[Federal Register Volume 68, Number 189 (Tuesday, September 30, 2003)]
[Notices]
[Pages 56353-56355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24754]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48534; File No. SR-Amex-2003-75]


Self-Regulatory Organizations; Order of Accelerated Approval of 
Proposed Rule Change by the American Stock Exchange LLC Relating to 
Eight Series of the iShares Trust Based on a Specified Fixed Income 
Index

September 24, 2003.
    On August 20, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposal to list under Rule 1000A the following eight 
additional series of the iShares Trust (each a ``New Fund'') based on 
indexes of fixed income securities selected to correspond generally to 
the performance of a specified U.S. bond index (each, an ``Underlying 
Index''): (1) iShares Lehman Short U.S. Treasury Bond Fund; (2) iShares 
Lehman 3-7 Year U.S. Treasury Bond Fund; (3) iShares Lehman 10-20 Year 
U.S. Treasury Bond Fund; (4) iShares Lehman U.S. Treasury Inflation 
Protected Securities Fund; (5) iShares Lehman U.S. Credit Bond Fund; 
(6) iShares Lehman Intermediate U.S. Credit Bond Fund; (7) iShares 
Lehman Intermediate U.S. Government/Credit Bond Fund; and (8) iShares 
Lehman U.S. Aggregate Bond Fund.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    On September 2, 2003, the proposal was published for public comment 
in the Federal Register.\3\ The Commission received no comments on the 
proposal. This order grants accelerated approval to the proposed rule 
change.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 48398 (August 22, 
2003), 68 FR 52245 (``Notice'').
---------------------------------------------------------------------------

    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 Exchange Act. The Commission previously approved 
amendments to Rule 1000A to accommodate the listing of Index Fund 
Shares based on an index of fixed income securities, and in particular, 
series of the iShares Trust based on indexes of fixed income 
securities.\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 46252 (July 24, 
2002), 67 FR 49715 (July 31, 2002) (``Previous Approval Order'').
---------------------------------------------------------------------------

    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 \5\ and the rules and regulations thereunder 
applicable to a national securities exchange \6\ and, in particular, 
the requirements of section 6 of the Act.\7\ Specifically, the 
Commission believes that the proposal is consistent with section 
6(b)(5) of the Exchange Act.\8\ 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. 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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f.
    \6\ 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).
    \7\ 15 U.S.C. 78f.
    \8\ Id.
---------------------------------------------------------------------------

    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

[[Page 56354]]

unfair discrimination between customers, issuers, brokers, or 
dealers.\9\
---------------------------------------------------------------------------

    \9\ 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.
---------------------------------------------------------------------------

    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.\10\
---------------------------------------------------------------------------

    \10\ Investment Company Act Release No. 25622 (June 25, 2002).
---------------------------------------------------------------------------

    The Commission notes that the New Funds will operate in 
substantially the same manner as the funds that were the subject of the 
Previous Approval Order. The Commission notes one difference is that 
with respect to the Lehman Aggregate Fund, approximately 35% of its 
assets will be invested in TBA transactions, which is a purchase or 
sale of a pass-through security for future settlement at an agreed upon 
date. The Exchange represented that the use of TBA transactions is not 
intended to help the Lehman Aggregate Fund outperform its Underlying 
Index, but rather to increase pricing efficiency while at the same time 
maintaining the Lehman Aggregate Fund's exposure to its Underlying 
Index. Since the intra-day prices of TBA agreements are more readily 
available than intra-day prices on specific mortgage pools and because 
mortgage pools tend to be less liquid than TBA agreements, the 
Commission agrees that the use of TBA agreements should help maintain 
the efficiency of the Lehman Aggregate Fund's arbitrage mechanism.
    For the reasons stated in the Notice, the Commission finds that 
adequate rules and procedures exist to govern the trading of Index Fund 
Shares, including the New Funds. For the reasons stated in the Notice, 
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, investment grade corporate bonds, and TBA 
prices), the pricing information should be available. However, the 
Commission notes that 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 
because arbitrators may wait for greater premiums or discounts to 
develop in the market price of the ETF shares before engaging in 
arbitrage transactions.
    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.\11\ 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.\12\ 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 New 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.
---------------------------------------------------------------------------

    \11\ See Investment Company Act Release Nos. 25595 (May 29, 
2002) (notice) and 25623 (June 25, 2002) (order).
    \12\ 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.\13\ 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.\14\
---------------------------------------------------------------------------

    \13\ Amex Rule 411.
    \14\ 15 U.S.C. 78f(b)(f).
---------------------------------------------------------------------------

    The Commission also notes that certain concerns are raised when a 
broker-dealer, such as Lehman, is involved in the development, 
maintenance, and calculation of an index upon which an ETF is based. 
Lehman has represented that it has procedures in place to prevent the 
misuse of material, non-public information relating to the index.\15\ 
The Commission believes that these provisions should help to address 
concerns raised by Lehman's involvement in the management of the 
indices. The Commission believes that this should act to further 
minimize the possibility of manipulation.
---------------------------------------------------------------------------

    \15\ Telephone call on September 24, 2003 between Claire P. 
McGrath, Senior Vice President and Deputy General Counsel, Amex, and 
Florence E. Harmon, Senior Special Counsel, Division of Market 
Regulation, Commission. 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 New Funds will trade on the Exchange in the same manner 
as the funds that were the subject of the Previous Approval Order, and 
the proposed rule change. The proposed rule change raises no novel 
issues. The Commission noticed the proposed rule change for the 21-day 
comment period and received no comments. Based on the above, the 
Commission finds good cause to accelerate approval of the proposed rule 
change.

[[Page 56355]]

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\16\ that the proposed rule change (SR-AMEX-2003-75) is 
hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24754 Filed 9-29-03; 8:45 am]
BILLING CODE 8010-01-P