[Federal Register Volume 67, Number 154 (Friday, August 9, 2002)]
[Notices]
[Pages 51907-51916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20178]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46299; File No. SR-NYSE-2002-26]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. Relating to Fixed Income ETFs (Section 703.16)

August 1, 2002.
    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 24, 2002, the New York Stock Exchange, Inc. 
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NYSE proposes to amend Section 703.16 (Investment Company 
Units) of the Listed Company Manual (``Manual'') to accommodate the 
listing and trading of fixed income Exchange Traded Funds (``ETFs''), 
which are based on indexes of fixed income securities, including the 
trading thereof on an unlisted trading privilege (``UTP'') basis. The 
proposed rule change will permit the listing and trading on the 
Exchange of the following series of the iShares Trust, a registered 
open-end management investment company (``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.
* * * * *
703.16  Investment Company Units
    The Exchange will consider for listing, whether pursuant to Rule 
19b-4(e) under the Securities Exchange Act of 1934 (the ``Exchange 
Act'') or otherwise, units of trading (``Units'') that meet the 
criteria of this paragraph. A Unit is a security that represents an 
interest in a registered investment

[[Page 51908]]

company (``Investment Company'') that could be organized as a unit 
investment trust, an open-end management investment company, or a 
similar entity. (See also NYSE Rule 1100.)
(A) Original Unit Listing Standards
    (1) The Investment Company must:
    (a) hold securities (including fixed income securities) comprising, 
or otherwise based on or representing an investment in, an index or 
portfolio of securities; or
    (b) hold securities in another registered investment company that 
holds securities as described in (a) above.
    An index or portfolio may be revised as necessary or appropriate to 
maintain the quality and character of the index or portfolio.
    (2) The Investment Company must issue Units in a specified 
aggregate number in return for a deposit (the ``Deposit'') consisting 
of either:
    (a) a specified number of shares of securities (or if applicable, a 
specified portfolio of fixed income securities) that comprise the index 
or portfolio, or are otherwise based on or represent an investment in 
securities comprising such index or portfolio, and/or a cash amount; or
    (b) shares of a registered investment company, as described in 
clause (A)(1)(b) above, and/or a cash amount.
    (3) Units must be redeemable, directly or indirectly, from the 
Investment Company for securities (including fixed income securities) 
and/or cash then comprising the Deposit. Units must pay holders 
periodic cash payments corresponding to the regular cash dividends or 
distributions declared with respect to the securities held by the 
Investment Company, less applicable expenses and charges.
* * * * *

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

    In its filing with the Commission, the NYSE included statements 
concerning the purpose of and basis for the proposed rule change 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 NYSE 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

    Section 703.16 of the Manual provides standards for listing 
Investment Company Units, which are defined as ``securities 
representing an interest in a registered investment company that could 
be organized as a unit investment trust, open-end management investment 
company or similar entity.'' In addition to being registered under the 
Investment Company Act of 1940 (``1940 Act''), these securities are 
registered under the Exchange Act. The Exchange is proposing to amend 
this definition to facilitate the listing and trading (including on a 
UTP basis) 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. Examples of such products include U.S. 
government securities and corporate and non-corporate (other than U.S. 
government) debt securities. As amended, Section 703.16 of the Manual, 
together with Exchange Rule 1100, would accommodate the listing of 
Units based on an index 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 and 
traded under Section 703.16, as amended, would include Units 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.\3\ The Commission has recently approved the request of the 
American Stock Exchange LLC (``Amex'') to list and trade fixed income 
ETFs.\4\ The Exchange believes that its proposed rule changes are 
substantially similar to those of the Amex.
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    \3\ Investment Company Units based on a fixed income securities 
index are not eligible for listing under the Exchange's generic 
listing criteria (Section 703.16). Therefore, the Exchange will file 
separate proposed rule changes pursuant to Rule 19b-4 under the 
Exchange Act prior to listing and trading (including trading on a 
UTP basis) any additional series of such Investment Company Units.
    \4\ See Securities Exchange Act Release No. 46252 (July 24, 
2002) (SR-Amex-2001-35).
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    Accordingly, the Exchange proposes to amend Section 703.16 to 
specify that Investment Company Units 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.
    Upon approval of the proposed amendments to Section 703.16, the 
Exchange proposes to list and trade on a UTP basis the following seven 
series of the 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 (each, a ``Fund,'' and collectively, the ``Funds'').
    Each 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.\5\
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    \5\ 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 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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    Barclays Global Fund Advisors (``Advisor'' or ``BGFA'') is the 
investment advisor for each 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. (``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 Funds

    The investment objective of each Fund will be to provide investment 
results that correspond generally to the price and yield performance of 
its Underlying Index. In seeking to achieve its respective investment 
objective, each Fund will utilize ``passive'' indexing investment 
strategies. Each Fund may fully replicate its Underlying Index, but 
currently intends to use a

[[Page 51909]]

``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).\6\
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    \6\ The Commission approved an ``Application'' by the Trust, the 
Advisor and the Distributor (``Applicants'') for an Order under 
Sections 6(c) and 17(b) of the 1940 Act for the purpose of exempting 
the Funds from various provisions of the 1940 Act. 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 Funds is based on information included in the 
Application and Order which include additional information regarding 
the Trust and the Funds.
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    When using a representative sampling strategy, the Advisor attempts 
to match the risk and return characteristics of a 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.\7\
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    \7\ 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 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, e.g., coupon 
rates instead of dividend payments.
    According to the Application, the 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 
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 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 Advisor does not anticipate that the 
Funds would need to make such adjustments, particularly since these 
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 Fund 
will have a tracking error relative to the performance of its 
respective Underlying Index of no more than five percent (5%). Each 
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 
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 Fund 
track its Underlying Index, as well as in certain futures, options and 
swap contracts, cash and cash equivalents. For example, these Funds may 
invest in securities not included in the relevant Underlying Index in 
order to reflect prospective changes in the relevant Underlying Index 
(such as future corporate actions and index reconstitutions, additions 
and deletions). Each of the iShares Lehman Corporate Bond Fund and the 
iShares Goldman Sachs Corporate Bond Fund 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 
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 Fund (the ``iShares'') will be issued 
on a continuous offering basis in groups of 50,000 or more. These 
``groups'' of shares are called ``Creation Unit Aggregations.'' The 
Funds will issue and redeem iShares only in Creation Unit 
Aggregations.\8\ As with other open-

[[Page 51910]]

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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    \8\ 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 Fund is determined as of the close of the 
regular trading session on the Exchange on each day that the Exchange 
is open. The Trust sells Creation Unit Aggregations of each Fund only 
on business days at the next determined NAV of each Fund.
    Creation Unit Aggregations will be issued by each Fund in exchange 
for the in-kind deposit of portfolio securities designated by the 
Advisor to correspond generally to the price and yield performance of 
the 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 Fund in exchange for portfolio 
securities of the 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 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 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 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 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 Exchange (currently 9:30 a.m. 
Eastern Time), the list of the names and the required number of shares 
of each Deposit Security included in the current Portfolio Deposit 
(based on information at the end of the previous Business Day) for the 
relevant Fund. The Portfolio Deposit will be applicable to a Fund 
(subject to any adjustments to the Balancing Amount, as described 
below) in order to effect purchases of Creation Unit Aggregations of 
the 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 Fund will change from time 
to time. The composition of the Deposit Securities may change in 
response to adjustments to the weighting or composition of the 
Component Securities in the relevant Underlying Index. These 
adjustments will reflect changes, known to the Advisor to be in effect 
by the time of determination of the Deposit Securities, in the 
composition of the Underlying Index being tracked by the relevant Fund, 
or resulting from rebalance or additions or deletions to the relevant 
Underlying Index. In addition, the Trust reserves the right with 
respect to each Fund to permit or require the substitution of an amount 
of cash (i.e., a ``cash in lieu'' amount) to be added to the Balancing 
Amount to replace any Deposit Security: (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

    1. In General. 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 Exchange's regular trading hours and disseminated 
every 15 seconds on the Consolidated Tape. Bloomberg will use Bloomberg 
Generic Prices (``BGN 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.
    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 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 Fund will

[[Page 51911]]

be calculated and disseminated daily. There will also be disseminated a 
variety of data with respect to each 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 Exchange. The closing prices of the 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 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''), \9\ 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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    \9\ The Bid-Ask Price of a Fund is determined using the highest 
bid and lowest offer on the Exchange as of the time of calculation 
of each Fund's NAV.
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    2. Information Regarding the Underlying Debt Securities. The 
secondary market for Treasury securities is a highly organized over-
the-counter market. Many dealers, and particularly the primary dealers, 
make markets in Treasury securities. Trading activity takes place 
between primary dealers, non-primary dealers, and customers of these 
dealers, including financial institutions, non-financial institutions 
and individuals. Increasingly, trading in Treasury securities occurs 
through automated trading systems.\10\
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    \10\ See ``eCommerce in the Fixed-Income Markets: The 2001 
Review of Electronic Transaction Systems,'' December 2001. This 
survey of electronic trading systems in the bond market was prepared 
by the staff of The Bond Market Association and is available through 
the Association's web site: www.bondmarkets.com.
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    The primary dealers are among the most active participants in the 
secondary market for Treasury securities. The primary dealers and other 
large market participants frequently trade with each other, and most of 
these transactions occur through an interdealer broker.\11\ The 
interdealer brokers provide primary dealers and other large 
participants in the Treasury market with electronic screens that 
display the bid and offer prices among dealers and allow trades to be 
consummated.
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    \11\ E.g., BrokerTec Global, Cantor Fitzgerald, Garban-
Intercapital, and Liberty Brokerage.
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    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,\12\ 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.\13\
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    \12\ See www.govpx.com.
    \13\ See www.tradeweb.com.
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    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.\14\ The Bond Market Association provides links to price and 
other bond information sources on its investor web site at 
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.
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    \14\ Corporate prices are available at 20 minute intervals from 
Capital Management Services at www.bondvu.com/quotmenu.htm.
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    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.

D. Redemption of iShares

    Creation Unit Aggregations of each Fund will be redeemable at the 
NAV next determined after receipt of a request for redemption. Creation 
Unit Aggregations of each Fund will be redeemed principally in-kind, 
together with a balancing cash payment (although, as described below, 
Creation Unit Aggregations may sometimes be redeemed for cash). The 
value of each Fund's redemption payments on a Creation Unit Aggregation 
basis will equal the NAV per the appropriate number of iShares of such 
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 Fund. Redemption orders must 
be placed by or through an Authorized Participant.
    Creation Unit Aggregations of any 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 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 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 Fund. The Trust may also 
make redemptions in cash in lieu of transferring one or more Fund 
Securities to a redeemer if the Trust determines, in its discretion, 
that such method is warranted due to unusual circumstances. An unusual 
circumstance could arise, for example, when a redeeming entity is 
restrained by regulation or policy from transacting in certain Fund 
Securities, such as the presence of such Fund Securities, on a 
redeeming investment banking firm's restricted list.

[[Page 51912]]

E. Clearance and Settlement

    The Deposit Securities and Fund Securities of each 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 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 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 
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 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 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 Funds will hold the collateral until the 
delivery of such Deposit Security. The 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 Funds will be protected from failure to 
receive Creation Unit Aggregations of iShares because the Custodian 
will not effect the 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 
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. 
The issuer does not believe that the clearing and settlement process 
will affect the arbitrage of iShares of the Funds.

F. Dividends and Distributions

    Dividends from net investment income will be declared and paid to 
Beneficial Owners of record at least annually by each Fund. Certain of 
the 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 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 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 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 Investment Company 
Units in Section 703.16 of the Manual. 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 traded series of 
Investment Company Units.
    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 original listing fees that 
would be applicable to the Funds if listed on the

[[Page 51913]]

Exchange is $5,000 for each Fund. In addition, the annual listing fees 
applicable to the Funds is $2,000 for each Fund.
    3. Stop and Stop Limit Orders. Commentary .30 to Exchange Rule 13 
provides that stop and stop limit orders in an Investment Company Unit 
shall be elected by a quotation, but specifies that if the electing bid 
on an offer is more than 0.10 points away from the last sale and is for 
the specialist's dealer account, prior Floor Official approval is 
required for the election to be effective. This rule applies to 
Investment Company Units generally, including fixed income ETFs.
    4. Rule 460.10. Rule 460.10 generally precludes certain business 
relationships between an issuer and the specialist in the issuer's 
securities. Exceptions in the Rule permit specialists in ETF shares, 
including fixed income ETFs, to enter into Creation Unit transactions 
through the Distributor to facilitate the maintenance of a fair and 
orderly market. A specialist Creation Unit transaction may only be 
effected on the same terms and conditions as any other investor, and 
only at the net asset value of the ETF shares. A specialist may acquire 
a position in excess of 10% of the outstanding issue of the ETF shares, 
provided, however, that a specialist registered in a security issued by 
an investment company may purchase and redeem the investment company 
unit or securities that can be subdivided or converted into such unit, 
from the investment company as appropriate to facilitate the 
maintenance of a fair and orderly market in the subject security.
    5. Prospectus Delivery. Pursuant to Exchange Rule 1100, 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).
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    6. Trading Halts. In order to halt the trading of a fixed income 
ETF, the Exchange may consider, among other things, factors such as the 
extent to which trading is not occurring in underlying security(s); 
whether trading has been halted or suspended in the primary market(s) 
for any combination of underlying stocks accounting for 20% or more of 
the applicable current portfolio value; and whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
    7. Suitability. Pursuant to Exchange Rule 405, before a member, 
member organization, allied member or employee of such member 
organization undertakes to recommend a transaction in ETF shares, 
including fixed income ETFs, such member or member organization should 
make a determination that such shares are suitable for such customer. 
If any recommendation is made with respect to such shares, the person 
making the recommendation should have a reasonable basis for believing 
at the time of making the recommendation, that the customer has such 
knowledge and experience in financial matters that he or she may 
reasonably be expected to be capable of evaluating the risks and any 
special characteristics of the recommended transaction, and is 
financially able to bear the risks of the recommended transaction.
    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 Investment Company Units currently trading on the Exchange. The 
Exchange represents that its surveillance procedures are adequate to 
properly monitor the trading of the Funds.\16\
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    \16\ Telephone call between Janet Kissane, Attorney, NYSE, and 
Jennifer Lewis, Attorney, Division of Market Regulation, Commission, 
on July 30, 2002.
---------------------------------------------------------------------------

    10. Hours of Trading/Minimum Price Variation. The Funds will trade 
on the Exchange until 4:15 p.m. (Eastern time). The minimum price 
variation for quoting will be $0.01.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act,\17\ in general and furthers the 
objectives of Section 6(b),\18\ in particular, because 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.
---------------------------------------------------------------------------

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

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with 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 NYSE. All submissions should refer to File No. 
SR-NYSE-2002-26 and should be submitted by August 30, 2002.

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

    After careful review, the Commission finds that implementation of 
the

[[Page 51914]]

proposed rule change is consistent with the requirements of Section 6 
of the Exchange Act \19\ and the rules and regulations thereunder 
applicable to a national securities exchange.\20\ Specifically, the 
Commission believes that the proposal is consistent with Section 
6(b)(5) of the Exchange Act.\21\ The Commission believes that the 
Exchange's proposal to list and trade fixed income ETFs (including the 
trading thereof on a UTP basis) \22\ 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 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 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.\23\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f.
    \20\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ The Commission notes that, pursuant to Rule 12f-5 under the 
Act, prior to trading a particular class or type of security 
pursuant to UTP, NYSE must have listing standards comparable to 
those of the primary market on which the security is listed. 17 CFR 
240.12f-5. The Commission finds that adequate rules and procedures 
exist to govern the trading of the Fund on NYSE, pursuant to UTP.
    \23\ 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 Funds appropriate relief 
under various sections of the 1940 Act, including sections 6(c) and 
17(b), so that each Fund may register under the 1940 Act as an open-end 
fund and issue shares that are redeemable in Creation Units, shares of 
Funds may trade in the secondary market at negotiated prices, and 
certain persons affiliated with a 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.\24\
---------------------------------------------------------------------------

    \24\ 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).\25\
---------------------------------------------------------------------------

    \25\ As of July 1, 2002, the composition of the Goldman Sachs 
Index, which underlies the iShares Goldman Sachs Corporate Bond 
Fund, was expanded from 30 to 100 investment grade bonds, and the 
index is 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 Funds will operate in substantially the same manner as Equity ETFs. 
Like many other ETFs, each Fund will use a representative sampling 
strategy to track its index. With a sampling strategy, a 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 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 Funds will have a tracking 
error relative to the performance of their respective underlying 
indices of no more than 5%.
    Shares of the 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 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 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 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 Funds will provide investors with a fund 
product that discloses its portfolio on a daily basis rather than semi-
annually.
    While the Funds will be operated in a manner that closely parallels 
the

[[Page 51915]]

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 Funds will invest in some of the most liquid debt 
securities, including U.S. Government securities and investment grade 
corporate and non-corporate bonds.\26\ In addition, Barclays will 
employ a sampling method of portfolio management that would allow the 
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 Funds have addressed the liquidity issues 
that might hamper arbitrage.
---------------------------------------------------------------------------

    \26\ 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 NYSE 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 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 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.\27\ For instance, the Bond 
Market Association provides links to price and other bond information 
sources on its investor web site at 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.
---------------------------------------------------------------------------

    \27\ Corporate prices are available at 20 minute intervals from 
Capital Management Services at 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.
    NYSE represents that every 15 seconds a price calculated by 
Bloomberg reflecting the current value of the Portfolio Deposit on a 
per ETF share basis for the Funds will be disseminated. 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-party price contributors such as 
broker-dealers.\28\ Accordingly, NYSE 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 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 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.
---------------------------------------------------------------------------

    \28\ 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 
NYSE's listing standards, sales in the secondary market must be 
accompanied by a ``product description,'' describing the ETF and its 
shares.\29\ The Commission believes a product description, which not 
only highlights the basic characteristics of the product and the manner 
in which the ETF shares trade in the secondary market, but also 
highlights the differences of the Funds 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.
---------------------------------------------------------------------------

    \29\ 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 Funds.
---------------------------------------------------------------------------

    The Commission also notes that upon the initial listing of any ETF 
under Exchange Rule 1100 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 Funds, in addition to details on the composition of 
the fixed income indices

[[Page 51916]]

upon which they are based and how each Fund would use a representative 
sampling strategy to track its index. The circular also should note 
Exchange members' responsibilities under Exchange Rule 405 (``know your 
customer rule'') regarding transactions in such Fixed Income ETFs. 
Exchange Rule 405 generally requires that members use due diligence to 
learn the essential facts relative to every customer, every order or 
account accepted.\30\ The circular also will address members' 
prospectus delivery requirements as well as highlight the 
characteristics of purchases in 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 Funds is consistent 
with Section 6(b)(5) of the Exchange Act.\31\
---------------------------------------------------------------------------

    \30\ Exchange Rule 405.
    \31\ 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 Investment Company 
Unit listing standards in Exchange Rule 703.16, 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 
Funds.
    In particular, the Commission finds that adequate rules and 
procedures exist to govern the trading of Investment Company Units, 
including Funds. Funds will be deemed equity securities subject to NYSE 
rules governing the trading of equity securities. These rules include: 
Dealings and Settlements Rules, such as priority, parity, and 
precedence of orders, market volatility related trading halt provisions 
pursuant to Exchange Rule 80B, members dealing for their own accounts, 
specialists, odd-lot brokers, and registered traders, handling of 
orders and reports; 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;\32\ 
and Operation of Member Organization Rules and Communications with the 
Public Rules, such as conduct of accounts, margin rules, and 
advertising. \33\ NYSE also will consider halting trading in any series 
of Investment Company Units under certain other circumstances including 
those set forth in Exchange Rule 717(b)(iv) 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 
Funds.
---------------------------------------------------------------------------

    \32\ Exchange Rules 45-227.
    \33\ Exchange Rules 325-472.
---------------------------------------------------------------------------

    The Commission also notes that certain concerns are raised when a 
broker-dealer, such as Lehman or Goldman, is involved in the 
development and maintenance of a stock index upon which an ETF is 
based. Previously, the Commission noted the importance of an exchange 
adopting adequate procedures to prevent the misuse of material, non-
public information regarding changes to component stocks in a fixed 
income securities index.\34\ Goldman and Lehman each have procedures in 
place to prevent the misuse of material, non-public information 
regarding changes to component stocks to the Funds. \35\ The Commission 
believes that these provisions should help to address concerns raised 
by Goldman and Lehman's involvement in the management of the indices.
---------------------------------------------------------------------------

    \34\ See supra, note 4.
    \35\ 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 NYSE has appropriate surveillance 
procedures in place to detect and deter potential manipulation for 
similar index-linked products. By applying these procedures to the 
Funds, the Commission believes that the potential for manipulation 
should be minimized, while protecting investors and the public 
interest.
    NYSE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice thereof in the Federal Register. NYSE has 
requested accelerated approval because the 1940 Act Application 
relating to the Funds has been reviewed by the Division of Investment 
Management and notice of the Application has been published in the 
Federal Register.\36\ The Application disclosed the characteristics and 
risks associated with the Funds. No comments were submitted and the 
Commission granted the relief requested in the Application.\37\ The 
Funds will trade on the Exchange in the same manner as Investment 
Company Units previously approved by the Commission. Furthermore, the 
Commission notes that it recently granted accelerated approval to the 
request of the Amex to list and trade fixed income ETFs.\38\ Based on 
the above, the Commission finds good cause to accelerate approval of 
the proposed rule change.
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    \36\ Investment Company Act Release No. 25594 (May 29, 2002), 67 
FR 38681 (June 5, 2002).
    \37\ Investment Company Act Release No. 25622 (June 25, 2002).
    \38\ See supra, note 4.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\39\ that the proposed rule change, (File No. SR-NYSE 
2002-26) is hereby approved on an accelerated basis.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20178 Filed 8-8-02; 8:45 am]
BILLING CODE 8010-01-P