[Federal Register Volume 69, Number 153 (Tuesday, August 10, 2004)]
[Notices]
[Pages 48539-48546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18283]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50142; File No. SR-NYSE-2004-27]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendments 
No. 1 and 2 Thereto by the New York Stock Exchange, Inc. Relating to 
the Trading Pursuant to Unlisted Trading Privileges of iShares MSCI 
Index Funds and the S&P Europe 350 Index Fund

August 3, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 15, 2004, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On July 23, 2004, the NYSE filed Amendment No. 1 to the proposed rule 
change.\3\ On August 3, 2004, the NYSE filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons and is approving the proposal, as amended, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 21, 2004 (``Amendment No. 
1''). In Amendment No. 1, the NYSE, among other things, corrected 
the name of the iShares MSCI Emerging Markets Fund and also 
corrected the name of the underlying index for the iShares Pacific 
ex-Japan Fund.
    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
August 3, 2004 (``Amendment No. 2''). In Amendment No. 2, the NYSE 
withdrew its request to trade pursuant to unlisted trading 
privileges the iShares MSCI Emerging Markets Fund and made 
representations regarding the compliance of the funds with the 
listing standards.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The New York Stock Exchange, Inc. (the ``Exchange'' or the 
``NYSE'') proposes to trade pursuant to unlisted trading privileges the 
following iShares Index Funds,\5\ which are Investment Company Units 
(``ICUs'') under Section 703.16 of the Exchange Listed Company Manual: 
shares issued by iShares Trust:

[[Page 48540]]

iShares MSCI\SM\ EAFE and iShares S&P Europe 350; and shares issued by 
iShares Inc.: iShares MSCI Taiwan; iShares MSCI Pacific ex-Japan; 
iShares MSCI Brazil; iShares MSCI United Kingdom; iShares MSCI South 
Korea; iShares MSCI Singapore; iShares MSCI Germany; iShares MSCI 
Australia; iShares MSCI Mexico; iShares MSCI Hong Kong; iShares MSCI 
South Africa; and iShares MSCI Malaysia.\6\
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    \5\ iShares is a registered trademark of Barclays Global 
Investors, N.A.
    \6\ MSCI and MSCI Indices are registered service marks of Morgan 
Stanley & Co., Incorporated.
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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, as 
amended, 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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has adopted listing standards applicable to ICUs, 
which are consistent with the listing criteria currently used by the 
American Stock Exchange, Inc. (``Amex'') and other exchanges, and 
trading standards pursuant to which the Exchange may trade ICUs on the 
Exchange on an unlisted trading privileges (``UTP'') basis.\7\ The 
Exchange now proposes to trade pursuant to UTP and on the basis more 
fully set forth herein the following iShares Index Funds (``Funds''), 
which are ICUs under Section 703.16 of the Exchange Listed Company 
Manual: shares issued by iShares Trust: iShares MSCI\SM\ EAFE and 
iShares S&P Europe 350; and shares issued by iShares, Inc: iShares MSCI 
Taiwan; iShares MSCI Pacific ex-Japan; iShares MSCI Brazil; iShares 
MSCI United Kingdom; iShares MSCI South Korea; iShares MSCI Singapore; 
iShares MSCI Germany; iShares MSCI Australia; iShares MSCI Mexico; 
iShares MSCI Hong Kong; iShares MSCI South Africa; and iShares MSCI 
Malaysia.
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    \7\ In 1996, the Commission approved Section 703.16 of the 
Listed Company Manual (``Manual''), which sets forth the rules 
related to the listing of ICUs. See Securities Exchange Act Release 
No. 36923 (March 5, 1996), 61 FR 10410 (March 13, 1996) (SR-NYSE-95-
23). In 2000, the Commission also approved the Exchange's generic 
listing standards for the listing and trading, or the trading 
pursuant to UTP, of ICUs under Section 703.16 of the Manual and 
Exchange Rule 1100. See Securities Exchange Act Release No. 43679 
(December 5, 2000), 65 FR 77949 (December 13, 2000) (SR-NYSE-00-46).
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a. Description of the Funds
    The Funds are currently listed and traded on the Amex \8\ and trade 
on other securities exchanges \9\ and in the over-the-counter market. 
NYSE currently trades the iShares MSCI Japan Index Fund pursuant to 
UTP.\10\ The information below is intended to provide a description of 
how the Funds were created and are traded.\11\
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    \8\ The Funds (with the exception of the MSCI\SM\ EAFE and S&P 
Europe 350 Funds) were formerly known as World Equity Benchmark 
Shares or WEBS, and an initial series of WEBS, including the iShares 
MSCI United Kingdom, iShares MSCI Singapore (Free), iShares MSCI 
Germany, iShares MSCI Australia, iShares MSCI Mexico, iShares MSCI 
Hong Kong and iShares MSCI Malaysia Funds were initially approved 
for listing and trading on the Amex in 1996. See Securities Exchange 
Act Release No. 36947 (March 8, 1996), 61 FR 10606 (March 14, 1996) 
(SR-Amex-95-43) (``Amex WEBS Approval Order''). Additional WEBS 
series were approved for listing and trading in 2000, including 
iShares MSCI Brazil, iShares MSCI Taiwan, iShares MSCI South Africa 
and iShares MSCI South Korea. See Securities Exchange Act Release 
No. 42748 (May 2, 2000), 65 FR 30155 (May 10, 2000) (SR-Amex-98-49). 
iShares S&P Europe 350 and iShares MSCI\SM\ EAFE, issued by iShares 
Trust, were approved for Amex listing and trading in 2000 and 2001, 
respectively. See Securities Exchange Act Release Nos. 42786 (May 
15, 2000), 65 FR 33586 (May 24, 2000) (SR-Amex-99-49) and 44700 
(August 14, 2001), 66 FR 43927 (August 21, 2001) (SR-Amex-2001-34). 
The iShares MSCI Pacific ex-Japan, issued by iShares Trust, were 
approved for Amex listing and trading in 2001. See Securities 
Exchange Act Release No. 44900 (October 25, 2001), 66 FR 55712 
(November 2, 2001) (Amex 2001-45) (collectively ``Listing Approval 
Orders'').
    \9\ See, e.g., Securities Exchange Act Release No. 39117 
(September 22, 1997), 62 FR 50973 (September 29, 1997) (SR-CHX-96-
14) (approving the UTP trading of WEBS).
    \10\ See Securities Exchange Act Release No. 46298 (August 1, 
2002), 67 FR 51614 (August 8, 2002) (SR-NYSE-2002-27).
    \11\ Much of the information in this filing was taken from the 
Prospectuses and Statements of Additional Information of iShares, 
Inc. dated as of July 1, 2004, the Prospectus of iShares Trust 
MSCI\SM\ EAFA, dated as of April 14, 2004, the Prospectus of iShares 
S&P Europe 350, dated as of August 1, 2004, and from the Websites of 
the Amex (http://www.amex.com) and iShares (http://www.iShares.com). 
Fund information relating to net asset value (``NAV''), returns, 
dividends, component stock holdings and the like is updated on a 
daily basis on the websites. Telephone Conversation between Michael 
Cavalier, Assistant General Counsel, NYSE, and Elizabeth MacDonald, 
Attorney, Division, July 30, 2004.
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    The shares of the Funds are issued by iShares, Inc., except for 
iShares MSCI\SM\ EAFE and S&P Europe 350, which are issued by iShares 
Trust. iShares, Inc. and iShares Trust are open-ended management 
investment companies. Each Fund seeks investment results that 
correspond generally to the price and yield performance, before fees 
and expenses, of the applicable underlying index. The Funds utilize 
representative sampling to invest in a representative sample of 
securities in the applicable underlying index. Barclays Global Fund 
Advisors (``BGFA''), a subsidiary of Barclays Global Investors, N.A. 
(``BGI''), is the investment advisor for each Fund. BGI is a wholly 
owned indirect subsidiary of Barclays Bank PLC of the United Kingdom. 
BGFA and its affiliates are not affiliated with the index providers 
(MSCI and Standard & Poor's). Investors Bank and Trust Company serves 
as administrator, custodian and transfer agent for the Funds, and SEI 
Investments Distribution Co. is distributor for the Funds. The 
distributor is not affiliated with the NYSE or BGFA.
    iShares, Inc. and iShares Trust, as applicable, will issue and 
redeem the shares of the Funds only in aggregations of substantial 
size, which varies for the various Funds but is at least 50,000 shares 
(each aggregation a ``Creation Unit'').\12\ The size of the applicable 
Creation Unit Aggregation is set forth in the Fund's prospectus and 
ranges from approximately $450,000 to approximately $7 million. The 
Funds issue and sell shares of the Index Funds through SEI Investments 
Distribution Co., the Distributor and principal underwriter, on a 
continuous basis at the net asset value per share next determined after 
an order to purchase iShares in Creation Unit size aggregations is 
received in proper form. Creation Unit Aggregations may be purchased 
only by or through a participant that has entered into a participant 
agreement with the Distributor (``Authorized Participant''). Each 
Participant must be a Depository Trust Company (``DTC'') participant. 
iShares are traded on the Exchange like other equity securities by 
professionals, as well as retail and institutional investors.
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    \12\ See supra note 11.
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    Creation Unit Aggregations generally will be issued in exchange for 
an in-kind deposit of securities and cash. An Index Fund also may sell 
Creation Unit Aggregations on a ``cash only'' basis in limited 
circumstances.\13\ An investor wishing to make an in-kind purchase of a 
Creation Unit Aggregation from an Index Fund will have to transfer to 
the Fund a ``Portfolio Deposit'' consisting of (a) a portfolio of 
securities that has been selected by Barclays Global Fund Advisors 
(``Advisor'') to correspond generally to the price and yield 
performance of the relevant underlying

[[Page 48541]]

index (``Deposit Securities''), (b) a cash payment equal per Creation 
Unit Aggregation to the dividends accrued on the Portfolio Securities 
of the Index Fund since the last dividend payment on the Portfolio 
Securities, net of expenses and liabilities (the ``Dividend Equivalent 
Payment''), and (c) an amount equal to the difference between (i) the 
``NAV'' per Creation Unit Aggregation of the Index Fund and (ii) the 
sum of (I) the Dividend Equivalent Payment and (II) the total aggregate 
market value per Creation Unit Aggregation of the Deposit Securities 
(the ``Balancing Amount,'' and, together with the Dividend Equivalent 
Payment, the ``Cash Component''). The Balancing Amount serves the 
function of compensating for differences, if any, between the NAV per 
Creation Unit Aggregation and the value of the Deposit Amount. The 
Deposit Amount is the sum of (a) the Dividend Equivalent Payment and 
(b) the market value per Creation Unit Aggregation of the Deposit 
Securities. If the Balancing Amount is a positive number (i.e., the NAV 
per Creation Unit Aggregation of the Index Fund exceeds that of the 
Deposit Amount), the Balancing Amount will be paid to the Fund by the 
Creator. If the Balancing Amount is a negative number (i.e., the NAV 
per Creation Unit Aggregation of the Index Fund is less than that of 
the Deposit Amount) the creator will receive cash in an amount equal to 
the differential.
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    \13\ See ``Information Circular'' Section, below.
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    Each Index Fund reserves the right to permit or require the 
substitution of an amount of cash or the substitution of any security 
to replace any Deposit Security that may be unavailable or unavailable 
in sufficient quantity for delivery to iShares, Inc., or which may be 
ineligible for trading by an Authorized Participant or the investor on 
whose behalf the Authorized Participant is acting.
    It is anticipated that the deposit of Deposit Securities and the 
Cash Component in exchange for iShares will be made primarily by 
institutional investors, arbitrageurs, and the Exchange specialist. 
Creation Units are separable upon issuance into identical shares that 
are listed and traded on the American Stock Exchange. iShares will be 
traded on the Exchange by professionals as well as institutional and 
retail investors.
    Individual iShares will not be redeemable. iShares will only be 
redeemable in Creation Unit Aggregations through each Index Fund. To 
redeem, an investor will have to accumulate enough iShares to 
constitute a Creation Unit Aggregation. An investor redeeming a 
Creation Unit Aggregation generally will receive (a) a portfolio of 
Portfolio Securities in effect on the date the request for redemption 
is made (``Redemption Securities''), which may not be identical to the 
Deposit Securities applicable to the purchase of Creation Unit 
Aggregations, and (b) a ``Cash Redemption Payment,'' consisting of an 
amount calculated in the same manner as the Cash Component, although 
the actual amounts may differ if the Redemption Securities are not 
identical to the Deposit Securities. To the extent that the Redemption 
Securities have a value greater than the NAV of the iShares being 
redeemed, the redeeming beneficial owner must make compensating cash 
payment to the Fund equal to the differential between the value of the 
Redemption Securities and the NAV of the iShares being redeemed. An 
investor may receive the cash equivalent of a Redemption Security in 
certain circumstances, such as where a redeeming entity is restrained 
by regulation or policy from transacting in the Redemption Security. An 
Index Fund may redeem Creation Unit Aggregations in cash in limited 
circumstances, such as when it is impossible to effect deliveries of 
Redemption Securities in the applicable jurisdiction.\14\
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    \14\ See ``Information Circular'' Section, below.
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    The Funds may make periodic distributions of dividends from net 
investment income, including net foreign currency gains, if any, in an 
amount approximately equal to accumulated dividends on securities held 
by the Fund during the applicable period, net of expenses and 
liabilities for such period. The final dividend amount for each Fund is 
the amount of dividends to be paid by a Fund for the appropriate period 
(usually annually). The final dividend amount is also disseminated by 
the Funds to Bloomberg and other sources. The Funds 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.
b. MSCI and S&P Indexes
    The MSCI Indexes are calculated by MSCI for each trading day in the 
applicable foreign exchange markets based on official closing prices in 
such exchange markets. For each trading day, MSCI publicly disseminates 
the MSCI Index values for the previous day's close. The S&P Europe 350 
Index is calculated by Standard & Poor's (``S&P''), and is publicly 
disseminated by S&P for the previous day's close. The Indexes are 
reported periodically in major financial publications, and the intra-
day values of the Indexes, disseminated every 15 seconds throughout the 
trading day, are available through vendors of financial information as 
further described in the Listing Approval Orders.
    The underlying indexes for the Funds are market capitalization 
weighted. As stated in the iShares, Inc. prospectus, effective May 31, 
2002, all single-country MSCI indices are free-float weighted, i.e., 
companies are included in the indices at the value of their free public 
float (free float multiplied by price). MSCI defines ``free float'' as 
total shares excluding shares held by strategic investors such as 
governments, corporations, controlling shareholders and management, and 
shares subject to foreign ownership restrictions.
    With respect to the S&P Europe 350 Index, S&P announced on March 1, 
2004 that it intends to shift its major indexes to ``float-adjusted'' 
market capitalization weights. That is, the value of the Index will be 
calculated by, for each component, multiplying the number of shares in 
the public float of the component by the price per share of the 
component. The result is then divided by the divisor. Thus, the ``float 
adjusted'' market capitalization methodology will exclude blocks of 
stocks that do not trade from the weighting determination for a stock 
in the index.
c. Funds' Assets and Industry Concentration
    Barclays Global Investors (``BGI'') has made certain 
representations to the Exchange regarding the percentage of fund assets 
that certain Funds will invest in component securities in the 
underlying indexes for such Funds and the maximum percentage of fund 
assets that such Funds may invest in American Depositary Receipts 
(``ADRs'').\15\
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    \15\ See letter from W. John McGuire, Morgan, Lewis & Bockius, 
to Michael Cavalier, Assistant General Counsel, NYSE, dated August 
2, 2004, attached as Exhibit A. to Amendment No. 2.
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    BGI has represented that each of the following Funds will invest at 
all times at least ninety percent (90%) of their total assets in 
component securities that are represented in the underlying index for 
such Fund: iShares MSCISM EAFE Index Fund; iShares S&P Europe 350 Index 
Fund; iShares MSCI Pacific ex-Japan Index Fund; iShares MSCI United 
Kingdom Index Fund; iShares MSCI Germany Index Fund; iShares MSCI 
Australia Index Fund; iShares MSCI

[[Page 48542]]

Mexico Index Fund; iShares MSCI Hong Kong Index Fund; iShares MSCI 
Singapore Index Fund; and iShares MSCI Malaysia Index Fund. Each of 
these Funds will invest not more than ten percent (10%) of fund assets 
in ADRs that are not included in the component securities of their 
underlying index.
    Barclays Global Investors has further represented that each of the 
following Funds will invest at all times at least eighty percent (80%) 
of their total assets in component securities that are represented in 
the underlying index for such Fund and at least half of the remaining 
twenty percent (20%) of their assets in such stocks or in stocks 
included in the relevant market but not in the index: iShares MSCI 
Brazil Index Fund; iShares MSCI South Korea Index Fund; iShares MSCI 
Taiwan Index Fund; and iShares MSCI South Africa Index Fund. Each of 
these Funds will invest not more than twenty percent (20%) of fund 
assets in ADRs that are not included in the component securities of 
their underlying index.
    Finally, Barclays Global Investors has represented that each of the 
ADRs in which these Funds will invest shall be listed on a national 
securities exchange or quoted on the Nasdaq National Market''. 
Currently, the underlying indexes do not contain ADRs. To the extent 
the Funds invest in ADRs, these ADRs will be subject to the 10% and 20% 
levels described above.\16\
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    \16\ Telephone Conversation between Michael Cavalier, Assistant 
General Counsel, NYSE, and Florence Harmon, Senior Special Counsel, 
Division, August 3, 2004.
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    As of August 2, 2004, the market capitalization of the securities 
included in the various Funds ranged from a high of $203,594 million to 
a low of $118 million. As of August 2, 2004, the average daily trading 
volume for these same securities for the last 30 days ranged from a 
high of 3,131,225,000 (for one component that constituted 3.65% of the 
net assets of the Fund) to a low of 100,000 (for one component that 
constituted 0.12% of the net assets of the Fund). As of June 30, 2004, 
the ten most heavily weighted component securities of the various Funds 
ranged from 23.46% (Samsung Electronics Co. Ltd. (``Samsung'') in South 
Korea Fund) to 1.80%.\17\
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    \17\ Id.
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    iShares, Inc. and iShares Trust will cause to be made available 
daily the names and required number of shares of each of the securities 
to be deposited in connection with the issuance of the Funds' shares in 
Creation Unit size aggregations for the Funds, as well as information 
relating to the required cash payment representing, in part, the amount 
of accrued dividends for the Funds. This information will be made 
available to the Funds' Advisor and to any National Securities Clearing 
Corporation (``NSCC'') participant requesting such information. In 
addition, other investors can request such information directly from 
the Funds' distributor. The NAV for the Funds will be calculated 
directly by the Funds' administrator. The NAV will also be available to 
the public on http://www.iShares.com, from the Fund distributor by 
means of a toll-free number, and to NSCC participants through data made 
available from the NSCC.
    As disclosed in the Funds' prospectus, each of the iShares MSCI 
Mexico Index, iShares MSCI Singapore Index and iShares MSCI South Korea 
Index Funds has the following concentration policy: With respect to the 
two most heavily weighted industries or groups of industries in its 
underlying index, the Fund will invest in securities (consistent with 
its investment objective and other investment policies) so that the 
weighting of each such industry or group of industries in the Fund does 
not diverge by more than 10% from the respective weighting of such 
industry or group of industries in its underlying index. An exception 
to this policy is that if investment in the stock of a single issuer 
would account for more than 25% of the Fund, the Fund will invest less 
than 25% of its net assets in such stock and will reallocate the excess 
to stock(s) in the same industry or group of industries, and/or to 
stock(s) in another industry or group of industries, in its underlying 
index. Each Fund will evaluate these industry weightings at least 
weekly, and at the time of evaluation will adjust its portfolio 
composition to the extent necessary to maintain compliance with the 
above policy.
    Each of the iShares MSCI Australia Index, iShares MSCI Brazil 
Index, iShares MSCI Hong Kong Index, iShares MSCI Malaysia Index, 
iShares MSCI Pacific ex-Japan Index, iShares MSCI South Africa Index, 
iShares MSCI Taiwan Index and iShares MSCI United Kingdom Index Funds 
will not concentrate its investments (i.e., hold 25% or more of its 
total assets in the stocks of a particular industry or group of 
industries), except that, to the extent practicable, the Fund will 
concentrate to approximately the same extent that its underlying index 
concentrates in the stocks of such particular industry or group of 
industries.
    For the iShares MSCI EAFE Index Fund and iShares S&P Europe 350 
Index Fund, a Fund will not concentrate its investments (i.e., hold 25% 
or more of its total assets) in a particular industry or group of 
industries, except that a Fund will concentrate its investments to 
approximately the same extent that its underlying index is so 
concentrated. For purposes of this limitation, securities of the U.S. 
Government (including its agencies and instrumentalities), repurchase 
agreements collateralized by U.S. Government securities, and securities 
of state or municipal governments and their political subdivisions are 
not considered to be issued by members of any industry.
    Each Fund will maintain regulated investment company compliance, 
which requires, among other things, that, at the close of each quarter 
of the Fund's taxable year, not more than 25% of its total assets may 
be invested in the securities of any one issuer. In order for a Fund to 
qualify for tax treatment as a regulated investment company, it must 
meet several requirements under the Internal Revenue Code. Among these 
is the requirement that, at the close of each quarter of the Fund's 
taxable year, (a) at least 50% of the market value of the Fund's total 
assets must be represented by cash items, U.S. government securities, 
securities of other regulated investment companies and other 
securities, with such other securities limited for purposes of this 
calculation in respect of any one issuer to an amount not greater than 
5% of the value of the Fund's assets and not greater than 10% of the 
outstanding voting securities of such issuer, and (b) not more than 25% 
of the value of its total assets may be invested in the securities of 
any one issuer.
    The Exchange believes that these requirements and policies prevent 
any Index Fund from being excessively weighted in any single security 
or small group of securities and significantly reduce concerns that 
trading in an Index Fund could become a surrogate for trading in 
unregistered securities.
d. Tracking Error
    According to the Funds' prospectus, Barclays Global Fund Advisors 
expect that over time, the correlation between each Fund's performance 
and that of its underlying index, before fees and expenses, will be 95% 
or better. A figure of 100% would indicate perfect correlation. Any 
correlation of less than 100% is called ``tracking error.'' A Fund 
using a representative sampling strategy (which all of the Funds 
utilize) can be expected to have a greater tracking error than a Fund 
using a replication strategy.

[[Page 48543]]

Replication is a strategy in which a Fund invests in substantially all 
of the securities in its underlying index in approximately the same 
proportions as in the underlying index.
    The Funds have chosen to pursue a representative sampling strategy 
that, by its very nature, entails some risk of tracking error. (It 
should also be noted that Fund expenses, the timing of cash flows, and 
other factors all contribute to tracking error.) The Web site for the 
Funds, http://www.iShares.com, contains detailed information on the 
performance and the tracking error for each Fund.
e. Availability of Information Regarding Funds
    As indicated in the Listing Approval Orders, the Web site for the 
Funds, http://www.iShares.com, will contain the prior business day's 
NAV and the reported closing price, and a calculation of the premium or 
discount of such price against NAV; and data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price against the NAV.\18\
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    \18\ Telephone Conversation between Michael Cavalier, Assistant 
General Counsel, NYSE, and Florence Harmon, Senior Special Counsel, 
Division, August 3, 2004.
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    As stated above and in the Listing Approval Orders, the value of 
each underlying index will be updated intra-day on a real time basis as 
individual component securities of that index change in price. The 
intra-day values of the indexes will be disseminated every 15 seconds 
throughout the trading day by organizations authorized by the index 
providers and are available through major financial information 
vendors.
    To provide current Fund pricing information, Amex disseminates 
through the facilities of the Consolidated Tape Association an 
``indicative optimized portfolio value'' (the ``Value'') for the Funds 
as calculated by Bloomberg, L.P. The Value will be disseminated every 
fifteen seconds during regular Amex trading hours of 9:30 a.m. to 4 
p.m. New York time. The Value likely will not reflect the value of all 
securities included in the applicable indexes. In addition, the Value 
will not necessarily reflect the precise composition of the current 
portfolio of securities held by the Funds at a particular moment. The 
Value disseminated during Amex trading hours should not be viewed as a 
real-time update of the NAV of the Funds, which is calculated only once 
a day. It is expected, however, that during the trading day the Value 
will closely approximate the value per share of the portfolio of 
securities for the Funds except under unusual circumstances.
    For iShares MSCI South Korea, Singapore, Malaysia, Taiwan, Hong 
Kong, Australia and Pacific ex-Japan Funds, there is no overlap in 
trading hours between the foreign and U.S. markets. Therefore, for each 
of these Funds, the Value calculator will utilize closing prices 
(denominated in the applicable foreign currency) in the principal 
foreign market for securities in the applicable Fund's portfolio and 
convert the price to U.S. dollars. This Value will be updated every 15 
seconds during Amex trading hours to reflect changes in currency 
exchange rates between the U.S. dollar and the applicable foreign 
currency. The Value will also include the estimated cash component for 
each Fund.
    For iShares MSCISM EAFE, S&P Europe 350, Brazil, United 
Kingdom, Germany, Mexico and South Africa Funds, there is an overlap in 
trading hours between the foreign and U.S. markets. Therefore, the 
Value calculator will update the applicable Value every 15 seconds to 
reflect price changes in the applicable foreign market or markets and 
convert such prices into U.S. dollars based on the currency exchange 
rate. When the foreign market or markets are closed but U.S. markets 
are open, the Value will be updated every 15 seconds to reflect changes 
in currency exchange rates after the foreign market closes. The Value 
will also include the applicable cash component for each Fund.
f. Information Circular
    In connection with the trading of the Funds, the Exchange will 
inform Exchange members and member organizations in an Information 
Circular of certain characteristics of certain Funds, as discussed 
below. The circular will discuss the special characteristics and risks 
of trading this type of security. Specifically, the circular, among 
other things, will discuss what the Funds are, how they are created and 
redeemed, the requirement that members and member firms deliver a 
prospectus or Product Description to investors purchasing shares of the 
Fund prior to or concurrently with the confirmation of a transaction, 
applicable Exchange rules, dissemination information, trading 
information and the applicability of suitability rules (including NYSE 
Rule 405).\19\ The circular will also discuss exemptive, no-action and 
interpretive relief granted by the Commission from Section 11(d)(1) and 
certain rules under the Act, including Rule 10a-1, Rule 10b-10, Rule 
14e-5, Rule 10b-17, Rule 11d1-2, Rules 15c1-5 and 15c1-6, and Rules 101 
and 102 of Regulation M under the Act.
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    \19\ The Commission has issued an order (``Order'') granting the 
Funds an exemption from Section 24(d) of the Investment Company Act 
of 1940. See, e.g., Investment Company Act Release No. 25623 (June 
25, 2002). Any Product Description used in reliance on the Section 
24(d) exemptive order will comply with all representations made and 
all conditions contained in the Application for the Order.
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    Local restrictions on transfers of securities to and between 
certain types of investors exist in South Korea, Malaysia, Taiwan and 
Brazil. These restrictions currently preclude ``in kind'' creations and 
redemptions of creation units of iShares MSCI South Korea, Malaysia, 
Taiwan and Brazil Index Funds. Creations and redemptions of creation 
units of the iShares MSCI South Korea, Malaysia, Taiwan and Brazil 
Index Funds therefore involve ``for cash'' transfers. In such cases, a 
Fund will charge creation and redemption fees intended to offset the 
transfer and other transaction costs incurred by the Fund, including 
market impact expenses (primarily associated with creation units for 
cash), related to investing in or disposing of the basket of securities 
held by the Fund.
    For Funds that effect creations and/or redemptions only for cash 
(i.e., iShares MSCI South Korea, Malaysia, Taiwan and Brazil), it is 
possible that portfolio securities transactions by iShares, Inc. in the 
relevant local markets for those Funds could affect the prices of those 
portfolio securities at the times those Funds' NAVs are calculated.
    The NAV for the iShares MSCI Malaysia, South Korea and Taiwan Index 
Funds will be calculated every day that the American Stock Exchange is 
open for trading, normally as of 11 a.m. (Eastern Time). This is in 
contrast to the other Funds, for which the NAV is normally calculated 
at 4 p.m. (Eastern Time).
g. Other Issues
i. Surveillance Procedures
    The Exchange intends to utilize its existing surveillance 
procedures applicable to Investment Company Units to monitor trading in 
the Funds. The Exchange represents that these procedures are adequate 
to monitor Exchange trading of the Funds.\20\
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    \20\ Telephone Conversation between Michael Cavalier, Assistant 
General Counsel, NYSE, and Florence Harmon, Senior Special Counsel, 
Division, August 3, 2004.

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[[Page 48544]]

ii. NYSE Rule 460.10
    NYSE 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 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 NAV 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.
iii. Trading Hours
    The trading hours for the Funds on the Exchange will be 9:30 a.m. 
to 4 p.m., except for iShares MSCISM EAFE and iShares S&P 
Europe 350, which will trade until 4:15 p.m.
iv. Due Diligence
    The Exchange represents that the Information Circular to members 
will note, for example, Exchange responsibilities including that before 
an Exchange member, member organization, or employee thereof recommends 
a transaction in the Funds, a determination must be made that the 
recommendation is in compliance with all applicable Exchange and 
federal rules and regulations, including due diligence obligations 
under Exchange Rule 405.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act \21\ in general and furthers the 
objectives of Section 6(b)(5)\22\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, remove impediments to and perfect 
the mechanisms of a free and open market and a national market system, 
and, in general, protect investors and the public interest.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
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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 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-27. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 the 
filing also will be available for inspection and copying at the 
principal office of the NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2004-27 and should be submitted on or before August 
31, 2004.

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

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange, and, in particular, with the requirements of 
Section 6(b)(5) of the Act.\23\ The Commission believes that the 
Exchange's proposal to trade the Funds pursuant to UTP will provide 
investors with a convenient way of participating in foreign securities 
markets and can produce added benefits to investors through the 
increased competition between other markets trading the product. 
Specifically, the Commission believes that NYSE's proposal should help 
provide investors with increased flexibility in satisfying their 
investment needs, by allowing them to purchase and sell at negotiated 
prices throughout the trading day securities that replicate the 
performance of several portfolios of stock,\24\ and by increasing the 
availability of the Fund as an investment tool. Accordingly, as 
discussed below, the rule proposal is consistent with the requirements 
of Section 6(b)(5) that Exchange rules 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.\25\
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ The Commission notes that unlike typical open-end 
investment companies, where investors have the right to redeem their 
fund shares on a daily basis, investors in the Funds can redeem them 
in creation unit size aggregations only.
    \25\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    As the Commission noted in greater detail in the order approving 
iShares (formally ``World Equity Benchmark Securities'' or ``WEBS'') 
for listing and trading on Amex,\26\ the estimated cost of an 
individual iShares, such as the

[[Page 48545]]

Funds, should make it attractive to individual retail investors who 
wish to hold a security replicating the performance of a portfolio of 
foreign stocks. The Commission also notes that the Funds should provide 
investors with several advantages over standard open-end investment 
companies; in particular, investors can trade the Funds continuously 
throughout the day in secondary markets at negotiated prices.\27\ In 
contrast, Investment Company Act of 1940 (``Investment Company Act'') 
Rule 22c-1 \28\ limits holders and prospectus holders of open-end 
management investment company shares to purchasing or redeeming 
securities of the fund based on the NAV of the securities held by the 
fund as designated by the board of directors. Thus, the Funds should 
allow investors to respond quickly to market changes through intra-day 
trading opportunities, expand the opportunity for retail investors to 
engage in hedging strategies, and reduce transaction costs for trading 
a portfolio of stocks. The Commission notes that, under the proposed 
rule change, the benefits of the Fund will now be available to 
investors trading on NYSE, and believes that the addition of their 
trading on NYSE pursuant to UTP could produce added benefits to 
investors through the increased competition.
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    \26\ See Amex WEBS Approval Order, supra note 8. The Commission 
hereby incorporates by reference the discussion and rationale for 
approving WEBS provided in the Amex WEBS Approval Order.
    \27\ The Commission believes that the Funds will not trade at a 
material discount or premium in relation to their NAV, because of 
potential arbitrage opportunities. See Amex WEBS Approval Order, 
supra note 8. The mere potential for arbitrage should keep the 
market price of shares of the Funds comparable to their NAVs; 
therefore, arbitrage activity likely will not be significant.
    \28\ 17 CFR 270.22c-1. Investment Company Act Rule 22c-1 
generally provides that a registered investment company issuing a 
redeemable security, its principal underwriter, and dealers in that 
security may sell, redeem, or repurchase the security only at a 
price based on the NAV next computed after receipt of an investor's 
request to purchase, redeem, or resell. The NAV of an open-end 
management investment company generally is computed once daily 
Monday to Friday as designated by the investment company's board of 
directors. The Commission granted WEBS an exemption from this 
provision to allow them to trade in the secondary market at 
negotiated prices. See Amex WEBS Approval Order, supra note 8.
---------------------------------------------------------------------------

    The Commission notes that, although the value of the Funds is based 
on the value of the securities and cash held in the Funds, the shares 
of the Funds are not leveraged instruments. The shares of the Funds are 
essentially equity securities that represent an interest in a portfolio 
of stocks designed to reflect substantially the applicable MSCI 
Indexes. Accordingly, it is appropriate to regulate the Funds in a 
manner similar to other equity securities. Nonetheless, the Commission 
believes that the unique nature of the Funds raise certain disclosure, 
trading, and other issues that need to be addressed. The remainder of 
this section addresses these issues, although they are discussed in 
greater detail in the Amex Listing Approval Orders, where the 
Commission approved WEBS, later known as iShares, for trading as a new 
product.

A. Trading of the Fund on NYSE Pursuant to UTP

    The Commission notes that, pursuant to Rule 12f-5 under the 
Act,\29\ prior to trading a particular class or type of security 
pursuant to UTP, NYSE must have listing standards and trading rules 
comparable to those of the primary market on which the security is 
listed. The Commission finds that adequate rules and procedures exist 
to govern the trading of the Fund on NYSE, pursuant to UTP. Fund shares 
will be deemed equity securities subject to NYSE's rules governing the 
trading of equity securities. Accordingly, the Exchange's existing 
general rules that currently apply to the trading of equity securities 
will also apply to the Fund. In addition, Section 703.16 of the NYSE's 
Manual and Exchange Rule 1100 \30\ which contain listing and delisting 
criteria to accommodate the trading of Units, will apply to the trading 
of the Fund.\31\ Moreover, the market capitalization and liquidity of 
the Fund components is such that an adequate level of liquidity exists 
in each iShares series to allow for the maintenance of fair and orderly 
markets. Also, the Fund components will not be highly concentrated such 
that the Funds become surrogates for trading unregistered foreign 
securities.\32\ The delisting criteria allow the Exchange to consider 
the suspension of trading and the delisting of a series of Units, 
including suspending trading in the Fund traded on the Exchange 
pursuant to UTP, if an event were to occur that made further dealings 
in such securities inadvisable. This will give the Exchange flexibility 
to suspend trading in the Fund if circumstances warrant such action. 
Accordingly, the Commission believes that NYSE's equity rules in 
general, and Section 703.16 of the Manual and Exchange Rule 1100 in 
particular, provide adequate safeguards to prevent manipulative acts 
and practices and to protect investors and the public interest.\33\
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    \29\ 17 CFR 240.12f-5.
    \30\ The Commission approved generic rules for the listing and 
trading of ICUs on NYSE in 2000. See Securities Exchange Act Release 
No. 43679 (December 5, 2000), 65 FR 77949 (December 13, 2000).
    \31\ The Commission notes the listing and delisting criteria is 
similar to those adopted by Amex to trade WEBS/iShares.
    \32\ The Commission notes that Samsung, a component in the South 
Korea Fund, constitutes 23.46% of the Fund. Should this weighting 
increase to above 25%, or other material deviations occur from the 
characteristics described herein and in the Listing Approval Orders, 
the Funds would not be in compliance with the listing and trading 
standards approved by the Commission. The Commission also notes, 
however, that Samsung is a foreign private issuer that submits to 
the Commission, on a current basis, the material required by Rule 
12g3-2(b). 17 CFR 240.12g3-2(b).
    \33\ The Commission also believes that the proposed rule change 
should help protect investors and the public interest, and help 
perfect the mechanisms of a national market system, in that it will 
allow for the trading of the Fund on NYSE pursuant to UTP, making 
the Fund more broadly available to the investing public.
---------------------------------------------------------------------------

B. Disclosure

    The Commission believes that NYSE's proposal should provide for 
adequate disclosure to investors relating to the terms, 
characteristics, and risks of trading the Fund. All investors in the 
Fund, including those purchasing the Fund on NYSE pursuant to UTP, will 
receive a prospectus or a Product Description \34\ regarding the 
product. The prospectus or Product Description will address the special 
characteristics of the Fund, including a statement regarding their 
redeemability and method of creation, and that Fund shares are not 
individually redeemable.
---------------------------------------------------------------------------

    \34\ See Investment Company Act Release No. 25623 (June 25, 
2002).
---------------------------------------------------------------------------

    The Commission notes that the Exchange has represented that it will 
also distribute an information circular to all NYSE members prior to 
the commencement of trading of the Fund explaining the unique 
characteristics and risks of the Fund. The circular will note, for 
example, Exchange responsibilities including that before an Exchange 
member, member organization, or employee recommends a transaction in 
the Funds, a determination must be made that the recommendation is in 
compliance with all applicable Exchange and federal rules and 
regulations, including due diligence obligations under Exchange Rule 
405.\35\ The circular will also address members' responsibility to 
deliver a prospectus or product description to all investors purchasing 
the Fund, as well as highlight the characteristics of the Fund, 
including that Fund shares are only redeemable in Creation Unit size 
aggregation and that local restrictions may cause certain Funds to 
effect creations and redemptions for cash.\36\
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    \35\ See Amendment No. 2.
    \36\ The Commission notes that the information circular should 
also discuss exemptive relief granted by the Commission from certain 
rules under the Act. The applicable rules are: Rule 10a-1; Rule 10b-
10; Rule 14e-5; Rule 10b-17; Rule 11d1-2; Rules 15c1-5 and 15c1-6; 
and Rules 101 and 102 of Regulation M under the Act.

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[[Page 48546]]

C. Dissemination of the Fund Portfolio and Underlying Index Information

    The Commission believes that since Amex is disseminating the Values 
for the various WEBS/iShares series, investors will be provided with 
timely and useful information concerning the value of iShares, on a per 
iShares basis. The Commission notes that the information is 
disseminated through facilities of the CTA and reflects the currently 
available information concerning the value of the assets comprising the 
deposit securities. The information is disseminated every fifteen 
seconds during the hours of 9:30 a.m. to 4 p.m. Eastern Standard Time 
and will be available to all investors, irrespective of where the 
transaction is executed. In addition, because the value is expected to 
closely track the applicable iShares series, the Commission believes 
the Values will provide investors with adequate information to 
determine the intra-day value of a given iShares series, such as the 
Funds.\37\ In the Amex WEBS Approval Order, the Commission noted that 
it expected Amex to monitor the disseminated Value, and if Amex 
determines that the Value does not closely track applicable WEBS/
iShares series, it will arrange to disseminate an adequate alternative. 
Information about the Funds' performance, including tracking error and 
NAV, is publicly available at http://www.iShares.com. The Commission 
also notes that the intra-day index values are disseminated every 15 
seconds by various sources; however, there may be no overlap in trading 
hours between the foreign and U.S. markets for certain Funds.
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    \37\ In addition, the Amex WEBS Approval Order states that the 
statement of additional information (``SAI'') to the preliminary 
prospectus states that each series will calculate its NAV per share 
at the close of the regular trading session for the Amex on each day 
that the Amex is open for business. NAV generally will be based on 
the last quoted sales price on the exchange where the security 
primarily is traded. See Amex WEBS Approval Order, supra note 8.
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D. Surveillance

    The Commission notes that NYSE has represents that its surveillance 
procedures are adequate to address concerns associated with the listing 
and trading of such securities, including any concerns associated with 
specialists purchasing and redeeming Creation Units. The Exchange has 
represented that its surveillance procedures should allow it to 
identify situations where specialists purchase or redeem Creation Units 
to ensure compliance with NYSE Rule 460.10, which requires that such 
purchases or redemptions facilitate the maintenance of a fair and 
orderly market in the subject security.\38\
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    \38\ The Commission notes that, in the Amex WEBS Approval Order, 
it discussed the concerns raised when a broker-dealer is involved in 
the development, maintenance, and calculation of a stock index upon 
which a product such as WEBS is based. Adequate procedures to 
prevent the misuse of material, non-public information regarding 
changes to component stocks in an MSCI Index have been adopted and 
should help to address concerns raised by Morgan Stanley's 
involvement in the management of the Indices. See also the 
``firewall'' requirements under Section 703.16 of the NYSE's Manual.
---------------------------------------------------------------------------

E. Specialists

    The Commission finds that it is consistent with the Act to allow a 
specialist registered in a security issued by an Investment Company to 
purchase or redeem the listed security from the issuer as appropriate 
to facilitate the maintenance of a fair and orderly market in that 
security. The Commission believes that such market activities should 
enhance liquidity in such security and facilitate a specialist's market 
making responsibilities. In addition, because the specialist only will 
be able to purchase and redeem Fund shares on the same terms and 
conditions as any other investor (and only at the NAV), and Creation 
transactions must occur through the distributor and not directly with 
the issuer, the Commission believes that concerns regarding potential 
abuse are minimized. As noted above, the Exchange's surveillance 
procedures also should ensure that such purchases are only for the 
purpose of maintaining fair and orderly markets, and not for any other 
improper or speculative purposes. Finally, the Commission notes that 
its approval of this aspect of the Exchange's rule proposal does not 
address any other requirements or obligations under the federal 
securities laws that may be applicable.\39\
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    \39\ The Commission notes that with respect to iShares, broker-
dealers and other persons are cautioned in the prospectus and/or the 
Fund's SAI that some activities on their part may, depending on the 
circumstances, result in their being deemed statutory underwriters 
and subject them to the prospectus delivery and liability provision 
of the Securities Act of 1933.
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F. Accelerated Approval

    After careful review, the Commission finds 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 
pursuant to section 19(b)(2) of the Act.\40\ The Commission finds that 
this proposal is similar to several approved instruments currently 
listed and traded on the Exchange. Accordingly, the Commission finds 
that the listing and trading of the Fund on a UTP basis is consistent 
with the Act, and promotes just and equitable principles of trade, 
fosters cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, and, in general, protects 
investors and the public interest.\41\ The Commission further finds 
that accelerated approval will enable the Exchange to begin listing and 
trading the Fund on the Exchange on a UTP basis immediately. Therefore, 
the Commission finds good cause, consistent with Section 19(b)(2) of 
the Act,\42\ to approve the proposal and Amendment Nos. 1 and 2 thereto 
on an accelerated basis.
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    \40\ 15 U.S.C. 78s(b)(2).
    \41\ 15 U.S.C. 78f(b)(5).
    \42\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\43\ that the proposed rule change (SR-NYSE-2004-27) and Amendments 
No. 1 and 2 thereto are hereby approved on an accelerated basis.

    \43\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-18283 Filed 8-9-04; 8:45 am]
BILLING CODE 8010-01-P