[Federal Register Volume 67, Number 147 (Wednesday, July 31, 2002)]
[Notices]
[Pages 49715-49724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19314]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46252; File No. SR-Amex-2001-35]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 thereto by the American Stock Exchange LLC Relating to Seven Series 
of the iShares Trust Based on a Specified U.S. Treasury or Corporate 
Bond Index

July 24, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 49716]]

 (``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 29, 2001, the American Stock Exchange LLC (the 
``Amex'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. On June 28, 2002, the Amex submitted Amendment No. 1 to the 
proposed rule change.\3\ On July 23, 2002, Amex submitted Amendment No. 
2 to the proposed rule change.\4\ The Commission is publishing this 
notice, as amended, to solicit comments on the proposed rule change 
from interested persons, and to grant accelerated approval.
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    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ This notice, representing Amendment No. 1, replaces the 
original Rule 19b-4 filing in its entirety.
    \4\ See letter from Michael Cavalier, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission (Amendment No. 2). In 
Amendment No. 2, the Exchange provided additional information 
regarding the availability of quote and pricing information relating 
to U.S. government, corporate and non-corporate (other than U.S. 
government) debt securities underlying the iShares Trust series that 
are the subject of this proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Amex proposes to amend Amex Rule 1000A (``Index Fund Shares'') to 
accommodate listing of Index Fund Shares based on indexes of fixed 
income securities. The proposed rule change will accommodate listing on 
the Exchange of the following series of the iShares Trust: iShares 1-3 
Year Treasury Index Fund, iShares 7-10 Year Treasury Index Fund, 
iShares 20+ Year Treasury Index Fund, iShares Treasury Index Fund, 
iShares Government/Credit Index Fund, iShares Lehman Corporate Bond 
Fund, and iShares Goldman Sachs Corporate Bond Fund. The text of the 
proposed rule change is as follows. New text is italicized.

Index Fund Shares

Rule 1000A
    (a) No change.
    Definitions. The following terms as used in the Rules shall, unless 
the context otherwise requires, have the meanings herein specified: (1) 
Index Fund Share. The term ``Index Fund Share'' means a security (a) 
that is issued by an open-end management investment company based on a 
portfolio of stocks or fixed income securities that seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specified foreign or domestic stock index or fixed 
income securities index; (b) that is issued by such an open-end 
management investment company in a specified aggregate minimum number 
in return for a deposit of specified numbers of shares of stock and/or 
a cash amount, or a specified portfolio of fixed income securities and/
or a cash amount, with a value equal to the next determined net asset 
value; and (c) that, when aggregated in the same specified minimum 
number, may be redeemed at a holder's request by such open-end 
investment company which will pay to the redeeming holder the stock 
and/or cash or fixed income securities and/or cash, with a value equal 
to the next determined net asset value.

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

Purpose
    Amex Rule 1000A provides standards for listing Index Fund Shares, 
which are securities issued by an open-end management investment 
company (open-end mutual fund) for Exchange trading. These securities 
are registered under the Investment Company Act of 1940 (``1940 Act'') 
as well as the Securities Act of 1933 (``Securities Act'') and the 
Exchange Act. The Exchange currently trades over 80 different index 
funds under Rule 1000A based on various stock indexes, including more 
than 50 series of the iShares Trust (``Trust''), which is registered 
with the Commission as an open-end management investment company.
    Index Fund Shares are defined in Rule 1000A as securities based on 
a portfolio of stocks that seeks to provide investment results that 
correspond generally to the price and yield performance of a specified 
foreign or domestic stock index. The Exchange is proposing to amend 
this definition to permit listing of index-based fixed income 
investment products that are not based in any way on a stock index, but 
instead are based on an index of fixed income securities, which would 
encompass U.S. government securities and corporate and non-corporate 
(other than U.S. government) debt securities. As amended, Rule 1000A 
would accommodate listing of U.S. government debt securities (e.g., 
securities issued or guaranteed by the U.S. Treasury, an agency or 
instrumentality of the U.S. government, or by a government-sponsored 
entity). Other 1940 Act investment products that could be listed under 
Rule 1000A, as amended, would include Index Fund Shares based on an 
index of corporate and/or non-corporate debt securities, or an index 
consisting of U.S. government, corporate and non-corporate debt 
securities.\5\
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    \5\ Index Fund Shares based on a fixed income securities index 
are not eligible for listing under the Amex's generic listing 
criteria (Rule 1000A, Commentary .02). Therefore, the Exchange will 
file proposed rule changes prior to listing additional series of 
such Index Fund Shares pursuant to Rule 19b-4 under the Exchange 
Act.
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    The Exchange therefore, proposes to amend Rule 1000A(b) to specify 
that Index Fund Shares may be: (1) Based on a portfolio of fixed income 
securities, (2) issued by an investment company in return for a 
specified portfolio of fixed income securities and/or cash, and (3) 
redeemed at a holder's request by the investment company, which will 
pay the redeeming holder fixed income securities and/or cash.
    The Exchange proposes to list under Rule 1000A as proposed to be 
amended the following seven additional series of the Trust, each a 
``New Fund'': iShares 1-3 Year Treasury Index Fund; iShares 7-10 Year 
Treasury Index Fund, iShares 20+ Year Treasury Index Fund, iShares 
Treasury Index Fund, iShares Government/Credit Index Fund, iShares 
Lehman Corporate Bond Fund, and iShares Goldman Sachs Corporate Bond 
Fund.
    Each New Fund will hold certain fixed income securities selected to 
correspond generally to the price and yield performance of a specified 
U.S. Treasury, Government/Credit, or Corporate Bond (each, an 
``Underlying Index'') maintained either by Lehman Brothers, or, for the 
Goldman Sachs Corporate Bond Fund, by Goldman Sachs and Co.\6\
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    \6\ On June 18, 2002, Goldman, Sachs & Co. announced changes to 
the Goldman Sachs Index, which underlies the iShares Goldman Sachs 
Corporate Bond Fund. As of July 1, 2002, the composition of the 
index will be expanded from 30 to 100 investment grade bonds and the 
index will be permitted to include more than one bond per issuer. 
See Business Wire, June 18, 2002, ``Goldman Sachs Expands Corporate 
Bond Index to Enhance Market Representation.'' A description of the 
revised index is publicly available in the Commission's Public 
Reference Room.

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[[Page 49717]]

    Barclays Global Fund Advisors (the ``Advisor'' or ``BGFA'') is the 
investment adviser to each New Fund. The Advisor is registered under 
the Investment Advisers Act of 1940. The Advisor is a wholly owned 
subsidiary of Barclays Global Investors, N.A. (``BGI''). BGI is a 
wholly owned indirect subsidiary of Barclays Bank PLC of the United 
Kingdom.
    SEI Investments Distribution Co. (the ``Distributor''), a 
Pennsylvania corporation and broker-dealer registered under the 
Exchange Act, is the principal underwriter and distributor of Creation 
Unit Aggregations (as defined below) of iShares. The Distributor is not 
affiliated with the Exchange or the Advisor.
a. Operation of the New Funds
    1. Investment Objectives. The investment objective of each New 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 New Fund will utilize 
``passive'' indexing investment strategies. Each New Fund may fully 
replicate its Underlying Index, but currently intends to use a 
``representative sampling'' strategy to track its Underlying Index. A 
Fund utilizing a representative sampling strategy generally will hold a 
basket of the component securities (``Component Securities'') of its 
Underlying Index, but it may not hold all of the Component Securities 
of its Underlying Index (as compared to a Fund that uses a replication 
strategy which invests in substantially all of the Component Securities 
in its Underlying Index in the same approximate proportions as in the 
Underlying Index).\7\
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    \7\ The Commission approved an ``Application'' by The Trust, 
Advisor and Distributor (``Applicants'') for an Order under Sections 
6(c) and 17(b) of the 1940 Act for the purpose of exempting the New 
Funds of the Trust from various provisions of the 1940 Act with the 
Commission. See Investment Company Act Release No. 25622 (June 25, 
2002) (approving File No. 812-12390). The information provided in 
this Rule 19b-4 filing relating to the New Funds is based on 
information included in the Application and Order which include 
additional information regarding the Trust and the New Funds.
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    When using a representative sampling strategy, the Advisor attempts 
to match the risk and return characteristics of a New Fund's portfolio 
to the risk and return characteristics of the Underlying Index. As part 
of this process, the Advisor subdivides each Underlying Index into 
smaller, more homogeneous pieces. These subdivisions are sometimes 
referred to as ``cells.'' A cell will contain securities with similar 
characteristics. For fixed income indices, the Advisor generally 
divides the index according to the five parameters that determine a 
bond's risk and expected return: (1) Duration, (2) sector, (3) credit 
rating, (4) coupon, and (5) the presence of embedded options. When 
completed, all bonds in the index will have been assigned a cell. The 
Advisor then begins to construct the portfolio by selecting 
representative bonds from these cells. The representative sample of 
bonds chosen from each cell is designed to closely correlate to the 
duration, sector, credit rating, coupon, and embedded option 
characteristics of each cell. The characteristics of each cell when 
combined are, in turn, designed to closely correlate to the duration, 
sector, credit rating, coupon, and embedded option characteristics of 
the Underlying Index as a whole. The Advisor may exclude less liquid 
bonds in order to create a more tradable portfolio and improve 
arbitrage opportunities.\8\
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    \8\ As stated in the Application, the Goldman Sachs Index 
excludes bonds with embedded options. Although the Lehman Indices 
may include bonds with embedded options, according to the 
Application the bonds in each Lehman Index (and the respective 
Deposit Securities and Fund Securities, as defined below) should be 
liquid and easily tradable because each Lehman Index consists of 
U.S. Treasury and agency securities and/or liquid corporate and non-
corporate bonds. To the extent a particular bond is less liquid than 
another bond with similar characteristics, the Advisor's 
representative sampling techniques should permit the Advisor to 
replace the less liquid bond with a more liquid one. For these 
reasons, the Advisor does not believe the presence of bonds with 
embedded options in an Underlying Index, the Deposit Securities, or 
Fund Securities would have any material impact on the creation/
redemption process and the efficiency of the arbitrage mechanism for 
each New Fund.
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    According to the Application, the representative sampling 
techniques used by the Advisor to manage fixed income funds do not 
materially differ from the representative sampling techniques it uses 
to manage equity funds. Due to the differences between bonds and 
equities, the Advisor analyzes different information--such as dividend 
payments instead of coupon rates, for example.
    According to the Application, the New Funds' use of the 
representative sampling strategy is beneficial for a number of reasons. 
First, the Advisor can avoid bonds that are ``expensive names'' (i.e., 
bonds that trade at perceived higher prices or lower yields because 
they are in short supply) but have the same essential risk, value, 
duration and other characteristics as less expensive names. Second, the 
use of representative sampling techniques permits the Advisor to 
exclude bonds that it believes will soon be deleted from the Underlying 
Index. Third, the Advisor can avoid holding bonds it deems less liquid 
than other bonds with similar characteristics. Fourth, the Advisor can 
develop a basket that is easier to construct and cheaper to trade, 
thereby potentially improving arbitrage opportunities.
    From time to time, adjustments may be made in the portfolio of each 
New Fund in accordance with changes in the composition of the 
Underlying Index or to maintain compliance with requirements applicable 
to a regulated investment company (``RIC'') under the Internal Revenue 
Code. For example, if at the end of a calendar quarter a New Fund would 
not comply with the RIC diversification tests, the Advisor would make 
adjustments to the portfolio to ensure continued RIC status. The 
Exchange notes, however, that the Advisor does not anticipate that the 
New Funds would need to make such adjustments, particularly since these 
New Funds (other than the iShares Lehman Corporate Bond Fund and the 
iShares Goldman Sachs Corporate Bond Fund) invest a very large 
percentage of their assets in U.S. Treasury securities.
    The Exchange represents that the Advisor expects that each New Fund 
will have a tracking error relative to the performance of its 
respective Underlying Index of no more than five percent (5%). Each New 
Fund's investment objectives, policies and investment strategies will 
be fully disclosed in its prospectus (``Prospectus'') and statement of 
additional information (``SAI''). At least 90% of each of the iShares 
1-3 Year Treasury Index Fund, iShares 7-10 Year Treasury Index Fund, 
iShares 20+ Year Treasury Index Fund, iShares Treasury Index Fund, and 
iShares Government/Credit Index Fund's assets will be invested in 
Component Securities of its respective Underlying Index. Each of these 
New Funds may also invest up to 10% of its assets in bonds not included 
in its Underlying Index, but which the Advisor believes will help the 
New Fund track its Underlying Index, as well as in certain futures, 
options and swap contracts, cash and cash equivalents. For example, 
these New Funds may invest in securities not included in the relevant 
Underlying Index in order to reflect prospective changes in the 
relevant Underlying Index (such as future corporate actions and index 
reconstitutions, additions and deletions). Each of the iShares Lehman 
Corporate Bond Fund and the iShares Goldman Sachs Corporate Bond Fund

[[Page 49718]]

generally will invest at least 90% of its assets in Component 
Securities of its respective Underlying Index. However, each of the 
iShares Lehman Corporate Bond Fund and the iShares Goldman Sachs 
Corporate Bond Fund may at times invest up to 20% of its assets in 
certain futures, options and swap contracts, cash and cash equivalents 
as well as in bonds not included in its Underlying Index, but which the 
Advisor believes will help the New Fund track its Underlying Index and 
which are either (i) included in the broader index upon which such 
Underlying Index is based (i.e., the Lehman Credit Index for the Lehman 
Credit VLI Index or the Goldman Sachs Investment Grade Index for the 
Goldman Sachs InvesTop Index); or (ii) new issues entering or about to 
enter the Underlying Index or the broader index upon which such 
Underlying Index is based.
b. Issuance of Creation Unit Aggregations
    1. In General. Shares of each New 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 New Funds will issue and redeem iShares only in Creation Unit 
Aggregations.\9\ As with other open-end investment companies, iShares 
will be issued at the net asset value (``NAV'') per share next 
determined after an order in proper form is received. The anticipated 
price at which the iShares will initially trade is approximately $100.
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    \9\ Each Creation Unit Aggregation will consist of 50,000 or 
more iShares and the estimated initial value per Creation Unit 
Aggregation will be approximately $5 million.
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    The NAV per share of each New Fund is determined as of the close of 
the regular trading session on the Amex on each day that the Amex is 
open. The Trust sells Creation Unit Aggregations of each New Fund only 
on business days at the next determined NAV of each New Fund.
    Creation Unit Aggregations will be issued by each New Fund in 
exchange for the in-kind deposit of a portfolio securities designated 
by the Advisor to correspond generally to the price and yield 
performance of the New Fund's Underlying Index (the ``Deposit 
Securities''). Purchasers will generally be required to deposit a 
specified cash payment in the manner more fully described in the 
Application. Creation Unit Aggregations will be redeemed by each New 
Fund in exchange for portfolio securities of the New Fund (``Fund 
Securities'') and a specified cash payment in the manner more fully 
described herein. 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.
    The Distributor will act on an agency basis and will be the Trust's 
principal underwriter for the iShares in Creation Unit Aggregations of 
each New Fund. All orders to purchase iShares in Creation Unit 
Aggregations must be placed with the Distributor by or through an 
authorized participant (``Authorized Participant''). Authorized 
Participants, which are required to be Depository Trust Company 
(``DTC'') participants, must enter into a participant agreement with 
the Distributor. The Distributor will transmit such orders to the 
applicable New Fund and furnish to those placing orders confirmation 
that the orders have been accepted. The Distributor may reject any 
order that is not submitted in proper form. The Distributor will be 
responsible for delivering the prospectus to those persons creating 
iShares in Creation Unit Aggregations and for maintaining records of 
both the orders placed with it and the confirmations of acceptance 
furnished by it. In addition, the Distributor will maintain a record of 
the instructions given to the Trust to implement the delivery of 
iShares.
    2. In-Kind Deposit of Portfolio Securities. Payment for Creation 
Unit Aggregations placed through the Distributor will be made by the 
purchasers generally by an in-kind deposit with the New Fund of the 
Deposit Securities together with an amount of cash (the ``Balancing 
Amount'') specified by the Advisor in the manner described below. The 
Balancing Amount is an amount equal to the difference between (1) the 
NAV (per Creation Unit Aggregation) of the New Fund and (2) the total 
aggregate market value (per Creation Unit Aggregation) of the Deposit 
Securities (such value referred to herein as the ``Deposit Amount''). 
The Balancing Amount serves the function of compensating for 
differences, if any, between the NAV per Creation Unit Aggregation and 
that of the Deposit Amount. The deposit of the requisite Deposit 
Securities and the Balancing Amount are collectively referred to herein 
as a ``Portfolio Deposit.''
    The Advisor will make available to the market through the National 
Securities Clearing Corporation (the ``NSCC'') on each Business Day, 
prior to the opening of trading on the Amex (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 New Fund. The Portfolio Deposit will be applicable to a New 
Fund (subject to any adjustments to the Balancing Amount, as described 
below) in order to effect purchases of Creation Unit Aggregations of 
the New Fund until such time as the next-announced Portfolio Deposit 
composition is made available.
    The identity and number of shares of the Deposit Securities 
required for the Portfolio Deposit for each New 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 New 
Fund, or resulting from rebalance or additions or deletions to the 
relevant Underlying Index. In addition, the Trust reserves the right 
with respect to each New 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: (1) that may be 
unavailable or not available in sufficient quantity for delivery to the 
Trust upon the purchase of iShares in Creation Unit Aggregations, or 
(2) that may not be eligible for trading by an Authorized Participant 
or the investor on whose behalf the Authorized Participant is acting.
c. Availability of Information Regarding iShares and Underlying Indices
    On each Business Day the list of names and amount of each treasury 
security, government security or corporate bond constituting the 
current Deposit Securities of the Portfolio Deposit and the Balancing 
Amount effective as of the previous Business Day will be made 
available. An amount per iShare representing the sum of the estimated 
Balancing Amount effective through and including the previous Business 
Day, plus the current value of the Deposit Securities, on a per iShare 
basis (the Intra-day Optimized Portfolio Value'' or ``IOPV'') will be 
calculated by Bloomberg L.P. (``Bloomberg'') every 15 seconds during 
the Amex's regular trading hours and disseminated every 15 seconds by 
Bloomberg and by Amex on Consolidated Tape B. Bloomberg will use 
Bloomberg Generic Prices (''BGN

[[Page 49719]]

Prices'') to reflect changing bond prices and update the IOPV 
throughout the day. BGN Prices are current prices on individual bonds 
as determined by Bloomberg using an automated pricing program that 
analyzes multiple bond prices contributed to Bloomberg by third-party 
price contributors (such as broker-dealers). BGN Prices are updated 
throughout the day based on an ongoing analysis of the bid/ask prices 
submitted by the third-party price contributors. When Bloomberg 
receives bid/ask prices from a price contributor, the prices are 
filtered and screened according to pre-determined criteria and set 
parameters in order to maximize the accuracy of the pricing data. The 
net result of this process is an individual bond ``price'' based on an 
analysis of multiple pricing sources. BGN Prices are available on 
Bloomberg systems, and Applicants expect that the pricing of the 
Deposit Securities will be transparent to anyone with access to 
Bloomberg systems.
    Quote and trade information regarding Treasury securities is widely 
available to market participants from a variety of sources. The 
electronic trade and quote systems of the dealers and interdealer 
brokers are one such source. Groups of dealers and interdealer brokers 
also furnish trade and quote information to vendors such as Bloomberg, 
Reuters, Bridge, Moneyline Telerate, and CQG. GovPX,\10\ for example, 
is a consortium of leading government securities dealers and 
subscribers that provides market data from leading government 
securities dealers and interdealer brokers to market data vendors and 
subscribers. TradeWeb, another example, is a consortium of 18 primary 
dealers that, in addition to providing a trading platform, also 
provides market data direct to subscribers or to other market data 
vendors.\11\
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    \10\ See www.govpx.com.
    \11\ See www.tradeweb.com.
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    Pricing information for corporate and non-corporate securities is 
also available. For instance, real-time price quotes for corporate and 
non-corporate debt securities are available to institutional investors 
via proprietary systems such as Bloomberg, Reuters and Dow Jones 
Telerate. Additional analytical data and pricing information may also 
be obtained through vendors such as Bridge Information Systems, Muller 
Data, Capital Management Sciences, Interactive Data Corporation and 
Barra.
    Retail investors do have access to free intra-day bellwether 
quotes.\12\ The Bond Market Association provides links to price and 
other bond information sources on its investor web site at 
http://www.investinginbonds.com. In addition, transaction prices and 
volume data for the most actively-traded bonds on the exchanges are 
published daily in newspapers and on a variety of financial websites. 
Closing corporate and non-corporate bond prices are also available 
through subscription services (e.g., IDC, Bridge) that provide 
aggregate pricing information based on prices from several dealers, as 
well as subscription services from broker-dealers with a large bond 
trading operation, such as Lehman Brothers and Goldman Sachs.
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    \12\ Corporate prices are available at 20 minute intervals from 
Capital Management Services at www.bondvu.com/quotmenu.htm.
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    The Lehman Indices and the Goldman Sachs Index will not be 
calculated or disseminated intra-day. The value and return of each 
Lehman Index is updated on a daily basis by Lehman Brothers. The value 
and return of the Goldman Sachs Index is updated on a daily basis by 
Goldman Sachs.
    Each New Fund will make available through NSCC on a daily basis the 
names and required number of shares of each of the Deposit Securities 
in a Creation Unit Aggregation, as well as information regarding the 
Balancing Amount. The NAV for each New Fund will be calculated and 
disseminated daily. The Amex also intends to disseminate a variety of 
data with respect to each New Fund on a daily basis by means of CTA and 
CQ High Speed Lines; information with respect to recent NAV, shares 
outstanding, estimated cash amount and total cash amount per Creation 
Unit Aggregation will be made available prior to the opening of the 
Amex. The closing prices of the New Funds' Deposit Securities are 
readily available from published or other public sources, or on-line 
information services provided by Merrill Lynch, IDC, Bridge, Bloomberg, 
Lehman Brothers and other pricing services commonly used by bond mutual 
funds. In addition, the website for the Trust, which will be publicly 
accessible at no charge, will contain the following information, on a 
per iShare basis, for each New Fund: (a) the prior Business Day's NAV 
and the mid-point of the bid-ask price at the time of calculation of 
such NAV (''Bid/Ask Price''), \13\ 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 
Bid/Ask Price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters.
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    \13\ The Bid-Ask Price of a New Fund is determined using the 
highest bid and lowest offer on the Exchange as of the time of 
calculation of each New Fund's NAV.
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d. Redemption of iShares
    Creation Unit Aggregations of each New Fund will be redeemable at 
the NAV next determined after receipt of a request for redemption. 
Creation Unit Aggregations of each New Fund will be redeemed 
principally in-kind, together with a balancing cash payment (although, 
as described below, Creation Unit Aggregations may sometimes be 
redeemed for cash). The value of each New Fund's redemption payments on 
a Creation Unit Aggregation basis will equal the NAV per the 
appropriate number of iShares of such New Fund. Owners of iShares may 
sell their iShares in the secondary market, but must accumulate enough 
iShares to constitute a Creation Unit Aggregation in order to redeem 
through the New Fund. Redemption orders must be placed by or through an 
Authorized Participant.
    Creation Unit Aggregations of any New Fund generally will be 
redeemable on any Business Day in exchange for Fund Securities and the 
Cash Redemption Payment (defined below) in effect on the date a request 
for redemption is made. The Advisor will publish daily through NSCC the 
list of securities which a creator of Creation Unit Aggregations must 
deliver to the Fund (the ``Creation List'') and which a redeemer will 
receive from the New Fund (the ``Redemption List''). The Creation List 
is identical to the list of the names and the required numbers of 
shares of each Deposit Security included in the current Portfolio 
Deposit.
    In addition, just as the Balancing Amount is delivered by the 
purchaser of Creation Unit Aggregations to the New Fund, the Trust will 
also deliver to the redeeming Beneficial Owner in cash the ``Cash 
Redemption Payment.'' The Cash Redemption Payment on any given Business 
Day will be an amount calculated in the same manner as that for the 
Balancing Amount, although the actual amounts may differ if the Fund 
Securities received upon redemption are not identical to the Deposit 
Securities applicable for creations on the same day. To the extent that 
the Fund Securities have a value greater than the NAV of iShares being 
redeemed, a cash payment equal to the differential is required to be 
paid by the redeeming Beneficial Owner to the New Fund. The Trust may 
also make redemptions in cash in lieu of transferring one or more

[[Page 49720]]

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.
e. Clearance and Settlement
    The Deposit Securities and Fund Securities of each New Fund will 
settle via free delivery through the Federal Reserve system for U.S. 
government securities and the DTC for corporate securities and non-
corporate (other than U.S. government securities). The iShares will 
settle through the DTC. The Custodian will monitor the movement of the 
Deposit Securities and will instruct the movement of the iShares only 
upon validation that the Deposit Securities have settled correctly or 
that required collateral is in place.
    As with the settlement of domestic ETF transactions outside of the 
NSCC Continuous Net Settlement System (the ``CNS System''), (i) iShares 
of the New Funds and corporate and non-corporate securities (other than 
U.S. government securities) will clear and settle through DTC, and (ii) 
U.S. government securities and cash will clear and settle through the 
Federal Reserve system. More specifically, creation transactions will 
settle as follows. On settlement date (T + 3) an Authorized Participant 
will transfer Deposit Securities that are corporate and non-corporate 
bonds (other than U.S. government securities) through DTC to a DTC 
account maintained by the New Funds' Custodian, and Deposit Securities 
that are U.S. government securities, together with any Balancing 
Amount, to the Custodian through the Federal Reserve system. Once the 
Custodian has verified the receipt of all of the Deposit Securities (or 
in the case of failed delivery of one or more bonds, collateral in the 
amount of 105% or more of the missing Deposit Securities) and the 
receipt of any Balancing Amount, the Custodian will notify the 
Distributor and the Advisor. The Fund will issue Creation Unit 
Aggregations of iShares and the Custodian will deliver the iShares to 
the Authorized Participant through DTC. DTC will then credit the 
Authorized Participant's DTC account. The clearance and settlement of 
redemption transactions essentially reverses the process described 
above. After the Trust has received a redemption request in proper form 
and the Authorized Participant transfers Creation Unit Aggregations of 
iShares to the New Funds' Custodian through DTC, the Trust will cause 
the Custodian to initiate procedures to transfer the requisite Fund 
Securities and any Cash Redemption Payment. On T + 3, assuming the 
Custodian has verified receipt of the Creation Unit Aggregations, the 
Custodian will transfer Fund Securities that are corporate and non-
corporate bonds to the Authorized Participant through DTC and Fund 
Securities that are U.S. government securities, together with any Cash 
Redemption Payment, through the Federal Reserve system.
    iShares of the New Funds will be debited or credited by the 
Custodian directly to the DTC accounts of the Authorized Participants. 
With respect to domestic equity-based ETFs using the CNS System, 
Creation Unit Aggregations of iShares are deposited or charged to the 
Authorized Participants' DTC accounts through the CNS System. Since 
creation/redemption transactions for iShares of the New Funds will not 
clear and settle through the CNS System, the failed delivery of one or 
more Deposit Securities (on a create) or one or more Fund Securities 
(on a redemption) will not be facilitated by the CNS System. Therefore, 
Authorized Participants will be required to provide collateral to cover 
the failed delivery of Deposit Securities in connection with an ``in-
kind'' creation of iShares. In case of a failed delivery of one or more 
Deposit Securities, the New Funds will hold the collateral until the 
delivery of such Deposit Security. The New Funds will be protected from 
failure to receive the Deposit Securities because the Custodian will 
not effect the Fund's side of the transaction (the issuance of iShares) 
until the Custodian has received confirmation of receipt of the 
Authorized Participant's incoming Deposit Securities (or collateral for 
failed Deposit Securities) and Balancing Amount. In the case of 
redemption transactions, the New Funds will be protected from failure 
to receive Creation Unit Aggregations of iShares because the Custodian 
will not new effect the New Fund's side of the transaction (the 
delivery of Fund Securities and the Cash Redemption Payment) until the 
Transfer Agent has received confirmation of receipt of the Authorized 
Participant's incoming Creation Unit Aggregations. In order to simplify 
the transfer agency process and align the settlement of iShares of the 
New Funds with the settlement of the Deposit Securities and Fund 
Securities, Applicants plan to settle transactions in U.S. government 
securities, corporate bonds, non-corporate bonds (other than U.S. 
Government securities) and iShares on the same T + 3 settlement cycle. 
Amex represents that according to the Application, the clearance and 
settlement process will not affect the arbitrage of iShares in the New 
Fund.\14\
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    \14\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
and Michael Milone, Attorney, Division, Commission, on July 17, 
2002.
---------------------------------------------------------------------------

f. Dividends and Distributions
    Dividends from net investment income will be declared and paid to 
Beneficial Owners of record at least annually by each New Fund. Certain 
of the New Funds may pay dividends, if any, on a quarterly or more 
frequent basis. Distributions of realized securities gains, if any, 
generally will be declared and paid once a year, but each New Fund may 
make distributions on a more frequent basis to comply with the 
distribution requirements of the Internal Revenue Code and consistent 
with the 1940 Act.
    Dividends and other distributions on iShares of each New Fund will 
be distributed on a pro rata basis to Beneficial Owners of such 
iShares. Dividend payments will be made through the Depository and the 
DTC Participants to Beneficial Owners then of record with amounts 
received from each New Fund.
    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 such 
investor's broker to ascertain the availability and a description of 
the Service through such broker. The SAI will also caution interested 
Beneficial Owners that they should note that each broker may require 
investors to adhere to specific procedures and timetables in order to 
participate in the Service and such investors should ascertain from 
their broker such necessary details. 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.
g. Other Issues
1. Criteria for Initial and Continued Listing
    iShares are subject to the criteria for initial and continued 
listing of Index

[[Page 49721]]

Fund Shares in Rule 1002A. It is anticipated 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 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 to seek to provide 
investment results that correspond generally to the price and yield 
performance of the Index.
2. Original and Annual Listing Fees
    The Amex original listing fee applicable to the listing of the New 
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.
3. 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 a 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, as eligible for this 
treatment. See Release No. 34-29063, note 9, (SR-Amex-90-31) regarding 
Exchange designation of equity derivative securities as eligible for 
such treatment under Rule 154, Commentary .04(c).
4. Rule 190
    Rule 190, Commentary .04 applies to Index Fund Shares listed on the 
Exchange, including iShares. Commentary .04 states that nothing in 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 as appropriate to facilitate 
the maintenance of a fair and orderly market.
5. Prospectus 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 the prospectus or Product 
Description delivery requirements applicable to iShares. The Applicants 
have filed with the Commission's 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. 
\15\ Any product description used in reliance on a Section 24(d) 
exemptive order will comply with all representations made therein and 
all conditions thereto.
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    \15\ See Investment Company Act Release No. 25595 (May 29, 
2002), 67 FR 38684 (June 5, 2002) (Notice of Application for 
iShares, Inc., the Advisor, the Distributor, and the Trust). The 
Commission has granted such prospectus relief. See Investment 
Company Act Release No. 25623 (June 25, 2002).
---------------------------------------------------------------------------

6. 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 securities 
underlying the index, or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. \16\ In addition, trading in iShares will be halted 
if the circuit breaker parameters under Amex Rule 117 have been 
reached.
---------------------------------------------------------------------------

    \16\ See Amex Rule 918C.
---------------------------------------------------------------------------

7. 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).
8. Purchases 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.
9. Surveillance
    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. The Exchange represents that 
its surveillance procedures are adequate to properly monitor the 
trading of the New Funds. If the issuer or a broker-dealer is 
responsible for maintaining (or has a role in maintaining), or 
calculating the underlying Index, it would be required to erect and 
maintain a ``Fire Wall'' in a form satisfactory to the Exchange to 
prevent the flow of information regarding the underlying index from the 
index production personnel and index calculation personnel to the sales 
and trading personnel. The Exchange will implement surveillance 
procedures to monitor and prevent the misuse of material, non-public 
information in connection with the indices.
10. Hours of Trading/Minimum Price Variation
    The New Funds will trade on the Amex until 4:15 p.m. (Eastern 
time). The minimum price variation for quoting will be $0.01.
Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act in general and furthers the 
objectives of Section 6(b) 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 Exchange believes that the proposed rule change will not impose 
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, as amended, is consistent with

[[Page 49722]]

the Exchange 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 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 No. SR-Amex-2001-35 and should be 
submitted by August 21, 2002.

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

    After careful review, the Commission finds that implementation of 
the proposed rule change is consistent with the requirements of Section 
6 of the Exchange Act \17\ and the rules and regulations thereunder 
applicable to a national securities exchange.\18\ Specifically, the 
Commission believes that the proposal is consistent with Section 
6(b)(5) of the Exchange Act.\19\ The Commission believes that the 
Exchange's proposal to list and trade fixed income ETFs will provide 
investors with a convenient way of participating in the U.S. 
government, corporate and non-corporate (other than U.S. government) 
fixed income markets. The Exchange's proposal should help to provide 
investors with increased flexibility in satisfying their investment 
needs by allowing them to purchase and sell securities at negotiated 
prices throughout the business day that replicate the performance of 
several portfolios of stocks. The Commission believes that the 
availability of the New Funds will provide an instrument for investors 
to achieve desired investment results that correspond generally to the 
price and yield performance of the underlying U.S. Treasury, 
Government/Credit, or Corporate Bond Index. The investment objective of 
each New Fund will be to provide investment results that correspond 
generally to the price and yield performance of the underlying index 
based on fixed income securities. Accordingly, the Commission finds 
that the Exchange's proposal will facilitate transactions in 
securities, remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, protect 
investors and the public interest, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\20\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
    \20\ 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.
---------------------------------------------------------------------------

    iShares Trust and iShares, Inc. are each registered in the 1940 Act 
as an open-ended management investment company with multiple series. 
iShares Trust has created (or identified for creation) 66 separate 
series, while iShares, Inc. has created (or identified for creation) 35 
separate series. All of these series operate (or will operate) as ETFs 
pursuant to six prior exemptive orders from the 1940 Act, and each of 
the ETFs seeks to match the return of an equity securities index. 
Additionally, the Commission has granted the New Funds appropriate 
relief under various sections of the 1940 Act, including sections 6(c) 
and 17(b), so that each New Fund may register under the 1940 Act as an 
open-end fund and issue shares that are redeemable in Creation Units, 
shares of New Funds may trade in the secondary market at negotiated 
prices, and certain persons affiliated with a New Fund by reason of 
owning 5% or more, and in some cases more than 25%, of its outstanding 
securities may do in-kind purchases and redemptions of Creation 
Units.\21\
---------------------------------------------------------------------------

    \21\ Investment Company Act Release No. 25622 (June 25, 2002).
---------------------------------------------------------------------------

    Barclays is registered as an investment adviser under the 1940 Act 
and serves as the investment adviser to the series of iShares Trust and 
iShares, Inc. Distributor acts as the principal underwriter and 
distributor for iShares Trust and iShares, Inc.
    IShares Trust will create seven new series each of which operates 
as an ETF seeking to match the performance of a fixed income securities 
index. The seven indices are the following:
     Lehman Brothers 1-3 Year U.S. Treasury Index (containing 
U.S. Treasury securities with remaining maturities of between 1 and 3 
years);
     Lehman Brothers 7-10 Year U.S. Treasury Index (containing 
U.S. Treasury securities with remaining maturities of between 7 and 10 
years);
     Lehman 20+ Year U.S. Treasury Index (containing U.S. 
Treasury securities with remaining maturities of more than 20 years);
     Lehman U.S. Treasury Index (containing U.S. Treasury 
securities with remaining maturities of more than 1 year);
     Lehman Government/Credit Index (containing certain 
investment grade government and credit securities with maturities of 
more than 1 year);
     Lehman Credit VLI Index (containing the largest issues of 
investment grade credit securities with remaining maturities of more 
than 1 year); and
     Goldman Sachs InvesTop Index (containing the 100 most 
liquid and representative bonds in the U.S. investment grade corporate 
market with remaining maturities of at least 3 years).\22\
---------------------------------------------------------------------------

    \22\ As of July 1, 2002, the composition of the Goldman Sachs 
Index, which underlies the iShares Goldman Sachs Corporate Bond 
Fund, will be expanded from 30 to 100 investment grade bonds, and 
the index will be permitted to include more than one bond per 
issuer.
---------------------------------------------------------------------------

    The Commission notes that this is the first ETF based on an 
underlying index of fixed income securities (``Fixed Income ETFs''). 
The New Funds will operate in substantially the same manner as Equity 
ETFs. Like many other ETFs, each New Fund will use a representative 
sampling strategy to track its index. With a sampling strategy, a New 
Fund will seek to match the return of its index by holding some, but 
not all, of the fixed income securities contained in its underlying 
index. In constructing the portfolio for a New Fund, Barclays will 
select a sample of bonds that will correlate to the duration, sector, 
credit rating, coupon, and embedded option characteristics of the 
underlying index as a whole. Barclays may also exclude less liquid 
bonds in order to create a more tradable portfolio to enhance arbitrage 
efficiency. As with its Equity ETFs, Barclays represents that the New 
Funds will have a tracking error relative to the performance of their 
respective underlying indices of no more than 5%.
    Shares of the New Funds will be issued and redeemed in Creation 
Units priced at NAV in exchange for Portfolio Deposits and Redemption 
Baskets consisting of Bonds selected and announced by Barclays at the 
beginning of each business day.
    The Commission finds that the New Funds will provide benefits to 
investors in allowing investors to trade baskets of bonds in a single 
transaction at a cost comparable to that of trading existing

[[Page 49723]]

equity securities and will allow investors to trade baskets of bonds 
throughout the day and thereby permit them to take advantage of (or 
protect themselves against) intra-day market movements. The New Funds 
may make it easier for individual investors to diversify their 
portfolios across a broader range of assets and will provide 
institutional and other large investors with an alternative to futures 
for various hedging and other investment strategies that involve fixed 
income securities. Finally, the New Funds will provide investors with a 
fund product that discloses its portfolio on a daily basis rather than 
semi-annually.
    While the New Funds will be operated in a manner that closely 
parallels the manner in which Equity ETFs are operated, one key 
potential difference may be the efficiency of the arbitrage process. 
The arbitrage mechanism for Equity ETFs generally has caused the market 
price of ETF shares to track closely the NAV of the ETF shares. With 
respect to liquidity of the debt securities likely to be in the ETF 
portfolios, to the extent these debt securities could not be readily 
purchased and sold, the arbitrage process would be less efficient. 
However, the Commission notes that the New Funds will invest in some of 
the most liquid debt securities, including U.S. Government securities 
and investment grade corporate and non-corporate bonds.\23\ In 
addition, Barclays will employ a sampling method of portfolio 
management that would allow the New Funds to exclude any bonds 
contained in an underlying index that may not have sufficient liquidity 
for easy trading. As a result, the Commission believes that the New 
Funds have addressed the liquidity issues that might hamper arbitrage.
---------------------------------------------------------------------------

    \23\ The Lehman Government/Credit Index, Lehman Credit VLI 
Index, and Goldman Sachs InvesTop Index may include investment grade 
corporate and non-corporate bonds issued by non-U.S. issuers 
(sovereign, supra-national, foreign agency, and foreign local 
government). In Barclays' 1940 Act Application, it stated that these 
bonds will be dollar denominated, registered for sale in the U.S., 
and traded on U.S. markets at negotiated and readily available 
prices. Barclays does not believe that these bonds present any 
unique pricing or liquidity issues and does not expect the bonds to 
negatively affect arbitrage efficiency. The Commission notes that if 
any of these major characteristics of these fixed income indices 
(e.g., investment grade, face amount issued, maturity 
classification) were to materially change, the Commission would 
expect Amex to amend these listing standards accordingly.
---------------------------------------------------------------------------

    In addition, differences in the degree of price transparency in the 
debt and equity markets could lead to larger discounts and premiums for 
the New Funds than have been experienced by Equity ETFs. Specifically, 
because the pricing of debt securities can be less transparent than the 
pricing of equity securities, arbitrageurs might account for pricing 
uncertainty by waiting for greater premiums or discounts to develop in 
the market price of the ETF shares before engaging in arbitrage 
transactions.
    The Commission finds that because of the nature of the particular 
debt securities to be included in the portfolios of the New Funds 
(i.e., U.S. Government securities and investment grade corporate and 
non-corporate bonds), the pricing information should be available. The 
Exchange has indicated that real-time price quotes for corporate and 
non-corporate debt securities are available to institutional investors 
via proprietary systems such as Bloomberg, Reuters and Dow Jones 
Telerate. Additional analytical data and pricing information may also 
be obtained through vendors such as Bridge Information Systems, Muller 
Data, Capital Management Sciences, Interactive Data Corporation and 
Barra.
    The Exchange has also represented that retail investors would have 
access to free intra-day bellwether quotes.\24\ For instance, the Bond 
Market Association provides links to price and other bond information 
sources on its investor web site at http://www.investinginbonds.com. In 
addition, transaction prices and volume data for the most actively-
traded bonds on the exchanges are published daily in newspapers and on 
a variety of financial websites. Closing corporate and non-corporate 
bond prices are also available through subscription services (e.g., 
IDC, Bridge) that provide aggregate pricing information based on prices 
from several dealers, as well as subscription services from broker-
dealers with a large bond trading operation, such as Lehman Brothers 
and Goldman Sachs & Co.
---------------------------------------------------------------------------

    \24\ Corporate prices are available at 20 minute intervals from 
Capital Management Services at http://www.bondvu.com/quotmenu.htm.
---------------------------------------------------------------------------

    The Commission also believes that pricing information for the 
Treasury securities should also be available. Quote and trade 
information regarding Treasury securities is widely available to market 
participants from a variety of sources. The electronic trade and quote 
systems of the dealers and interdealer brokers are one such source. 
Groups of dealers and interdealer brokers also furnish trade and quote 
information to vendors such as Bloomberg, Reuters, Bridge, Moneyline 
Telerate, and CQG.
    Amex represents that it will disseminate every 15 seconds a price 
calculated by Bloomberg reflecting the current value of the Portfolio 
Deposit on a per ETF share basis for the New Funds. To calculate this 
intra-day value, Bloomberg intends to use Bloomberg Generic Prices, 
which are current prices for individual bonds as determined by 
Bloomberg using an automated pricing program that analyzed multiple 
bond prices contributed by third-part price contributors such as 
broker-dealers.\25\ According, Amex believes that the pricing of the 
bonds included in the Portfolio Deposit (and in the Redemption basket) 
will be transparent to anyone with access to Bloomberg systems. Because 
the arbitrageurs of ETF shares are generally large institutional 
investors, including broker-dealers, the Commission believes that these 
investors likely will have access to Bloomberg systems, as well as 
other bond pricing information sources that should permit efficient 
arbitrage to occur. While the Commission believes that differences in 
the liquidity and pricing transparency of the underlying fixed income 
markets, as compared to the equity markets, may result in the New Funds 
trading at slightly higher discounts and premiums, the Commission does 
not believe that this effect is likely to be so substantial as to 
undermine the benefits that New Funds will provide to the markets and 
to investors. The Commission expects the Exchange to review the 
discounts or premiums for these products and to respond appropriately 
if there is in fact a significant pricing disparity.
---------------------------------------------------------------------------

    \25\ The Lehman Indices and the Goldman Sachs Index will not be 
calculated or disseminated intra-day. The value and return of each 
Lehman Index is updated on a daily basis by Lehman Brothers. The 
value and return of the Goldman Sachs Index is updated on a daily 
basis by Goldman Sachs.
---------------------------------------------------------------------------

    The Commission has also granted the issuer, Barclays, exemptive 
relief from Section 24(d) of the 1940 Act so that dealers may effect 
secondary market transaction in Barclays ETF shares without delivery a 
prospectus to the purchaser. Instead, under the exemption and under 
Amex's listing standards, sales in the secondary market must be 
accompanied by a ``product description,'' describing the ETF and its 
shares.\26\ The Commission believes a product description, which not 
only highlights the basic characteristics of the product and the manner 
in which

[[Page 49724]]

the ETF shares trade in the secondary market, but also highlights the 
differences of the New Fund from existing equity ETFs and notes the 
unique characteristics and risks of this product, should provide market 
participants with adequate notice of the salient features of the 
product.
---------------------------------------------------------------------------

    \26\ Recently approved Nasdaq listing standards for ETFs clarify 
that NASD members trading equity ETFs through electronic 
communication networks (``ECNs'') would be subject to NASD Rules 
4420(i)(2) and 4420(j)(2) requiring the delivery of product 
descriptions in connection with sales of ETF shares. See Securities 
Exchange Act Release No. 45920 (May 13, 2002), 67 FR 35605 (May 20, 
2002). The Commission expects NASD members to observe the same 
standards for the secondary market trading of New Funds.
---------------------------------------------------------------------------

    The Commission also notes that upon the initial listing of any ETF 
under Amex Rule 1000A the Exchange issues a circular to its members 
explaining the unique characteristics and risks of the security; in 
this instance, Fixed Income ETFs. In particular, the circular should 
include, among other things, a discussion of the risks that may be 
associated with the New Funds, in addition to details on the 
composition of the fixed income indices upon which they are based and 
how each New Fund would use a representative sampling strategy to track 
its index. The circular also should note Exchange members' 
responsibilities under Exchange Rule 411 (``know your customer rule'') 
regarding transactions in such Fixed Income ETFs. Exchange Rule 411 
generally requires that members use due diligence to learn the 
essential facts relative to every customer, every order or account 
accepted.\27\ The circular also will address members' prospectus 
delivery requirements as well as highlight the characteristics of 
purchases in New Funds, including that they only are redeemable in 
Creation Unit size aggregations. Based on these factors, the Commission 
finds that the proposal to trade the New Funds is consistent with 
Section 6(b)(5) of the Exchange Act.\28\
---------------------------------------------------------------------------

    \27\ Amex Rule 411.
    \28\ 15 U.S.C. 78f(b)(f).
---------------------------------------------------------------------------

    The Commission also notes that the Exchange's rules and procedures 
should address the special concerns attendant to the trading of new 
derivative products. In particular, by imposing the Index Fund Share 
listing standards in Amex Rule 1000A, and addressing the suitability, 
disclosure, and compliance requirements noted above, the Commission 
believes that the Exchange has addressed adequately the potential 
problems that could arise from the derivative nature of the New Funds.
    In particular, the Commission finds that adequate rules and 
procedures exist to govern the trading of Index Fund Shares, including 
New Funds. New Funds will be deemed equity securities subject to Amex 
rules governing the trading of equity securities. These rules include: 
General and Floor Rules, such as priority, parity, and precedence of 
orders, market volatility related trading halt provisions pursuant to 
Rule 117, members dealing for their own accounts, specialists, odd-lot 
brokers, and registered traders, and handling of orders and 
reports;\29\ Office Rules, such as conduct of accounts, margin rules, 
and advertising; \30\ and Contracts in Securities, such as duty to 
report transactions, comparisons of transactions, marking to the 
market, delivery of securities, dividends and interest, closing of 
contracts, and money and security loans.\31\ The Amex also will 
consider halting trading in any series of Index Funds Shares under 
certain other circumstances including those set forth in Amex Rule 
918C(b)(4) regarding the presence of other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market. The Commission believes that the application of these rules 
should strengthen the integrity of the New Funds.
---------------------------------------------------------------------------

    \29\ Amex Rules 1-236.
    \30\ Amex Rules 300-590.
    \31\ Amex Rules 700-891.
---------------------------------------------------------------------------

    The Commission also notes that certain concerns are raised when a 
broker-dealer, such as Lehman or Goldman, is involved in the 
development, maintenance, and calculation of an index upon which an ETF 
is based.
    Goldman and Lehman have represented that each have procedures in 
place to prevent the misuse of material, non-public information 
relating to the index.\32\ The Commission believes that these 
provisions should help to address concerns raised by Goldman and 
Lehman's involvement in the management of the indices. The Commission 
believes that this should act to further minimize the possibility of 
manipulation.
---------------------------------------------------------------------------

    \32\ The Commission expects that the procedures implemented by 
Goldman and Lehman will monitor and prevent the misuse of material, 
non-public information as it relates to the development, maintenance 
and calculation of the indices.
---------------------------------------------------------------------------

    The Commission also believes that the Amex has appropriate 
surveillance procedures in place to detect and deter potential 
manipulation for similar index-linked products. By applying these 
procedures to the New Funds, the Commission believes that the potential 
for manipulation should be minimized, while protecting investors and 
the public interest.
    Amex has requested that the Commission find good cause for 
approving the proposed rule change, as amended, prior to the thirtieth 
day after the date of publication of notice thereof in the Federal 
Register. The Amex has requested accelerated approval because the 1940 
Act Application relating to the New Funds has been reviewed by the 
Division of Investment Management and notice of the Application has 
been published in the Federal Register.\33\ The Application disclosed 
the characteristics and risks associated with New Funds. No comments 
were submitted and the Commission granted the relief requested in the 
Application.\34\ The New Funds will trade on the Exchange in the same 
manner as Index Fund Shares previously approved by the Commission. 
Based on the above, the Commission finds good cause to accelerate 
approval of the proposed rule change, as amended.
---------------------------------------------------------------------------

    \33\ Investment Company Act Release No. 25594 (May 29, 2002), 67 
FR 38681 (June 5, 2002).
    \34\ Investment Company Act Release No. 25622 (June 25, 2002).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\35\ that the proposed rule change, (File No. SR-Amex 
2001-35), as amended, is hereby approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\36\
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    \35\ 15 U.S.C. 78s(b)(2).
    \36\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-19314 Filed 7-30-02; 8:45 am]
BILLING CODE 8010-01-P