[Federal Register Volume 69, Number 238 (Monday, December 13, 2004)]
[Notices]
[Pages 72228-72237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27253]



[[Page 72228]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50800; File No. SR-Amex-2004-85]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the American 
Stock Exchange LLC to Trade the iShares<SUP>[reg]</SUP> FTSE/Xinhua 
China 25 Index Fund

December 6, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 20, 2004 the American Stock Exchange LLC (``Amex'' 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 Amex proposes to trade, pursuant to unlisted trading privileges 
(``UTP''), shares of the iShares[reg]FTSE/Xinhua China 25 Index Fund, 
which are Index Fund Shares under Amex Rule 1000A.

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 Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Amex has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    Amex Rules 1000A et seq. provide standards for listing and trading 
Index Fund Shares, which are securities issued by an open-end 
management investment company (open-end mutual fund) for exchange 
trading. These securities are generally registered under the Investment 
Company Act of 1940, as amended (``Investment Company Act''), as well 
as the Act. Index Fund Shares are defined in Amex Rule 1000A as 
securities based on a portfolio of stocks or fixed income securities 
that seeks to provide investment results that correspond generally to 
the price and yield of a specified foreign or domestic stock index or 
fixed income securities index. The Exchange proposes to trade under 
Amex Rules 1000A et seq., pursuant to UTP, shares of the 
iShares<SUP>[reg]</SUP> FTSE/Xinhua China 25 Index Fund (``Fund''),\3\ 
a series of the iShares Trust (``Trust'').\4\
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    \3\ iShares is a registered trademark of Barclays Global 
Investors, N.A.
    \4\ The Trust is registered under the 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 (File Nos. 
333-92935 and 811-09729) (as amended, the ``Registration 
Statement''). On July 28, 2004, the Trust filed a Form N-1A to 
update certain Fund information.
    On September 8, 2004, the Trust filed with the Commission a 
Second Amended and Restated Application to Amend Orders under 
Sections 6(c) and 17(b) of the Investment Company Act for the 
purpose of exempting the Fund from various provisions of the 
Investment Company Act and the rules thereunder (the 
``Application''). See Barclays Global Fund Advisors, et al.; Notice 
of Application, Investment Company Act Release No. 26597 (September 
14, 2004), 69 FR 56105 (September 17, 2004) (File No. 812-12936). 
The Application requested that the Commission amend a prior order 
received by the Advisor, the Trust and the Distributor on August 15, 
2001, as amended (the ``Prior Order'') to permit the Trust to offer 
three new International ETFs, including the Fund, and to permit the 
Fund, along with certain other International ETFs, to invest in 
certain depositary receipts, as described below. See also In the 
Matter of iShares Trust, et al., Investment Company Act Release No. 
25111 (August 15, 2001) (File No. 812-12254); In the Matter of 
iShares, Inc., et al., Investment Company Act Release No. 25623 
(June 25, 2002); In the Matter of iShares Trust, et al., Investment 
Company Act Release No. 26006 (April 15, 2003) (relating to Prior 
Order).
    On October 5, 2004, the Commission approved the Application. See 
Barclays Global Fund Advisors, et al., Investment Company Act 
Release No. 26626 (October 5, 2004) (``Amended Order'').
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    The Fund is listed and traded on the New York Stock Exchange, Inc. 
(``NYSE'')\5\ and traded in the over-the-counter market. The 
information below is intended to provide a description of how the Fund 
was created, operates and is traded.\6\
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    \5\ See Securities Exchange Act Release No. 50505 (October 8, 
2004), 69 FR 61280 (October 15, 2004) (SR-NYSE-2004-55).
    \6\ Much of the information in this filing was taken from the 
iShares Trust Prospectus dated October 4, 2004 (``Prospectus''), and 
Statement of Additional Information dated August 1, 2004 (as revised 
October 5, 2004) (``SAI''), as well as from the Web sites of the 
NYSE (http://www.nyse.com) and iShares (http://www.iShares.com). 
Fund information relating to NAV, returns, dividends, component 
stock holdings and the like is updated on a daily basis on these Web 
sites.
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    As set forth in detail below, 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 was created to qualify as a ``regulated investment company'' 
(``RIC'') under the Internal Revenue Code (``Code'').\7\ 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 Act, is 
the principal underwriter and distributor of Creation Unit Aggregations 
of iShares.\8\ The Distributor is not affiliated with the Exchange or 
the Advisor. The Trust has appointed Investors Bank & Trust Co. to act 
as administrator (``Administrator''), custodian, fund accountant, 
transfer agent, and dividend disbursing agent for the Fund. The 
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''),\9\ 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.\10\ The Fund is not sponsored,

[[Page 72229]]

offered, or sold by FXI. FXI is not affiliated with a broker or dealer.
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    \7\ See also infra note 12.
    \8\ See infra note 25 and accompanying text.
    \9\ FXI is a Hong Kong incorporated, joint venture company 
between FTSE, the global index company, and Xinhua Financial 
Network.
    \10\ 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 18 members 
of the FTSE/Xinhua Index Committee. Telephone conversation between 
Marija Willen, Associate General Counsel, Amex, and Natasha Cowen, 
Attorney, Division, Commission, on November 26, 2004. 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 role of the Index Committee is to review the appropriateness of 
existing Underlying Index rules, to provide oversight to ensure that 
Underlying Index rules are properly followed and to recommend 
changes to the rules in response to changes in the underlying market 
that the Underlying Index seeks to represent. Input from persons or 
experts (i.e., practitioners) who have applicable industry knowledge 
of the underlying market the Underlying Index seeks to represent 
helps ensure that the published Underlying 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 Underlying Index rules and 
methodology. 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 Underlying 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 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. BGIL and BGFA 
are separate legal entities and do not share employees, office 
space, trading floors or portfolio management systems.
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    (a) Operation of the Fund \11\
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    \11\ The information provided herein is based on information 
included in the Application and the Prior Order. While the Advisor 
manages the Fund, the Fund's Board of Directors has 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 NYSE Listed Company Manual, 
which requires that the Fund have an audit committee that complies 
with Rule 10A-3 of the Act. 17 CFR 240.10A-3. Section 803(a) of the 
Amex Company guide imposes the same requirement on Index Fund Shares 
listed and traded on the Amex pursuant to Amex Rule 1000A et seq. 
Telephone conversation between Marija Willen, Associate General 
Counsel, Amex, and Natasha Cowen, Attorney, Division, Commission, on 
November 26, 2004.
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    The investment objective of the Fund is 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 utilizes ``passive'' indexing investment strategies. The Fund 
may fully replicate the 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 (``Component 
Securities''), but it may not hold all of the Component Securities. The 
Application states that the representative sampling techniques to be 
used by the Advisor to manage the Fund do not differ from the 
representative sampling techniques it uses to manage the funds that 
were the subject of the Prior Order.
    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.\12\ 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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    \12\ In order for the Fund to qualify 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 than 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. The Prospectus also gives the 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 
Underlying Index or in American Depositary Receipts (``ADRs'') and 
Global Depositary Receipts (``GDRs'') representing such securities.
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    The Underlying Index is a theoretical financial calculation while 
the Fund is an actual investment portfolio. 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.'' The Fund's investment objectives, policies, 
and investment strategies are fully disclosed in the Prospectus and 
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 and in depositary receipts representing Component 
Securities (``Depositary Receipts'')\13\ and at least half of the 
remaining 20% of its assets in Component Securities, Depositary 
Receipts, or 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 Depositary 
Receipts 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.\14\ 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 
\15\ and other exchange traded funds (including other iShares 
funds).\16\ For example, the Fund may invest in securities not included 
in the Underlying Index to reflect prospective changes in the

[[Page 72230]]

Underlying Index (such as future corporate actions and index 
reconstitutions, additions, and deletions).
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    \13\ For the purposes of this order, ``Depositary Receipts'' are 
ADRs and GDRs.
    \14\ In addition, the Exchange understands that all Depositary 
Receipts must be sponsored (with the exception of certain pre-1984 
ADRs that are listed but unsponsored because they were 
grandfathered). Telephone conversation between Marija Willen, 
Associate General Counsel, Amex, and Ira Brandriss, Assistant 
Director, Lisa Jones, Special Counsel, and Natasha Cowen, Attorney, 
Division of Market Regulation (``Division''), Commission, on 
November 10, 2004.
    \15\ See In the Matter of Master Investment Portfolio, et al., 
Investment Company Act Release No. 25158 (September 18, 2001).
    \16\ 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 Underlying 
Index that are listed on the Hong Kong Stock Exchange. The Fund does 
not intend to hold any B-shares which are listed on Chinese markets and 
included in the Underlying Index.\17\ The Exchange understands that the 
Fund does not currently intend to invest in Depositary Receipts but 
reserves the flexibility to do so.\18\ As with the 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 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.
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    \17\ See infra note 23.
    \18\ Telephone conversation between Marija Willen, Associate 
General Counsel, Amex, and Ira Brandriss, Assistant Director, Lisa 
Jones, Special Counsel, and Natasha Cowen, Attorney, Division, 
Commission, on November 10, 2004.
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(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. Component 
Securities 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. 
Component Securities 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.
    As of October 29, 2004, 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.\19\
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    \19\ Information on Underlying Index constituents was attached 
to the proposed rule change as Exhibit A, available at the places 
specified in Item III below.
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    As of October 29, 2004,\20\ the FTSE/Xinhua China 25 Index 
components had a total market capitalization of approximately $302 
billion and a float-adjusted market capitalization of approximately $47 
billion.\21\ The average total market capitalization was approximately 
$12.1 billion and the average float-adjusted market capitalization was 
approximately $1.9 billion. The ten largest constituents represented 
approximately 59.8% of the Underlying Index weight. The five highest 
weighted stocks, which represented 39.7% of the Underlying Index 
weight, had an average daily trading volume in excess of 31.4 million 
shares during the past two months. All of the Component Securities 
traded at least 250,000 shares in each of the previous six months.
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    \20\ The information below updates information provided by Amex 
in the proposed rule change as filed, pursuant to a telephone 
conversation between Marija Willen, Associate General Counsel, Amex, 
and Natasha Cowen, Attorney, Division, Commission, on November 16, 
2004.
    \21\ Float-adjusted market capitalization includes shares 
available in the market for public investment, and reflects free-
float adjustments to the Underlying 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 to the Underlying Index in accordance with the 
Underlying Index procedures.\22\
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    \22\ See also supra note 10.
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    Eligibility. Each Component Security 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.\23\ As of September 24, 2004, only one Component Security was B 
shares (approximately 1% of the Underlying Index). FXI expects to 
eventually eliminate B shares from the Underlying Index.
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    \23\ ``H'' Shares--H shares are shares of companies incorporated 
in China and listed and traded on the Hong Kong Stock 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 shares of companies 
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 interests 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 shares of companies 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 People's Republic of China and also 
residents of the People's Republic of China with appropriate foreign 
currency dealing accounts. There is no true ``delivery versus 
payment'' settlement for B shares. B shares settle in the local 
markets and cash settles subsequently in 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 Underlying 
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.\24\
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    \24\ 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 availability of 
current and reliable price information and the level of trading volume 
relative to shares outstanding. Value traded and float turnover are 
also

[[Page 72231]]

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 conditions 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 Underlying 
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 Underlying 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 Underlying Index 
calculation on the day following the announcement of the change. All 
adjustments are made before the start of the Underlying 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 in order to maintain 25 Underlying 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 Underlying 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 constituent 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.
    Index Availability. The Underlying Index is calculated in real-time 
and published every minute during the Underlying Index period (09:15-
16:00 Local Hong Kong Time) or (17:15-24:00 U.S. Pacific Daylight 
Time). It is available real-time directly from FTSE and from the 
following vendors: Reuters, Bloomberg, Telekurs, FTID and LSE/Proquote. 
The end of day Underlying Index value is distributed at 16:15 (Local 
Hong Kong Time). Daily values will also 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 uses Hong Kong Stock Exchange trade prices and Reuters 
real-time spot currency rates. 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.
    The daily closing Underlying 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 Underlying Index are also available from the Web 
site.
    Exchange Rates and Pricing. The Underlying Index uses Reuters real-
time foreign exchange spot rates and local stock exchange real-time 
security prices. The Underlying Index is calculated in Hong Kong 
Dollars. Non-Hong Kong Dollar denominated constituent prices are 
converted to Hong Kong Dollars to calculate the Underlying Index. The 
Reuters foreign exchange rates and Hong Kong Stock Exchange prices 
received at the closing time of the Underlying Index are used to 
calculate the final Underlying Index levels.
(c) Issuance of iShares in Creation Unit Aggregations
    The Application states that 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.
    (i) In General. Shares of the Fund (the ``iShares'') will be issued 
on a continuous offering basis in groups of 50,000 or more. These 
``groups'' of shares are called ``Creation Unit Aggregations.'' The 
Fund will issue and redeem iShares only in Creation Unit 
Aggregations.\25\
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    \25\ Each Creation Unit Aggregation consists of 50,000 or more 
iShares.
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    As with other open-end investment companies, iShares will be issued 
at the net asset value (``NAV'') per share next determined after an 
order in proper form is received.
    The NAV per share of the Fund is determined as of the close of the 
regular trading session on the NYSE on each day that the NYSE 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, a clearing agency that is registered with the SEC, or a 
Depository Trust Company (``DTC'') participant (``DTC Participant''), 
and in each case, must enter into a Participant Agreement. The Exchange 
understands that the Fund is currently imposing transaction fees in 
connection with creation and redemption transactions.\26\
---------------------------------------------------------------------------

    \26\ Telephone conversation between Marija Willen, Associate 
General Counsel, Amex, and Ira Brandriss, Assistant Director, Lisa 
Jones, Special Counsel and Natasha Cowen, Attorney, Division, 
Commission, on November 10, 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

[[Page 72232]]

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 NSCC participants \28\ 
through the NSCC on each business day, prior to the opening of trading 
on the NYSE (currently 9:30 a.m. eastern standard 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.
---------------------------------------------------------------------------

    \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. Telephone 
conversation between Marija Willen, Associate General Counsel, Amex, 
and Natasha Cowen, Attorney, Division, Commission, on November 23, 
2004.
    \28\ Telephone conversation between Marija Willen, Associate 
General Counsel, Amex, and Natasha Cowen, Attorney, Division, 
Commission, on November 16, 2004.
---------------------------------------------------------------------------

    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 Component 
Securities. 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 
(``Intraday Optimized Portfolio Value'' or ``IOPV'') is currently 
calculated by an independent third party (``Value Calculator''), such 
as Bloomberg L.P., every 15 seconds during the NYSE'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 IOPV on a per 
Fund share basis disseminated during the NYSE'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 NYSE at 
9:30 a.m. eastern standard 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 securities in a Fund 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 be disseminating a value for the Underlying 
Index once each trading day, based on closing prices on the Hong Kong 
Stock Exchange. The NAV for the Fund will be calculated and 
disseminated daily. The Fund NAV will be calculated by Investors Bank 
and Trust (``IBT''). IBT will also disseminate the information to BGI, 
SEI, and others. The Fund NAV will be published in a number of places, 
including http://www.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 
Underlying Index values. The Fund uses 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 NYSE. 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 
NYSE. In addition, the Web site for the Trust, 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 at the time of calculation of such 
NAV (``Bid/Ask

[[Page 72233]]

Price''),\29\ 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.
---------------------------------------------------------------------------

    \29\ The Bid-Ask Price of the Fund is determined using the 
highest bid and lowest offer on the NYSE 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 iShares of the 
Fund. Owners of iShares may sell their iShares in the secondary market, 
but must accumulate enough iShares to constitute a Creation Unit 
Aggregation in order to redeem through the Fund. Redemption orders must 
be placed by or through an Authorized Participant.
    Creation Unit Aggregations of 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. 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.
(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 DTC 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. 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) Stop and Stop Limit Orders. Amex Rule 154, Commentary .04(c) 
provides that stop and stop limit orders to buy or sell a security 
(other than an option, which is covered by Amex Rule 950(f) and 
Commentary thereto) the price of which is derivatively based upon 
another security or index of securities, may with the prior approval of 
a Floor Official, be elected by a quotation, as set forth in Commentary 
.04(c) (i-v). The Exchange has designated Index Fund Shares, including 
iShares, as eligible for this treatment.\30\
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 29063 (April 10, 
1991), 56 FR 15652 (April 17, 1991) (SR-Amex-90-31) (regarding 
Exchange designation of equity derivative securities as eligible for 
such treatment under Amex Rule 154, Commentary .04(c)).
---------------------------------------------------------------------------

    (2) Rule 190. Amex Rule 190, Commentary .04 applies to Index Fund 
Shares listed on the Exchange, including iShares. Commentary .04 states 
that nothing in Amex Rule 190(a) should be construed to restrict a 
specialist registered in a security issued by an investment company 
from purchasing and redeeming the listed security, or securities that 
can be subdivided or converted into the listed security, from the 
issuer as appropriate to facilitate the maintenance of a fair and 
orderly market.
    (3) 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

[[Page 72234]]

reliance on a 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).
---------------------------------------------------------------------------

    (4) Information Circular. The Exchange will distribute an 
information circular to its members in connection with the trading of 
the Fund (``Information Circular''). The Information Circular will 
discuss the special characteristics and risks of trading this type of 
security. Specifically, the Information Circular will discuss, among 
other things, 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 before, or concurrently with, the confirmation of a transaction, 
applicable Exchange rules, dissemination information, trading 
information and the applicability of suitability rules (including Amex 
Rule 411). The Information Circular will also discuss exemptive, no-
action and interpretive relief granted by the Commission from Section 
11(d)(1) and certain rules under the Act, including Rule 10a-1, Rule 
10b-10, Rule 14e-5, Rule 10b-17, Rule 11d1-2, Rules 15c1-5 and 15c1-6, 
and Rules 101 and 102 of Regulation M under the Act.
    (5) Trading Halts. In addition to other factors that may be 
relevant, the Exchange may consider factors such as those set forth in 
Amex Rule 918C(b) in exercising its discretion to halt or suspend 
trading in Index Fund Shares, including iShares. These factors would 
include, but are not limited to, (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.\32\ In addition, trading in iShares 
will be halted if the circuit breaker parameters under Amex Rule 117 
have been reached.
---------------------------------------------------------------------------

    \32\ See Amex Rule 918C.
---------------------------------------------------------------------------

    (6) Suitability. Prior to commencement of trading, the Exchange 
will issue an Information Circular informing members and member 
organizations of the characteristics of the iShares and of applicable 
Exchange rules, as well as of the requirements of Amex Rule 411 (Duty 
to Know and Approve Customers).
    (7) Purchases and Redemptions in Creation Unit Aggregations. In the 
Information Circular members and member organizations will be informed 
that procedures for purchases and redemptions of iShares in Creation 
Unit Aggregations are described in the Prospectus and SAI, and that 
iShares are not individually redeemable but are redeemable only in 
Creation Unit Aggregations or multiples thereof.
    (8) Surveillance. The Exchange represents that its surveillance 
procedures are adequate to properly monitor the trading of the iShares. 
Specifically, the Amex will rely on its existing surveillance 
procedures governing Index Fund Shares, which have been deemed adequate 
under the Act. The Exchange 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, by way of example, the Hong Kong Stock Exchange.
    (9) Hours of Trading/Minimum Price Variation. The Fund will trade 
on the Exchange until 4:15 p.m. (eastern standard time). The minimum 
price variation for quoting will be $.01.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \33\ in general, and furthers the 
objectives of Section 6(b)(5)\34\ in particular, in that it is designed 
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 a national market 
system, and in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f(b).
    \34\ 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.

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

    No written comments were solicited or received with respect to 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 Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#a6d4d3cac38bc5c9cbcbc3c8d2d5e6d5c3c588c1c9d0"><span class="__cf_email__" data-cfemail="354740595018565a5858505b4146754650561b525a43">[email protected]</span></a>. Please include 
File No. SR-Amex-2004-85 on the subject line.

Paper Comments

    <bullet> 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 No. SR-Amex-2004-85. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Amex. 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 No. SR-Amex-2004-85 and should be 
submitted on or before January 3, 2005.

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 Act and the rules and regulations 
thereunder applicable to a national securities

[[Page 72235]]

exchange.\35\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\36\ which 
requires, among other things, that the Exchange's rules promote just 
and equitable principles of trade and facilitate transactions in 
securities, and, in general, protect investors and the public 
interest.\37\
---------------------------------------------------------------------------

    \35\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \36\ 15 U.S.C. 78f(b)(5).
    \37\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of exchange trading for new products upon a 
finding that the introduction of the product is in the public 
interest. Such a finding would be difficult with respect to a 
product that served no investment, hedging or other economic 
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 Amex'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.\38\
---------------------------------------------------------------------------

    \38\ 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 Aggregations only. See, e.g., 
Securities Exchange Act Release No. 43679 (December 5, 2000), 65 FR 
77949 (December 13, 2000) (File No. SR-NYSE-00-46); Securities 
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 Act.\39\ In addition, as noted above, the Commission 
has previously approved a substantially similar proposed rule change 
submitted by the NYSE to list and trade the iShares.\40\
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78s(b)(2).
    \40\ See Securities Exchange Act Release No. 50505 (October 8, 
2004), 69 FR 61280 (October 15, 2004) (SR-NYSE-2004-55).
---------------------------------------------------------------------------

    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.

A. Fund Characteristics

    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.\41\ 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 and in Depositary Receipts and at 
least half of the remaining 20% of its assets in Component Securities, 
Depositary Receipts, or in stocks included in the Chinese market, but 
not included in the Underlying Index.\42\ 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%.
---------------------------------------------------------------------------

    \41\ 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 
October 12, 2004, its constituents had a total market capitalization 
of approximately $302 billion and a float-adjusted market 
capitalization of approximately $47 billion.
    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 not 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 Underlying 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.
    \42\ The Exchange states that, to the extent the Fund invests in 
Depositary Receipts, any ADRs will be listed on a national 
securities exchange or Nasdaq. Other Depositary Receipts 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 currently intends to hold all of the 
securities in the Underlying 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 
Fund's assets.\43\
---------------------------------------------------------------------------

    \43\ See discussion under Section II.A.1(a) ``Operation of the 
Fund'' above.
---------------------------------------------------------------------------

    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 October 29, 2004, the ten 
largest constituents represented approximately 59.8% of the index 
weight. The 5 highest weighted stocks, which represented 39.7% of 
the index weight, had an average daily trading volume in excess of 
31.4 million shares during the past two months. All of the Component 
Securities traded at least 250,000 shares in each of the previous 
six 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 standards approved herein, and the 
Commission would expect the Amex to file a proposed rule change 
pursuant to Rule 19b-4 of the Act. In addition, the Exchange has 
represented that it will immediately notify the Commission if the 
Exchange becomes aware of any changes made in the Fund and not 
represented herein.\45\
---------------------------------------------------------------------------

    \45\ Telephone conversation between Marija Willen, Associate 
General Counsel, Amex, and Ira Brandriss, Assistant Director, Lisa 
Jones, Special Counsel, and Natasha Cowen, Attorney, Division, 
Commission, on November 10, 2004.
---------------------------------------------------------------------------

B. Disclosure

    The Exchange represents that it will circulate the Information 
Circular detailing applicable prospectus and product description 
delivery requirements. The Information Circular also will address 
members'

[[Page 72236]]

responsibility to deliver a prospectus or product description to all 
investors and highlight the characteristics of the Funds. The 
Information Circular will also remind members and member organizations 
of their suitability obligations, including the requirements of Amex 
Rule 411. For example, the Information Circular will also inform 
members that Fund shares are not individually redeemable, but are 
redeemable only in Creation Unit Aggregations or multiples thereof as 
set forth in the Prospectus and SAI.\46\
---------------------------------------------------------------------------

    \46\ See discussion under Section II.A.1(a) ``Operation of the 
Fund,'' above. The Exchange has represented that the Information 
Circular will also discuss exemptive, no-action, and interpretive 
relief granted by the Commission from certain rules under the Act.
---------------------------------------------------------------------------

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 and made 
available on http://www.iShares.com and on the Consolidated Tape.\47\
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    \47\ 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.
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    During each day the Amex 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 Exchange trading day to reflect fluctuations in 
exchange rates between the U.S. dollar and the applicable home foreign 
currency. The Underlying Index value is available real-time directly 
from FTSE and from the following vendors: Reuters, Bloomberg, Telekurs, 
FTID and LSE/Proquote. An end of day closing value for the Underlying 
Index is available on http://www.ftsexinhua.com, along with other 
Underlying 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.
    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 
NYSE. 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 NYSE. In 
addition, the Web site for the Trust, 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, 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 NYSE 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 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 Prospectus and two most recent 
reports to shareholders; and other quantitative information such as 
daily trading volume.
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    The Exchange also represents that it will halt trading if the 
dissemination of the Fund's value ceases and there is no readily 
available source for obtaining such information.\50\
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    \50\ Telephone conversation between Marija Willen, Associate 
General Counsel, Amex, and Ira Brandriss, Assistant Director, Lisa 
Jones, Special Counsel, and Natasha Cowen, Attorney, Division, 
Commission, on November 10, 2004.
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    Based on the representations made in the proposal, the Commission 
believes that pricing and other important information about the Fund is 
adequate and consistent with the Act.

D. Trading

    The Commission further finds that adequate rules and procedures 
exist to govern trading of the Fund's shares, pursuant to UTP. Fund 
shares will be traded pursuant to UTP under Amex Rule 1000A and, unless 
Amex Rules 1000A et seq. stipulate otherwise, are subject to all Amex 
rules applicable to trading on the Exchange, including, among others, 
rules governing trading halts.\51\
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    \51\ 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 underlying securities; 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 will be halted if the circuit breaker 
parameters under Amex Rule 117 have been reached.
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E. Surveillance

    The Exchange represents that it will rely on its existing 
surveillance procedures governing Index Fund Shares currently trading 
on the Exchange. The Exchange also represents that it is able to obtain 
information from the NYSE or any third party regarding trading in both 
the Fund shares and the Component Securities by its members or member 
organizations on any relevant market. In addition, the Exchange 
represents that it may obtain trading information via the 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 Exchange has requested that the Commission approve the proposed 
rule change on an accelerated basis. The Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\52\ for approving the proposed 
rule change prior to the thirtieth day after the date of publication of 
notice in the Federal Register. The Commission has previously approved 
a substantially similar proposed rule change submitted by the NYSE to 
list and trade the iShares \53\ and does not believe that the proposed 
rule change raises novel regulatory issues. Consequently, the 
Commission believes that it is appropriate to permit investors to 
benefit from the ability to trade these products on the Amex as soon as 
possible. Accordingly, the Commission finds that there is good cause, 
consistent with Section 6(b)(5) of the Act,\54\ to approve the proposal 
on an accelerated basis.
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    \52\ 15 U.S.C. 78s(b)(2).
    \53\ See Securities Exchange Act Release No. 50505 (October 8, 
2004), 69 FR 61280 (October 15, 2004) (SR-NYSE-2004-55).
    \54\ 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 Act, 
that the proposed rule change (SR-Amex-2004-

[[Page 72237]]

85), is hereby approved on an accelerated basis.\55\
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    \55\ 15 U.S.C. 78s(b)(2).
    \56\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\56\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-27253 Filed 12-10-04; 8:45 am]
BILLING CODE 8010-01-P


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