but must accumulate enough iShares to
constitute a Creation Unit Aggregation in order to redeem through the
Fund. Redemption orders must be placed by or through an Authorized
Participant. Creation Unit Aggregations of the Funds generally will be
redeemable on any business day in exchange for applicable Fund
Securities and the Cash Redemption Payment (defined below) in effect on
the date a request for redemption is made. The Advisor will publish
daily through NSCC the list of securities which a creator of Creation
Unit Aggregations must deliver to the Fund (``Creation List'') and
which a redeemer will receive from the Funds (``Redemption List''). The
Creation List is identical to the list of the names and the required
numbers of shares of each Deposit Security included in the current Fund
Deposit.
In addition, just as the Balancing Amount is delivered by the
purchaser of Creation Unit Aggregations to the Funds, the Trust will
also deliver to the
[[Page 46248]]
redeeming beneficial owner in cash the ``Cash Redemption Payment.'' The
Cash Redemption Payment on any given business day will be an amount
calculated in the same manner as that for the Balancing Amount,
although the actual amounts may differ if the Fund Securities received
upon redemption are not identical to the Deposit Securities applicable
for creations on the same day.\26\ To the extent that the Fund
Securities have a value greater than the NAV of iShares being redeemed,
a cash payment equal to the differential is required to be paid by the
redeeming beneficial owner to the applicable Fund. The Trust may also
make redemptions in cash in lieu of transferring one or more Fund
Securities to a redeemer if the Trust determines, in its discretion,
that such method is warranted due to unusual circumstances. An unusual
circumstance could arise, for example, when a redeeming entity is
restrained by regulation or policy from transacting in certain Fund
Securities, such as the presence of such Fund Securities on a redeeming
investment banking firm's restricted list.
---------------------------------------------------------------------------
\26\ See discussion under Section II.A.1(d)(ii) ``In-Kind
Deposit of Portfolio Securities,'' above.
---------------------------------------------------------------------------
(f) Availability of Information Regarding iShares and the
Underlying Index. On each business day, the list of names and amount of
each security constituting the current Deposit Securities of the Fund
Deposit and the Balancing Amount effective as of the previous business
day, per outstanding share of each Fund, will be made available. An
amount per iShare representing the sum of the estimated Balancing
Amount effective through and including the previous business day, plus
the current value of the Deposit Securities in U.S. dollars, on a per
iShare basis (the ``Intra-day Optimized Portfolio Value'' or ``IOPV'')
will be calculated by an independent third party (the ``IOPV
Calculator''), such as Bloomberg L.P., every 15 seconds during the
Exchange's regular trading hours and disseminated every 15 seconds on
the Consolidated Tape.
The IOPV reflects the current value of the Deposit Securities and
the Balancing Amount. The IOPV also reflects changes in currency
exchange rates between the U.S. dollar and the applicable home foreign
currency.\27\
---------------------------------------------------------------------------
\27\ The IOPV ticker is available at www.iShares.com and Intra-
day IOPV is publicly available utilizing this ticker through various
financial Web sites such as https://finance.yahoo.com. Telephone
conversation between Florence Harmon, Senior Special Counsel,
Division of Market Regulation, Commission, and Michael Cavalier,
Assistant General Counsel, NYSE, on July 7, 2005.
---------------------------------------------------------------------------
Since the Funds will utilize a representative sampling strategy,
the IOPV may not reflect the value of all securities included in the
Underlying Indexes. In addition, the IOPV does not necessarily reflect
the precise composition of the current portfolio of securities held by
the Funds at a particular point in time. Therefore, the IOPV on a per-
Fund-share basis disseminated during the Exchange's trading hours
should not be viewed as a real time update of the NAV of the Fund,
which is calculated only once a day.
While the IOPV disseminated by the Exchange at 9:30 a.m. New York
Time is expected to be generally very close to the most recently
calculated Fund NAV on a per-Fund-share basis, it is possible that the
value of the portfolio of securities held by each Fund may diverge from
the Deposit Securities values during any trading day. In such case, the
IOPV will not precisely reflect the value of each Fund's portfolio.
However, during the trading day, the IOPV can be expected to closely
approximate the value per Fund share of the portfolio of securities for
each Fund, except under unusual circumstances (e.g., in the case of
extensive rebalancing of multiple securities in a Fund at the same time
by the Advisor).
The Exchange believes that dissemination of the IOPV based on the
Deposit Securities provides additional information regarding the Funds
that is not otherwise available to the public and is useful to
professionals and investors in connection with Fund shares trading on
the Exchange or the creation or redemption of Fund shares.
There is an overlap in trading hours between the foreign and U.S.
markets with respect to the Funds. Therefore, the IOPV Calculator will
update the applicable IOPV every 15 seconds to reflect price changes in
the applicable foreign market or markets and convert such prices into
U.S. dollars based on the currency exchange rate. When the foreign
market or markets are closed but U.S. markets are open, the IOPV will
be updated every 15 seconds to reflect changes in currency exchange
rates after the foreign market closes. The IOPV will also include the
applicable cash component for each Fund.
In addition, there will be disseminated a value for the Underlying
Indexes once each trading day, based on closing prices in the relevant
exchange market. In each MSCI Index, the prices used to calculate the
MSCI Indices are the official exchange closing prices or those figures
accepted as such. MSCI reserves the right to use an alternative pricing
source on any given day.
To convert the foreign exchange closing price into U.S. dollars,
MSCI uses the FX rates published by WM/Reuters at 4 p.m. London time.
MSCI uses WM/Reuters rates for all developed and emerging markets.
Exchange rates are taken daily at 4 p.m. London time by the WM Company
and are sourced whenever possible from multi-contributor quotes on
Reuters. Representative rates are selected for each currency based on a
number of ``snapshots'' of the latest contributed quotations taken from
the Reuters service at short intervals around 4 p.m. WM Reuters
provides closing bid and offer rates. MSCI uses these rates to
calculate the mid-point to 5 decimal places.
The NAV for the Fund will be calculated and disseminated daily. The
Funds' NAV will be calculated by IBT. IBT will disseminate the
information to BGI, SEI and others, including the NYSE. The Funds' NAV
will be published in a number of places, including https://
www.iShares.com and on the Consolidated Tape.\28\
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\28\ In addition, the Web site for the Trust, https://
www.iShares.com, which will be publicly accessible at no charge,
will contain the following information, such as: (i) The prior
business day's NAV and the mid-point of the bid-ask price at the
time of calculation of such NAV (``Bid/Ask Price''), and a
calculation of the premium or discount of such price against such
NAV; and (ii) data in chart format displaying the frequency
distribution of discounts and premiums of the Bid/Ask Price against
the NAV, within appropriate ranges, for each of the four previous
calendar quarters.
---------------------------------------------------------------------------
The Exchange states that closing prices of the Funds' Deposit
Securities are readily available from, as applicable, the relevant
exchanges, automated quotation systems, published or other public
sources in the relevant country, or on-line information services such
as Bloomberg or Reuters. The exchange rate information required to
convert such information into U.S. dollars is also readily available in
newspapers and other publications and from a variety of on-line
services.
(g) Dividends and Distributions. The Exchange notes that dividends
are accrued daily from net investment income and will be declared and
paid to beneficial owners of record at least annually by the Funds.
Distributions of realized securities gains, if any, generally will be
declared and paid once a year, but the Funds may make distributions on
a more frequent basis to comply with the distribution requirements of
the Code and consistent with the Investment Company Act.
Dividends and other distributions on iShares of the Funds will be
distributed on a pro rata basis to beneficial owners of such iShares.
Dividend payments will
[[Page 46249]]
be made through the DTC and the DTC Participants to beneficial owners
then of record with amounts received from the Fund.
The Trust currently does not intend to make the DTC book-entry
Dividend Reinvestment Service (``Service'') available for use by
beneficial owners for reinvestment of their cash proceeds, but certain
individual brokers may make the Service available to their clients. The
SAI will inform investors of this fact and direct interested investors
to contact such investor's broker to ascertain the availability and a
description of the Service through such broker. The SAI will also
caution interested beneficial owners that they should note that each
broker may require investors to adhere to specific procedures and
timetables in order to participate in the Service and such investors
should ascertain from their broker such necessary details. The Funds
acquired pursuant to the Service will be held by the beneficial owners
in the same manner, and subject to the same terms and conditions, as
for original ownership of the Funds.
Beneficial owners of the Funds will receive all of the statements,
notices, and reports required under the Investment Company Act and
other applicable laws. They will receive, for example, annual and semi-
annual reports, written statements accompanying dividend payments,
proxy statements, annual notifications detailing the tax status of
distributions, IRS Form 1099-DIVs, etc. Because the Trust's records
reflect ownership of iShares by DTC only, the Trust will make available
applicable statements, notices, and reports to the DTC Participants
who, in turn, will be responsible for distributing them to the
beneficial owners.
(h) Other Issues
(i) Criteria for Initial and Continued Listing. The Funds are
subject to the criteria for initial and continued listing of ICUs in
Section 703.16 of the Manual. A minimum of one Creation Unit (400,000
iShares) will be required to be outstanding at the start of trading.
This minimum number of shares of each Fund required to be outstanding
at the start of trading will be comparable to requirements that have
been applied to previously traded series of ICUs.
The Exchange believes that the proposed minimum number of shares of
each Fund outstanding at the start of trading is sufficient to provide
market liquidity and to further each Fund's investment objective to
seek to provide investment results that correspond generally to the
price and yield performance of its Underlying Index.
(ii) Original and Annual Listing Fees. The original listing fees
applicable to the Funds for listing on the Exchange is $5,000 for each
Fund, and the annual continuing listing fees will be $2,000 for each
Fund.
(iii) Stop and Stop Limit Orders. Commentary .30 to NYSE Rule 13
provides that stop and stop limit orders in an ICU shall be elected by
a quotation, but specifies that if the electing bid on an offer is more
than 0.10 points away from the last sale and is for the specialist's
dealer account, prior Floor Official approval is required for the
election to be effective. This rule applies to ICUs generally.
(iv) Rule 460.10. Rule 460.10 generally precludes certain business
relationships between an issuer and the specialist or its affiliates in
the issuer's securities.\29\ Exceptions in the Rule permit specialists
in Fund shares to enter into Creation Unit transactions through the
Distributor to facilitate the maintenance of a fair and orderly market.
A specialist Creation Unit transaction may only be effected on the same
terms and conditions as any other investor, and only at the net asset
value of the Fund shares. A specialist may acquire a position in excess
of 10% of the outstanding issue of the Funds' shares, provided,
however, that a specialist registered in a security issued by an
investment company may purchase and redeem the investment company unit
or securities that can be subdivided or converted into such unit, from
the investment company as appropriate to facilitate the maintenance of
a fair and orderly market in the subject security in accordance with
the terms of Rule 460.10.\30\
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\29\ Telephone conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation, Commission, and
Michael Cavalier, Assistant General Counsel, NYSE, on July 7, 2005.
\30\ Telephone conversation between Florence Harmon, Senior
Special Counsel, Division of Market Regulation, Commission, and
Michael Cavalier, Assistant General Counsel, NYSE, on July 29, 2005
(as to specific terms of Rule 460.10).
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(v) Prospectus Delivery. The Commission has granted the Trust an
exemption from certain prospectus delivery requirements under Section
24(d) of the Investment Company Act.\31\ Any product description used
in reliance on the Section 24(d) exemptive order will comply with all
representations made therein and all conditions thereto. The Exchange,
in an Information Memo to Exchange members and member organizations,
will inform members and member organizations, prior to commencement of
trading, of the prospectus or product description delivery requirements
applicable to the Funds and will refer members and member organizations
to NYSE Rule 1100(b). The Information Memo will also advise members and
member organizations that delivery of a prospectus to customers in lieu
of a product description would satisfy the requirements of Rule
1100(b).
---------------------------------------------------------------------------
\31\ 15 U.S.C. 80a-24. See In the Matter of iShares, Inc., et
al., Investment Company Act Release No. 25623 (June 25, 2002).
---------------------------------------------------------------------------
(vi) Information Memo. The Exchange will distribute an Information
Memo to its members in connection with the trading of the Funds. The
Memo will discuss the special characteristics and risks of trading this
type of security. Specifically, the Memo, among other things, will
discuss what the Funds are, how the Funds' shares are created and
redeemed, the requirement that members and member firms deliver a
prospectus or product description to investors purchasing shares of the
Funds prior to or concurrently with the confirmation of a transaction,
applicable Exchange rules, dissemination information, trading
information and the applicability of suitability rules (including NYSE
Rule 405). The memo will also discuss exemptive, no-action and
interpretive relief granted by the Commission from Section 11(d)(1) and
certain rules under the Act.
(vii) Trading Halts. In order to halt the trading of the Funds, the
Exchange may consider, among other things, factors such as the extent
to which trading is not occurring in underlying security(s) and whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in the Funds' shares is subject to trading halts caused by
extraordinary market volatility pursuant to NYSE Rule 80B.
(viii) Due Diligence. The Exchange represents that the Information
Memo to members will note, for example, Exchange responsibilities
including that before an Exchange member, member organization, or
employee thereof recommends a transaction in the Funds, a determination
must be made that the recommendation is in compliance with all
applicable Exchange and federal rules and regulations, including due
diligence obligations under NYSE Rule 405 (Diligence as to Accounts).
(ix) Purchases and Redemptions in Creation Unit Size. In the Memo
referenced above, members and member organizations will be informed
that procedures for purchases and redemptions of shares of the Funds in
Creation Unit Size are described in the Funds' Prospectus and SAI, and
that shares of the Funds are not individually redeemable but are
redeemable only in
[[Page 46250]]
Creation Unit size aggregations or multiples thereof.
(x) Surveillance. The Exchange will utilize its existing
surveillance procedures applicable to ICUs to monitor trading in the
Funds. The Exchange believes that these procedures are adequate to
monitor Exchange trading of the Funds.
The Exchange states that its surveillance procedures applicable to
trading in the proposed iShares are comparable to those applicable to
other ICUs currently trading on the Exchange. The Exchange represents
that its surveillance procedures, which the Exchange has filed with the
Commission, are adequate to properly monitor the trading of the Funds.
The Exchange's current trading surveillances focus on detecting
securities trading outside their normal patterns. When such situations
are detected, surveillance analysis follows and investigations are
opened, where appropriate, to review the behavior of all relevant
parties for all relevant trading violations. The Exchange is able to
obtain information regarding trading in both the Fund shares and the
component securities through NYSE members, in connection with such
members' proprietary or customer trades, on any relevant market on
which such members may trade; in addition, the Exchange may obtain
trading information via the Intermarket Surveillance Group (``ISG'')
from other exchanges who are members or affiliates of the ISG.
(xi) Hours of Trading/Minimum Price Variation. The Funds will trade
on the Exchange until 4:15 p.m. (Eastern time) each business day. The
minimum price variation for quoting will be $.01.
1. Statutory Basis
NYSE believes that the proposed rule change is consistent with
Section 6(b)(5) of the Act \32\ requiring that an exchange have rules
that are designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest.
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\32\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2005-41 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
All submissions should refer to File Number SR-NYSE-2005-41. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the NYSE. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSE-2005-41 and should be submitted on or before August
30, 2005.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder, applicable to a national securities exchange.\33\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act \34\ and will promote just
and equitable principles of trade, and facilitate transactions in
securities, and, in general, protect investors and the public interest.
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\33\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\34\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the NYSE's proposal should advance the
public interest by providing investors with increased flexibility in
satisfying their investment needs and by allowing them to purchase and
sell Fund shares at negotiated prices throughout the business day that
generally track the price and yield performance of the targeted
Underlying Index.\35\
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\35\ The Commission notes that, as is the case with similar
previously approved exchange traded funds, investors in the Fund can
redeem shares in Creation-Unit-size aggregations only. See, e.g.,
Securities Exchange Act Release Nos. 43679 (December 5, 2000), 65 FR
77949 (December 13, 2000) (File No. SR-NYSE-00-46); 50505 (October
8, 2004), 69 FR 61280 (October 15, 2004) (File No. SR-NYSE-2004-55);
50189 (August 12, 2004), 69 FR 51723 (August 20, 2004) (File No. SR-
Amex-2004-05).
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Furthermore, the Commission believes that the proposed rule change
raises no issues that have not been previously considered by the
Commission. The Fund is similar in structure and operation to exchange-
traded index funds that the Commission has previously approved for
listing and trading on national securities exchanges under Section
19(b)(2) of the Act.\36\ Further, with respect to each of the following
key issues, the Commission believes that the Fund satisfies established
standards.
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\36\ 15 U.S.C. 78s(b)(2).
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A. Fund Characteristics
Similar to other previously-approved, exchange-listed index fund
shares, the Commission believes that the proposed Funds are reasonably
designed to provide investors with an investment vehicle that
substantially reflects in value the performance of the respective
Underlying Index and will provide investors with an alternative to
trading a range of securities on an individual basis. The estimated
cost of individual shares in the Fund, approximately $50,
[[Page 46251]]
should make them attractive to individual retail investors who wish to
hold a security representing the performance of a portfolio of stocks.
In addition, investors will be able to trade shares in the Fund
continuously throughout the business day in secondary market
transactions at negotiated prices.\37\ Accordingly, the proposed Fund
will allow investors to: (1) Respond quickly to market changes through
intra-day trading opportunities; (2) engage in hedging strategies
similar to those used by institutional investors; and (3) reduce
transaction costs for trading a portfolio of securities.
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\37\ Because of the potential arbitrage opportunities, the
Commission believes that Fund shares will not trade at a material
discount or premium in relation to their NAV.
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Moreover, the Commission finds that, although the value of the
Fund's shares will be derived from and based on the value of the
securities and cash held in the Fund, the Fund is not leveraged.
Accordingly, the level of risk involved in the purchase or sale of Fund
shares is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism
for shares in the Fund is based on a portfolio of securities.
The Commission notes that the MSCI EAFE Value and Growth Index
Funds (i) will invest at least 90% of its assets in Component
Securities of its respective Underlying Index and in Depositary
Receipts (defined above) representing such securities and (ii) may
invest up to 10% of its assets in certain futures, options and swap
contracts, cash and cash equivalents, including money market mutual
funds advised by BGFA,\38\ other exchange-traded funds, including other
iShares Funds,\39\ and stocks not included in the Underlying Index but
which the Advisor believes will help the Fund track its Underlying
Index.\40\ It is expected that the Fund will have a tracking error
relative to the performance of its Underlying Index of no more than 5%.
As described above, each Index generally represents approximately 50%
of the free float-adjusted market capitalization of the MSCI EAFE
Index, itself consisting of various MSCI EAFE country indices, and
consists of those securities classified by MSCI as most representing
the growth or value style.
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\38\ In the Matter of Master Investment Portfolio, et al.,
Investment Company Act Release No. 25158 (September 18, 2001).
\39\ The Fund, as well as any existing iShares Fund, is
permitted to invest in shares of another iShares Fund to the extent
that such investment is consistent with the Fund's investment
objective, registration statement, and any applicable investment
restrictions.
\40\ The Commission notes that the Funds may invest in sponsored
ADRs and other Depositary Receipts, but will not invest in any
unlisted depositary receipts or any listed depositary receipts that
the Advisor deems to be illiquid or for which pricing information is
not readily available. See note 16 supra.
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Given the market capitalization and liquidity of the Underlying
Indexes and Funds' Component Securities, the Commission does not
believe that the Fund shares should be susceptible to manipulation.\41\
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\41\ The Exchange states that as of March 31, 2005, the ten
largest constituents represented approximately 21.2% of the index
weight for both the MSCI EAFE Growth Index and the MSCI EAFE Value
Index. The 5 highest weighted stocks, which rep
