[Federal Register: October 15, 2004 (Volume 69, Number 199)]
[Notices]
[Page 61280-61289]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15oc04-129]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50505; File No. SR-NYSE-2004-55]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc. To List and Trade the iShares[reg] FTSE/Xinhua
China 25 Index Fund
October 8, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''), \1\ and Rule 19b-4 thereunder, \2\ notice is hereby
given that on September 27, 2004 the New York Stock Exchange, Inc.
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and is approving the
proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to list and trade the iShares[reg] FTSE/Xinhua
China 25 Index Fund (``Fund''), an exchange traded fund, which is a
type of Investment Company Unit (``ICU'').
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. The
text of these statements may be examined at the places specified in
Item III, below, and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
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 LLC and other national securities exchanges, and trading
standards pursuant to which the Exchange may either list and trade
ICUs, or trade such ICUs on the Exchange on an unlisted trading
privileges (``UTP'') basis. \3\
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\3\ In 1996, the Commission approved Section 703.16 of the NYSE
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). In 2000,
the Commission also approved the Exchange's generic listing
standards for listing and trading, or the trading pursuant to UTP,
of ICUs under Section 703.16 of the Manual and NYSE Rule 1100. See
Securities Exchange Act Release No. 43679 (December 5, 2000), 65 FR
77949 (December 13, 2000).
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The Exchange now proposes to list and trade under Section 703.16 of
the NYSE Listed Company Manual and NYSE Rule 1100 shares of the Fund,
\4\ a series of the iShares Trust (``Trust''). \5\ Because the Fund
invests in foreign securities not listed on a national securities
exchange or the Nasdaq Stock Market, the Fund does not meet the
``generic'' listing requirements of Section 703.16 of the Manual, which
permits the listing and trading of ICUs pursuant to Rule 19b-4(e) under
the Exchange Act. \6\ Therefore, to list the Fund (or trade pursuant to
unlisted trading privileges), the Exchange must file, and obtain
Commission approval of, a proposed rule change pursuant to Rule 19b-4
under the Exchange Act.
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\4\ iShares is a registered trademark of Barclays Global
Investors, N.A.
\5\ The Trust is registered under the Investment Company Act of
1940, as amended (``Investment Company Act''). On January 22, 2003,
the Trust filed with the Commission a Registration Statement for the
fund on Form N-1A under the Securities Act of 1933, as amended, and
under the Investment Company Act relating to the Fund (File Nos.
333-92935 and 811-09729) (as amended, the ``Registration
Statement''). On January 27, 2004, the Trust filed a Form N-1A to
update certain Fund information.
On October 5, 2004, the Commission approved the Second Amended
and Restated Application for an Amended Order under Sections 6(c)
and 17(b) of the Investment Company Act. See Investment Company Act
Release No. 26626 (October 5, 2004) (``Amended Order''); Investment
Company Act Release No. 26597 (September 14, 2004), 69 FR 56105
(September 17, 2004) (File No. 812-12936). The Amended Order permits
the Trust to offer three new International ETFs, including the Fund,
and permits the Fund, along with certain other International ETFs,
to invest in certain depository receipts, as described below.
\6\ 17 CFR 240.19b-4(e).
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As set forth in detail herein, the Fund will hold certain
securities and other instruments selected to correspond generally to
the performance of the FTSE/Xinhua China 25 Index (``Underlying
Index''). The Fund intends to qualify as a ``regulated investment
company'' (``RIC'') under the Internal Revenue Code (the ``Code'').
Barclays Global Fund Advisors (``Advisor'' or ``BGFA'') is the
investment advisor to the Fund. The Advisor is registered under the
Investment Advisers Act of 1940. The Advisor is the wholly owned
subsidiary of Barclays Global Investors, N.A. (``BGI''), a national
banking association. BGI is an indirect subsidiary of Barclays Bank PLC
of the United Kingdom. SEI Investments Distribution Co.
(``Distributor''), a Pennsylvania corporation and broker-dealer
registered under the Exchange Act, is the principal underwriter and
distributor of Creation Unit Aggregations of iShares (see ``Issuance of
Creation Unit Aggregations'' below). The Distributor is not affiliated
with the Exchange or the Advisor. The Trust has appointed Investors
Bank & Trust Co. (``IBT'' or ``Administrator'') to act as
administrator, custodian, fund accountant, transfer agent, and dividend
disbursing agent for the Fund. The Exchange expects that performance of
the Administrator's duties and obligations will be conducted within the
provisions of the Investment Company Act and the rules thereunder.
There is no affiliation between the Administrator and the Trust, the
Advisor or the Distributor.
FTSE/Xinhua Index Ltd. (``FXI''),\7\ the sponsor and compiler of
the FTSE/Xinhua China 25 Index, is not affiliated with the Trust, the
Administrator, the Distributor, or with the Advisor or its
affiliates.\8\ The Fund is not sponsored,
[[Page 61281]]
offered or sold by FXI. FXI is not affiliated with a broker or dealer.
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\7\ FXI is a Hong Kong incorporated, joint venture company
between FTSE, the global index company, and Xinhua Financial
Network.
\8\ Although FXI is not an affiliated person, or an affiliated
person of an affiliated person of the Advisor, an employee of
Barclays Global Investors, North Asia Limited (``BGIL''), an
affiliate of the Advisor, currently serves as one of the 19 members
of the FTSE/Xinhua Index Committee. The FTSE/Xinhua Index Committee
provides practitioner input into the construction of the FTSE/Xinhua
indices and independent oversight to ensure that relevant index
construction rules are being followed. The Index Committee is
currently composed of 19 members, four of whom are currently
affiliated with non-U.S. broker-dealers. The role of the Index
Committee is to review the appropriateness of existing index rules,
to provide oversight to ensure that index rules are properly
followed, and to recommend changes to the rules in response to
changes in the underlying market that the index seeks to represent.
Input from persons or experts (i.e., practitioners) who have
applicable industry knowledge of the underlying market that the
index seeks to represent helps ensure that the published index rules
and the implementation of such rules adequately reflect current
developments in the underlying market. Any such input would be
provided in accordance with the published index rules and
methodology and any changes in index components would be implemented
in accordance with such rules. The index compilation functions of
FXI and the FTSE/Xinhua Index Committee are, and will remain,
completely separate and independent of the portfolio management
functions of BGFA. FXI and the FTSE/Xinhua Index Committee have
adopted policies that prohibit the dissemination and use of
confidential and proprietary information about the Index and have
instituted procedures designed to prevent the improper dissemination
and use of such information. The BGIL employee on the FTSE/Xinhua
Index Committee is not and will not be involved in the operations of
the Advisor or the Fund, and is and will not be involved in any
capacity with the Fund's Board of Trustees. BGI and BGIL have
adopted policies that limit the use of confidential and proprietary
information about portfolio management decisions to those person
whose duties require and permit them to have access to such
information and have instituted procedures designed to prevent the
improper dissemination and use of such information. BGIL and BGFA
are separate legal entities and do not share employees, office
space, trading floors or portfolio management systems.
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While the Advisor would manage the Fund, the Fund's Board of
Directors would have overall responsibility for the Fund's operations.
The composition of the Board is, and would be, in compliance with the
requirements of Section 10 of the Investment Company Act. The Fund is
subject to and must comply with Section 303A.06 of the Manual, which
requires that the Fund have an audit committee that complies with Rule
10A-3 of the Exchange Act.\9\
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\9\ 17 CFR 240.10A-3.
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(a) Operation of the Fund
The investment objective of the Fund will be to provide investment
results that correspond generally to the price and yield performance of
the Underlying Index. In seeking to achieve its investment objective,
the Fund will utilize ``passive'' indexing investment strategies. The
Fund may fully replicate its Underlying Index, but currently intends to
use a ``representative sampling'' strategy to track its Underlying
Index. A Fund utilizing a representative sampling strategy generally
will hold a basket of the Component Securities of its Underlying Index,
but it may not hold all of the Component Securities of its Underlying
Index.
From time to time, adjustments may be made in the portfolio of the
Fund in accordance with changes in the composition of the Underlying
Index or to maintain compliance with requirements applicable to a RIC
under the Code.\10\ For example, if at the end of a calendar quarter a
Fund would not comply with the RIC diversification tests, the Advisor
would make adjustments to the portfolio to ensure continued RIC status.
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\10\ In order for the Fund to quality for tax treatment as a
RIC, it must meet several requirements under the Code. Among these
is a requirement that, at the close of each quarter of the Fund's
taxable year, (1) 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 RICs and other securities, with such
other securities limited for the purpose of this calculation with
respect to 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 (2) not more than
25% of the value of its total assets may be invested in securities
of any one issuer, or two or more issuers that are controlled by the
Fund (within the meaning of Section 851(b)(4)(B) of the Code) and
that are engaged in the same or similar trades or business (other
than U.S. government securities of other RICs).
``Other securities'' of an issuer are considered qualifying
assets only if they meet the following conditions:
The entire amount of the securities of the issuer owned by the
company is not greater in value than 5% of the value of the total
assets of the company; and the entire amount of the securities of
such issuer owned by the company does not represent more than 10% of
the outstanding voting securities of such issuer.
Under the second diversification requirement, the ``25%
diversification limitation,'' a company may not invest more that 25%
of the value of its assets in any one issuer or two issuers or more
that the taxpayer controls.
Compliance with the above referenced RIC asset diversification
requirements are monitored by the Adviser and any necessary
adjustments to portfolio issuer weights will be made on a quarterly
basis or as necessary to ensure compliance with RIC requirements.
When an iShares Fund's Underlying Index itself is not RIC compliant,
the Adviser generally employs a representative sampling indexing
strategy (as described in the prospectus) in order to achieve the
Fund's investment objective. Each iShare Fund's prospectus also
gives such Fund additional flexibility to comply with the
requirements of the Code and other regulatory requirements and to
manage future corporate actions and index changes in smaller markets
by investing a percentage of fund assets in securities that are not
included in the Fund's Underlying Index or in American Depository
Receipts and Global Depository Receipts representing such
securities.
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The performance of the Fund and the Underlying Index will vary
somewhat due to transaction costs, market impact, corporate actions
(such as mergers and spin-offs) and timing variances. It is expected
that, over time, the correlation between the Fund's performance and
that of the 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.'' Thus, as
with existing iShares funds, BGFA represents that the expected tracking
error of the Fund relative to the performance of its Underlying Index
will be no more than 5%. The Fund's investment objectives, policies and
investment strategies will be fully disclosed in its prospectus
(``Prospectus'') and statement of additional information (``SAI'').
The Fund will not concentrate its investments (i.e., hold 25% or
more of its assets) in a particular industry or group of industries,
except that the Fund will concentrate its investments to approximately
the same extent that the 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.
The Fund will at all times invest at least 80% of its assets in
component securities of its Underlying Index (``Component Securities'')
and in depository receipts representing such Component Securities \11\
and at least half of the remaining 20% of its assets in Component
Securities or Depository Receipts or in stocks included in the Chinese
market, but not included in the Underlying Index. To the extent the
Fund invests in ADRs, they will be listed on a national securities
exchange or Nasdaq. Other depository receipts, namely GDRs, will be
listed on a foreign exchange. The Fund will not invest in any unlisted
depository receipts or any listed depository receipts that the Advisor
deems to be illiquid or for which pricing information is not readily
available.\12\ The Fund may also invest up to 10% of its assets in
certain futures, options and swap contracts and cash and cash
equivalents, including money market funds advised by the Advisor \13\
and other exchange traded funds (including other iShares funds).\14\
For example, the Fund may invest in securities not included in the
Underlying Index in order to reflect prospective changes in the
Underlying Index (such as future corporate actions
[[Page 61282]]
and index reconstitutions, additions and deletions).
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\11\ For the purposes of this order, ``Depository Receipts'' are
American Depository Receipts (``ADRs'') and Global Depository
Receipts (``GDRs'') (collectively, ``Depository Receipts'').
\12\ In addition, the Exchange represents that all Depository
Receipts must be sponsored (with the exception of certain pre-1984
ADRs that are listed but unsponsored because they were
grandfathered).
\13\ See In the Matter of Master Investment Portfolio, et al.,
Investment Company Act Release No. 25158 (September 18, 2001).
\14\ The Fund, as well as any existing iShares Fund, is
permitted to invest in shares of another iShares Fund to the extent
that such investment is consistent with the Fund's investment
objective, registration statement, and any applicable investment
restrictions.
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The Fund intends to hold all of the securities in the Index that
are listed on the Hong Kong Stock Exchange. The Fund does not intend to
hold any B-shares which are listed in Chinese markets and included in
the Underlying Index.\15\ The Fund also does not currently intend to
invest in the Depository Receipts but reserves the flexibility to do
so.\16\
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\15\ See infra note 20.
\16\ Telephone conversation between Mike Cavalier, Associate
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and
Florence Harmon, Senior Special Counsel, Division, Commission, on
October 7, 2004.
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The Exchange believes that these requirements and policies prevent
the Fund from being excessively weighted in any single security or
small group of securities and significantly reduce concerns that
trading in the Fund could become a surrogate for trading in
unregistered securities.
(b) Description of the Fund and the Underlying Index (FTSE/Xinhua China
25 Index)
FXI is a Hong Kong incorporated, joint venture company between
FTSE, the global index company, and Xinhua Financial Network (``XFN'').
The company was created to facilitate the development of real-time
indices for the Chinese market that can be used as performance
benchmarks and as a basis for derivative trading and index tracking
funds. FTSE is an independent company whose sole business is the
creation and management of indices and associated data services. FTSE
originated as a joint venture between the Financial Times and the
London Stock Exchange. FTSE calculates over 60,000 indices daily,
including more than 600 real-time indices. XFN is an independent
financial information provider that focuses on China's markets. XFN is
based in Hong Kong and Beijing.
Index Description
The Underlying Index is designed to represent the performance of
the largest companies in the mainland China equity market that are
available to international investors. The Underlying Index includes 25
of the largest and most heavily traded Chinese companies.\17\
Securities in the Underlying Index are weighted based on the free-float
adjusted total market value of their shares, so that securities with
higher total market values generally have a higher representation in
the Underlying Index. Index constituents are screened for liquidity and
weightings are capped to avoid over-concentration in any one stock. The
inception date of the Underlying Index was March 2001.
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\17\ The Exchange provided additional information regarding the
Index and a complete list of its components as of August 31, 2004 in
Exhibit A to its Form 19b-4 submission.
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As of December 31, 2003, the Underlying Index's top three holdings
were BOC Hong Kong (Holdings), PetroChina and China Mobile and the
Underlying Index's top three industries were oil and gas,
telecommunications services and banks.
As of August 31, 2004, the Underlying Index's components had a
total market capitalization of approximately $154 billion and a float-
adjusted market capitalization of approximately $41 billion.\18\ The
average total market capitalization was approximately $6.2 billion and
the average float-adjusted market capitalization was approximately $1.6
billion. The ten largest constituents represented approximately 60.8%
of the index weight. The 5 highest weighted stocks, which represented
40.2% of the index weight, had an average daily trading volume in
excess of 47.5 million shares during the past 2 months. All of the
component stocks traded at least 250,000 shares in each of the previous
6 months.
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\18\ Float-adjusted market capitalization includes shares
available in the market for public investment, and reflects free
float adjustments to the Index in accordance with FTSE's free float
rules. Additional information regarding FTSE's free float adjustment
methodology is available on http://www.ftse.com.
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Index Methodology
Component Selection Criteria. The FTSE/Xinhua China 25 Index is
rule-based and is monitored by a governing committee. The FTSE/Xinhua
China 25 Index Committee (``Index Committee'') is responsible for
conducting the quarterly review of constituents of the Underlying Index
and for making changes in accordance with applicable procedures. The
Index Committee is currently composed of 19 members, four of whom are
currently affiliated with non-U.S. broker-dealers, including an
employee of BGIL. Any such input would be provided in accordance with
the published index rules and methodology and any changes in index
components would be implemented in accordance with such rules.\19\
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\19\ Telephone conversation between Mike Cavalier, Associate
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and
Florence Harmon, Senior Special Counsel, Division, Commission, on
October 7, 2004.
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FTSE has represented that the FTSE, FXI, and the Index Committee
have adopted policies that prohibit the dissemination and use of
confidential and proprietary information about the Underlying Index and
have instituted procedures designed to prevent the improper
dissemination of the use of such information. BGI and BGIL have made
similar representations with respect to the Index Committee member who
is a BGIL employee.
Eligibility. Each security included in the Underlying Index will be
a current constituent of the FTSE All-World Index. All classes of
equity securities in issue are eligible for inclusion in the Underlying
Index subject to conforming with free-float and liquidity restrictions.
H shares, Red Chip shares and B shares are eligible for inclusion in
the Underlying Index.\20\ As of September 24, 2004, only one
constituent was B shares (approximately 1% of the Underlying Index).
FXI expects to eventually eliminate B shares from the Underlying Index.
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\20\ ``H'' Shares--H shares are incorporated in China and listed
and traded on the Hong Kong exchange. They are quoted and traded in
Hong Kong and U.S. dollars. Like other securities trading on the
Hong Kong Stock Exchange, there are no restrictions on who can trade
H shares.
``Red Chip'' Shares--Red Chip shares are incorporated in Hong
Kong and trade on the Hong Kong stock exchange. They are quoted in
Hong Kong dollars. Red Chip companies may be substantially owned
directly or indirectly by the Chinese Government and have the
majority of their business interested in mainland China.
H shares and Red Chip shares trade on the Hong Kong Stock
Exchange, typically on a T+2 basis, through a central book-entry
system that effectively guarantees settlement of exchange trades by
broker-dealers.
``B'' Shares--B shares are incorporated in China and trade on
either the Shanghai or Shenzhen stock exchanges. They are quoted in
U.S. dollars on the Shanghai stock exchange and Hong Kong dollars on
the Shenzhen stock exchange. They can be traded by non-residents of
the Peoples' Republic of China and also residents of the People's
Republic of China with appropriate foreign currency dealing
accounts. There is not a true ``delivery versus payment'' settlement
for B foreign depositaries or local banks.
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Float-Adjusted Market Capitalization. When calculating a company's
index weights, individual constituents' shares held by governments,
corporations, strategic partners, or other control groups are excluded
from the company's shares outstanding. Shares owned by other companies
are also excluded regardless of whether such companies are index
constituents. Where a foreign investment limit exists at the sector or
company level, the constituent's weight will reflect either the foreign
investment limit or the percentage float, whichever is the more
restrictive.\21\
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\21\ The Exchange understands that there are no foreign
ownership limits with the current constituents to the FTSE/Xinhua
China 25 Index and that, as such, the percentage float will be used.
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Stocks are screened to ensure there is sufficient liquidity to be
traded. Factors in determining liquidity include the
[[Page 61283]]
availability of current and reliable price information and the level of
trading volume relative to shares outstanding. Value traded and float
turnover are also analyzed on a monthly basis to ensure ample
liquidity. Fundamental analysis is not part of the selection criteria
for inclusion or exclusion of stocks from the Underlying Index. The
financial and operating condition of a company are not analyzed.
Index Maintenance and Issue Changes. The Index Committee is
responsible for undertaking the review of the Underlying Index and for
approving changes of constituents in accordance with the index rules
and procedures. The FTSE Global Classification Committee is responsible
for the industry classification of constituents of the Underlying Index
within the FTSE Global Classification System. The FTSE Global
Classification Committee may approve changes to the FTSE Global
Classification System and Management Rules. FXI appoints the Chairman
and Deputy Chairman of the Index Committee. The Chairman chairs
meetings of the Committee and represents the Committee in outside
meetings. Adjustments to reflect a major change in the amount or
structure of a constituent company's issued capital will be made before
the start of the index calculation on the day on which the change takes
effect. Adjustments to reflect less significant changes will be
implemented before the start of the index calculation on the day
following the announcement of the change. All adjustments are made
before the start of the index calculations on the day concerned, unless
market conditions prevent this.
A company will be inserted into the Underlying Index at the
periodic review if it rises to 15th position or above when the eligible
companies are ranked by full market value before the application of any
investibility weightings. A company in the Underlying Index will be
deleted at the periodic review if it falls to 36th position or below
when the eligible companies are ranked by full market value before the
application of any investibility weightings. Any deletion to the
Underlying Index will simultaneously entail an addition to the
Underlying Index to maintain 25 index constituents at all times.
Revisions to the Float Adjustments. The Underlying Index is
reviewed quarterly for changes in free float. These reviews will
coincide with the quarterly reviews undertaken of the Underlying Index
as a whole. Implementation of any changes will be after the close of
the index calculation on the third Friday in January, April, July and
October.
Quarterly Index Rebalancing. The quarterly review of the Underlying
Index constituents takes place in January, April, July and October. Any
changes will be implemented on the next trading day following the third
Friday of the same month of the review meeting. Details of the outcome
of the review and the dates on which any changes are to be implemented
will be published as soon as possible after the Index Committee meeting
has concluded its review.
Index Availability. The Underlying Index is calculated in real time
and published every minute during the index period (09:15-16:00 Local
Hong Kong Time) or (17:15-24:00 U.S. PDT). It is available, by
subscription, published every minute, directly from FTSE and from the
following vendors: Reuters, Bloomberg, Telekurs, FTID and LSE/Proquote.
The end of day index value, based on last sale prices,\22\ is
distributed at 16:15 (Local Hong Kong Time). This end of day index
value also will be made available to the Financial Times Asia edition
and other major newspapers and will be available at the FTSE Index
Services Web site: http://www.ftse.com. The Underlying Index is
calculated using Hong Kong Stock Exchange trade prices and Reuter's
real-time spot currency rates, as described below. A total return index
value that takes into account reinvested dividends is published daily
at the end of day. The Underlying Index is not calculated on days that
are holidays in Hong Kong.
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\22\ Telephone conversation between Mike Cavalier, Associate
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and
Florence Harmon, Senior Special Counsel, Division, Commission, on
October 7, 2004.
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The daily closing index value, historical values, constituents'
weighting, constituents' market capitalization and daily percentage
changes are publicly available from http://www.ftsexinhua.com. All
corporate actions and rules relating to the management of the indices
are also available from the Web site.
Exchange Rates and Pricing. FXI calculates the value of the
Underlying Index using Reuters real-time foreign exchange spot rates
and local stock exchange real-time, last sale security prices. The
Underlying Index is calculated in Hong Kong Dollars, using Hong Kong
Stock Exchange trade prices. Non-Hong Kong Dollar denominated
constituent prices are converted to Hong Kong Dollars in order to
calculate the value of the Underlying Index.\23\ Thus, the Reuter's
foreign exchange rates and Hong Kong Stock Exchange prices received at
the closing time of the Underlying Index will be used to calculate the
final Underlying Index value each day.
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\23\ As stated, the Index provider has announced its intention
to remove the B Share component trading on either the Shanghai or
Shenzhen stock exchanges in the near future.
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(c) Issuance of Creation Unit Aggregations
The Exchange notes that, according to the Application, the issuance
and redemption of Creation Unit Aggregations will operate in a manner
identical to that of the funds that are the subject of the Prior
Order.\24\
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\24\ See supra note 5.
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(i) In General. The Fund will issues shares (the ``iShares'') on a
continuous offering basis in groups of 50,000 or more. These ``groups''
of shares are called ``Creation Unit Aggregations.'' The Fund will
issue and redeem iShares only in Creation Unit Aggregations.\25\ The
anticipated price at which the iShares will initially trade is
approximately $50.
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\25\ Each Creation Unit Aggregation will consist of 50,000 or
more iShares and the estimated initial value per Creation Unit
Aggregation will be approximately $2,500,000.
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The NAV per share of the Fund is determined as of the close of the
regular trading session on the Exchange on each day that the Exchange
is open. The Trust sells Creation Unit Aggregations of the Fund only on
business days at the next determined NAV of the Fund. Creation Unit
Aggregations generally will be issued by the Fund in exchange for the
in-kind deposit of equity securities designated by the Advisor to
correspond generally to the price and yield performance of the Fund's
Underlying Index (``Deposit Securities'') and a specified cash payment.
Creation Unit Aggregations generally will be redeemed by the Fund in
exchange for portfolio securities of the Fund (``Fund Securities'') and
a specified cash payment. Fund Securities received on redemption may
not be identical to Deposit Securities deposited in connection with
creations of Creation Unit Aggregations for the same day.
All orders to purchase iShares in Creation Unit Aggregations must
be placed through an Authorized Participant. An Authorized Participant
must be either a ``Participating Party'', i.e., a broker-dealer or
other participant in the clearing process through the National
Securities Clearing Corporation (``NSCC'') Continuous Net Settlement
System (``Clearing Process''), a clearing agency that is registered
with the SEC, or a Depository Trust Company (``DTC'') participant, and
in each case, must enter into a Participant Agreement. The Fund is
currently imposing transaction fees in
[[Page 61284]]
connection with creation and redemption transactions.\26\
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\26\ Telephone conversation between Mike Cavalier, Associate
General Counsel, NYSE, Richard Morris, Senior Counsel, BGI, and
Florence Harmon, Senior Special Counsel, Division, Commission, on
October 7, 2004.
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(ii) In-Kind Deposit of Portfolio Securities. Payment for Creation
Unit Aggregations will be made by the purchasers generally by an in-
kind deposit with the Fund of the Deposit Securities together with an
amount of cash (``Balancing Amount'') specified by the Advisor in the
manner described below. The Balancing Amount is an amount equal to the
difference between (1) the NAV (per Creation Unit Aggregation) of the
Fund and (2) the total aggregate market value (per Creation Unit
Aggregation) of the Deposit Securities (such value referred to herein
as the ``Deposit Amount''). The Balancing Amount serves the function of
compensating for differences, if any, between the NAV per Creation Unit
Aggregation and that of the Deposit Amount.\27\ The deposit of the
requisite Deposit Securities and the Balancing Amount are collectively
referred to herein as a ``Fund Deposit.'' The Advisor will make
available to the market through the NSCC on each business day, prior to
the opening of trading on the Exchange (currently 9:30 a.m. Eastern
Time), the list of the names and the required number of shares of each
Deposit Security included in the current Fund Deposit (based on
information at the end of the previous business day) for the Fund. The
Fund Deposit will be applicable to the Fund (subject to any adjustments
to the Balancing Amount, as described below) in order to effect
purchases of Creation Unit Aggregations of the Fund until such time as
the next-announced Fund Deposit composition is made available.
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\27\ Where the NAV (per Creation Unit Aggregation) of the Fund
exceeds the Deposit Amount, the purchaser pays the corresponding
balancing Amount to the Fund. Where, by contrast, the Deposit Amount
exceeds the NAV (per Creation Unit Aggregation) of the Fund, the
Balancing Amount is paid by the Fund to the purchaser.
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The identity and number of shares of the Deposit Securities
required for the Fund Deposit for the Fund will change from time to
time. The composition of the Deposit Securities may change in response
to adjustments to the weighting or composition of the constituent
securities in the Underlying Index. In addition, the Trust reserves the
right to permit or require the substitution of an amount of cash--i.e.,
a ``cash in lieu'' amount--to be added to the Balancing Amount to
replace any Deposit Security that may not be available in sufficient
quantity for delivery or that may not otherwise be eligible for
transfer. The Trust also reserves the right to permit or require a
``cash in lieu'' amount where the delivery of the Deposit Security by
the Authorized Participant would be restricted under the securities
laws or where the delivery of the Deposit Security to the Authorized
Participant would result in the disposition of the Deposit Security by
the Authorized Participant becoming restricted under the securities
laws, or in certain other situations. The adjustments described above
will reflect changes known to the Advisor on the date of announcement
to be in effect by the time of delivery of the Fund Deposit, in the
composition of the Underlying Index or resulting from certain corporate
actions.
(d) Availability of Information Regarding iShares and the Underlying
Index
On each business day the list of names and amount of each security
constituting the current Deposit Securities of the Fund Deposit and the
Balancing Amount effective as of the previous business day, per
outstanding share of the Fund, will be made available. An amount per
iShare representing the sum of the estimated Balancing Amount effective
through and including the previous business day, plus the current value
of the Deposit Securities in U.S. dollars, on a per iShare basis (the
``Intra-day Optimized Portfolio Value'' or ``IOPV'') will be calculated
by an independent third party (the ``Value Calculator''), such as
Bloomberg L.P., every 15 seconds during the Exchange's regular trading
hours and disseminated every 15 seconds on the Consolidated Tape.
The IOPV reflects the current value of the Deposit Securities and
the Balancing Amount. The IOPV also reflects changes in currency
exchange rates between the U.S. dollar and the applicable home foreign
currency.
Since the Fund will utilize a representative sampling strategy, the
IOPV may not reflect the value of all securities included in the
Underlying Index. In addition, the IOPV does not necessarily reflect
the precise composition of the current portfolio of securities held by
the Fund at a particular point in time. Therefore, the Exchange states
that the IOPV on a per Fund share basis disseminated during the
Exchange's trading hours should not be viewed as a real time update of
the NAV of the Fund, which is calculated only once a day. While the
IOPV disseminated by the Exchange at 9:30 a.m. New York Time is
expected to be generally very close to the most recently calculated
Fund NAV on a per-Fund-share basis, it is possible that the value of
the portfolio of securities held by the Fund may diverge from the
Deposit Securities values during any trading day. In such case, the
IOPV will not precisely reflect the value of the Fund portfolio.
However, during the trading day, the IOPV can be expected to
closely approximate the value per Fund share of the portfolio of
securities for the Fund except under unusual circumstances (e.g., in
the case of extensive rebalancing of multiple Component Securities at
the same time by the Advisor).
The Exchange believes that dissemination of the IOPV based on the
Deposit Securities provides additional information regarding the Fund
that is not otherwise available to the public and is useful to
professionals and investors in connection with Fund shares trading on
the Exchange or the creation or redemption of Fund shares. Since the
trading hours of the Hong Kong Stock Exchange do not overlap with
regular trading hours in the U.S., it is expected that the Value
Calculator, when calculating IOPV, will utilize closing prices (in
applicable foreign currency prices) in the principal foreign market for
the securities in the Fund portfolio (i.e., the Hong Kong Stock
Exchange), and convert the prices to U.S. dollars.
In addition, FTSE will disseminate a value for the Underlying Index
once each trading day, based on closing prices in the Hong Kong Stock
Exchange. The NAV for the Fund will be calculated and disseminated
daily. The Fund NAV will be calculated by IBT. IBT will disseminate the
information to BGI, SEI and others, including the NYSE. The Fund NAV
will be published in a number of places, including iShares.com and on
the Consolidated Tape.
The Underlying Index currently uses the Reuters foreign exchange
rate at the close of the index (4 p.m. Hong Kong Time) to compute final
index values. The Fund intends to use Reuters/WM foreign exchange rates
at 4 p.m. London Time. There will also be disseminated a variety of
data with respect to the Fund on a daily basis by means of CTA and CQ
High Speed Lines, which will be made available prior to the opening of
trading on the Exchange. Information with respect to recent NAV, shares
outstanding, estimated cash amount and total cash amount per Creation
Unit Aggregation will be made available prior to the opening of the
Exchange. In addition, the Web site for the Trust, http://www.ishares.com,
which will be
[[Page 61285]]
publicly accessible at no charge, will contain the following
information, on a per iShare basis, for the Fund: (a) The prior
business day's NAV and the mid-point of the bid-ask price at the time
of calculation of such NAV (``Bid/Ask Price''),\28\ and a calculation
of the premium or discount of such price against such NAV; and (b) data
in chart format displaying the frequency distribution of discounts and
premiums of the Bid/Ask Price against the NAV, within appropriate
ranges, for each of the four previous calendar quarters.
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\28\ The Bid-Ask Price of the Fund is determined using the
highest bid and lowest offer on the Exchange as of the time of
calculation of the Fund's NAV.
---------------------------------------------------------------------------
The closing prices of the Fund's Deposit Securities are readily
available from, as applicable, the relevant exchanges, automated
quotation systems, published or other public sources in the relevant
country, or on-line information services such as Bloomberg or Reuters.
The exchange rate information required to convert such information into
U.S. dollars is also readily available in newspapers and other
publications and from a variety of on-line services.
(e) Redemption of iShares
Creation Unit Aggregations of the Fund will be redeemable at the
NAV next determined after receipt of a request for redemption. Creation
Unit Aggregations of the Fund generally will be redeemed in-kind,
together with a balancing cash payment (although, as described below,
Creation Unit Aggregations may sometimes be redeemed for cash). The
value of the Fund's redemption payments on a Creation Unit Aggregation
basis will equal the NAV per the appropriate number of Fund shares.
Owners of iShares may sell their iShares in the secondary market, but
must accumulate enough iShares to constitute a Creation Unit
Aggregation in order to redeem through the Fund. Redemption orders must
be placed by or through an Authorized Participant.
Creation Unit Aggregations of the Fund generally will be redeemable
on any business day in exchange for Fund Securities and the Cash
Redemption Payment (defined below) in effect on the date a request for
redemption is made. The Advisor will publish daily through NSCC the
list of securities which a creator of Creation Unit Aggregations must
deliver to the Fund (``Creation List'') and which a redeemer will
receive from the Fund (``Redemption List''). The Creation List is
identical to the list of the names and the required numbers of shares
of each Deposit Security included in the current Fund Deposit.
In addition, just as the Balancing Amount is delivered by the
purchaser of Creation Unit Aggregations to the Fund, the Trust will
also deliver to the redeeming beneficial owner in cash the ``Cash
Redemption Payment.'' The Cash Redemption Payment on any given business
day will be an amount calculated in the same manner as that for the
Balancing Amount, although the actual amounts may differ if the Fund
Securities received upon redemption are not identical to the Deposit
Securities applicable for creations on the same day.\29\ To the extent
that the Fund Securities have a value greater than the NAV of iShares
being redeemed, a cash payment equal to the differential is required to
be paid by the redeeming beneficial owner to the Fund. The Trust may
also make redemptions in cash in lieu of transferring one or more Fund
Securities to a redeemer if the Trust determines, in its discretion,
that such method is warranted due to unusual circumstances. An unusual
circumstance could arise, for example, when a redeeming entity is
restrained by regulation or policy from transacting in certain Fund
Securities, such as the presence of such Fund Securities on a redeeming
investment banking firm's restricted list.
---------------------------------------------------------------------------
\29\ See discussion under Section II.A.1(c)(ii) ``In-Kind
Deposit of Portfolio Securities,'' above.
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(f) Dividends and Distributions
Dividends from net investment income will be declared and paid to
beneficial owners of record at least annually by the Fund.
Distributions of realized securities gains, if any, generally will be
declared and paid once a year, but the Fund may make distributions on a
more frequent basis to comply with the distribution requirements of the
Code and consistent with the Investment Company Act.
Dividends and other distributions on iShares of the Fund will be
distributed on a pro rata basis to beneficial owners of such iShares.
Dividend payments will be made through the Depository and the DTC
Participants to beneficial owners then of record with amounts received
from the Fund.
The Trust currently does not intend to make the DTC book-entry
Dividend Reinvestment Service (``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.\30\
---------------------------------------------------------------------------
\30\ The SAI will inform investors of this fact and direct
interested investors to contact such investor's broker to ascertain
the availability and a description of the Service through such
broker. The SAI will also caution interested beneficial owners that
they should note that each broker may require investors to adhere to
specific procedures and timetables in order to participate in the
Service and such investors should ascertain from their broker such
necessary details. iShares acquired pursuant to the Service will be
held by the beneficial owners in the same manner, and subject to the
same terms and conditions, as for original ownership of iShares.
---------------------------------------------------------------------------
Beneficial owners of iShares will receive all of the statements,
notices, and reports required under the Investment Company Act and
other applicable laws. They will receive, for example, annual and semi-
annual reports, written statements accompanying dividend payments,
proxy statements, annual notifications detailing the tax status of
distributions, IRS Form 1099-DIVs, etc. Because the Trust's records
reflect ownership of iShares by DTC only, the Trust will make available
applicable statements, notices, and reports to the DTC Participants
who, in turn, will be responsible for distributing them to the
beneficial owners.
(g) Other Issues
(1) Criteria for Initial and Continued Listing. iShares are subject
to the criteria for initial and continued listing of ICUs in Section
703.16 of the Manual. A minimum of two Creation Units (100,000 iShares)
will be required to be outstanding at the start of trading. his minimum
number of iShares required to be outstanding at the start of trading
will be comparable to requirements that have been applied to previously
traded series of ICUs.
The Exchange believes that the proposed minimum number of iShares
outstanding at the start of trading is sufficient to provide market
liquidity and to further the Trust's objective to seek to provide
investment results that correspond generally to the price and yield
performance of the Underlying Index.
(2) Original and Annual Listing Fees. The original listing fee
applicable to the Fund for listing on the Exchange is $5,000, and the
annual continuing listing fee will be $2,000.
(3) Stop and Stop Limit Orders. Commentary .30 to Exchange Rule 13
provides that stop and stop limit orders in an ICU shall be elected by
a quotation, but specifies that if the electing bid or an offer is more
than 0.10 points away from the last sale and is for the specialist's
dealer account, prior Floor Official approval is required for the
election to be effective. This rule applies to ICUs generally.
(4) Rule 460.10. Rule 460.10 generally precludes certain business
relationships
[[Page 61286]]
between an issuer and the member or member organization or any other
member, allied member, or approved person or officer or employee of the
member organization, such as participating in a proxy contest or
becoming a director of the company, if the member specializes in the
issuer's securities. Exceptions in the Rule permit specialists in Fund
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
Fund shares. A specialist may acquire a position in excess of 10% of
the outstanding issue of the Fund shares, the redemption of which would
not result in a position, directly or indirectly, in any equity
security in which the specialist is registered exceeding the 10%
threshold. However, a specialist registered in the Fund shares may
purchase and redeem Fund shares from the investment company, as
appropriate to facilitate the maintenance of a fair and orderly market
in the subject security.
(5) Prospectus Delivery. The Commission has granted the Trust an
exemption from certain prospectus delivery requirements under Section
24(d) of the Investment Company Act.\31\ Any product description used
in reliance on the Section 24(d) exemptive order will comply with all
representations made therein and all conditions thereto. The Exchange,
in an Information Circular to Exchange members and member
organizations, will inform members and member organizations, prior to
commencement of trading, of the prospectus or product description
delivery requirements applicable to the Fund.
---------------------------------------------------------------------------
\31\ See In the Matter of iShares, Inc., et al., Investment
Company Act Release No. 25623 (June 25, 2002).
---------------------------------------------------------------------------
(6) Information Circular. The Exchange will distribute an
information circular to its members in connection with the trading of
the Fund. 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 Fund is, how Fund shares 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 (Diligence as to Accounts). The circular will
also discuss exemptive, no-action and interpretive relief granted by
the Commission from certain rules under the Exchange Act.
(7) Trading Halts. In order to halt the trading of the Fund, the
Exchange may consider, among other things, factors such as the extent
to which trading is not occurring in Component Securities and whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Fund shares is subject to trading halts caused by
extraordinary market volatility pursuant to Exchange Rule 80B.
(8) 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 Fund, 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 (Diligence as to
Accounts).
(9) Purchases and Redemptions in Creation Unit Size. In the
Information Circular referenced above, members and member organizations
will be informed that procedures for purchases and redemptions of
iShares in Creation Unit Size are described in the Fund Prospectus and
SAI, and that iShares are not individually redeemable but are
redeemable only in Creation-Unit-size aggregations or multiples
thereof.
(10) Surveillance. Exchange surveillance procedures applicable to
trading in the proposed iShares are comparable to those applicable to
other ICUs currently trading on the Exchange. The Exchange represents
that its surveillance procedures are adequate to properly monitor the
trading of the Fund. The Exchange's current trading surveillances focus
on detecting securities trading outside their normal patterns. When
such situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations. The Exchange
represents that it is able to obtain information regarding trading in
both the Fund shares and the Component Securities by its members on any
relevant market. In addition, the Exchange may obtain trading
information via the Intermarket Surveillance Group (``ISG'') from other
exchanges who are members or affiliates of the ISG, including the Hong
Kong Stock Exchange.
(11) Hours of Trading/Minimum Price Variation. The Fund will trade
on the Exchange until 4:15 p.m. (Eastern time) each business day. The
minimum price variation for quoting will be $.01.
Statutory Basis
NYSE believes that the proposed rule change is consistent with
Section 6(b)(5) of the Exchange Act \32\ requiring that an exchange
have rules that are designed, among other things, to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. 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 rule-comments@sec.gov. Please include
File Number SR-NYSE-2004-55 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-2004-55. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your
[[Page 61287]]
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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such 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-2004-55 and should be submitted on or before
November 5, 2004.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Exchange Act and the rules and regulations
thereunder, applicable to a national securities exchange.\33\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Exchange Act \34\ and will
promote just and equitable principles of trade, and facilitate
transactions in securities, and, in general, protect investors and the
public interest.\35\
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\33\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\34\ 15 U.S.C. 78f(b)(5)
\35\ Pursuant to Section 6(b)(5) of the Exchange 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
function, 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 believes that the NYSE's proposal should advance the
public interest by providing investors with increased flexibility in
satisfying their investment needs and by allowing them to purchase and
sell Fund shares at negotiated prices throughout the business day that
generally track the price and yield performance of the targeted
Underlying Index.\36\
---------------------------------------------------------------------------
\36\ The Commission notes that, as is the case with similar
previously approved exchange traded funds, investors in the Fund can
redeem shares in Creation-Unit-size aggregations only. See, e.g.,
Exchange Act Release No. 43679 (December 5, 2000), 65 FR 77949
(December 13, 2000) (File No. SR-NYSE-00-46); Exchange Act Release
No. 50189 (August 12, 2004); 69 FR 51723 (August 20, 2004) (File No.
SR-Amex-2004-05)
---------------------------------------------------------------------------
Furthermore, the Commission believes that the proposed rule change
raises no issues that have not been previously considered by the
Commission. The Fund is similar in structure and operation to exchange-
traded index funds that the Commission has previously approved for
listing and trading on national securities exchanges under Section
19(b)(2) of the Exchange Act.\37\ The stocks included in the Underlying
Index are among the stocks with the highest liquidity and market
capitalization in the Chinese markets. Further, with respect to each of
the following key issues, the Commission believes that the Fund
satisfies established standards.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
A. Fund Characteristics
Similar to other previously-approved, exchange-listed index fund
shares, the Commission believes that the proposed Fund will provide
investors with an alternative to trading a range of securities on an
individual basis and will give investors the ability to trade a product
representing an interest in a portfolio of securities designed to
reflect substantially the Underlying Index. The estimated cost of
individual shares in the Fund, approximately $50, should make them
attractive to individual retail investors who wish to hold a security
representing the performance of a portfolio of stocks. In addition,
investors will be able to trade shares in the Fund continuously
throughout the business day in secondary market transactions at
negotiated prices.\38\ Accordingly, the proposed Fund will allow
investors to: (1) Respond quickly to market changes through intra-day
trading opportunities; (2) engage in hedging strategies similar to
those used by institutional investors; and (3) reduce transaction costs
for trading a portfolio of securities.
---------------------------------------------------------------------------
\38\ Because of the potential arbitrage opportunities, the
Commission believes that Fund shares will not trade at a material
discount or premium in relation to their NAV.
---------------------------------------------------------------------------
The Commission believes that the proposed Fund is reasonably
designed to provide investors with an investment vehicle that
substantially reflects in value the performance of the Underlying
Index.\39\
---------------------------------------------------------------------------
\39\ The FTSE/Xinhua China 25 Index is a free float-adjusted
market capitalization weighted index that is designed to represent
the performance of the largest companies in the mainland China
equity market that are available to international investors. As of
August 31, 2004, its constituents had a total market capitalization
of approximately $154 billion and a float-adjusted market
capitalization of approximately $41 billion.
---------------------------------------------------------------------------
Moreover, the Commission finds that, although the value of the
Fund's shares will be derived from and based on the value of the
securities and cash held in the Fund, the Fund is not leveraged.
Accordingly, the level of risk involved in the purchase or sale of Fund
shares is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism
for shares in the Fund is based on a portfolio of securities. The
Commission notes that the Fund will at all times invest at least 80% of
its assets in Component Securities of its Underlying Index and in
Depository Receipts representing such securities and at least half of
the remaining 20% of its assets in such securities or in stocks
included in the Chinese market, but not included in the Underlying
Index.\40\ As noted above, the Fund will use a representative portfolio
sampling strategy to attempt to track its Underlying Index. Although a
representative sampling strategy entails some risk of tracking error,
the Advisor will seek to minimize tracking error. It is expected that
the Fund will have a tracking error relative to the performance of its
Underlying Index of no more than 5%.
---------------------------------------------------------------------------
\40\ The Exchange states that, to the extent the Fund invests in
Depository Receipts, any ADRs will be listed on a national
securities exchange or Nasdaq. Other Depository Receipts, e.g.,
GDRs, will be listed on a foreign exchange. The Fund will not invest
in any unlisted depositary receipts or any listed depositary
receipts that the Advisor deems to be illiquid or for which pricing
information is not readily available. The Fund does not currently
intend to invest in ADRs and GDRs but has retained the flexibility
to do so. Rather, the Fund currently intends to hold all of the
securities in the Index that are listed on the Hong Kong Stock
Exchange.
---------------------------------------------------------------------------
The Advisers to the Fund may attempt to reduce tracking error by
using a variety of investment instruments, including futures contracts,
repurchase agreements, options, swaps and currency exchange contracts;
however, these instruments will not constitute more than 10% of the
Funds' assets.\41\ The Exchange represents, however, that the Fund will
not use these instruments to leverage, or borrow against, its
securities holdings or for speculative purposes. Also, the Exchange
represents that the Fund will
[[Page 61288]]
not concentrate its investments in any particular industry or group of
industries, except to the extent that the Underlying Index concentrates
in the stocks of a particular industry or industries. As described
above, the Underlying Index is designed to represent the performance of
the largest companies in the mainland China equity market that are
available to international investors and includes 25 of the largest and
most heavily traded Chinese companies.\42\ FXI may adjust the
Underlying Index based on annual full country indeed reviews, quarterly
index reviews, and ongoing event-related changes.\43\ Changes to the
Underlying Index are made public via print and electronic media, and,
in particular, through press releases on the FTSE Web site.
---------------------------------------------------------------------------
\41\ See discussion under Section II.A.1(a) ``Operation of
Fund,'' above.
\42\ The Commission notes that securities in the Underlying
Index are weighted based on the free-float adjusted total market
value of their shares, so that securities with higher total market
values generally have a higher representation in the Underlying
Index. Index constituents are screened for liquidity and weightings
are capped to avoid over-concentration in any one stock.
\43\ The Commission notes that although one employee of an
affiliate of the Advisor serves on the FTSE/Xinhua Index Committee
and provides input to help ensure that the published index rules and
the implementation of such rules adequately reflect current
developments in the underlying market, such employee is and will not
be involved in the operations of the Advisor or the Fund or be
involved in any capacity with the Fund's Board of Trustees.
Moreover, the index compilation functions of FXI and the FTSE/Xinhua
Index Committee are, and will remain, completely separate and
independent of the portfolio management functions of BGFA. FXI and
the FTSE/Xinhua Index Committee have adopted policies that prohibit
the dissemination and use of confidential and proprietary
information about the Index and have instituted procedures designed
to prevent the improper dissemination and use of such information.
BGI and BGIL have adopted policies that limit the use of
confidential and proprietary information about portfolio management
decisions to those persons whose duties require and permit them to
have access to such information and have instituted procedures
designed to prevent the improper dissemination and use of such
information.
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The Commission believes that the market capitalization and
liquidity of the Component Securities is such that an adequate level of
liquidity exists so that the Fund shares should not be susceptible to
manipulation.\44\ Also, the Commission does not believe that the Fund
will be so highly concentrated such that it becomes a surrogate for
trading unregistered foreign securities on the Exchange.
---------------------------------------------------------------------------
\44\ The Exchange states that as of August 31, 2004, the ten
largest constituents represented approximately 60.8% of the index
weight. The 5 highest weighted stocks, which represented 40.2% of
the index weight, had an average daily trading volume in excess of
47.5 million shares during the past 2 months. All of the component
stocks traded at least 250,00 shares in each of the previous 6
months.
---------------------------------------------------------------------------
While the Commission believes that these requirements should help
to reduce concerns that the Fund could become a surrogate for trading
in a single or a few unregistered stocks, if the Fund's characteristics
changed materially from the characteristics described herein, the Fund
would not be in compliance with the listing and trading standards
approved herein, and the Commission would expect the NYSE to file a
proposed rule change pursuant to Rule 19b-4 of the Exchange Act.
B. Disclosure
The Exchange represents that it will circulate an information
circular detailing applicable prospectus and product description
delivery requirements. The circular also will address NYSE members'
responsibility to deliver a prospectus or product description to all
investors and highlight the characteristics of the Funds. The circular
will also remind members of their suitability obligations, including
NYSE Rule 405 (Diligence as to Accounts).\45\ For example, the
information circular will also inform members and member organizations
that Fund shares are not individually redeemable, but are redeemable
only in Creation-Unit-size aggregations or multiples thereof as set
forth in the Fund Prospectus and SAI.\46\
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\45\ NYSE Rule 405 generally requires that members use due
diligence to learn the essential facts relative to every customer,
order or account accepted.
\46\ See discussion under Section II.A.1(a) ``Operation of
Fund,'' above. The Exchange has represented that the information
circular will also discuss exemptive, no-action, and interpretive
relief ranted by the Commission from certain rules under the
Exchange Act.
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C. Dissemination of Fund Information
With respect to pricing, each day, the NAV for the Fund will be
calculated and disseminated by IBT, to various sources, including the
NYSE, and made available on iShares.com and the Consolidated Tape.\47\
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\47\ The index currently uses the Reuters foreign exchange rate
at the close of the index (4 p.m. Hong Kong Time) to compute final
index values. The Fund intends to use Reuters/WM foreign exchange
rates at 4 p.m. London Time.
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During each day the NYSE is open for business, the Exchange states
that the IOPV of the Underlying Index will be disseminated at regular
intervals (every 15 seconds) on the Consolidated Tape. The IOPV will be
updated throughout the NYSE trading day to reflect fluctuations in
exchange rates between the U.S. dollar and the Hong Kong dollar. The
underlying Index value based on the sale reporting in the foreign
market of the Index constituents will be disseminated every 60 seconds
throughout the foreign market trading day, including, by subscription,
directly from FTSE and from the following vendors: Reuters, Bloomberg,
Telekurs, FTID and LSE/Proquote. An end of day closing value for the
Index, based on last sale reporting in the foreign market, will be
available throughout the NYSE trading day on http://www.ftsexinhua.com,
along with other Index information such as historical values,
composition and component weighting. The Commission believes that this
information will help an investor to determine whether, and to what
extent, iShares may be selling at a premium or a discount to NAV.
The Exchange will also be disseminating a variety of data with
respect to the Fund on a daily basis by means of CTA and CQ High Speed
Lines, which will be made available prior to the opening of trading on
the Exchange. Information with respect to recent NAV, shares
outstanding, estimated cash amount and total cash amount per Creation
Unit Aggregation will be made available prior to the opening of the
Exchange. In addition, the Web site for the Trust, http://www.ishares.com,
which will be publicly accessible at no charge, will contain the
following information, on a per iShare basis, for the Fund: (a) The
prior business day's NAV and the mid-point of the bid-ask price \48\ at
the time of calculation of such NAV (``Bid/Ask Price''), and a
calculation of the premium or discount of such price against such NAV;
and (b) data in chart format displaying the frequency distribution of
discounts and premiums of the Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar quarters.
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\48\ The Bid-Ask Price of the Fund is determined using the
highest bid and lowest offer on the Exchange as of the time of
calculation of the Fund's NAV.
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The closing prices of the Fund's Deposit Securities are available
from, as applicable, the relevant exchanges, automated quotation
systems, published or other public sources in the relevant country, or
on-line information services such as Bloomberg or Reuters. The exchange
rate information required to convert such information into U.S. dollars
is also readily available in newspapers and other publications and from
a variety of on-line services. In addition, the Commission notes that
the iShares Web site is and will be publicly accessible at no charge,
and will contain the Fund's NAV as of the prior business day, the Bid-
Asked Price, and a
[[Page 61289]]
calculation of the premium or discount of the Bid-Asked Price in
relation to the closing NAV.\49\
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\49\ Additional Information available to investors will include
data for a period covering at least the four previous calendar
quarters (or the life of a Fund, if shorter) indicating how
frequently the Fund's shares traded at a premium or discount to NAV
based on the Bid-Asked Price and closing NAV, and the magnitude of
such premiums and discounts; the Fund's Prospectus and two most
recent reports to shareholders; and other quantitative information
such as daily trading volume.
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Based on the representations made in the NYSE proposal, the
Commission believes that pricing and other important information about
the Fund is adequate and consistent with the Exchange Act.
D. Listing and Trading
The Commission finds that adequate rules and procedures exist to
govern the listing and trading of the Fund's shares. Fund shares will
be deemed equity securities subject to NYSE rules governing the trading
of equity securities, including, among others, rules governing trading
halts,\50\ responsibilities of the specialist, account opening and
customer suitability requirements,\51\ and the election of stop and
stop limit orders.
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\50\ In order to halt the trading of the Fund, the Exchange may
consider, among others, factors including: (1) The extent to which
trading is not occurring in stocks underlying the index; or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Fund shares is subject to trading halts caused by
extraordinary market volatility pursuant to NYSE Rule 80B.
\51\ Prior to commencement of trading, the Exchange states that
it will issue an Information Circular informing members and member
organizations of the characteristics of the Fund and of applicable
Exchange rules, as well as the requirements of NYSE Rule 405
(Diligence as to Accounts).
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In addition, the Exchange states that iShares are subject to the
criteria for initial and continued listing of ICUs in Section 703.16 of
the NYSE Manual. The Commission believes that the listing and delisting
criteria for Fund shares should help to ensure that a minimum level of
liquidity will exist in the Fund to allow for the maintenance of fair
and orderly markets. Accordingly, the Commission believes that the
rules governing the trading of Fund shares provide adequate safeguards
to prevent manipulative acts and practices and to protect investors and
the public interest.
As noted above, the NYSE expects to require that a minimum of two
Creation Units (100,000 iShares) will be required to be outstanding at
the start of trading. The Commission believes that this minimum number
is sufficient to help to ensure that a minimum level of liquidity will
exist at the start of trading.\52\
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\52\ This minimum number of shares required to be outstanding at
the start of trading is comparable to requirements that have been
applied to previously listed series of Investment Company Units.
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E. Surveillance
The Commission finds that NYSE has adequate surveillance procedures
to monitor the trading of the proposed iShares, including concerns with
specialists purchasing and redeeming Creation Units. The NYSE
represents that it will rely on existing surveillance procedures
governing ICUs currently trading on the Exchange. The Exchange is also
able to obtain information regarding trading in both the Fund shares
and the Component Securities by its members on any relevant market; in
addition, the Exchange may obtain trading information via the
Intermarket Surveillance Group (``ISG'') from other exchanges who are
members or affiliates of the ISG, including, by way of example, the
Hong Kong Stock Exchange.
F. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act,\53\ for approving the proposed rule change, as
amended, prior to the thirtieth day after the date of publication of
notice in the Federal Register. The Commission notes that the proposal
is consistent with the listing and trading standards in NYSE Rule
703.16 (Investment Company Units), and the Commission has previously
approved similar products based on foreign indices.\54\ The Commission
does not believe that the proposed rule change, as amended, raises
novel regulatory issues. Consequently, the Commission believes that it
is appropriate to permit investors to benefit from the flexibility
afforded by trading these products as soon as possible. Accordingly,
the Commission finds that there is good cause, consistent with Section
6(b)(5) of the Exchange Act,\55\ to approve the proposal on an
accelerated basis.
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\53\ 15 U.S.C. 78s(b)(2).
\54\ See supra note 36. See also, e.g., Securities Exchange Act
Release Nos. 44990 (October 25, 2001), 66 FR 56869 (November 13,
2001) (File No. SR-Amex-2001-45); 42748 (May 2, 2000), 65 FR 30155
(May 10, 2000); and 36947 (March 8, 1996), 61 FR 10606 (March 14,
1996) (File No. SR-Amex-95-43).
\55\ 15 U.S.C. 78s(b)(5).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that the proposed rule change (SR-NYSE-2004-55), is
hereby approved on an accelerated basis.\56\
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\56\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2657 Filed 10-14-04; 8:45 am]
BILLING CODE 8010-01-P