[Federal Register Volume 66, Number 213 (Friday, November 2, 2001)]
[Notices]
[Pages 55712-55722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27524]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44900; File No. SR-Amex-2001-45]


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 
Listing Additional Funds of iShares, Inc. Based on Foreign Stock 
Indexes

October 25, 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 July 2, 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 October 5, 2001 the Amex filed Amendment No. 1 to the proposal.\3\ 
On October 19, 2001, the Amex filed Amendment No. 2 to the proposal.\4\ 
On October 24, 2001, the Amex filed

[[Page 55713]]

Amendment No. 3 to the proposal.\5\ On October 25, 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.
---------------------------------------------------------------------------

    \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 Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated October 4, 2001 (``Amendment No. 1''). Amendment No. 1 
provided additional information concerning the proposal, including 
(1) the minimum size and predicted price range of Creation Unit 
Aggregations; (2) in-kind exchange procedures; (3) the purpose of 
the Balancing Amount that is used in the creation of Creation Unit 
Aggregations; (4) iShare redemption procedures; (5) the final 
dividend amount and method of dissemination; (6) fees associated 
with buying and selling baskets of stocks in countries with local 
transfer restrictions; (7) a representation by Amex on preventing 
excessive weighting and reducing concern that an Index Fund could 
become a surrogate for trading in unregistered securities; (8) a 
representation that Barclays Global Fund Advisors seeks to minimize 
tracking error; (9) 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 to 
the MSCI indexes underlying iShare Funds; and (9) the time of day 
when Net Asset Values will be determined for a given Index Fund.
    \4\ See letter from Michael Cavalier, Associate General Counsel, 
Legal & Regulatory Division, Amex, to Steven Johnston, Special 
Counsel, Division, Commission, dated October 18, 2001 (``Amendment 
No. 2''), Amendment No. 2: (1) Noted that iShares, Inc. had amended 
its application for certain exemptions under the Investment Company 
Act of 1940 (``1940 Act'') to add three funds not included in the 
original application; (2) clarified that Fund Participants must be a 
Depository Trust Company (``DTC'') Participant; (3) made technical 
changes to descriptions of Balancing Amount and redemption 
procedures; (4) clarified the level of the Funds' investment in 
their underlying indices.
    \5\ See letter from Michael Cavalier, Associate General counsel, 
Legal & Regulatory Division, Amex, to Steven Johnston, Special 
Counsel, Division, Commission, dated October 23, 2001 (``Amendment 
No. 3''). Amendment No. 3: clarified that fees are assessed to 
offset market impact costs of buying and selling baskets of stocks 
in countries with local transfer restrictions.
    \6\ See letter from Michael Cavalier, Associate General Counsel, 
Legal & Regulatory Division, Amex, to Steven Johnston, Special 
Counsel, Division, Commission, dated October 25, 2001 (``Amendment 
No. 4''). Amendment No. 4: clarified (1) further the level of the 
Funds investment in their underlying indices; (2) the Exchange will 
disseminate certain information to the National Securities Clearing 
Coprporation (``NSCC'') every 15 seconds; (3) Fund tracking error 
will be disseminated via an internet website; and (4) further the 
description of Balancing amount.
---------------------------------------------------------------------------

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. 
seven additional iSharesSM MSCI Index Funds (each an ``Index 
Fund'' or ``Fund''), with each Fund based on one of the following 
indices compiled by Morgan Stanley Capital International Inc. 
(``MSCI''): (1) MSCI Europe Index; (2) MSCI Emerging Markets (Free) 
Index; (3) MSCI Emerging Markets Latin America Index; (4) MSCI All 
Country World Ex USA Index; (5) MSCI All Country Far East (Free) Ex 
Japan Index; (6) MSCI Pacific (Free) Ex Japan Index; and (7) MSCI 
Israel Index. 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, and 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 1000A 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'').\7\
---------------------------------------------------------------------------

    \7\ 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'').
---------------------------------------------------------------------------

    The first Index Fund Shares approved by the Commission and listed 
on the Exchange were seventeen series of World Equity Benchmark 
SharesTM (later re-named iSharesSM MSCI Index 
Funds) issued by Foreign Fund, Inc. (now iShares, Inc.), based on the 
following MSCI indices: Australia, Austria, Belgium, Canada, France, 
Germany, Hong Kong, Italy, Japan, Malaysia, Mexico (Free), Netherlands, 
Singapore (Free), Spain, Sweden, Switzerland and United Kingdom.\8\ 
These funds have been trading on the Amex since March 18, 1996.\9\
---------------------------------------------------------------------------

    \8\ ``MSCI'' and ``MSCI Indices'' are service marks of Morgan 
Stanley & Co. Incorporated.
    \9\ Trading of these funds was specifically approved in the 1996 
Order.
---------------------------------------------------------------------------

    On May 2, 2000, the Commission approved the listing of additional 
Index Funds of iShares Inc. based on the following MSCI Indices: MSCI 
EMU Index; MSCI Brazil (free) Index; MSCI South Korea Index; MSCI South 
Africa Index; MSCI Taiwan Index; and MSCI United States Index.\10\
---------------------------------------------------------------------------

    \10\ Securities Exchange Act Release No. 42748 (May 2, 2000), 65 
FR 30155 (May 10, 2000).
---------------------------------------------------------------------------

    The Amex now proposes to list and trade under Amex Rules 1000A et 
seq. the following additional MSCI Index Funds: (1) MSCI Europe Index 
Fund; (3) MSCI Emerging Markets (Free) Index Fund; (3) MSCI Emerging 
Markets Latin America Index Fund; (4) MSCI All Country World Ex USA 
Index Fund; (5) MSCI All Country Far East (Free) Ex Japan Index (Fund); 
(6) MSCI Pacific (Free) Ex Japan Index Fund; and (7) MSCI Israel Index 
Fund (each individually a ``Fund'' and collectively the ``Funds'').\11\
---------------------------------------------------------------------------

    \11\ iShares, Inc. has filed with the Commission an Application 
for Orders under Sections 6(c) and 17(b) of the Investment Company 
Act of 1940 (``1940 Act'') as amended, for the purpose of exempting 
the Index Funds referenced herein from various provisions of the 
1940 Act and rules thereunder (File No. 812-12290). The iShares MSCI 
All Country World Ex USA Index Fund; iShares MSCI Pacific (Free) Ex 
Japan Index Fund; and iShares MSCI Israel Index Fund have been added 
to the Application by amendment. See Amendment No. 1., supra, 
footnote 3.
---------------------------------------------------------------------------

    Issuances of iShares are made only in Creation Unit Aggregations of 
50,000 shares or more. The size of the applicable Creation Unit 
Aggregation will be set forth in the Fund's prospectus, and it is 
currently anticipated that the price of a Creation Unit Aggregation 
will range from at least $450,000 to approximately $25,000,000. 
iShares, Inc. issues and sells shares of the Index Funds through SEI 
Investments Distribution Co., the Distributor and principal 
underwriter, on a continuous basis at the net asset value per share 
next determined after an order to purchase iShares in Creation Unit 
size aggregations is received in proper form. Creation Unit 
Aggregations may be purchased only by or through a participant that has 
entered into a participant agreement with the Distributor (``Authorized 
Participant'') \12\. Each Participant must be a Depository Trust 
Company participant (``DTC''). It is estimated that the initial net 
asset value per share for the proposed Index Funds will range from $20 
to $120. Following issuance, iShares are traded on the Exchange like 
other equity securities by professionals, as well as retail and 
institutional investors.
---------------------------------------------------------------------------

    \12\ See Amendment No. 1., supra, footnote 3.
---------------------------------------------------------------------------

    Creation Unit Aggregations generally will be issued in exchange for 
an in-kind deposit of securities and cash. An Index Fund also may sell 
Creation Unit Aggregations on a ``cash only'' basis in limited 
circumstances. An investor wishing to make an in-kind purchase of a 
Creation Unit Aggregation from an Index Fund will have to transfer to 
the Fund a ``Portfolio Deposit'' consisting of (a) a portfolio of 
securities that has been selected by Barclays Global Fund Advisors 
(``Adviser'') to correspond generally to the price and yield 
performance of the relevant Underlying Index (``Deposit Securities''), 
(b) a cash payment equal per Creation Unit Aggregation to the dividends 
accrued on the Portfolio Securities of the Index Fund since the last 
dividend payment on the Portfolio Securities, net of expenses and 
liabilities (the ``Dividend Equivalent Payment''), and (c) an amount 
equal to the difference between (i) the net asset value (``NAV'') per 
Creation Unit Aggregation of the Index Fund and (ii) the sum of (I) the 
Dividend Equivalent Payment and (II) the total aggregate market value 
per Creation Unit Aggregation of the Deposit Securities (the 
``Balancing Amount,''

[[Page 55714]]

and, together with the Dividend Equivalent Payment, the ``Cash 
Component''). The Balancing Amount serves the function of compensating 
for differences, if any, between the net asset value per Creation Unit 
Aggregation and the value of the Deposit Amount. The Deposit Amount is 
the sum of (i) the Dividend Equivalent Payment and (ii) the market 
value per Creation Unit Aggregation of the Deposit Securities. If the 
Balancing Amount is a positive number (i.e., the net asset value per 
Creation Unit Aggregation of the Index Fund exceeds that of the Deposit 
Amount), the Balancing Amount will be paid to the Fund by the Creator. 
If the Balancing Amount is a negative number (i.e., the NAV per 
Creation Unit Aggregation of the Index Fund is less than that of the 
Deposit Amount) the creator will receive cash in an amount equal to the 
differential.\13\
---------------------------------------------------------------------------

    \13\ See Amendment No. 4., supra, footnote 6.
---------------------------------------------------------------------------

    On each business day, the Adviser will make available through the 
Distributor, immediately prior to the opening of trading on the Amex, 
the list of the names and the required number of the shares of each 
Deposit Security for each Index Fund that offers in-kind purchases of 
Creation Unit Aggregations. The Portfolio Deposit will be applicable to 
purchases of Creation Unit Aggregations until a change in the Portfolio 
Deposit composition is next announced. On a daily basis, the Adviser 
provides NSCC with the names and required number of shares of the 
Deposit Securities in a Creation Unit Aggregation, the Balancing Amount 
and the estimated cash amount. The NSCC, in turn, makes this 
information available to NSCC members through an electronic file the 
NSCC members can download. In addition, the Amex will disseminate at 
regular intervals (every 15 seconds) throughout the trading day, via 
the facilities of the Consolidated Tape Association (``CTA''), an 
amount representing on a per iShare basis, the sum of the Cash 
Component effective through and including the prior business day, plus 
the current value of the Deposit Securities.
    Each Index Fund reserves the right to permit or require the 
substitution of an amount of cash or the substitution of any security 
to replace any Deposit Security that may be unavailable or unavailable 
in sufficient quantity for delivery to iShares, Inc., or which may be 
ineligible for trading by an Authorized Participant or the investor on 
whose behalf the Authorized Participant is acting.
    It is anticipated that the deposit of Deposit Securities and the 
Cash Component in exchange for iShares will be made primarily by 
institutional investors, arbitrageurs, and the Exchange specialist. 
Creation Units are separable upon issuance into identical shares which 
are listed and traded on the Amex. iShares will be traded on the 
Exchange by professionals as well as institutional and retail 
investors.
    Individual iShares will not be redeemable.\14\ iShares will only be 
redeemable in Creation Unit Aggregations through each Index Fund. To 
redeem, an investor will have to accumulate enough iShares to 
constitute a Creation Unit Aggregation. An investor redeeming a 
Creation Unit Aggregation generally will receive (a) a portfolio of 
Portfolio Securities in effect on the date the request for redemption 
is made (``Redemption Securities''), which may not be identical to the 
Deposit Securities applicable to the purchase of Creation Unit 
Aggregations, and (b) a ``Cash Redemption Payment,'' consisting of an 
amount calculated in the same manner as the Cash Component, although 
the actual amounts may differ if the Redemption Securities are not 
identical to the Deposit Securities. To the extent that the Redemption 
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 
Redemption Securities and the NAV of the iShares being redeemed.\15\ An 
investor may receive the cash equivalent of a Redemption Security in 
certain circumstances, such as where a redeeming entity is restrained 
by regulation or policy from transacting in the Redemption Security. An 
Index Fund may redeem Creation Unit Aggregations in cash in limited 
circumstances, such as when it is impossible to effect deliveries of 
Redemption Securities in the applicable jurisdiction.\16\
---------------------------------------------------------------------------

    \14\ See Amendment No. 2., supra, footnote 4.
    \15\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Legal & Regulatory Division, Amex and Florence E. 
Harmon, Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission, October 25, 2001.
    \16\ For example, local restrictions on transfers of securities 
to and between certain types of investors exist in Korea, Malaysia, 
Taiwan and Brazil. These restrictions currently preclude ``in kind'' 
creations and redemptions of Creation Units of iShares MSCI Korea, 
Malaysia, Taiwan and Brazil Index Funds. (See SR-Amex-98-49). 
Accordingly, creations and redemptions of Creation Units of other 
iShares MSCI Index Funds that hold shares of Korean, Malaysian, 
Taiwanese and Brazilian companies i.e., iShares MSCI Emerging 
Markets Latin America; iShares MSCI All Country Far East (Free) Ex 
Japan; iShares MSCI Emerging Markets (Free); iShares MSCI Pacific 
(Free) Ex Japan; and iShares MSCI All Country World Ex USA) will 
involve a combination of ``for cash'' and ``in kind'' transfers. In 
such cases, the Fund will charge creation and redemption fees 
intended to offset the transfer and other transaction costs incurred 
by the Fund, including market impact expenses (primarily associated 
with creations and redemptions for cash), related to investing in or 
disposing of the basket of stocks held by the Fund. The Exchange 
will disclose this information in the Information Circular sent to 
members and member organizations about the Funds. The Exchange 
further notes that the Fund prospectus will disclose: (1) The time 
that the NAV for each fund is calculated; (2) the possible market 
impact of a Fund buying or selling securities in Brazil, South 
Korea, Malaysia and Taiwan prior to calculation of the NAV, and (3) 
the creation and redemption fees for the Fund. The Exchange will 
also disclose in the Information Circular issued to members and 
member organizations in connection with start-up of trading in the 
Funds. See Amendment No. 3, supra, footnote 5. It is expected that 
continuous sales and redemptions of Funds that hold shares of 
Korean, Malaysian, Taiwanese and Brazilian companies will result in 
their trading close to net asset values. These Funds should 
ordinarily be able to buy and sell Creation Unit Aggregations 
shortly after receipt of an order (ordinarily on the business day 
after receipt of an order). See Amendment No. 2, supra, footnote 4.
---------------------------------------------------------------------------

    An Index Fund may make periodic distributions of dividends from net 
investment income, including net foreign currency gains, if any, in an 
amount approximately equal to accumulated dividends on securities held 
by the Fund during the applicable period, net of expenses and 
liabilities for such period. The final dividend amount for each Fund, 
which is made available on amextrader.com, is the amount of dividends 
to be paid by a Fund for the appropriate period (usually annually). The 
final dividend amount is also disseminated by the Funds to Bloomberg 
and other sources. iShares, Inc. 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.\17\
---------------------------------------------------------------------------

    \17\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Legal & Regulatory Division, Amex and Florence E. 
Harmon, Senior Special Counsel, Division, Commission, October 25, 
2001.
---------------------------------------------------------------------------

    The net asset value for each Index Fund is calculated by the Fund's 
Administrator (PFPC Inc.). After calculation, such net asset values are 
available to the public from the Fund's Distributor via a toll free 
telephone number, and are also available to NSCC participants through 
data made available from NSCC.
    Fund shares are registered in book entry form through The 
Depository Trust Company and the Index Funds will not issue individual 
share certificates. DTC or its nominee will be the record or registered 
owner of all outstanding iShares. Beneficial

[[Page 55715]]

ownership of iShares will be shown on the records of DTC or DTC 
participants.\18\ Trading in shares of iShares MSCI Index Funds on the 
Exchange is effected until 4 p.m. (New York Time) each business day. 
The minimum trading increment for such shares is $.01.
---------------------------------------------------------------------------

    \18\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Legal & Regulatory Division, Amex and Florence E. 
Harmon, Senior Special Counsel, Division, Commission, October 25, 
2001.
---------------------------------------------------------------------------

    MSCI Indices. Each MSCI Index on which a Fund is based is 
calculated by MSCI for each trading day in the applicable foreign 
exchange markets based on official closing prices in such exchange 
markets. For each trading day, MSCI publicly disseminates each index 
value for the previous day's close. MSCI Indices are reported 
periodically in major financial publications worldwide, and are also 
available through vendors of financial information. The information 
includes an Index description, Index capitalization and concentration, 
size range of Index companies, Index characteristics, industry group 
weightings, country weightings and top ten companies and their 
weightings.
    iShares MSCI Index Funds. As noted in the iShares MSCI Index Fund 
prospectus (Registration No. 33-97598), the investment objective of 
each Fund is to seek to provide investment results that correspond 
generally to the price and yield performance of public securities 
traded in the aggregate in particular markets, as represented by 
specific MSCI benchmark indices. Each Fund utilizes a ``passive'' or 
indexing investment approach (a ``representative sampling'' strategy) 
which attempts to approximate the investment performance of its 
benchmark index through quantitative analytical procedures. Each Fund 
has the policy to remain as fully invested as practicable in a pool of 
securities the performance of which will approximate the performance of 
the benchmark MSCI Index taken in its entirety. Each Fund will maintain 
regulated investment company compliance.\19\
---------------------------------------------------------------------------

    \19\ In order 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 purpose of this calculation in respect 
of any one issuer to an amount not greater than 5% of the value of 
the 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 total assets may be invested in the securities of any one 
issuer, or of two ore more issuers that are controlled by the Fund 
(within 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 of related trades or business (other than U.S. government 
securities or the securities of other regulated investment 
companies).
---------------------------------------------------------------------------

    Each Fund will normally invest at least 95% of its total assets in 
component securities that are represented in the underlying index, and 
will at all times invest at least 90% of its total assets in such 
stocks, except that in order to permit the Adviser additional 
flexibility to comply with the requirements of the Internal Revenue 
Code and other regulatory requirements and to manage future corporate 
actions and index changes in the smaller markets, certain Funds, 
identified in each Fund's prospectus, will at all times invest at least 
80% of their assets in such stocks and at least half of the remaining 
20% in such stocks or in stocks included in the relevant market, but 
not in the relevant underlying index. iShares, Inc. expects that the 
iShares MSCI Emerging Markets (Free), Emerging Markets Latin America 
and Israel Index Funds will be subject to the ``80%/20%'' exception 
described above. Each Fund may invest its remaining assets in money 
market instruments (subject to applicable limitations under the 1940 
Act), in repurchase agreements, in stocks that are in the relevant 
market but not in the relevant underlying index, and/or in combinations 
of certain stock index futures contracts, options on futures contracts, 
stock index options, stock index swaps, cash, local currency and 
forward currency exchange contracts that are intended to provide a Fund 
with exposure to a stock. The Adviser may attempt to reduce tracking 
error by using futures contracts whose behavior is expected to 
represent the market performance of the Fund's underlying securities. A 
Fund will not use these instruments to leverage, or borrow against, its 
securities holdings or for speculative purposes.
    As noted in the iShares MSCI Index Fund prospectus, the Exchange 
expects that, over time, the ``expected tracking error'' of an Index 
Fund relative to the performance of the relevant MSCI Index will be 
less than 5%. An expected tracking error of 5% means that there is a 
68% probability that the net return on the asset value for the Index 
Fund (including dividends and without reflecting expenses) will be 
between 95% and 105% of the return of the subject MSCI Index after one 
year without rebalancing the portfolio composition. While no particular 
level of tracking error is assured, the Adviser monitors the tracking 
error of each Fund on an ongoing basis and seeks to minimize tracking 
error to the maximum extent possible. Semi-annual and annual reports of 
the Fund disclose tracking error over the previous six month periods, 
and in the event that tracking error exceeds 5%, the Adviser will 
notify the Fund's Board of Directors and the Board will consider what 
action might be appropriate.
    The Index Funds do not intend to concentrate in any particular 
industry, except that each Fund will attempt to concentrate its 
investment (i.e., hold generally 25% or more of its total assets in the 
stocks of a particular industry or group of industries) \20\ to 
approximately the same extent that its underlying index concentrates in 
the stocks of such particular industry or group of industries.\21\ 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 state 
or municipal governments and their political subdivisions are not 
considered to be issued by members of any industry.
---------------------------------------------------------------------------

    \20\ 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. 
See supra, footnote 19.
    \21\ For the iShares MSCI Israel Index Fund, the MSCI Index 
seeks to reflect at least 60% of Israel's stock market 
capitalization.
---------------------------------------------------------------------------

    The Exchange believes that these requirements and policies prevent 
any Index Fund from being excessively weighted in any single security 
or small group of securities and significantly reduce concerns that 
trading in an Index Fund could become a surrogate for trading in 
unregistered securities.
    The Funds have chosen to pursue a representative sampling strategy 
which, by its very nature, entails some risk of tracking error. (It 
should also be noted that fund expenses, the timing of cash flows, and 
other factors all contribute to tracking error.) With this in mind, the 
Adviser seeks to minimize tracking error consistent with the Fund's 
decision to use a representative sampling strategy. The website for the 
Funds, www.ishares.com, contains detailed information on the 
performance and the tracking error for each Fund. Consistent with the 
current practice of other index funds, the Funds' annual and semi-
annual report will not contain any specific item designated ``tracking 
error.'' The annual and semi-annual report will contain all total 
return

[[Page 55716]]

performance information required by the Investment Company Act of 1940, 
Form N-1A and the standard conditions for the 1940 Act exemptive relief 
which we expect to be granted to the Funds. This information includes 
disclosure of the Funds' total return and each underlying index's total 
return for 1, 5 and 10 year periods, and line graphs comparing values 
of hypothetical $10,000 investments in the Fund and its Underlying 
index.
    MSCI has implemented procedures to prevent the misuse of material 
non-public information regarding changes to the MSCI indexes underlying 
the Index Funds. These procedures, which will also apply to the MSCI 
indexes that are the subject of this filing, were submitted to the 
Commission by MSCI in connection with approval of additional series of 
World Equity Benchmark Shares (the previous name for iShares MSCI Index 
Funds).\22\
---------------------------------------------------------------------------

    \22\ Securities Exchange Act Release No. 42748 (May 2, 2000), 65 
FR 30155 (May 10, 2000) (Order Approving File No. SR-Amex-98-49).
---------------------------------------------------------------------------

    Dissemination of Index Information. The daily closing index value 
and the percentage change in the daily closing index value for every 
MSCI country and regional index is publicly available on the MSCI Web 
site at www.mscidata.com. In addition, MSCI advises that various news 
publications (e.g., Barron's, Business Week, Forbes, Global Finance, 
Investor's Daily, The New York Times and The Wall Street Journal in the 
United States) publish data for certain MSCI Indices. For example, The 
Wall Street Journal recently has been publishing the closing index 
value, for MSCI Indices covering the United States, the United Kingdom, 
Canada, Japan, France, Germany, Hong Kong, Switzerland, Australia, the 
World and EAFE (i.e., European, Australian and Far Eastern markets).
    Data regarding each MSCI Index is available to MSCI subscribers 
through various methods of delivery. MSCI index data may be delivered 
to subscribers directly from MSCI on a daily or monthly basis via 
electronic delivery methods. MSCI subscribers also may receive index 
data on a daily, monthly, or quarterly basis in print format via 
express mail. Several independent data vendors package and disseminate 
MSCI data in various value-added formats (including vendors displaying 
both securities and index levels, such as FAME, FactSet, Datastream, 
RIMES, DSC Data Services and QUANTEC, and vendors displaying index 
levels only, such as Bloomberg, Bridge/Knight Ridder, Dow Jones 
Markets, DRI/McGraw Hill, Lipper Analytical, Quick, Quotron, Reuters 
and Telekurs). According to the iShares, Inc., compared to the MSCI 
data available free of charge from the MSCI website, the data available 
to users subscribing to quote vendors such as Bloomberg, Bridge and 
Reuters includes more frequent calculation and dissemination of index 
levels, including ``real-time'' feeds for certain indices, while the 
data available to MSCI paid subscribers (either directly from MSCI or 
from an independent ``full data'' vendor) includes more detailed 
information in respect of the securities included in a given index and/
or more frequent calculations and dissemination of index levels and 
securities levels.
    Availability of Information Regarding iShares. The Web site for 
iShares, Inc., which will be publicly accessible at no charge, will 
contain the following information, on a per iShare basis, for each 
Index Fund: (a) The prior business day's NAV and the reported closing 
price, and a calculation of the premium or discount of such price 
against such NAV; and (b) data in chart format displaying the frequency 
distribution of discounts and premiums of the daily closing price 
against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters.
    According to MSCI, the value of each Index Fund's underlying MSCI 
Index will be updated intra-day on a real time basis as individual 
component securities of that Index change in price. The intra-day 
values of these MSCI Indices will be disseminated every 15 seconds\23\ 
throughout the trading day by organizations authorized by MSCI. In 
addition, these organizations will disseminate values for each Index 
once each trading day, based on closing prices in the relevant exchange 
market.
---------------------------------------------------------------------------

    \23\ See Amendment No. 4, supra, footnote 6.
---------------------------------------------------------------------------

    The NAV for each Index Fund will be calculated and disseminated 
daily. The NAV for the iShares MSCI Pacific (Free) Ex Japan Index Fund 
will be determined as of 8:30 a.m. Eastern Time. The time for NAV 
determination for the other Index Funds that are the subject of this 
filing will be established by iShares, Inc. prior to start-up of 
trading and will be publicly disclosed by the Funds. The Amex also 
intends disseminate for each Index Fund on a daily basis by means of 
CTA and CQ High Speed Lines information with respect to the Indicative 
Optimized Portfolio Value (as discussed below) and shares outstanding, 
prior to the opening of the Amex.\24\ The Exchange will also 
disseminate the NAV and final dividend amounts to be paid for each Fund 
on the Web site amextrader.com. The closing prices of the Index 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.
---------------------------------------------------------------------------

    \24\ See Amendment No. 3, supra, footnote 5.
---------------------------------------------------------------------------

    With each distribution, iShares, Inc. will furnish to the DTC 
Participants for distribution to Beneficial Owners of iShares of each 
Index Fund through the DTC Participants a statement setting forth the 
amount being distributed, expressed as a dollar amount per iShare of 
such Index Fund. Beneficial Owners also will receive annually 
notification as to the tax status of the distributions of iShares, Inc.
    Promptly after the end of each fiscal year, iShares, Inc. will 
furnish to the DTC Participants, for distribution to each person who 
was a Beneficial Owner of iShares at the end of the fiscal year, an 
annual report of iShares, Inc. containing financial statements audited 
by independent accountants of nationally recognized standing and such 
other information may be required by applicable laws, rules and 
regulations.
    Dissemination of Indicative Optimized Portfolio Value. As noted 
above, MSCI disseminates values for each MSCI Index once each trading 
day, based on closing prices in the relevant exchange market. In 
addition, the Fund causes to be made available on a daily basis the 
names and required number of shares of each of the securities to be 
deposited in connection with the issuance of Fund shares in Creation 
Unit size aggregations for each Fund, as well as information relating 
to the required cash payment representing, in part, the amount of 
accrued dividends applicable to such Funds. This information is made 
available by the Fund's Adviser to any NSCC participants requesting 
such information. In addition, other investors can request such 
information directly from the Fund's Distributor. The net asset value 
for each Fund is calculated daily by the Fund's Administrator (PFPC 
Inc.).
    In order to provide updated information relating to each Fund for 
use by investors, professionals and persons wishing to create or redeem 
iShares MSCI Index Fund shares, the Exchange disseminates through the 
facilities of CTA an updated ``indicative optimized portfolio value'' 
(``Value'') for each of the Funds currently traded as

[[Page 55717]]

calculated by Bloomberg, LP. The Exchange will also disseminate a Value 
for the proposed seven new Funds over CTA facilities (Network B) as 
calculated by a securities information provider (``Value Calculator''). 
The methodology utilized in connection with the iShares MSCI Index 
Funds currently traded will also be utilized for the proposed seven new 
Funds. The Value is disseminated on a per Fund share basis every 15 
seconds during regular Amex trading hours of 9:30 a.m. to 4 p.m. New 
York time. The equity securities values included in the Value are the 
values of the designated portfolio of equity securities (``Deposit 
Securities'') constituting an optimized representation of the benchmark 
MSCI foreign index for each Fund, which is the same as the portfolio 
that is to be utilized generally in connection with creations and 
redemptions of Fund shares in Creation Unit size aggregations on that 
day. The equity securities included in the Value reflects the same 
market capitalization weighting as the Deposit Securities in the 
optimized portfolio for the particular Fund. In addition to the value 
of the Deposit Securities for each Fund, the Value includes a cash 
component consisting of estimated accrued dividend and other income, 
less expenses. The Value also reflects changes in currency exchange 
rates between the U.S. dollar and the applicable home foreign 
currencies.
    The Value does not reflect the value of all securities included in 
the applicable benchmark MSCI index. In addition, the Value does not 
necessarily reflect the precise composition of the current portfolio of 
securities held by the Fund for each Fund at a particular point in 
time. Therefore, the Value on a per Fund share basis disseminated 
during Amex trading hours should not be viewed as a real time update of 
the net asset value of the Fund, which is calculated only once a day. 
While the Value disseminated by the Amex at 9:30 a.m. is generally very 
close to the most recently calculated Fund net asset value on a per 
Fund share basis \25\, it is possible that the value of the portfolio 
of securities held by the Fund for a particular 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. 
Following calculation of net asset value by the Fund's Administrator, 
the Value on a per Fund share basis can be expected to be the same as 
the net asset value of the Fund on a per Fund share basis.
---------------------------------------------------------------------------

    \25\ A slight different between the Value disseminated at 9:30 
a.m. and the most recently calculated Fund net asset value can be 
expected because the Value will include an estimated cash amount 
consisting principally of any divided accruals for the Deposit 
Securities going ``ex-dividend'' on that day.
---------------------------------------------------------------------------

    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 circumstances (e.g., in 
the case of extensive rebalancing of multiple securities in a Fund at 
the same time by the Adviser). 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 than 
circumstances causing any index fund or trust to diverge from an 
underlying benchmark index.
    The Exchange believes that dissemination of the Value based on the 
Deposit Securities provides additional information regarding each Fund 
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.
 MSCI All Country Far East Free Ex Japan Index; MSCI Pacific 
(Free) Ex Japan
    For these Indexes there is no overlap in trading hours between the 
foreign markets and the Amex. Therefore, for these Funds, the Value 
calculator will utilize closing prices (in applicable foreign currency 
prices) in the principal foreign market for securities in the Funds 
portfolio, and convert the price to U.S. dollars. This Value will be 
updated every 15 seconds during Amex trading hours to reflect changes 
in currency exchange rates between the U.S. dollar and the applicable 
foreign currency. The Value will also include the applicable estimated 
cash component for the Fund.
 MSCI Emerging Markets Latin America Index; MSCI All Country 
World Ex USA Index; MSCI Emerging Markets Free Index; MSCI Europe 
Index; MSCI Israel Index
    For the above noted MSCI Indexes, which include companies trading 
in markets with trading hours overlapping regular Amex trading hours, 
the Value calculator will update the applicable Value every 15 seconds 
to reflect price changes in the principal foreign market, and convert 
such prices into U.S. dollars based on the current currency exchange 
rate. When the foreign market is closed but the Amex is open, the Value 
will be updated every 15 seconds to reflect changes in currency 
exchange rates after the foreign market closes. The Value will also 
include the applicable estimated cash component for each Fund.
    Criteria for Initial and Continued Listing. The Index Funds are 
subject to the criteria for initial and continued listing of Index Fund 
Shares in rule 1002A. For each of the Funds, it is anticipated that a 
minimum of two Creation Units will be required to be outstanding at the 
start of the trading. The 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 listed series of 
Portfolio Depository Receipts and Index Fund Shares. The Exchange 
believes that the anticipated minimum number of iShares outstanding for 
each Fund at the start of trading is sufficient to provide market 
liquidity and to further the Fund's objective to seek to provide 
investment results that correspond generally to the price and yield of 
a specified MSCI Index.
    Original and Annual Listing Fees. The Amex original listing fee 
applicable to the listing of iShares MSCI Index Funds is $5,000 per 
Fund (i.e., $35,000 for the seven Funds listed above). In additional, 
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 shares in all iShares MSCI Index Funds listed on the Amex, 
including existing Funds and the seven additional Funds proposed 
herein.
    Stop and Stop Limit Orders. Amex rule 154, Commentary. 04(c) 
provides that stop and stop limit orders to buy or sell a security 
(other than an option, which is covered by rule 950(f) and Commentary 
thereto) the price of which is derivatively priced based upon another 
security or index of securities, may with the prior approval of Floor 
Official, be elected by a quotation, as set forth in Commentary .04(c) 
(i-v). The Exchange has designated Index Fund Shares, including iShares 
MSCI Index Funds, as eligible for this treatment \26\
---------------------------------------------------------------------------

    \26\ See Securities Exchange Act Release No. 29063 (April 10, 
1998), 56 FR 15652 (April 17, 2001) (Oder Approving File No. SR-
Amex-90-31), and supra, footnote 9.
---------------------------------------------------------------------------

    Rule 190. Rule 190, Commentary .04 applies to Index Fund Shares 
listed on the Exchange, including iShares MSCI Index Funds. Commentary 
.04 states that nothing in rule 190(a) should be construed to restrict 
a specialist registered in security issued by an investment company 
from purchasing and redeeming the listing security, or securities that 
can be subdivided or converted into the listed security, from the 
issuer as appropriate to facilitate the

[[Page 55718]]

maintenance of a fair and orderly market.
    Prospects Delivery. The Exchange, in an Information Circular to 
Exchange members and member organizations, will inform members and 
member organizations, prior to commencement of trading, of prospectus 
or product description delivery requirements applicable to iShares MSCI 
Index Funds. IShares, Inc. has on file with the Division of Investment 
Management a separate request for an exemptive order granting relief 
from certain prospectus delivery requirements under section 24(d) of 
the 1940 Act. Any product description used in reliance on an section 
24(d) exemptive order will comply with all representations made therein 
and all conditions thereto.
    Purchase and Redemptions in Creation Unit Size. In the Information 
Circular referenced above, members and member organizations will be 
informed that procedures for purchases and redemptions of iShares in 
Creation Unit size are described in the Fund prospectus and Statement 
of Additional Information, and that iShares are not individually 
redeemable but are redeemable only in Creation Unit size aggregations 
or multiples thereof.
    Trading Halts. In addition to other factors that may be relevant, 
the Exchange may consider factors such as those set forth in 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; (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. (See Amex rule 918C). In addition, trading in 
iShares will be halted if the circuit breaker parameters under Amex 
rule 117 have been reached.
    Suitability. The Information Circular referenced above will inform 
members and member organizations of the characteristics of the specific 
Index Fund and of applicable Exchange rules, as well as of the 
requirements of Amex rule 411 (Duty to Know and Approve Customers). The 
Information Circular will also disclose the time that the NAV is 
determined for a particular Fund and will disclose that for Funds 
holding shares of Korean, Malaysian, Taiwanese and Brazilian companies 
that the Fund will charge creation and redemption fees intended to 
offset brokerage costs associated with cash creations and redemptions, 
(as discussed in footnote 16 above).
    Surveillance. Exchange surveillance procedures applicable to 
trading in the proposed iShares MSCI Index Funds are the same as those 
applicable to iShares currently trading on the Exchange.
(2) Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
in general and furthers the objection 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 proposed rule change will impose no 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. Solitation 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 the 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 will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to file number SR-Amex-2001-45 and should be 
submitted by November 23, 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).\27\ Specifically, 
the Commission finds that the proposal to list and trade the proposed 
iShares will provide investors with a convenient and less expensive way 
of 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.\28\ 
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.\29\
---------------------------------------------------------------------------

    \27\ 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).
    \28\ The Commission notes that unlike typical 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.
    \29\ 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.

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

[[Page 55719]]

    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: 15 
series of iShares Trust;\30\ 23 series of iShare MSCI Index Funds 
(formerly MSCI World Equity Benchmark Shares (``WEBS''));\31\ series of 
the iShares Trust based on the S&P Europe 350 Index and the S&P/TSE 60 
Index;\32\ nine series of Select Sector SPDRs and one series of the 
Technology 100 Index Fund;\33\ and shares of the street Tracks Dow 
Jones Global Titans Index Fund.\34\
---------------------------------------------------------------------------

    \30\ Securities Exchange Act Release No. 4470 (August 14, 2001), 
66 FR 43927 (August 21, 2001) (order approving File No. SR-Amex-
2001-34).
    \31\ 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); 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).
    \32\ See Securities Exchange Act Release No. 42786 (May 15, 
2000), 65 FR 33586 (May 24, 2000) (order approving File No. SR-Amex-
99-49).
    \33\ See Securities Exchange Act Release No. 40749 (December 4, 
1998), 63 FR 68483 (December 11, 1998) (order approving File No. SR-
Amex-98-29).
    \34\ See Securities Exchange Act Release No. 433338 (September 
25, 2000) 65 FR 59235 (October 4, 2000) (order approving File No. 
SR-Amex-00-53).
---------------------------------------------------------------------------

    Similar to these Index Fund 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 an interest 
in a portfolio of securities designed to reflect substantially the 
applicable Underlying Index. The estimated cost of individual iShares, 
approximately $20 to $120, 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.\35\ 
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.
---------------------------------------------------------------------------

    \35\ 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 comprising the MSCI 
All Country World Ex USA Index;\36\ (2) the component securities 
comprising the MSCI All Country Far East (Free) Ex Japan Index;\37\ (3) 
the component securities comprising the MSCI Emerging Markets (Free) 
Index;\38\ (4) the component securities comprising the MSCI Emerging 
Markets Latin America Index;\39\ (5) the component securities 
comprising the MSCI Europe Index;\40\ (6) the component securities 
comprising the MSCI Pacific (Free) Ex Japan Index;\41\ and (7) the 
component securities of the MSCI Israel Index.\42\
---------------------------------------------------------------------------

    \36\ The MSCI All Country World Ex USA Index, is comprised of 
securities trading on the exchanges of 49 of the 51 countries for 
which MSCI has indices. The index represents world stock markets 
(not including markets in the United States). The index included 
1849 constituent companies as of May 31, 2001.
    \37\ The MSCI All Country Far East (Free) Ex Japan Index 
comprises 9 of the 51 countries for which MSCI has indices. The 
index represents Asian stock markets (not including markets in 
Japan). The index included 407 constituent countries as of May 31, 
2001. Approximately 45% of the index is comprised of securities 
traded on the combined markets in Korea, Malaysia, and Taiwan. Those 
countries have restrictions that preclude in-kind redemptions and 
creations. Therefore, the MSCI Pacific (Free) Ex Japan Index Fund 
will charge fees to offset related transfer and transaction costs. 
Those costs include market impact costs because there is a 
possibility, which the Exchange will disclose in its prospectus, of 
market impact as a result of the Fund buying or selling securities 
in those countries.
    \38\ The MSCI Emerging Markets (Free) Index comprises 25 of the 
51 countries for which MSCI has indices. The index included 696 
constituent companies as of May 31, 2001. Approximately 40% of the 
index is comprised of securities trading in Brazil, Korea, Malaysia, 
and Taiwan. Those countries have restrictions that preclude in-kind 
redemptions and creations. Therefore, the Emerging Markets (Free) 
Index Fund will charge fees to offset related transfer and 
transaction costs. Those costs include market impact costs because 
there is a possibility, which the Exchange will disclose in its 
prospectus, of market impact as a result of the Fund buying or 
selling securities in those countries.
    \39\ The Emerging Markets Latin America Index comprises 7 of the 
51 countries for which MSCI has indices. The index included 127 
constituent companies as of May 31, 2001. Approximately 40% of the 
index is comprised of securities trading in Brazil, which has 
restrictions that preclude in-kind redemptions and creations. 
Therefore, the Emerging Markets Latin America Fund will charge fees 
to offset related transfer and transaction costs. Those costs 
include market impact costs because there is a possibility, which 
the Exchange will disclose in its prospectus, of market impact as a 
result of the Fund buying or selling securities in Brazil.
    \40\ The MSCI Europe Index comprises 7 of the 51 countries for 
which MSCI has indices. According to MSCI, the index included 127 
constituent companies as of May 31, 2001.
    \41\ The MSCI Pacific (Free) Ex Japan Index represents markets 
in Australia, Hong Kong, New Zealand and Singapore. There were 151 
constituent companies included in the index as of May 31, 2001.
    \42\ The MSCI Israel Index includes country constituents that 
are classified using the Global Industry Classification Standard 
(GICS), which has 10 sectors drawn from 23 Industry groups. Over 70% 
of the index is comprised of securities in three industry groups: 
Software & Services; Pharmaceuticals & Biotechnology; and Banks. 
There were 33 constituent companies as of May 31, 2001.
---------------------------------------------------------------------------

    The Commission notes that each Fund will normally invest at least 
95% of its total assets in component securities that are represented in 
the underlying index, and will at all times invest at least 90% of its 
total assets in such stocks, except that in order to permit the Adviser 
additional flexibility to comply with the requirements of the Internal 
Revenue Code and other regulatory requirements and to manage future 
corporate actions and index changes in the smaller markets, certain 
Funds, identified in each Fund's prospectus, will at all times invest 
at least 80% of its assets in such stocks and at least half of the 
remaining 20% in such stocks or in stocks included in the relevant 
market, but not in the relevant underlying index. iShares, Inc. expects 
that the iShares MSCI Emerging Markets (Free), Emerging Markets Latin 
America and Israel Index Funds will be subject to the ``80%/20%'' 
exception described above. Each Fund may invest its remaining assets in 
money market instruments (subject to applicable limitations under the 
1940 Act), in repurchase agreements, in stocks that are in the relevant 
market but not in the relevant underlying index, and/or in combinations 
of certain stock index futures contracts, options on futures contracts, 
stock index options, stock index swaps, cash, local currency and 
forward currency exchange contracts that are intended to provide a Fund

[[Page 55720]]

with exposure to a stock. The Adviser may attempt to reduce tracking 
error by using futures contracts whose behavior is expected to 
represent the market performance of the Fund's underlying securities. A 
Fund will not use these instruments to leverage, or borrow against, its 
securities holdings or for speculative purposes. The Exchange expects 
that each Fund does not intend to concentrate in any particular 
industry except to the extent that its Underlying Index concentrates in 
the stocks of a particular industry or industries.\43\ 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. 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.
---------------------------------------------------------------------------

    \43\ See Amendment No. 1, supra, footnote 3; Amendment No. 2, 
supra, footnote 4.
---------------------------------------------------------------------------

    As noted above, each Fund will use a representative portfolio 
sampling strategy to attempt to track its Underlying Index. Although a 
representative sampling strategy entails some risk of tracking error, 
the Advisor will seek to minimize tracking error. 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.\44\ The Commission notes that the Exchange will 
disseminate the NAV and final dividend amounts to be paid for each Fund 
on the website amextrader.com.\45\ In addition, the Funds' annual and 
semiannual reports will include disclosures 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.\46\ While the Commission 
believes that the proposed requirements for the Funds, and the expected 
tracking error of 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.\47\
---------------------------------------------------------------------------

    \44\ See Amendment No. 1, supra, footnote 3.
    \45\ See Amendment No. 1, supra, footnote 3.
    \46\ See Amendment No. 1, supra, footnote 3.
    \47\ 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.
---------------------------------------------------------------------------

B. Disclosure

    The Commission believes that the proposal should ensure that 
investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading iShares. 
Investors purchasing the proposed iShares will be required to receive 
either a prospectus or, as discussed below, a product description of 
the iShares.\48\ 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.
---------------------------------------------------------------------------

    \48\ As noted above, iShares, Inc. 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. 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.
    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 characteristics of the specific Index Fund and of 
applicable Exchange rules, as well as the requirements of Amex rule 
411. Amex rule 411 generally requires that member use due diligence to 
learn the essential facts relative to every customer, every order or 
account accepted.\49\
---------------------------------------------------------------------------

    \49\ See Amex Rule 411.
---------------------------------------------------------------------------

    The Information Circular will also disclose the time that the NAV 
is determined for a particular Fund and will disclose that for Funds 
holding shares of Korean, Malaysian, Taiwanese and Brazilian companies 
that the Fund will charge creation and redemption fees intended to 
offset brokerage costs associated with cash creations and redemption. 
It will also inform members and member organizations, prior to 
commencement of trading, of prospectus or product description delivery 
requirements applicable to iShares MSCI Index Funds.

C. Listing and Trading of iShares

    The Commission finds that adequate rules and procedure 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,\50\ including, among others, rules governing trading 
halts,\51\ responsibilities of the specialist, account opening and 
customer suitability requirements, and the election of stop and stop 
limit orders.
---------------------------------------------------------------------------

    \50\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Legal & Regulatory Division, Amex and Steven 
Johnston, Special Counsel, Division, Commission, October 25, 2001.
    \51\ In addition to other factors that may be relevant, the Amex 
may consider factors such as those set forth in Amex Rule 918(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,\52\ 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 markets. The de listing 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 vent that iShares became a surrogate for trading a 
single or few unregistered

[[Page 55721]]

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.
---------------------------------------------------------------------------

    \52\ See 1996 Order.
---------------------------------------------------------------------------

    As noted above, the Amex expects to require that a minimum of two 
Creation Units (100,000 iShares) to 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 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.

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 
Funds prospectus and statement of additional information (``SAI''), the 
Commission believes that concerns regarding potential abuse are 
minimized.\53\ The Amex's existing surveillance procedure 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.
---------------------------------------------------------------------------

    \53\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Legal & Regulatory Division, Amex and Florence E. 
Harmon, Senior Special Counsel, Division, Commission, October 25, 
2001.
---------------------------------------------------------------------------

E. Stop and Stop Limited 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 or 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.\54\
---------------------------------------------------------------------------

    \54\ See generally Securities Exchange Act Release No. 29063 
(April 10, 1991), 56 FR 15652 (April 17, 1999) (order approving File 
No. SR-Amex-90-31) (relating to stop and stop limit orders in 
certain equity securities).
---------------------------------------------------------------------------

F. Surveillance

    The Amex represents that the Exchange surveillance procedures 
applicable to trading in the proposed iShares MSCI Index Funds are the 
same as those applicable to iShares currently trading on the Exchange.
    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.

G. Use of Non-Public Information

    The Commission notes that when 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 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 MSCI indexes underlying the Index 
Funds. The Commission believes,\55\ 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.
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 42748 (May 2, 
2000), 65 FR 30155 (May 10, 2000) (order approving File No. SR-Amex-
98-49)
---------------------------------------------------------------------------

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 represents that Indicative Portfolio Value will be 
disseminated through the facilities of the CTA every 15 seconds from 
9:30 a.m. to 4 p.m.Eastern time. 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.
    The daily index value and the percentage change in the daily 
closing index value for every MSCI country and regional index will be 
publicly available on the MSCI website at www.mscidata.com. In addition 
the website for the Funds, 222.ishares.com, contains detailed 
information on the performance of each Fund, and the tracking error for 
each fund.
    The NAV for each Index Fund will be calculated and disseminated 
daily. The NAV for the iShares MSCI Pacific (Free) Ex Japan Index Fund 
will be determined as of 8:30 a.m. Eastern Time; the time for NAV 
determination for the other Index Funds that are the subject of this 
filing will be established by iShares, Inc. prior to start-up of 
trading and will be publicly disclosed by the Funds. 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.\56\
---------------------------------------------------------------------------

    \56\ See Amendment No. 1, supra, footnote 3.
---------------------------------------------------------------------------

    The Amex also will disseminate for each Index Fund on a daily basis 
by means of CTA and CQ High Speed Lines information with respect to the 
Indicative Optimized Portfolio Value (as discussed below) and shares

[[Page 55722]]

outstanding, prior to the opening of the Amex. The Exchange will also 
disseminate the NAV and final dividend amounts to be paid for each Fund 
on amextrader.com.
    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 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.\57\
---------------------------------------------------------------------------

    \57\ See Amendment No. 4, supra, footnote 6.
---------------------------------------------------------------------------

I. Scope of the Commission's Order

    The Commission is approving the 7 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 of 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 
strengthens the Amex's proposal by, among other things, stating that 
the Exchange will disclose, in an Information Circular that Funds 
holding shares of Korean, Malaysian, Taiwanese and Brazilian companies 
will charge creation and redemption fees intended to offset brokerage 
costs associated with cash creations and redemptions; and representing 
that MSCI has implemented procedures to prevent the misuse of material 
non-public information regarding MSCI indices. Amendment No. 2 
clarifies the proposal by, among other things, noting that Fund 
Participants are limited to DTC Participants and clarifying the level 
of the Funds' investment in their Underlying Indices. Amendment No. 2 
further clarified the proposal explaining that fees assessed in 
connection with Funds trading in countries where in-kind purchases of 
securities are precluded, are assessed in part to cover market impact 
costs. Amendment No. 4 also strengthened the proposal by requiring, 
among other things, that the Fund prospectus will disclose the possible 
market impact of a Fund buying or selling securities in those countries 
prior to calculation of the NAV. Amendment No. 4 clarified the proposal 
by, among other things, further delineating the level of the Funds 
investment in their Underlying Indices. Accordingly, the Commission 
believes that there is good cause, consistent with sections 6(b)(5) and 
19(b)(2) of the Act,\58\ to approve the proposal and Amendment Nos. 1, 
2, 3, and 4 to the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-Amex-2001-45), as amended, is 
approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27524 Filed 11-1-01; 8:45 am]
BILLING CODE 8010-01-M