[Federal Register Volume 66, Number 162 (Tuesday, August 21, 2001)]
[Notices]
[Pages 43927-43937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21014]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44700; File No. SR-Amex-2001-34]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
Nos. 1, 2, 3, and 4 by the American Stock Exchange LLC, Relating to 
Funds of the iShares Trust Based on Foreign Stock Indexes

August 14, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 25, 2001, the American Stock Exchange LLC (``Amex'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the Amex. 
On June 25, 2001, the Amex filed Amendment No. 1 to the proposal.\3\ On 
July 18, 2001, the Amex filed Amendment No. 2 to the proposal.\4\ On 
July 26, 2001, the Amex filed Amendment No. 3 to the proposal.\5\ On

[[Page 43928]]

August 9, 2001, the Amex filed Amendment No. 4 to the proposal.\6\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change and Amendment Nos. 1, 2, 3, and 4 from interested 
persons and is simultaneously approving the proposal, as amended, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael Cavalier, Associate General Counsel, 
Legal & Regulatory Department, Amex, to Yvonne Fraticelli, Division 
of Market Regulation (``Division''), Commission, dated June 20, 2001 
(``Amendment No. 1''). Amendment No. 1 deleted the S&P Global 700 
Index Fund from the new series of the iShares Trust that the Amex 
proposes to list and trade.
    \4\ See letter from Michael Cavalier, Associate General Counsel, 
Legal & Regulatory Division, Amex, to Yvonne Fraticelli, Division, 
Commission, dated July 17, 2001 (``Amendment No. 2''). Amendment No. 
2 provided additional information concerning the proposal, including 
(1) the minimum price variation for the proposed new series of 
iShares; (2) a description of the ``representative sample'' strategy 
that the Funds will use; (3) a description of the requirements for a 
Fund to qualify for tax treatment as a regulated investment company; 
(4) a description of indicative portfolio value for each Fund that 
the Amex will disseminate during regular Amex trading hours; (5) a 
clarification regarding the Balancing Amount used in the purchase of 
Creation Unit Aggregations; and (6) a representation that Morgan 
Stanley Capital International's (``MSCI'') has implemented 
procedures to prevent the misuse of material non-public information 
with regard to changes in the MSCI Europe, Australia, Far East 
(``EAFE'') Index.
    \5\ See letter from Michael Cavalier, Associate General Counsel, 
Legal & Regulatory Division, Amex, to Yvonne Fraticelli, Division, 
Commission, dated July 25, 2001 (``Amendment No. 3''). In Amendment 
No. 3, the Amex revised its proposal to, among other things: (1) 
Amend Amex Rule 1000A, Commentary .04 to indicate that transactions 
in iShares Index Funds of the iShares Trust may be effected until 4 
p.m. or 4:15 p.m. (New York time) each business day, as specified by 
the Amex; (2) indicate that the Funds do not intend to concentrate 
in any particular industry, except that each Fund will attempt to 
concentrate its investments to approximately the same extent that 
its Underlying Index concentrates in the stocks of a particular 
industry or group of industries; (3) indicate that the web site for 
the Funds will disclose the tracking error for each Fund and that 
the Advisor will notify the Fund's Board of Trustees if the tracking 
error for a Fund exceeds 5%; (4) indicate that the National 
Securities Clearing Corporation (``NSCC'') will make the Balancing 
Amount per Creation Unit Aggregation available to its members 
electronically on a daily basis; and (5) indicate that an 
``Authorized Participant'' is either a broker-dealer or other 
participant in the continuous net settlement system of the NSCC or a 
participant in the Depository Trust Company (``DTC'').
    \6\ See letter from Michael Cavalier, Associate General Counsel, 
Legal & Regulatory Division, Amex, to Yvonne Fraticelli, Division, 
Commission, dated August 8, 2001 (``Amendment No. 4''). In Amendment 
No. 4, the Amex indicated that: (1) Barclays Global Fund Advisors 
will provide the NSCC on a daily basis with the names and required 
number of shares of the Deposit Securities in a Creation Unit 
Aggregation and the Balancing Amount, which the NSCC will make 
available to NSCC members through an electronic file that NSCC 
members can download; (2) the final dividend amount for each Fund is 
the amount of dividends to be paid by a Fund for the appropriate 
period (usually annually); and (3) the Funds will disseminate the 
final dividend amount to Bloomberg and other sources.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to list and trade under Amex Rules 1000A et seq. 
the following fifteen series \7\ of the iShares  Trust (each 
such series, an ``Index Fund'' or ``Fund''): \8\ (1) the iShares S&P 
Global Consumer Discretionary Index Fund; (2) the iShares S&P Global 
Consumer Staples Index Fund; (3) the iShares S&P Global Energy Index 
Fund; (4) the iShares S&P Global Finances Index Fund; (5) the iShares 
S&P Global Health Care Index Fund; (6) the iShares S&P Global 
Industries Index Fund; (7) the iShares Global Information Technology 
Index Fund; (8) the iShares S&P Global Materials Index Fund; (9) the 
iShares S&P Global Telecommunication Services Index Fund; (10) the 
iShares S&P Global Utilities Index Fund; (11) the iShares S&P Global 
1200 Index Fund; (12) the iShares S&P/TOPIX 150 Index Fund; (13) the 
iShares S&P Asia Pacific 100 Index Fund; (14) the iShares S&P Latin 
America 40 Index Fund; and (15) the iShares MSCI EAFE Index Fund (each 
individually a ``Fund'' and collectively the ``Fund'').
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    \7\ The Amex amended its proposal to delete the iShares S&P 
Global 700 Index Fund as one of the series of the iShares Trust that 
the Amex proposes to list and trade. See Amendment No. 1, supra note 
3.
    \8\ The iShares Trust (``Trust'') has filed with the Commission 
an Application for Orders (``Application'') under sections 6(c) and 
17(b) of the Investment Company Act of 1940 (``1940 Act'') for the 
purpose of exempting the Index Funds of the Trust from various 
provisions of the 1940 Act and rules thereunder (File No. 812- 
12254). The information provided in this Rule 19b-4 filing relating 
to the Index Funds is based on information included in the 
Application, which includes additional information regarding the 
Trust and the Index Funds.
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    The text of the proposed rule change is available at the Amex and 
at the Commission.

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 Amex included statements 
concerning the purpose of, and basis for, the proposed rule change, and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Amex has prepared summaries, set forth in Sections 
A, B, C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    In 1996, the Commission approved an Amex proposal to list and trade 
under Amex Rules 100A et seq. securities issued by an open-end 
management investment company that seeks to provide investment results 
that correspond generally to the price and yield performance of a 
specified foreign or domestic equity market index (``Index Fund 
Shares'').\9\
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    \9\ See Securities Exchange Act Release No. 36947 (March 8, 
1996), 61 FR 10606 (March 14, 1996) (order approving File No. SR-
Amex-95-43) (``1996 Order'').
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    The Amex proposes to list and trade under Amex Rules 1000A et seq. 
the following fifteen series of the iShares Trust:\10\ (1) 
The iShares S&P Global Consumer Discretionary Index Fund; (2) the 
iShares S&P Global Consumer Staples Index Fund; (3) the iShares S&P 
Global Energy Index Fund; (4) the iShares S&P Global Financials Index 
Fund; (5) the iShares S&P Global Health Care Index Fund; (6) the 
iShares S&P Global Industrials Index Fund; (7) the iShares S&P Global 
Information Technology Index Fund; (8) the iShares S&P Global Materials 
Index Fund; (9) the iShares S&P Global Telecommunications Services 
Index Fund; (10) the iShares S&P Global Utilities Index Fund; (11) the 
iShares S&P Global 1200 Index Fund; (12) the iShares S&P/TOPIX 150 
Index Fund; (13) the iShares S&P Asia Pacific 100 Index Fund; (14) the 
iShares S&P Latin America 40 Index Fund; and (15) the iShares MSCI EAFE 
Index Fund.
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    \10\ The iShares Trust (``Trust'') has filed with the Commission 
an Application for Orders (``Application'') under sections 6(c) and 
17(b) of the Investment Company Act of 1940 (``1940 Act'') for the 
purpose of exempting the Index Funds of the Trust from various 
provisions of the 1940 Act and rules thereunder (File No. 812-
12254). The information provided in this Rule 19b-4 filing relating 
to the Index Funds is based on information included in the 
Application, which includes additional information regarding the 
Trust and the Index Funds.
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    The index on which a particular Fund is based is referred to as an 
``Underlying Index'' and the securities included in the Underlying 
Index are referred to as ``Component Securities.'' The Underlying Index 
for each Fund may consist of both U.S. and/or foreign stocks. 
Descriptions of the Underlying Indexes for the proposed Funds are 
available in the Commission;s Public Reference Room as Exhibits A 
through P of this filing.\11\ The Exhibits include index descriptions, 
component selection criteria, index maintenance and issue changes, the 
top components of each index, and portfolio composition and 
characteristics.
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    \11\ The Amex deleted Exhibit O, which described the S&P Global 
700 Index, from its proposal. See Amendment No. 1. supra note 3.
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    Barclays Global Fund Advisors (the ``Advisor'') is the investment 
adviser to each Fund. The Advisor is registered under the Investment 
Advisers Act of 1940 and is a wholly owned subsidiary of Barclays 
Global Investors, N.A., a wholly-owned indirect subsidiary of Barclays 
Bank PLC of the United Kingdom.
    SEI Investments Distribution Company (the ``Distributor''), a 
Pennsylvania corporation and broker-dealer registered under the Act, is 
the principal underwriter and distributor of Creation Unit Aggregations 
(as defined below) of iShares. The Distributor is not affiliated with 
the Amex or the Advisor.
    iShares will be registered in book-entry form only and the Index 
Fund will not issue individual share certificates. DTC or its nominee 
will be the record or registered owner of all outstanding iShares. 
Beneficial ownership of iShares will be shown in the records of DTC or 
DTC participants.

[[Page 43929]]

Amendment to Amex Rule 1000A, Commentary .04
    The Amex proposes to amend Amex Rule 1000A, Commentary .04 to 
indicate that transactions in iShares Index Funds of the iShares Trust 
may be effected until 4 p.m. or 4:15 p.m. (New York time) each business 
day, as specified by the Amex.\12\ Shares of each Fund will trade with 
a minimum price variation of $.01.\13\
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    \12\ See Amendment No. 3, supra note 5.
    \13\ See Amendment No. 2, supra note 4.
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``Passive'' Indexing Investment Strategy
    The investment objective of each Index Fund will be to provide 
investment results that correspond generally to the price and yield 
performance of its Underlying Index. In seeking to achieve its 
respective investment objective, each Fund will utilize a ``passive'' 
indexing investment strategy. Specifically, each Fund will utilize a 
``representative sampling'' strategy to attempt to track its Underlying 
Index.\14\ The Funds will attempt to hold a representative sample of 
the Component Securities in the applicable Underlying Index utilizing 
quantitative analytical models.\15\
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    \14\ See Amendment Nos. 2 and 3, supra notes 4 and 5.
    \15\ See Amendment No. 3, supra note 4.
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    A Fund will hold most of the Component Securities of its Underlying 
Index, but it may not hold all of the Component Securities of its 
Underlying Index. This may be the case, for example, when there are 
practical difficulties or substantial costs involved in compiling an 
entire Underlying Index basket which contains hundreds of Component 
Securities or, in certain instances, when a Component Security is 
illiquid.
    Each fund will concentrate is holdings in investments in issuers of 
one or more particular industries approximately to the extent that its 
Underlying Index concentrates in the stocks of particular industry or 
industries.\16\ From time to time, adjustments will be made in the 
portfolio of each Fund in accordance with changes in the composition of 
the Underlying Index or to maintain compliance as a regulated 
investment company under the Internal Revenue Code.\17\
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    \16\ See Amendment No. 2, supra note 4.
    \17\ For a Fund to qualify for tax treatment as a regulated 
investment company, it must meet several requirements under the 
Internal Revenue Code. Among these is the requirement that, at the 
close of each quarter of the Fund's taxable year, (i) at least 50% 
of the market value of the Fund's total assets must be represented 
by cash items, U.S., government securities, securities of other 
regulated investment companies and other securities, with such other 
securities limited for purposes of this calculation is respect of 
any one issuer to an among not greater than 5% of the value of that 
Fund's assets and not greater than 10% of the outstanding voting 
securities of such issuer; and (ii) not more than 25% of the value 
of its assets may be invested in securities of any one issuer, or 
two or more that are controlled by the Fund (with the meaning of 
section 851(b)(4)(B) of the Internal Revenue Code) and that are 
engaged in the same or similar trades or businesses or related trade 
or businesses (other than U.S. government securities or the 
securities of other regulated investment companies) See Amendment 
No. 2, supra note 4.
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    At least 90% of each Fund's total assets will be invested in the 
component securities of its Underlying Index. Each Fund also may invest 
up to 10% of its total assets in stocks that are not included in its 
Underlying Index. For example, a Fund may invest in stocks not included 
in the relevant Underlying Index to reflect various corporate actions 
such as mergers and other changes in the relevant Underlying Index, 
such as reconstitutions, additions, and deletions. As long as a Fund 
invests at least 90% of its total assets in the stocks of its 
Underlying Index, it also may invest its other assets in futures 
contracts, options on futures contracts, options, and swaps related to 
its Underlying Index, as well as cash and cash equivalents.
    It is expected that each Fund will have a tracking error relative 
to the performance of its respective Underlying Index of no more than 
5%. Each Fund's investment objectives, policies and investment 
strategies will be fully disclosed in its propectus and statement of 
additional information (``SAI''). In addition, the web site for the 
Funds, www.ishares.com, will contain detailed information on the 
performance of each Fund, the performance of the Underlying Indexes, 
and the tracking error for each Fund.\18\ The Funds' annual and semi-
annual reports will include disclosure of the Funds' total return and 
each Underlying Index's total return for one-, five-, and 10-year 
periods, and graphs comparing values of hypothetical $10,000 
investments in the Fund and its Underlying Index.\19\ If the tracking 
error for a Fund exceeds 5%, the Advisor will notify the Trust's Board 
of Trustees (``Board'') and discuss appropriate actions with the 
Board.\20\
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    \18\ See Amendment No. 3, supra note 5.
    \19\ See Amendment No. 3, supra note 5.
    \20\ See Amendment No. 3, supra note 5.
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    While each Fund will be managed by the Advisor, the Board will have 
overall responsibility for the Funds' operations. The composition of 
the Board is, and will be, in compliance with the requirements of 
section 10 of the 1940 Act.
Creation Unit Aggregations
    Shares of each Fund (the ``iShares'') will be issued on a 
continuous offering basis in groups of 50,000 or more. These groups of 
shares are called ``Creation Unit Aggregations.'' The Funds will issue 
and redeem iShares only in Creation Unit Aggregations. iShares will be 
issued at the net asset value (``NAV'') per share next determined after 
an order in proper from is received. The NAV per share of each Fund is 
determined as of the close of the regular trading session on the New 
York Stock Exchange (``NYSE'') on each day that the NYSE is open. It is 
expected that as of the inception date of each Fund, the value of a 
Creation Unit Aggregation for each Fund will range from approximately 
$2 million to approximately $7.3 million.
    Orders to create iShares must be placed through an Authorized 
Participant, which is either: (1) A broker-dealer or other participant 
in the continuous net settlement system of the NSCC; or (2) a 
participant in the DTC.\21\
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    \21\ See Amendment No. 3, supra note 5.
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    Purchasers generally will pay for Creation Unit Aggregations placed 
through the Distributor by an in-kind deposit with the Trust of a 
portfolio of securities designated by the Advisor to correspond 
generally to the price and yield performance of the Fund's Underlying 
Index (the ``Deposit Securities''), together with an amount of cash 
(the ``Balancing Amount'') specified by the Advisor. 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 
(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. If the Balancing Amount is 
a positive number (i.e., the NAV per Creation Unit Aggregation exceeds 
the Deposit Amount), the creator will pay the Balancing Amount to the 
Trust.\22\ If the Balancing Amount is a negative number (i.e., the NAV 
per Creation Unit Aggregation is less than the Deposit Amount), the 
creator will receive cash in an amount equal to the differently.\23\ 
The deposit of the requisite Deposit Securities and the Balancing 
Amount are collectively referred to as a ``Portfolio Deposit.''
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    \22\ See Amendment No. 2, supra note 4.
    \23\ See Amendment No. 2, supra note 4.

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[[Page 43930]]

Availability of Information Regarding the Portfolio Deposit
    The Advisor will make available through the Distributor or 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 Portfolio 
Deposit (based on information at the end of the previous business day) 
for the relevant Fund. The Portfolio Deposit will be applicable to a 
Fund (subject to any adjustments to the Balancing Amount, as described 
in the Application) to effect purchases of Creation Unit Aggregations 
of the Fund until such time as the next-announced Portfolio Deposit 
composition is made available.
    In addition, the Advisor will provide the NSCC on a daily basis 
with the name and required number of shares of the Deposit Securities 
in a Creation Unit Aggregation and the Balancing Amount, which the NSCC 
will make available to NSCC members through an electronic file that 
NSCC members can download.\24\
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    \24\ See Amendment No. 4 supra note 6.
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    The identity and number of shares of the Deposit Securities 
required for the Portfolio 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 relevant Underlying Index. These 
adjustments will reflect changes, known to the Advisor to be in effect 
by the time of determination of the Deposit Securities, in the 
composition of the Underlying Index being tracked by the relevant Fund, 
or resulting from stock splits and other corporate actions. In 
addition, the Trust reserves the right with respect to each Fund 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 under circumstances specified in the Application. When 
cash purchases of Creation Unit Aggregations are available or specified 
for a Fund, they will be effected in essentially the same manner as in-
kind purchases of iShares. In the case of a cash purchase, the investor 
must pay the cash equivalent of the Deposit Securities it would 
otherwise be required to provide through an in-kind purchase, plus the 
same Balancing Amount required to be paid by an in-kind purchaser.
    The Amex anticipates that institutional investors, arbitrageurs, 
and the Amex specialist primarily will make the deposit of Deposit 
Securities and the Balancing Amount in exchange for iShares.\24\ 
Creation Units are separable upon issuance into identical shares which 
are listed and traded on the Amex. Professionals as well as 
institutional and retail investors will trade iShares on the Amex.
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    \25\ See Amendment No. 2, supra 4.
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Availability of Information Regarding the Underlying Indexes
    The providers of the Underlying Indexes have advised the Trust that 
on or before the first day of trading of each Fund, the value of its 
Underlying Index will be updated intra-day on a real-time basis as 
individual Component Securities change in price. These intra-day values 
of the Underlying Indices will be disseminated at regular intervals 
(currently expected to be every 15 second) throughout the trading day 
by organizations authorized by each respective Underlying Index 
provider. In addition, these organizations will disseminate values for 
each Underlying Index once each trading day based on closing prices in 
the relevant exchange market.
Availability of Information Regarding the Funds
    The Trust intends to maintain a web site that will include, for 
each Fund, its prospectus and SAI, its Underlying Index and additional 
quantitative information that will be undated on a daily basis, 
including daily trading volume, closing price and closing NAV.
    On amextrader.com, the Amex will disseminate the NAV for each Fund 
on a daily basis and the final dividend amounts that each Fund will 
pay.\26\ The final dividend amount, which the funds will also 
disseminate to Bloomberg and other sources, is the amount of dividends 
to be paid by a Fund for the appropriate period (usually annually).\27\ 
In addition, for each Fund the Amex will disseminate at the opening 
over the Consolidated Tape Association (``CTA'') Network B the number 
of iShares outstanding.\28\
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    \26\ See Amendment No. 3, supra note 5.
    \27\ See Amendment No. 4, supra note 6.
    \28\ See Amendment No. 3, supra note 5.
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    The closing prices of the Funds' Deposit Securities are readily 
available from, as applicable, the Exchange's dissemination over 
Network B, 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.
Dissemination of Indicative Portfolio Value
    To provide updated information relating to each Fund for use by 
investors, professionals, and persons wishing to create or redeem the 
proposed iShares, the Amex will disseminate through the facilities of 
the CTA an updated indicative portfolio value (``Value'') for each of 
the Funds traded on the Amex as calculated by a securities information 
provider (``Value calculator'').\29\ The Amex anticipates that the 
methodology utilized in connection with the Funds will be similar to 
procedures used to calculate the Value for iShares trading currently on 
the Amex. The Value will be disseminated on a per iShares basis every 
15 seconds during regular Amex trading hours of 9:30 a.m. to 4 p.m. or 
4:15 p.m. Eastern Time,\30\ depending on the time the Amex specifies 
for the trading of iShares. The equity securities values included in 
the Value are the same as the portfolio values generally utilized in 
connection with creations and redemptions of iShares in Creation Unit 
size aggregations on that day. The equity securities included in the 
Value generally reflect the same market capitalization weighting as the 
Deposit Securities in the portfolio for the particular iShares Fund. In 
addition to the value of the Deposit Securities for each Fund, the 
Value includes the Balancing Amount. The Value also reflects changes in 
currency exchange rates between the U.S. dollar and the applicable home 
foreign currency.\31\
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    \29\ See Amendment Nos. 2 and 3, supra note 4 and 5.
    \30\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Legal & Regulatory Division, Amex, and Yvonne 
Fraticelli, Division, Commission, on August 6, 2001 (``August 6 
Conversation'').
    \31\ See Amendment No. 2, supra note 4.
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    The Value may not reflect the value of all securities included in 
the applicable Underlying Index. In addition, the Value does not 
necessarily reflect the precise composition of the current portfolio of 
securities held by each Fund at a particular point in time. Therefore, 
the Value on a per iShares basis disseminated during Amex trading hours 
should not be viewed as a real time update of the NAV of a particular 
Fund, which is calculated only once a day. While the Value that the 
Amex will disseminate at 9:30 a.m. is expected to be generally very 
close to the most recently calculated Fund NAV on a per iShare basis, 
it is possible that the value of the portfolio of securities held by a

[[Page 43931]]

Fund may diverge from the Deposit Securities values during any trading 
day. In such case, the Value will not precisely reflect the value of 
the Fund portfolio.\32\
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    \33\ See Amendment No. 2, supra note 4.
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    However, during the trading day, the Value can be expected to 
closely approximate the value per Fund share of the portfolio of 
securities for each Fund except under unusual circumstance (e.g., in 
the case of extensive rebalancing of multiple securities in a Fund at 
the same time by the Advisor). The circumstances that might cause the 
Value to be based on calculations different from the valuation per Fund 
share of the actual portfolio of a Fund would not be different from 
circumstances causing any index fund or trust to diverge from an 
underlying benchmark index.\33\
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    \33\ See Amendment No. 2, supra note 4.
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    The Amex believes that the dissemination of the Value based on the 
Deposit Securities provides additional information regarding each Fund 
that would not otherwise be available to the public and is useful to 
professionals and investors in connection with iShares trading on the 
Amex or the creation or redemption of iShares.\34\
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    \34\ See Amendment No. 2, supra note 4.
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    For each Fund, the Value calculator will utilize closing prices (in 
applicable foreign currency prices) in the principal foreign market(s) 
for securities in the Fund portfolio, and convert the price to U.S. 
dollars. For funds that include foreign stocks the principal foreign 
markets for which have trading hours overlapping regular Amex trading 
hours, the Value calculator will update the applicable Value every 15 
seconds to reflect price changes in the applicable foreign currency 
market or markets, and convert such prices into U.S. dollars based on 
the current currency exchange rate. When the foreign market or markets 
are closed but the Amex is open, the Value will be updated every 15 
seconds to reflect changes in currency exchange rates after the foreign 
markets close.\35\
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    \35\ See Amendment No. 2, supra note 4.
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Redemption of Creation Unit Aggregations
    Creation Unit Aggregations of each Fund will be redeemable at the 
NAV next determined after receipt of a request for redemption. Creation 
Unit Aggregations of each fund will be redeemed principally in kind, 
together with a balancing cash payment; however, as described in the 
Application, Creation Unit Aggregations sometimes may be redeemed for 
cash. Owners of iShares may sell their iShares in the secondary market, 
but must accumulate enough iShares to constitute a Creation Unit 
Aggregation to redeem through the Trust. Redemption orders must be 
placed through an Authorized Participant, which is either: (1) A 
broker-dealer or other participant in the continuous net settlement 
system of the NSCC; or (2) a participant in the DTC.\36\
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    \36\ See Amendment No. 2, supra note 5.
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    Each Fund will redeem Creation Unit Aggregations in exchange for 
portfolio securities of the Fund (``Fund Securities'') in effect on the 
date a request for redemption is made and a specified cash amount, the 
``Cash Redemption Amount,'' as defined below. 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.\37\ The Advisor will publish daily through the Distributor the 
list of securities which a creator of Creation Unit Aggregations must 
deliver to the Fund and which a redeemer will receive from the Fund.
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    \37\ In some circumstances and/or in certain countries, it may 
not be practicable, convenient, or permissible under the current law 
for a Fund to purchase and redeem shares on an ``in-kind'' basis 
exclusively. In addition, over time, the Trust may conclude that 
operating on an exclusively ``in-kind'' basis for one or more funds 
may present operational problems for such funds. Therefore, the 
Trust may permit, in its discretion, with respect to one or more 
funds under certain circumstances, an in-kind purchaser to 
substitute cash in lieu of depositing some or all of the requisite 
Deposit Securities. For the Trust to preserve maximum efficiency and 
flexibility, the Trust reserves the right to determine in the future 
that Shares of one or more Funds may be purchased in Creation Unit 
Aggregations on a cash-only basis. The decision to permit cash-only 
purchases of Creation Unit Aggregations, to the extent made at all 
in the future, would be made if the Trust and the Advisor believed 
such method would substantially minimize the Trust's transactional 
costs or would enhance the Trust's operational efficiencies. This 
would likely happen only in limited circumstances. For example, on 
days when a substantial rebalancing of a Fund's portfolio is 
required, the Advisor might prefer to receive cash rather than in-
kind stocks so that it has the liquid resources at hand to make the 
necessary purchases. If a Fund were to receive in-kind stocks on 
such a day, it would have to sell many of such stocks and acquire 
new stocks to properly track its Underlying Index, thus incurring 
transaction costs that could have been avoided (or at least 
minimized) if the Fund had received payment for the Creation Unit 
Aggregations in cash.
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    The Cash Redemption Amount 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. Specifically, the Cash Redemption Amount 
is an amount equal to the difference between the iShares being 
redeemed, as next determined after a receipt of a request in proper 
form, and the value of the Fund Securities. To the extent that the Fund 
Securities have a value greater than the NAV of the iShares being 
redeemed, the redeeming beneficial owner must make a compensating cash 
payment to the Fund equal to the differential between the value of the 
Fund Securities and the NAV of the iShares being redeemed.
    The Trust may 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.
Other Characteristics of iShares
    Each Fund will declare and pay dividends from net investment income 
at least annually in the same manner as other open-end investment 
companies. Certain of the Funds may pay dividends, if any, on a 
quarterly or more frequent basis.
    The Trust will not make the DTC book-entry Dividend Reinvestment 
Service (the ``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 their 
broker to ascertain the availability and a description of the Service 
through their 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 to participate in the 
Service and such investors should ascertain from their broker the 
necessary details. iShares 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 iShares.
    With each distribution, the Trust will furnish to DTC participants 
for distribution to beneficial owners of iShares of each Fund a 
statement setting forth the amount being distributed, expressed as a 
dollar amount per share. Beneficial owners also will receive annual 
notification as to the tax status of the Funds' distribution. Promptly 
after the end of each fiscal year, the Trust will furnish to DTC 
participants, for distribution to each person who was

[[Page 43932]]

a beneficial owner of iShares at the end of the fiscal year, an annual 
report of the Trust containing financial statements audited by 
independent accountants of nationally recognized standing and such 
other information as may be required by applicable laws, rules and 
regulations. Copies of annual and semi-annual shareholder reports will 
also be provided to the DTC participants for distribution to beneficial 
owners of iShares.
Criteria for Initial and Continued Listing
    iShares are subject to the criteria for initial and continued 
listing of Index Fund Shares in Amex Rule 1002A, ``Initial and 
Continued Listing.'' The Amex anticipates that a minimum of two 
Creation Units (100,000 iShares) will be required to be outstanding at 
the start of trading. This minimum number of iShares required to be 
outstanding at the start of trading will be comparable to requirements 
that have been applied to previously listed series of Portfolio 
Depositary Receipts and Index Fund Shares. The Amex anticipates that 
the initial price of an iShare for each Fund would be approximately $50 
to $100.
    The Exchange believes that the proposed minimum number of iShares 
outstanding at the start of trading is sufficient to provide market 
liquidity and to further the Trust's objective of providing investment 
results that correspond generally to the price and yield performance of 
each Underlying Index.
Original and Annual Listing Fees
    The Amex original listing fee applicable to the listing of the 
Funds is $5,000 for each Fund. In addition, the annual listing fee 
applicable to the Funds under Section 141 of the Amex Company Guide 
will be based upon the year-end aggregate number of outstanding iShares 
in all funds of the Trust listed on the Exchange.
Stop and Stop Limit Orders
    Commentary .04(c) to Amex Rule 154, ``Orders Left with 
Specialist,'' provides that stop and stop limit orders to buy or sell a 
security, other than an option, \38\ the price of which is derivately 
priced based upon another security or index or securities may, with the 
prior approval of a Floor Official, be elected by a quotation, as set 
forth in Commentary .04(c). The Exchange has designated Index Fund 
Shares, including iShares, as eligible for this treatment. \39\
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    \38\ Amex Rule 950(f) and Commentary .01 to Amex Rule 950(f) 
apply to options.
    \39\ Amex Rule 154, Commentary .04(c)(v) states that Commentary 
.04(c), regarding election of stop and stop limit orders by 
quotation, shall apply to such derivative securities as the Amex 
designates from time to time as eligible for such treatment.
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Amex Rule 190
    Commentary .04 to Amex Rule 190, ``Specialist's Transactions with 
Public Customers,'' applies to Index Fund Shares listed on the 
Exchange, including iShares. Commentary .04 states that nothing in Amex 
Rule 190(a) should be construed to restrict a specialist registered in 
a security issued by an investment company from purchasing and 
redeeming the listed security, or securities that can be subdivided or 
converted into the listed security, from the issuer an appropriate to 
facilitate the maintenance of a fair and orderly market.
Prospectus Delivery
    The Trust has requested an exemptive order granting relief from the 
prospectus delivery requirements imposed by section 24(d) of the 1940 
Act. \40\ In an Information Circular to members, the Amex will inform 
members of the prospectus or product description delivery requirements 
applicable to iShares prior to the commencement of trading.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 870a-24(d). See Amendment No. 3, supra note 5.
---------------------------------------------------------------------------

Trading Halts
    In addition to other factors that may be relevant, the Exchange may 
consider factors such as those set forth in Amex Rule 918C(b) in 
exercising its discretion to halt or suspend trading in Index Fund 
Shares, including iShares. These factors would include, but are not 
limited to: (1) The extent to which trading is not occurring in stocks 
underlying the index; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\41\ In addition, trading in iShares will be halted 
if the circuit breakers parameters under Amex Rule 117, ``Trading Halts 
Due to Extraordinary Market Volatility,'' have been reached.
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    \41\ See Amex Rule 918C.
---------------------------------------------------------------------------

Suitability
    Prior to commencement of trading, the Exchange will issue an 
Information Circular informing members and member organizations of the 
characteristics of the Funds and of applicable Exchange rules, as well 
as of the requirements of Amex Rule 411, ``Duty to Know and Approve 
Customers.''
Purchases and Redemptions in Creation Unit Size
    In the Information Circular referenced above, the Amex will inform 
members and member organizations that each Fund's prospectus and SAI 
describe procedures for purchases and redemptions of iShares in 
Creation Unit size aggregations, and that iShares are not individually 
redeemable but are redeemable only in Creation Unit size aggregations 
or multiples thereof.
Survelliance
    The Exchange surveillance procedures applicable to trading in the 
proposed iShares are comparable to those applicable to other Index Fund 
Shares currently trading on the Exchange.
(2) Basis
    The Amex believes that the proposed rule change is consistent with 
section 6(b) of the Act, in general, and furthers the objectives of 
section 6(b)(5), in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transaction in 
securities, and, in general to protect investors and the public 
interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change imposes any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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 and Amendment Nos. 1, 2, 3, and 4 are consistent with the Act. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609. 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

[[Page 43933]]

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 will also be available for inspection and copying at the 
principal office of the Amex. All submissions should refer to the file 
number SR-Amex-2001-34 and should be submitted by September 11, 2001.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Amex has requested that the Commission approve the proposal on 
an accelerated basis. The Amex notes that the proposed iShares are 
similar in structure and operation to Index Fund Shares approved 
previously by the Commission and that the component securities of the 
Underlying Indexes are among the stocks with the highest liquidity and 
market capitalization in their respective countries. The Amex believes 
that the proposal does not raise issues that the Commission has not 
considered in connection with previous proposed rule changes relating 
to Index Fund Shares.
    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, and in 
particular, with the requirements of section 6(b)(5).\42\ Specifically, 
the Commission finds that the proposal to list and trade the proposed 
iShares will provide investors with a convenient and less expensive way 
or participating in the foreign securities markets. The Commission 
believes that the Amex's proposal should advance the public interest by 
providing investors with increased flexibility in satisfying their 
investment needs by allowing them to purchase and sell single 
securities at negotiated prices throughout the business day that 
represent the performance of several portfolios of stocks.\43\ 
Accordingly, the Commission finds that the Amex's proposal will promote 
just and equitable principles of trade, foster cooperation and 
coordination with persons engaged in clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, protect investors and the public interest, 
consistent with section 6(b)(5) of the Act.\44\
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    \42\ 15 U.S.C. 78f(b)(5). In approving the proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \43\ The Commission notes that unlike open-end investment 
companies, where investors have the right to redeem their fund 
shares on a daily basis, investors in iShares can redeem in Creation 
Unit size aggregations only.
    \44\ Pursuant to section 6(b)(5) of the Act, the Commission must 
predicate approval of exchange trading for new products upon a 
finding that the introduction of the product is in the public 
interest. Such a finding would be difficult with respect to a 
product that served no investment, hedging or other economic 
functions, because any benefits that might be derived by market 
participants would likely be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.
---------------------------------------------------------------------------

    Amex Rules 1000A et seq. provide for the listing and trading of 
Index Fund Shares. The Commission has approved the listing and trading 
of various Index Fund Shares on the Amex, including the following: 23 
series of iShares MSCI Index Funds (formerly MSCI World Equity 
Benchmark Shares (``WEBS''));\45\ series of the iShares Trust based on 
the S&P Europe 350 Index and the S&P/TSE 60 Index;\46\ nine series of 
Select Sector SPDRs and one series of the Technology 100 Index 
Fund;\47\ and shares of the streetTracks Dow Jones Global Titans Index 
Fund.\48\
---------------------------------------------------------------------------

    \45\ See 1996 Order (approving the listing and trading of Index 
Fund Shares under Amex Rules 1000A et seq. and 17 series of WEBS 
based on MSCI foreign indexes), supra note 9; and Securities 
Exchange Act Release No. 42748 (May 2, 2000), 65 FR 30155 (May 10, 
2000) (order approving File No. SR-Amex-98-49) (approving the 
listing and trading of six series of WEBS based on MSCI Indexes).
    \46\ See Securities Exchange Act Release No. 42786 (May 15, 
2000), 65 FR 33586 (May 24, 2000) (order approving File No. SR-Amex-
99-49).
    \47\ See Securities Exchange Act Release No. 40749 (December 4, 
1998), 63 FR 68483 (December 11, 1998) (order approving File No. SR-
Amex-98-29).
    \48\ See Securities Exchange Act Release No. 43338 (September 
25, 2000) 65 FR 59235 (October 4, 2000) (order approving File No. 
SR-Amex-00-53).
---------------------------------------------------------------------------

    Similar to these Index Shares, the Commission believes that the 
proposed iShares will provide investors with an alternative to trading 
a broad range of securities on an individual basis, and will give 
investors the ability to trade a product representing in interest in a 
portfolio of securities designed to reflect substantially the 
applicable Underlying Index. The estimated cost of individual iShares, 
approximately $50 to $100, should make them attractive to individual 
retail investors who wish to hold a security representing the 
performance of a portfolio of stocks. In addition, unlike the case with 
standard open-end investment companies specializing in such stocks, 
investors will be able to trade iShares continuously throughout the 
business day in secondary market transactions at negotiated prices.\49\ 
Accordingly, the proposed iShares will allow investors to: (1) Respond 
quickly to market changes through intraday 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.
---------------------------------------------------------------------------

    \49\ Because of the potential arbitrage opportunities, the 
Commission believes that iShares will not trade at a material 
discount or premium in relation to their NAV. The mere potential for 
arbitrage should keep the market price of iShares comparable to 
their NAV; therefore, arbitrage activity likely will not be 
significant.
---------------------------------------------------------------------------

    Although the value of iShares will be derived from and based on the 
value of the securities and cash held in the Fund, iShares are not 
leveraged instruments. Accordingly, the level of risk involved in the 
purchase or sale of iShares is similar to the risk involved in the 
purchase or sale of traditional common stock, with the exception that 
the pricing mechanism for the iShares is based on a portfolio of 
securities. Nevertheless, the Commission believes that the unique 
nature of iShares raises certain product design, disclosure, trading 
and other issues that must be addressed.

A. Generally

    The Commission believes that the proposed iShares are reasonably 
designed to provide investors with an investment vehicle that 
substantially reflects in value their Underlying Indexes and, in turn, 
the performance of: (1) The component securities of the S&P Global 1200 
Index; \50\ (2) the component securities comprising 10 S&P global 
market sector indexes; \51\ (3) the component securities comprising the 
S&P TOPIX 150 Index, the S&P Asia Pacific 100 Index, and the S&P Latin 
America 40 Index; \52\ and (4) the

[[Page 43934]]

component securities comprising the MSCI EAFE Index.\53\
---------------------------------------------------------------------------

    \50\ The S&P Global 1200 Index is comprised of selected equities 
trading on the exchanges of 29 subject countries. In a manner 
similar to the S&P 500 Index, the S&P Global 1200 Index tracks the 
leading companies in the leading industries for their home 
countries. The S&P Global 1200 Index is comprised of six distinct 
regional component indexes: the S&P 500 Index (U.S.); the S&P/TSE 60 
Index (Canada); the S&P Latin America 40 Index; the S&P TOPIX 150 
Index (Japan); the S&P Asia Pacific 100 Index; and the S&P Europe 
350 Index. See Exhibit K.
    \51\ The sector indexes are: the S&P Global Consumer 
Discretionary Index; the S&P Global Consumer Staples Index; the S&P 
Global Energy Index; the S&P Global Financials Index; the S&P Global 
Health Care Index; the S&P Global Industrials Index; the S&P Global 
Information Technology Index; the S&P Global Materials Index; the 
S&P Global Telecommunication Services Index; and the S&P Global 
Utilities Index. Each component security of the sector indexes is a 
component security of the S&P Global 1200 Index.
    \52\ The S&P/TOPIX 150 Index, which includes 150 securities 
selected from each major sector of the Tokyo market, represents 
approximately 70% of the market value of the Japanese equity market. 
The S&P Asia Pacific 100 Index is comprised of stocks from 
Australia, Hong Kong, Malaysia, New Zealand, Singapore, South Korea, 
and Taiwan. The S&P Latin America 40 Index is comprised of stocks 
from Argentina, Brazil, Chile, and Mexico. See Exhibits L, M, and N.
    \53\ The MSCI EAFE Index is designed to represent developed 
stock markets outside of North America. The MSCI EAFE Index includes 
equity securities from Australia, Austria, Belgium, Denmark, 
Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, 
the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, 
Sweden, Switzerland, and the United Kingdom. See Exhibit P.
---------------------------------------------------------------------------

    The Commission notes that S&P and MSCI impose specified criteria in 
the selection of the component securities of the Underlying Indexes. 
The component securities included in the Underlying Indexes maintained 
by S&P are components of the S&P Global 1200 Index, which, in a manner 
similar to the S&P 500 Index, is designed to track the leading 
companies in the leading industries in 29 countries.\54\ The component 
securities of the Underlying Indexes maintained by S&P must meet 
criteria for sector representation, liquidity, and size.\55\ S&P 
analyzes the financial and operating condition of potential components 
of the Underlying Indexes and seeks to minimize turnover among the 
components of the Underlying Indexes.\56\ With regard to the MSCI EAFE 
Index, an index comprised of component securities from 21 countries 
outside North America, MSCI seeks to have 85% of the free-float market 
capitalization of a country's stock market represented in the EAFE 
Index.\57\ MSCI seeks to select stocks with good liquidity and float, 
and seeks to avoid cross-ownership.\58\ The Commission believes that 
S&P's and MSCI's selection criteria should serve to ensure that the 
Component Securities of the Underlying Indexes are well capitalized and 
actively traded.
---------------------------------------------------------------------------

    \54\ See Exhibit K.
    \55\ See Exhibits A through N.
    \56\ See Exhibits A through N.
    \57\ See Exhibit P.
    \58\ See Exhibit P.
---------------------------------------------------------------------------

    The Commission notes that at least 90% of each Fund's total assets 
will be invested in the Component Securities of its Underlying Index 
and that each Fund will hold most of the Component Securities of its 
Underlying Index. As noted above, each Fund will concentrate its 
holdings in investments in issues of one or more particular industries 
to the extent that its Underlying Index concentrates in the stocks of a 
particular industry or industries.\59\ In addition, each Fund will 
maintain regulated investment company compliance, which requires, among 
other things, that, at the close of each quarter of the Fund's taxable 
year, not more than 25% of its total assets may be invested in the 
securities of any one issuer.\60\ While the Commission believes that 
these requirements should help to reduce concerns that the Funds could 
become a surrogate for trading in a single or a few unregistered 
stocks, in the event that a Fund were to become such a surrogate, the 
Commission would expect the Amex to take action immediately to delist 
the securities to ensure compliance with the Act.
---------------------------------------------------------------------------

    \59\ See Amendment No. 2 supra note 4.
    \60\ See Amendment No. 2, supra note and note 17, supra.
---------------------------------------------------------------------------

    As noted above, each Fund will use a representative portfolio 
sampling strategy to attempt to track its Underlying Index.\61\ 
Although a representative sampling strategy entails some risk of 
tracking error, the Advisor will seek to minimize tracking error.\62\ 
It is expected that each Fund will have a tracking error relative to 
the performance of its Underlying Index of no more than 5%. If the 
tracking error for a Fund exceeds 5%, the Advisor will notify the Board 
and discuss appropriate actions with the Board.\63\ The Commission 
notes that the web site for the Funds will provide detailed information 
on the performance of each Fund, the performance of the Underyling 
Indexes and the tracking error for each Fund.\64\ In addition, the 
Funds' annual and semiannual reports will include disclosure regarding 
the Funds' total return and each Underlying Index's total return for 
one-, five-, and 10-year periods, and graphs comparing hypothetical 
$10,000 investments in the Funds and their Underlying Indexes.\65\ 
While the Commission believes that the proposed requirements for the 
Funds, and the expected tracking error or less than 5%, should be 
adequate to characterize the proposed Funds as bona fide index funds, 
the Commission would be concerned if a Fund's portfolio failed to 
substantially reflect its Underlying Index.\66\
---------------------------------------------------------------------------

    \61\ See Amendment Nos. 2 and 3, supra notes 4 and 5.
    \62\ See Amendment No. 3, supra note 5.
    \63\ See Amendment No. 3, supra note 5.
    \64\ See Amendment No. 3, supra note 5.
    \65\ See Amendment No. 3, supra notes 3 and 5.
    \66\ Among other issues that may arise under the federal 
securities laws, such an occurrence could raise the issue of whether 
trading of the proposed iShares would remain consistent with Amex 
listing standards for Index Fund Shares, as well as the surrogate 
trading issue discussed above. See text accompanying notes 58 and 
59, supra.
---------------------------------------------------------------------------

B. Disclosure

    The Commission believes that the proposal should ensure that 
investors have information that will allow them to be adequately 
appraised of the terms, characteristics, and risks of trading iShares. 
Investors purchasing the proposed Shares will be required to receive 
either a prospectus or, as discussed below, a product description of 
the iShares.\67\ If the proposed iShares are not granted relief from 
the prospectus delivery requirements of the 1940 Act, then investors 
purchasing iShares will be required to receive a prospectus prior to or 
concurrently with the confirmation of a transaction therein. Because 
iShares will be in continuous distribution, the prospectus delivery 
requirements of the Securities Act of 1933 will apply both to initial 
investors and to all investors purchasing such securities in secondary 
market transactions on the Amex.
---------------------------------------------------------------------------

    \67\ As noted above, the Trust has requested an exemptive order 
granting relief from the prospectus delivery requirements imposed by 
section 24(d) of the 1940 Act.
---------------------------------------------------------------------------

    Alternatively, if the proposed iShares are granted relief from the 
prospectus delivery requirements of the 1940 Act, they will be subject 
to Commentary .03 to Amex Rule 1000A, which provides for delivery of a 
product description for series of Index Fund Shares that have been 
granted relief from the prospectus delivery requirements of the 1940 
Act. The prospectus or product description will address the special 
terms and characteristics of the Funds, including a statement regarding 
their redeemability and method of creation, and a statement regarding 
the likelihood of whether such products will trade below, at, or above 
NAV, based on the role of discounts or premiums.\68\ Under Commentary 
.03, the delivery requirement will extend to a member or member 
organization carrying an omnibus account for a non-member broker-
dealer, who must notify the non-member to make the product description 
available to its customers on the same terms as are directly applicable 
to members and member organizations. In addition, Commentary .03 
provides that a member or member organization must deliver a prospectus 
to a customer upon request.
---------------------------------------------------------------------------

    \68\ See August 6 Conversation, supra note 30.
---------------------------------------------------------------------------

    The Commission notes that prior to the commencement of trading in 
the proposed iShares, the Amex will issue a circular to its members 
explaining the unique characteristics and risks of this particular type 
of security. The circular will address members' responsibility to 
deliver a prospectus or product description to all investors and will 
highlight the characteristics of purchases in iShares, including that 
they are redeemable only in Creation Unit size aggregations or 
multiples thereof. The circular will advise members that the Fund 
prospectus and

[[Page 43935]]

SAI describe procedures for the purchase and redemption of iShares in 
Creation Unit size. In addition, the circular will address Amex 
members' responsibilities under Amex Rule 411 regarding transactions in 
Fund shares. Amex Rule 411 generally requires that members use due 
diligence to learn the essential facts relative to every customer, 
every order or account accepted.\69\
---------------------------------------------------------------------------

    \69\ See Amex Rule 411.
---------------------------------------------------------------------------

C. Listing and Trading of iShares

    The Commission finds that adequate rules and procedures exist to 
govern the listing and trading of iShares. iShares will be deemed 
equity securities subject to Amex rules governing the trading of equity 
securities,\70\ including, among others, rules governing trading 
halts,\71\ responsibilities of the specialist, account opening and 
customer requirements, and the election of stop and stop limit orders.
---------------------------------------------------------------------------

    \70\ See August 6 Conversation, supra note 30.
    \71\ As noted above, in addition to other factors that may be 
relevant, the Amex may consider factors such as those set forth in 
Amex Rule 918C(b) in exercising its discretion to halt or suspend 
trading in iShares. These factors would include, but are not limited 
to: (1) The extent to which trading is not occurring in stocks 
underlying the index; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. In addition, trading in iShares will be halted 
if the circuit breaker parameters under Amex Rule 117 have been 
reached.
---------------------------------------------------------------------------

    In addition, the Funds will be subject to Amex listing and 
delisting/suspension rules and procedures governing the trading of 
Index Fund Shares on the Amex. As the Commission has noted 
previously,\72\ the listing and delisting criteria for Index Fund 
Shares should help to ensure that a minimum level of liquidity will 
exist in each series of Index Fund Shares to allow for the maintenance 
of fair and orderly marketers. The delisting criteria also will allow 
the Amex to consider the suspension of trading and the delisting of a 
series of iShares if an event were to occur that made further dealings 
in such securities inadvisable. This will give the Amex flexibility to 
delist iShares if circumstances warrant such action. For example, as 
noted above, in the event that iShares became a surrogate for trading a 
single or few unregistered securities, such an event could raise issues 
that would require the delisting of iShares to ensure compliance with 
the Act. Accordingly, the Commission believes that the rules governing 
the trading of iShares provide adequate safeguards to prevent 
manipulative acts and practices and to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \72\ See 1996 Order, supra note 9.
---------------------------------------------------------------------------

    As noted above, the Amex expects to require that a minimum of two 
Creation Units (100,000 iShares) be outstanding at the start of 
trading. The Commission believes that this minimum number is sufficient 
to help to ensure that a minimum level of liquidity will exist at the 
start of trading.
    The Commission believes that the Amex's proposal to trade iShares 
with a minimum price variation of $.01 \73\ is consistent with the Act. 
The Commission believes that such trading may enhance market liquidity 
and should promote more accurate pricing, tighter quotations, and 
reduced price fluctuations. The Commission also believes that such 
trading should allow customers to receive the best possible execution 
of their transactions in the Funds. Additionally, the Commission 
believes that the proposed original listing fee of $5,000 is 
reasonable, as is the proposed method for calculating the annual fee.
---------------------------------------------------------------------------

    \73\ See Amendment No. 2, supra note 4.
---------------------------------------------------------------------------

D. Specialists

    The Commission finds that it is consistent with the Act to allow a 
specialist registered in a security issued by an Investment Company to 
purchase or redeem the listed security from the issuers as appropriate 
to facilitate the maintenance of a fair and orderly market in that 
security. The Commission believes that such market activities should 
enhance liquidity in such securities and facilitate a specialist's 
market making responsibilities. In addition, because the specialist 
will only be able to purchase and redeem iShares on the same terms and 
conditions as any other investor in accordance with the terms of the 
Fund prospectus and SAI, the Commission believes that concerns 
regarding potential abuse are minimized. The Amex's existing 
surveillance procedures also should ensure that such purchases are only 
for the purpose of maintaining fair and orderly markets, and not for 
any improper or speculative purposes. Finally, the Commission notes 
that its approval of this aspect of the Amex's proposal does not 
address any other requirements or obligations under the federal 
securities laws that may be applicable.

E. Stop and Stop Limit Orders

    The Commission believes that the Amex's proposal to designate the 
proposed iShares as eligible for election by quotation with the prior 
approval of a Floor Official is consistent with the Act. Amex Rule 154, 
Commentary .04(c) generally provides that stop and stop limit orders to 
buy and sell a security or index of securities may, with prior approval 
of a Floor Official, be elected by quotation, as set forth in Amex Rule 
154, Commentary .04. Amex Rule 154, Commentary .04(c)(v) states that 
election by quotation only is available for such derivative securities 
as are designated by the Amex as eligible for such treatment. The Amex 
has so designated Index Fund Shares, including the proposed iShares.
    The Commission believes that allowing stop and stop limit orders in 
iShares to be elected by quotation, a rule typically used in the 
options context, is appropriate because, as a result of their 
derivative nature, iShares are in effect equity securities that have a 
pricing and trading relationship to the underlying securities similar 
to the relationship between options and their underlying 
securities.\74\
---------------------------------------------------------------------------

    \74\ See generally Securities Exchange Act Release No. 29063 
(April 10, 1991), 56 FR 15652 (April 17, 199) (order approving File 
No. SR-Amex-90-31) (relating to stop and stop limit orders in 
certain equity securities).
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F. Amendment to Amex Rule 1000A, Commentary .04

    The Commission believes that the proposal to amend Amex Rule 1000A, 
commentary 0.4 \75\ to provide that transactions in iShares may be 
effected until 4 p.m. or 4:15 p.m., as specified by the Amex, will 
provide the Amex with flexibility in the hours of trading for iShares. 
The Commission notes that the generic listing standards in Amex Rule 
1000A, Commentary .02 provide that trading for Index Fund Shares will 
occur between 9:30 a.m. and either 4 p.m. or 4:15 p.m., as specified by 
the Amex.\76\
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    \75\ See Amendment No. 3, supra note 5.
    \76\ See Amex Rule 1000A, Commentary .02(f).
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G. Surveillance

    The Amex represents that the surveillance procedures applicable to 
trading in the proposed iShares are comparable to those applicable to 
other Index Fund Shares currently trading on the Amex. The Commission 
believes that the surveillance procedures developed by the Amex for 
Index Fund Shares are adequate to address the concerns associated with 
the listing and trading of the iShares, including any concerns 
associated with purchasing and redeeming Creation Units.
    With regard to the MSCI EAFE Index Fund, the Commission notes that 
when a broker-dealer, such as Morgan Stanley or a broker-dealer's 
affiliate, such as MSCI, is involved in the development

[[Page 43936]]

and maintenance of a stock index upon which a product such as iShares 
is based, the broker-dealer and 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 the 
component stocks of the EAFE Index Fund that are the same as the 
procedures MSCI applies to other iShares MSCI Index Funds.\77\ The 
Commission believes,\78\ as it has concluded previously, that the 
information barrier procedures put in place by MSCI address the 
unauthorized transfer and misuse of material, non-public information.
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    \77\ See Amendment No. 2, supra note 4.
    \78\ See Securities Exchange Act Release No. 42748 (May 2, 
2000), 65 FR 30155 (May 10, 2000) (Order approving File No. SR-Amex-
98-49).
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H. Dissemination of Information Regarding the Funds

    The Commission believes that the Value that the Amex proposes to 
have disseminated for the Funds will provide investors with timely and 
useful information concerning the value of the individual Funds. The 
Exchange presents that the Value information will be disseminated 
through the facilities of the CTA every 15 seconds from 9:30 a.m. to 4 
p.m. or 4.15 p.m. Eastern time,\79\ depending on the time the Amex 
specifies for the trading of iShares, and should closely approximate 
the value per Fund share of the portfolio of the Deposit Securities and 
Balancing Amount 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).\80\ The Commission expects that 
the Amex will monitor the disseminated Value and, if the Amex were to 
determine that the Value does not closely track the applicable iShares 
series, it would arrange to disseminate an adequate alternative value.
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    \79\ See August 6 Conversation, supra note 30.
    \80\ See Amendment No. 2, supra note 4.
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    The NAV per share of each Fund will be determined as of the close 
of the regular trading session on the NYSE on each that the NYSE is 
open. The Amex will disseminate the NAV for each Fund on a daily basis 
\81\ and the final dividend amounts to be paid for each Fund on 
amextrader.com.\82\ For each Fund, the Amex will disseminate over 
Network B at the opening the number of iShares outstanding.\83\
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    \81\ See August Conversation, supra note 29.
    \82\ See Amendment No. 3, supra note 5. As noted above, the 
final dividend amount, which the Funds will also disseminate to 
Bloomberg and other sources, is the amount of dividends to be paid 
by a Fund for the appropriate period (usually annually). See 
Amendment No. 4, supra note 6.
    \83\ See Amendment No. 3, supra note 5.
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    The Trust intends to maintain a web site that will include, for 
each Fund, its prospectus, SAI, Underlying Index, and additional 
quantitative information that is updated on a daily basis, including 
daily trading volume, closing price, and closing NAV. The web site for 
the funds also will provide information regarding the tracking error 
for each Fund.\84\ In addition, the Funds' annual and semi-annual 
report will include disclosure of the Funds' total return and each 
Underlying Index's total return for 
one-, five-, and 10-year periods, and graphs comparing value of 
hypothetical $10,000 investments in the Fund and its Underlying 
Index.\85\
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    \84\ See Amendment No. 3, supra note 5.
    \85\ See Amendment No. 3, supra note 5.
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    Organizations authorized by each respective Underlying Index 
provider will disseminate intra-day values of the Underlying Indexes at 
regular intervals, currently expected to be every 15 seconds, 
throughout the trading day. In addition, these organizations will 
disseminate values for each Underlying Index once each trading day 
based on the closing prices in the relevant exchange market.
    As described more fully above, the Advisor will make available 
through the Distributor on each business day prior to the opening of 
trading on the Exchange the list of the names and the required number 
of shares of each Deposit Security included in the current Portfolio 
Deposit (based on information at the end of the previous business day) 
for each Fund to effect purchases of Creation Unit Aggregations of the 
Fund.
    In addition, the Advisor will provide the NSCC on a daily basis 
with the names and required number of shares of the Deposit Securities 
in a Creation Unit Aggregation and the Balancing Amount, which the NSCC 
will make available to NSCC members through an electronic file that 
NSCC members can download.\86\
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    \86\ See Amendment No. 4, supra note 6.
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I. Scope of the Commission's Order

    The Commission is approving the 15 series of iShares described 
herein. Other similarly structured products, or additional iShares 
Funds based on indexes that include securities not listed on a national 
securities exchange or The Nasdaq Stock Market, would require review by 
the Commission pursuant to section 19(b) of the Act prior to being 
traded on the Amex.

J. Accelerated Approval of the Proposal and Amendment Nos. 1, 2, 3, and 
4

    The Commission finds good cause for approving the proposed rule 
change and Amendment Nos. 1, 2, 3, and 4 to the proposed rule change 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. As discussed more fully above, 
the Commission has approved the listing and trading of various Index 
Fund Shares on the Amex. Several of the Amex's previous proposals to 
list and trade Index Fund Shares were published for comment and the 
Commission received no comments regarding the proposals. Accordingly, 
the Commission believes that it is reasonable to make the proposed 
iShares available to investors as soon as possible. Amendment No. 1 
clarifies the Amex's proposal by deleting the S&P Global 700 Index Fund 
from the new series of iShares that the Amex proposes to list and 
trade. Amendment No.2 strengthens the Amex's proposal by, among other 
things, representing the MSCI has implemented procedures to prevent the 
misuse of material non-public information regarding the MSCI EAFE 
Index, describing the Value for each Fund that the Amex will 
disseminate during regular Amex trading Hours, and describing the 
requirements for a Fund to qualify for tax treatment as a regulated 
investment company. Amendment No. 3 strengthens the Amex's proposal by, 
among other things, discussing the tracking error for the Funds, 
defining an ``Authorized Participant,'' and revising Amex Rule 1000A, 
Commentary .04 to indicate the transactions in iShares may be effected 
until 4 or 4:15 (New York) time each business day, as specified by the 
Amex. Amendment No. 4 clarifies the proposal by indicating that the 
Advisor will provide the NSCC with the names and required number of 
shares of the Deposit Securities in a Creation Unit Aggregation and the 
Balancing Amount, and by identifying the final dividend amount as the 
amount to be paid by a Fund for the appropriate period. Accordingly, 
the Commission believes that there is good cause, consistent with 
sections 6(b)(5) and 19(b)(2) of the Act,\87\ to approve the proposal 
and Amendment Nos. 1, 2, 3, and 4 to the proposal on an accelerated 
basis.
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    \87\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-Amex-2001-

[[Page 43937]]

34), as amended, is approved on an accelerated basis.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\88\
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    \88\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-21014 Filed 8-20-01; 8:45 am]
BILLING CODE 8010-01-M