[Federal Register Volume 77, Number 197 (Thursday, October 11, 2012)]
[Notices]
[Pages 61804-61808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-24957]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67985; File No. SR-NYSEArca-2012-92]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
iShares 2018 S&P AMT-Free Municipal Series and iShares 2019 S&P AMT-
Free Municipal Series Under NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02

October 4, 2012.

I. Introduction

    On August 16, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant

[[Page 61805]]

to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to list and 
trade shares (``Shares'') of the iShares 2018 S&P AMT-Free Municipal 
Series (``2018 Fund'') and iShares 2019 S&P AMT-Free Municipal Series 
(``2019 Fund'' and, collectively, ``Funds''). The proposed rule change 
was published for comment in the Federal Register on August 30, 
2012.\3\ The Commission received no comments on the proposed rule 
change. This order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67729 (August 24, 
2012), 77 FR 52776 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Funds 
pursuant to NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, which 
governs the listing and trading of Investment Company Units (``Units'') 
based on fixed income securities indexes. The Funds are two series of 
iShares Trust (``Trust'').\4\ Blackrock Fund Advisors (``Investment 
Adviser'') is the investment adviser for the Funds. SEI Investments 
Distribution Co. is the Funds' distributor (``Distributor'').
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On June 29, 2012, the Trust filed with the 
Commission Post-Effective Amendment No. 745 (with respect to the 
2018 Fund, ``2018 Registration Statement'') and Post-Effective 
Amendment No. 746 (with respect to the 2019 Fund, ``2019 
Registration Statement'') to the Trust's registration statement on 
Form N-1A under the Securities Act of 1933 and the 1940 Act (File 
Nos. 333-92935 and 811-09729) (collectively, ``Registration 
Statements''). In addition, the Commission has issued an order 
granting certain exemptive relief to the Trust under the 1940 Act. 
See Investment Company Act Release No. 27608 (December 21, 2006) 
(File No. 812-13208).
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iShares 2018 S&P AMT-Free Municipal Series

    The 2018 Fund will seek investment results that correspond 
generally to the price and yield performance, before fees and expenses, 
of the S&P AMT-Free Municipal Series 2018 Index\TM\ (``2018 
Index'').\5\ The 2018 Fund will not seek to return any predetermined 
amount at maturity. The 2018 Index measures the performance of 
investment-grade U.S. municipal bonds maturing in 2018. According to 
the Exchange, as of May 1, 2012, there were 1,443 issues in the 2018 
Index.
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    \5\ Each of the 2018 Index and 2019 Index (as defined below) 
(collectively, ``Underlying Indexes'') is sponsored by an 
organization (``Index Provider'') that is independent of the Funds 
and the Investment Adviser. The Index Provider determines the 
composition and relative weightings of the securities in the 
Underlying Indexes and publishes information regarding the market 
value of the Underlying Indexes. The Index Provider with respect to 
the Underlying Indexes is Standard & Poor's Financial Services LLC 
(a subsidiary of The McGraw-Hill Companies) (``S&P''). The Index 
Provider is not a broker-dealer or affiliated with a broker-dealer 
and has implemented procedures designed to prevent the use and 
dissemination of material, non-public information regarding the 
Underlying Indexes.
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    The 2018 Index includes municipal bonds primarily from issuers that 
are state or local governments or agencies (including the Commonwealth 
of Puerto Rico and U.S. territories such as the U.S. Virgin Islands and 
Guam) such that the interest on the bonds is exempt from U.S. federal 
income taxes and the federal alternative minimum tax (``AMT''). 
According to the exchange, each bond eligible for inclusion in the 2018 
Index must have a rating of at least BBB- by S&P, Baa3 by Moody's 
Investors Service, Inc. (``Moody's''), or BBB- by Fitch, Inc., and must 
have a minimum maturity par amount of $2 million. To remain in the 2018 
Index, bonds must maintain a minimum par amount greater than or equal 
to $2 million as of each rebalancing date. All bonds in the 2018 Index 
will mature between June 1 and August 31 of 2018. When a bond matures 
in the 2018 Index, an amount representing its value at maturity will be 
included in the 2018 Index throughout the remaining life of the 2018 
Index, and any such amount will be assumed to earn a rate equal to the 
performance of the S&P's Weekly High Grade Index, which consists of 
Moody's Investment Grade-1 municipal tax-exempt notes that are not 
subject to federal AMT. By August 31, 2018, the 2018 Index is expected 
to consist entirely of cash carried in this manner. The 2018 Index is a 
market value weighted index and is rebalanced after the close on the 
last business day of each month.
    The Exchange submitted this proposed rule change because the 2018 
Index for the 2018 Fund does not meet all of the ``generic'' listing 
requirements of Commentary .02(a) to NYSE Arca Equities Rule 5.2(j)(3) 
applicable to the listing of Units based on fixed income securities 
indexes. The 2018 Index meets all such requirements except for those 
set forth in Commentary .02(a)(2).\6\ Specifically, as of May 1, 2012, 
only 9.95% of the weight of the 2018 Index components have a minimum 
original principal amount outstanding of $100 million or more.
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    \6\ Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3) 
provides that components that in the aggregate account for at least 
75% of the weight of the index or portfolio each shall have a 
minimum original principal amount outstanding of $100 million or 
more.
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    According to the Exchange, the 2018 Fund generally will invest at 
least 80% of its assets in the securities of the 2018 Index, except 
during the last months of such Fund's operations, as described below. 
The 2018 Fund may at times invest up to 20% of its assets in cash and 
cash equivalents (including money market funds affiliated with the 
Investment Adviser), as well as in municipal bonds not included in the 
2018 Index, but which the Investment Adviser believes will help the 
2018 Fund track the 2018 Index. For example, the 2018 Fund may invest 
in municipal bonds not included in the 2018 Index in order to reflect 
prospective changes in the 2018 Index (such as 2018 Index 
reconstitutions, additions, and deletions). The 2018 Fund will 
generally hold municipal bond securities issued by state and local 
municipalities whose interest payments are exempt from U.S. federal 
income tax, the federal AMT and, effective beginning in 2013, a federal 
Medicare contribution tax of 3.8% on ``net investment income,'' 
including dividends, interest, and capital gains. In addition, the 2018 
Fund may invest any cash assets in one or more affiliated municipal 
money market funds. In the last months of operation, as the bonds held 
by the 2018 Fund mature, the proceeds will not be reinvested in bonds 
but instead will be held in cash and cash equivalents, including 
without limitation, AMT-free tax-exempt municipal notes, variable rate 
demand notes and obligations, tender option bonds, and municipal 
commercial paper. These cash equivalents may not be included in the 
2018 Index. On or about August 31, 2018, the 2018 Fund will wind up and 
terminate, and its net assets will be distributed to then-current 
shareholders.

iShares 2019 S&P AMT-Free Municipal Series

    The 2019 Fund will seek investment results that correspond 
generally to the price and yield performance, before fees and expenses, 
of the S&P AMT-Free Municipal Series 2019 Index\TM\ (``2019 
Index'').\7\ The 2019 Fund will not seek to return any predetermined 
amount at maturity. The 2019 Index measures the performance of 
investment-grade U.S. municipal bonds maturing in 2019. As of May 1, 
2012, there were 1,157 issues in the 2019 Index.
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    \7\ S&P is the 2019 Fund's Index Provider. See note 5, supra.
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    The 2019 Index includes municipal bonds primarily from issuers that 
are

[[Page 61806]]

state or local governments or agencies (including the Commonwealth of 
Puerto Rico and U.S. territories such as the U.S. Virgin Islands and 
Guam) such that the interest on the bonds is exempt from U.S. federal 
income taxes and the federal AMT. According to the Exchange, each bond 
must have a rating of at least BBB- by S&P, Baa3 by Moody's, or BBB- by 
Fitch, Inc. and must have a minimum maturity par amount of $2 million 
to be eligible for inclusion in the 2019 Index. To remain in the 2019 
Index, bonds must maintain a minimum par amount greater than or equal 
to $2 million as of each rebalancing date. All bonds in the 2019 Index 
will mature between June 1 and August 31 of 2019. When a bond matures 
in the 2019 Index, an amount representing its value at maturity will be 
included in the 2019 Index throughout the remaining life of the 2019 
Index, and any such amount will be assumed to earn a rate equal to the 
performance of the S&P's Weekly High Grade Index, which consists of 
Moody's Investment Grade-1 municipal tax-exempt notes that are not 
subject to federal AMT. By August 31, 2019, the 2019 Index is expected 
to consist entirely of cash carried in this manner. The 2019 Index is a 
market value weighted index and is rebalanced after the close on the 
last business day of each month.
    The Exchange submitted this proposed rule change because the 2019 
Index for the 2019 Fund does not meet all of the ``generic'' listing 
requirements of Commentary .02(a) to NYSE Arca Equities Rule 5.2(j)(3) 
applicable to listing of Units based on fixed income securities 
indexes. The 2019 Index meets all such requirements except for those 
set forth in Commentary .02(a)(2).\8\ Specifically, as of May 1, 2012, 
9.62% of the weight of the 2019 Index components have a minimum 
original principal amount outstanding of $100 million or more.
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    \8\ See note 6, supra.
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    According to the Exchange, the 2019 Fund generally will invest at 
least 80% of its assets in the securities of the 2019 Index, except 
during the last months of the 2019 Fund's operations, as described 
below. The Fund may at times invest up to 20% of its assets in cash and 
cash equivalents (including money market funds affiliated with the 
Investment Adviser), as well as in municipal bonds not included in the 
2019 Index, but which the Investment Adviser believes will help the 
2019 Fund track the 2019 Index. For example, the 2019 Fund may invest 
in municipal bonds not included in the 2019 Index in order to reflect 
prospective changes in the 2019 Index (such as 2019 Index 
reconstitutions, additions, and deletions). The 2019 Fund will 
generally hold municipal bond securities issued by state and local 
municipalities whose interest payments are exempt from U.S. federal 
income tax, the federal AMT and, effective beginning in 2013, a federal 
Medicare contribution tax of 3.8% on ``net investment income,'' 
including dividends, interest, and capital gains. In addition, the 2019 
Fund may invest any cash assets in one or more affiliated municipal 
money market funds. In the last months of operation, as the bonds held 
by the 2019 Fund mature, the proceeds will not be reinvested in bonds 
but instead will be held in cash and cash equivalents, including 
without limitation, AMT-free tax-exempt municipal notes, variable rate 
demand notes and obligations, tender option bonds, and municipal 
commercial paper. These cash equivalents may not be included in the 
2019 Index. On or about August 31, 2019, the 2019 Fund will wind up and 
terminate, and its net assets will be distributed to then-current 
shareholders.
    Additional information regarding the Trust, the Funds, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the Notice 
and Registration Statements, as applicable.\9\
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    \9\ See Notice and Registration Statements, supra notes 3 and 4, 
respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \10\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\11\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\12\ which 
requires, among other things, that the Exchange's rules be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The Commission notes that the Funds and the Shares must 
comply with the requirements of NYSE Arca Equities Rules 5.2(j)(3) and 
5.5(g)(2) to be listed and traded on the Exchange.
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    \10\ 15 U.S.C. 78f.
    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 17 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\13\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. The 2018 Index and 2019 
Index values, calculated and disseminated at least once daily, as well 
as the components of the 2018 Index and 2019 Index and their percentage 
weightings, will be available from major market data vendors. In 
addition, an Intraday Indicative Value (``IIV'') for the Shares of each 
Fund will be disseminated at least every 15 seconds during the Core 
Trading Session (9:30 a.m. to 4 p.m. Eastern Time) by one or more major 
market data vendors.\14\ Information regarding market price and trading 
volume of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services. The Funds' Web site at www.iShares.com will also include a 
form of the prospectus for the Funds, information relating to net asset 
value (``NAV''), and other applicable quantitative information. 
Additionally, the portfolio of securities held by the Funds will be 
disclosed on the Funds' Web site daily after the close of trading on 
the Exchange and prior to the opening of trading on the Exchange the 
following day.
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    \13\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \14\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02(c). 
According to the Exchange, several major market data vendors widely 
disseminate IIVs taken from the CTA or other data feeds. See Notice, 
supra note 3, at 52778, n.12.
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    The Commission believes that the proposal to list and trade the 
Shares is reasonably designed to promote fair disclosure of information 
that may be necessary to price the Shares appropriately and to prevent 
trading when a reasonable degree of transparency cannot be assured. The 
Exchange states that the Index Provider is not a broker-dealer or 
affiliated with a broker-dealer, and has implemented procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the

[[Page 61807]]

Underlying Indexes.\15\ Prior to the commencement of trading, the 
Exchange will inform its Equity Trading Permit Holders in an 
Information Bulletin of the special characteristics and risks 
associated with trading the Shares. With respect to trading halts, if 
the Exchange becomes aware that the NAV is not being disseminated to 
all market participants at the same time, it will halt trading in the 
Shares until such time as the NAV is available to all market 
participants. In addition, the Exchange may consider all relevant 
factors in exercising its discretion to halt or suspend trading in the 
Shares of the Funds. Trading may be halted because of market conditions 
or for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable. The Exchange represents that, if the IIV or the 
Underlying Index values are not being disseminated as required, the 
Exchange may halt trading during the day in which the interruption to 
the dissemination of the applicable IIV or Underlying Index value 
occurs. If the interruption to the dissemination of the applicable IIV 
or Underlying Index value persists past the trading day in which it 
occurred, the Exchange will halt trading. Moreover, trading in Shares 
of the Funds will be halted if the circuit breaker parameters in NYSE 
Arca Equities Rule 7.12 have been reached or because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. Further, trading in the Shares will 
be subject to NYSE Arca Equities Rule 7.34, which sets forth additional 
circumstances under which Shares of the Funds may be halted. The 
Exchange states that it has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange may obtain information 
via the Intermarket Surveillance Group (``ISG'') from other exchanges 
that are members of ISG or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
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    \15\ The Commission also notes that an investment adviser to an 
open-end fund is required to be registered under the Investment 
Advisers Act of 1940 (``Advisers Act''). As a result, the Investment 
Adviser and its personnel are subject to the provisions of Rule 
204A-1 under the Advisers Act relating to codes of ethics. This Rule 
requires investment advisers to adopt a code of ethics that reflects 
the fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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    Based on the Exchange's representations, the Commission believes 
that both the 2018 Index and 2019 Index are sufficiently broad-based 
and liquid to deter potential manipulation. As of May 1, 2012, there 
were 1,443 issues in the 2018 Index and 1,157 issues in the 2019 Index. 
As of the same date, 81.50% of the weight of the 2018 Index components 
and 81.66% of the weight of the 2019 Index components were comprised of 
individual maturities that were part of an entire municipal bond 
offering with a minimum original principal amount outstanding of $100 
million or more for all maturities of the offering. In addition, the 
total dollar amount outstanding of issues in the 2018 Index was 
approximately $16.59 billion, and the average dollar amount outstanding 
of issues in the 2018 Index was approximately $11.50 million. The total 
dollar amount outstanding of issues in the 2019 Index was approximately 
$13.50 billion, and the average dollar amount outstanding of issues in 
the 2019 Index was approximately $11.67 million. Further, the most 
heavily weighted component represents 4.06% of the weight of the 2018 
Index, and the five most heavily weighted components represent 8.20% of 
the weight of the 2018 Index.\16\ The most heavily weighted component 
represents 3.67% of the weight of the 2019 Index, and the five most 
heavily weighted components represent 9.62% of the weight of the 2019 
Index.\17\ In addition, the average daily notional trading volume for 
2018 Index components for the period April 1, 2011 to April 30, 2012 
was $12,417,528, and the sum of the notional trading volumes for the 
same period was approximately $3.38 billion. The average daily notional 
trading volume for 2019 Index components for the period April 1, 2011 
to April 30, 2012 was $14,434,454, and the sum of the notional trading 
volumes for the same period was approximately $3.93 billion. As of May 
1, 2012, 54.78% of the 2018 Index weight and 52.52% of the 2019 Index 
weight consisted of issues with a rating of AA/Aa2 or higher.
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    \16\ Commentary .02(a)(4) to NYSE Arca Equities Rule 5.2(j)(3) 
provides that no component fixed-income security (excluding Treasury 
Securities and GSE Securities, as defined therein) shall represent 
more than 30% of the weight of the index or portfolio, and the five 
most heavily weighted component fixed-income securities in the index 
or portfolio shall not in the aggregate account for more than 65% of 
the weight of the index or portfolio.
    \17\ See id.
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    In support of this proposal, the Exchange has made representations, 
including:
    (1) Except for Commentary .02(a)(2) to NYSE Arca Equities Rule 
5.2(j)(3), the Shares of the Funds currently satisfy all of the generic 
listing standards under NYSE Arca Equities Rule 5.2(j)(3).
    (2) The continued listing standards under NYSE Arca Equities Rules 
5.2(j)(3) and 5.5(g)(2) applicable to Units shall apply to the Shares.
    (3) The Shares will comply with all other requirements applicable 
to Units including, but not limited to, requirements relating to the 
dissemination of key information, such as the value of the Underlying 
Indexes and the applicable value of the IIV, rules governing the 
trading of equity securities, trading hours, trading halts, 
surveillance, information barriers, and the Information Bulletin to 
Equity Trading Permit Holders (each as described in more detail herein 
and in the Notice and Registration Statements, as applicable), as set 
forth in Exchange rules applicable to Units and prior Commission orders 
approving the generic listing rules applicable to the listing and 
trading of Units.
    (4) The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws.
    (5) For initial and continued listing of the Shares, the Trust is 
required to comply with Rule 10A-3 under the Act.\18\
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    \18\ See 17 CFR 240.10A-3.
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    (6) The 2018 Fund generally will invest at least 80% of its assets 
in the securities of the 2018 Index, and the 2019 Fund generally will 
invest at least 80% of its assets in the securities of the 2019 Index.
    (7) The Investment Adviser expects that over time each Fund's 
tracking error \19\ will not exceed 5%.
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    \19\ Tracking error is the difference between the performance 
(return) of a Fund's portfolio and that of the applicable Underlying 
Index.
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    (8) The 2018 Fund may at times invest up to 20% of its assets in 
cash and cash equivalents (including money market funds affiliated with 
the Investment

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Adviser), as well as in municipal bonds not included in the 2018 Index, 
but which Investment Adviser believes will help the 2018 Fund track the 
2018 Index. The 2019 Fund may at times invest up to 20% of its assets 
in cash and cash equivalents (including money market funds affiliated 
with Investment Adviser), as well as in municipal bonds not included in 
the 2019 Index, but which the Investment Adviser believes will help the 
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2019 Fund track the 2019 Index.

This approval order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, and the Exchange's 
description of the Funds.

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \20\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \20\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-NYSEArca-2012-92) be, and it 
hereby is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24957 Filed 10-10-12; 8:45 am]
BILLING CODE 8011-01-P