Document ID: SEC-2006-1652-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-12-19T05:00Z

[Federal Register: December 19, 2006 (Volume 71, Number 243)]
[Notices]               
[Page 76008-76017]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19de06-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54916; File No. SR-NYSE-2006-70]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change and Amendment Nos. 1 and 2 Thereto Relating to 
iShares[supreg] Lehman Bond Funds

December 11, 2006.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on August 24, 2006 the New York Stock Exchange LLC (``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 Exchange 
submitted Amendment No. 1 to the proposed rule change on November 6, 
2006.\4\ The Exchange submitted Amendment No. 1 to the proposed rule 
change on December 6, 2006.\5\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ In Amendment No. 1, which supplemented the proposed rule 
change as filed, the Exchange, among other things, represented that 
less than 1% of the market value of the underlying indices consisted 
of Rule 144A securities; addressed the firewall procedures used by 
Lehman Brothers Inc.; explained why an independent calculation agent 
is not required for the covered products; provided the top-ten 
component weightings for each index; and clarified the applicability 
of trade halts.
    \5\ In Amendment No. 2, which supplemented the proposed rule 
change as filed, the Exchange added disclosure to the purpose 
section of the filing and Exhibit 1 thereto (a) to note that the 
Funds (defined below) must comply with the federal securities laws, 
including that the securities accepted for deposit and those used to 
satisfy redemption requests are sold in transactions that would be 
exempt from the Securities Act of 1933 (``Securities Act'') and in 
compliance with the conditions of Rule 144A thereunder; and (b) to 
clarify how market capitalization is calculated for the Underlying 
Index (defined below) of each Fund.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares (``Shares'' or 
``iShares'') of the following eight series of the iShares Trust 
(collectively, the ``Funds''): (1) iShares[supreg] Lehman Short 
Treasury Bond Fund; (2) iShares Lehman 3-7 Year Treasury Bond Fund; (3) 
iShares Lehman 10-20 Year Treasury Bond Fund; (4) iShares Lehman 1-3 
Year Credit Bond Fund; (5) iShares Lehman Intermediate Credit Bond 
Fund; (6) iShares Lehman Credit Bond Fund; (7) iShares Lehman 
Intermediate Government/Credit Bond Fund; and (8) iShares Lehman 
Government/Credit Bond Fund.

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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended. The text of those statements may be examined at the places 
specified in Item III below. The Exchange 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
    The Exchange has adopted listing standards applicable to Investment 
Company Units (``ICUs'') 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.\6\
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    \6\ In 1996, the Commission approved Section 703.16 of the NYSE 
Manual, which sets forth general the rules related to the listing of 
ICUs. See Securities Exchange Act Release No. 36923 (March 5, 1996), 
61 FR 10410 (March 13, 1996) (SR-NYSE-95-23). In 2000, the 
Commission also approved the Exchange's generic listing standards 
pursuant to Rule 19b-4(e) of the Act 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) (SR-NYSE-00-46). 
Such standards, however, did not contemplate ICUs that are based on 
indexes containing fixed income securities, and thus the Exchange 
has filed this proposal to accommodate the products that are the 
subject of this proposal.
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    The Exchange now proposes to list and trade the following series of 
the iShares[supreg] Trust (the ``Trust'') \7\ under Section 703.16 of 
the NYSE Listed Company Manual (the ``Manual'') and the Exchange's 
Rules 1100 et seq.: (1) iShares \8\ Lehman Short Treasury Bond Fund; 
(2) iShares Lehman 3-7 Year Treasury Bond Fund; (3) iShares Lehman 10-
20 Year Treasury Bond Fund; (4) iShares Lehman 1-3 Year Credit Bond 
Fund; (5) iShares Lehman Intermediate Credit Bond Fund; (6) iShares 
Lehman Credit Bond Fund; (7) iShares Lehman Intermediate Government/
Credit Bond Fund; and (8) iShares Lehman Government/Credit Bond Fund.
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    \7\ The Trust is registered under the Investment Company Act of 
1940 (the ``Investment Company Act''). 15 U.S.C. 80a. On July 19, 
2006, the Trust filed with the Commission a Registration Statement 
for the Funds on Form N-1A under the Securities Act, 15 U.S.C. 77a, 
and under the Investment Company Act relating to the Funds (File 
Nos. 333-92935 and 811-09729) (the ``Registration Statement'').
    The Commission has issued orders granting relief requested by 
the Trust in its Applications for Orders under Sections 6(c) and 
17(b) of the Investment Company Act for the purpose of exempting the 
Funds from various provisions of the Investment Company Act. See In 
the Matter of Barclays Global Fund Advisors, et al., Investment 
Company Act Release No. 25622 (June 22, 2002); In the Matter of 
Barclays Global Fund Advisors, et al., Investment Company Act 
Release No. 26175 (September 8, 2003); and In the Matter of Barclays 
Global Fund Advisors, et al., Investment Company Act Release No. 
27417 (June 13, 2006).
    \8\ iShares is a registered trademark of Barclays Global 
Investors, N.A.
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    The Funds will be based on the following indexes, respectively: (1) 
Lehman Brothers Short U.S. Treasury Index; (2) Lehman Brothers 3-7 Year 
U.S. Treasury Index; (3) Lehman Brothers 10-20 Year U.S. Treasury 
Index; (4) Lehman Brothers 1-3 Year U.S. Credit Index; (5) Lehman 
Brothers Intermediate U.S. Credit Index; (6) Lehman Brothers U.S. 
Credit Index; (7)

[[Page 76009]]

Lehman Brothers Intermediate U.S. Government/Credit Index; and (8) 
Lehman Brothers U.S. Government/Credit Index. The indexes are referred 
to herein collectively as ``Indexes'' or ``Underlying Indexes.''
    Operation of the Funds.\9\
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    \9\ The Exchange notes that the information provided herein is 
based on information included in the Registration Statement. While 
the Adviser (defined above) would manage the Funds, the Funds' Board 
of Directors would have overall responsibility for the Funds' 
operations. Further, the composition of the Board is, and would be, 
in compliance with the requirements of Section 10 of the Investment 
Company Act. The Funds are subject to and must comply with Section 
303A.06 of the Manual, which requires that the Funds have an audit 
committee that complies with Rule 10A-3 under the Act.
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    Each Fund is an ``index fund'' that seeks investment results that 
correspond generally to the price and yield performance, before fees 
and expenses, of a particular index (its ``Underlying Index'') 
developed by Lehman.
    Barclays Global Fund Advisors (``BGFA''), the investment adviser to 
each Fund (``Adviser''), is a subsidiary of Barclays Global Investors, 
N.A. (``BGI''). BGFA and its affiliates are not affiliated with the 
Index Provider. Investors Bank & Trust Company (``Investors Bank'' or 
``IBT'') is the administrator, custodian and transfer agent for each 
Fund. SEI Investments Distribution Co. (``SEI'') serves as the 
Distributor of Creation Units (as described below) for each Fund on an 
agency basis. The Exchange states that SEI does not maintain a 
secondary market in shares of the Funds. The Exchange also notes that 
SEI has no role in determining the policies of any Fund or the 
securities that are purchased or sold by any Fund. Lehman Brothers, 
Inc. (``Lehman Brothers'') is the Index Provider. Lehman Brothers is 
not affiliated with the Trust, BGI, BGFA, Investors Bank, the 
Distributor, or the NYSE.
    The Exchange states that BGFA uses a ``passive'' or indexing 
approach to try to achieve each Fund's investment objective. Unlike 
many investment companies, the Funds do not try to ``beat'' the indexes 
they track and do not seek temporary defensive positions when markets 
decline or appear overvalued.
    Each of the iShares Lehman Short Treasury Bond Fund, iShares Lehman 
3-7 Year Treasury Bond Fund, and iShares Lehman 10-20 Year Treasury 
Bond Fund (the ``Treasury Funds'') generally will invest at least 90% 
of its assets in the bonds of its Underlying Index and at least 95% of 
its assets in U.S. government bonds. Each Treasury Fund also may invest 
up to 10% of its assets in U.S. government bonds not included in its 
Underlying Index, but which BGFA believes will help the Fund track its 
Underlying Index. For example, a Treasury Fund may invest in bonds not 
included in its Underlying Index in order to reflect changes in its 
Underlying Index (such as reconstitutions, additions, and deletions). 
Each Treasury Fund also may invest up to 5% of its assets in repurchase 
agreements collateralized by U.S. government obligations and in cash 
and cash equivalents, including shares of money market funds affiliated 
with BGFA.
    Each of the iShares Lehman 1-3 Year Credit Bond Fund, iShares 
Lehman Intermediate Credit Bond Fund, and iShares Lehman Credit Bond 
Fund (the ``Credit Bond Funds''), and iShares Lehman Intermediate 
Government/Credit Bond Fund and iShares Lehman Government/Credit Bond 
Fund (the ``Government/Credit Bond Funds'') will invest at least 90% of 
its assets in the securities of its Underlying Index. Each Credit Bond 
Fund and Government/Credit Bond Fund may invest the remainder of its 
assets in securities not included in its Underlying Index, but which 
BGFA believes will help the Fund track its Underlying Index. For 
example, a Credit Bond Fund or Government/Credit Bond Fund may invest 
in bonds not included in its Underlying Index in order to reflect 
changes in its Underlying Index (such as reconstitutions, additions and 
deletions). Each Credit Bond Fund or Government/Credit Bond Fund also 
may invest its other assets in futures, options and swap contracts, 
cash and cash equivalents, including money market funds advised by 
BGFA.
    BGFA uses a Representative Sampling indexing strategy. 
``Representative Sampling'' involves investing in a representative 
sample of bonds in the relevant Underlying Index, which has a similar 
investment profile as the relevant Underlying Index. Bonds selected 
have aggregate investment characteristics (based on market 
capitalization and industry weightings), fundamental characteristics 
(such as return variability, earnings valuation, duration, maturity, or 
credit ratings and yield) and liquidity measures similar to those of 
the relevant Underlying Index. Funds that use Representative Sampling 
generally do not hold all of the bonds that are included in the 
relevant Underlying Index.
    BGFA expects that, over time, the correlation between each Fund's 
performance and that of its Underlying Index, before fees and expenses, 
will be 95% or better. A correlation percentage of 100% would indicate 
perfect correlation. Any correlation percentage of less than 100% is 
called ``tracking error.'' The Exchange states that a Fund using a 
Representative Sampling indexing strategy can be expected to have a 
greater tracking error than a Fund using a Replication indexing 
strategy.\10\
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    \10\ Replication is an indexing strategy in which a Fund invests 
in substantially all of the securities in its Underlying Index in 
approximately the same proportions as in the Underlying Index.
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    A Fund will not concentrate its investments (i.e., hold 25% or more 
of its total assets), in a particular industry or group of industries, 
except that a Fund will concentrate its investments to approximately 
the same extent that its Underlying Index is so concentrated. For 
purposes of this limitation, securities of the U.S. government 
(including its agencies and instrumentalities), repurchase agreements 
collateralized by U.S. government securities, and securities of state 
or municipal governments and their political subdivisions are not 
considered to be issued by members of any industry.
    From time to time, adjustments may be made in the portfolio of the 
Funds in accordance with changes in the composition of the Underlying 
Indexes or to maintain compliance with requirements applicable to a 
regulated investment company (``RIC'') under the Internal Revenue Code 
(``Code'').\11\ For

[[Page 76010]]

example, if at the end of a calendar quarter a Fund would not comply 
with the RIC diversification tests, the Adviser would make adjustments 
to the portfolio to ensure continued RIC status.
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    \11\ In order for the Funds to qualify for tax treatment as a 
RIC, they must meet several requirements under the Code. Among these 
is a requirement that, at the close of each quarter of the Funds' 
taxable year, (1) at least 50% of the market value of the Funds' 
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 Funds' assets and not greater than 10% of the 
outstanding voting securities of such issuer; and (2) not more than 
25% of the value of their total assets may be invested in securities 
of any one issuer, or two or more issuers that are controlled by the 
Funds (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 a Fund's Underlying Index itself is not RIC compliant, the 
Adviser generally employs a representative sampling indexing 
strategy (as described in the Funds' prospectus) in order to achieve 
the Fund's investment objective. The Funds' prospectus also gives 
the Funds 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.
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    The Exchange states that an index is a theoretical financial 
calculation, while each Fund is an actual investment portfolio. The 
performance of the Funds and the Underlying Indexes will vary somewhat 
due to transaction costs, market impact, corporate actions (such as 
mergers and spin-offs), and timing variances. The Funds' investment 
objectives, policies, and investment strategies will be fully disclosed 
in their prospectus and statement of additional information (``SAI'').
    Description of the Funds and the Underlying Indexes.\12\
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    \12\ For each of the Funds, a Fund's investment objective and 
its Underlying Index may be changed without shareholder approval. In 
such case, the Exchange would be obligated to file for approval of 
listing and trading such derivative product pursuant to Section 
19(b)(1) of the Act (15 U.S.C. 78s(b)(1)) as a proposed rule change, 
which must be approved by the Commission, to permit continued 
listing and trading of the derivative product. See Telephone 
conference between Florence Harmon, Senior Special Counsel, Division 
of Market Regulation, Commission, and Michael Cavalier, Assistant 
General Counsel, NYSE, on November 17, 2006.
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    The iShares Lehman Short Treasury Bond Fund seeks investment 
results that correspond generally to the price and yield performance, 
before fees and expenses, of the short-term sector of the U.S. Treasury 
market as defined by the Lehman Brothers Short U.S. Treasury Index. 
This Index measures the performance of public obligations of the U.S. 
Treasury that have a remaining maturity of between 1 and 12 months, are 
rated investment grade, and have more than $250 million or more of 
outstanding face value. In addition, the securities must be denominated 
in U.S. dollars and must be fixed rate and non-convertible. Excluded 
from the Index are certain special issues, such as flower bonds, 
targeted investor notes (``TINs''), and state and local government 
series bonds (``SLGs''), and coupon issues that have been stripped from 
assets that are already included in the Index. As of May 31, 2006, 
there were 43 issues included in the Index. The Index, as for each of 
the Underlying Indexes, is market capitalization weighted,\13\ and the 
securities in the Index are updated (as described below) on the last 
calendar day of each month.
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    \13\ The Exchange states that the market capitalization of each 
Underlying Index's bond component is calculated by multiplying the 
price of the bond (accounting for accrued interest) by the par 
amount outstanding. For investment grade corporate debt, Lehman 
utilizes trader marked prices and a multi-dealer pricing matrix. For 
U.S. Treasuries and certain government related bonds, Lehman marks 
the bonds on a daily basis. For both categories of bonds, multiple 
pricing sources are also used to verify pricing determinations. See 
Amendment No. 2, supra note 5.
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    The iShares Lehman 3-7 Year Treasury Bond Fund seeks investment 
results that correspond generally to the price and yield performance, 
before fees and expenses, of the intermediate-term sector of the U.S. 
Treasury market as defined by the Lehman Brothers 3-7 Year U.S. 
Treasury Index. This Index measures the performance of public 
obligations of the U.S. Treasury that have a remaining maturity of 
greater than or equal to 3 years and less than 7 years, are rated 
investment grade, and have $250 million or more of outstanding face 
value. In addition, the securities must be denominated in U.S. dollars 
and must be fixed rate and non-convertible. Excluded from the Index are 
certain special issues, such as flower bonds, TINs, and SLGs, and 
coupon issues that have been stripped from assets that are already 
included in the Index. As of May 31, 2006, there were 36 issues 
included in the Index.
    The iShares Lehman 10-20 Year Treasury Bond Fund seeks investment 
results that correspond generally to the price and yield performance, 
before fees and expenses, of the long-term sector of the U.S. Treasury 
market as defined by the Lehman Brothers 10-20 Year U.S. Treasury 
Index. This Index measures the performance of public obligations of the 
U.S. Treasury that have a remaining maturity of greater than or equal 
to 10 years and less than 20 years, are rated investment grade, and 
have $250 million or more of outstanding face value. In addition, the 
securities must be denominated in U.S. dollars and must be fixed rate 
and non-convertible. Excluded from the Index are certain special 
issues, such as flower bonds, TINs, and SLGs, and coupon issues that 
have been stripped from assets that are already included in the Index. 
As of May 31, 2006, there were 22 issues included in the Index.
    The iShares Lehman 1-3 Year Credit Bond Fund seeks investment 
results that correspond generally to the price and yield performance, 
before fees and expenses, of the investment-grade credit sector of the 
U.S. bond market as defined by the Lehman Brothers 1-3 Year U.S. Credit 
Index. This Index measures the performance of investment-grade 
corporate debt and sovereign, supranational, local authority, and non-
U.S. agency bonds \14\ that are U.S. dollar denominated and have a 
remaining maturity of greater than or equal to 1 year and less than 3 
years, are rated investment grade, and have more than $250 million or 
more of outstanding face value. In addition, the securities must be 
denominated in U.S. dollars and must be fixed rate and non-convertible. 
Excluded from the Index are structured notes with embedded swaps or 
other special features, private placements, floating rate securities, 
and Eurobonds. As of May 31, 2006, there were 601 issues included in 
the Index.\15\
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    \14\ ``Local authority'' bonds are U.S. municipal securities. 
``Non-U.S. agency bonds'' are issued by foreign government sponsored 
entities from developed nations but are not backed by the full faith 
and credit of the foreign government. See Telephone conference 
between Florence Harmon, Senior Special Counsel, Division of Market 
Regulation, Commission, and Michael Cavalier, Assistant General 
Counsel, NYSE, on November 20, 2006 (``November 20 Telephone 
Conference'').
    \15\ Regarding the top ten holdings in the Lehman Brothers 1-3 
Year U.S. Credit Index, the top ten holdings constitute 8.3% of the 
Index, with the largest holding constituting 1%. See Amendment No. 
1, supra note 4.
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    The iShares Lehman Intermediate Credit Bond Fund seeks investment 
results that correspond generally to the price and yield performance, 
before fees and expenses, of the investment-grade credit sector of the 
U.S. bond market as defined by the Lehman Brothers Intermediate U.S. 
Credit Index. This Index measures the performance of investment-grade 
corporate debt and sovereign, supranational, local authority, and non-
U.S. agency bonds that are U.S. dollar denominated and have a remaining 
maturity of greater than or equal to 1 year and less than 10 years, are 
rated investment grade, and have more than $250 million or more of 
outstanding face value. In addition, the securities must be denominated 
in U.S. dollars and must be fixed rate and non-convertible. Excluded 
from the Index are structured notes with embedded swaps or other 
special features, private placements, floating rate securities, and 
Eurobonds. As of May 31, 2006, there were 2,193 issues included in the 
Index.\16\
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    \16\ Regarding the top ten holdings in the Lehman Brothers 
Intermediate U.S. Credit Index, the top ten holdings constitute 2.6% 
of the Index, with the largest holding constituting 0.3%. See 
Amendment No. 1, supra note 4.

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[[Page 76011]]

    The iShares Lehman Intermediate Government/Credit Bond Fund seeks 
investment results that correspond generally to the price and yield 
performance, before fees and expenses, of the investment-grade credit 
sector of the U.S. bond market and the total U.S. Treasury market as 
defined by the Lehman Brothers Intermediate U.S. Government/Credit 
Index. This Index measures the performance of U.S. dollar denominated 
U.S. Treasuries, investment-grade government-related (i.e., U.S. and 
foreign agencies, sovereign, supranational, and local authority) debt, 
and investment-grade U.S. corporate securities that have a remaining 
maturity of greater than or equal to 1 year and less than 10 years, are 
rated investment grade, and have more than $250 million or more of 
outstanding face value. In addition, the securities must be denominated 
in U.S. dollars and must be fixed rate and non-convertible. Excluded 
from the Index are certain special issues, such as flower bonds, TINs, 
and SLGs, and coupon issues that have been stripped from assets that 
are already included in the Index. Also excluded from the Index are 
structured notes with embedded swaps or other special features, private 
placements, floating rate securities, and Eurobonds. As of May 31, 
2006, there were 3,021 issues included in the Index.\17\
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    \17\ Regarding the top ten holdings in the Lehman Brothers 
Intermediate U.S. Government/Credit Index, the top ten holdings 
constitute 6.9% of the Index, with the largest holding constituting 
1.1%. See Amendment No. 1, supra note 4.
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    The iShares Lehman Credit Bond Fund seeks investment results that 
correspond generally to the price and yield performance, before fees 
and expenses, of the investment-grade credit sector of the U.S. bond 
market as defined by the Lehman Brothers U.S. Credit Index. This Index 
measures the performance of investment-grade corporate debt and 
sovereign, supranational, local authority, and non-U.S. agency bonds 
that are U.S. dollar denominated and have a remaining maturity of 
greater than or equal to 1 year, are rated investment grade, and have 
more than $250 million or more of outstanding face value. In addition, 
the securities must be denominated in U.S. dollars and must be fixed 
rate and non-convertible. Excluded from the Index are structured notes 
with embedded swaps or other special features, private placements, 
floating rate securities, and Eurobonds. As of May 31, 2006, there were 
2,996 issues included in the Index.\18\
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    \18\ Regarding the top ten holdings in the Lehman Brothers U.S. 
Credit Index, the top ten holdings constitute 2.3% of the Index, 
with the largest holding constituting 0.4%. See Amendment No. 1, 
supra note 4.
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    The iShares Lehman Government/Credit Bond Fund seeks investment 
results that correspond generally to the price and yield performance, 
before fees and expenses, of the investment-grade U.S. government and 
U.S corporate securities of the U.S. bond market as defined by the 
Lehman Brothers U.S. Government/Credit Index. This Index measures the 
performance of U.S. dollar denominated U.S. Treasuries, investment-
grade government-related (i.e., U.S. and foreign agencies, sovereign, 
supranational and local authority) debt, and investment-grade U.S. 
corporate securities that have a remaining maturity of greater than or 
equal to 1 year, are rated investment grade, and have more than $250 
million or more of outstanding face value. In addition, the securities 
must be denominated in U.S. dollars and must be fixed rate and non-
convertible. Excluded from the index are certain special issues, such 
as flower bonds, TINs, and SLGs, and coupon issues that have been 
stripped from assets that are already included in the index. Also 
excluded from the index are structured notes with embedded swaps or 
other special features, private placements, floating rate securities, 
and Eurobonds. As of May 31, 2006 there were 3,935 issues included in 
the Index.\19\
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    \19\ Regarding the top ten holdings in the Lehman Brothers U.S. 
Government/Credit Index, the top ten holdings constitute 5.7% of the 
Index, with the largest holding constituting 0.8%. See Amendment No. 
1, supra note 4.
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    The Exchange represents that, as of September 29, 2006, less than 
one percent of the market value of the Underlying Indexes for each of 
the Funds consisted of Rule 144A securities, and no Rule 144A 
securities were included in the Lehman Short Treasury Index; Lehman 3-7 
Year Treasury Index; and Lehman 10-20 Year Treasury Index.\20\
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    \20\ See Amendment No. 1, supra note 4. Rule 144A(b) under the 
Securities Act provides that ``[a]ny dealer who offers or sells 
securities in compliance with the conditions set forth in paragraph 
(d) of this section shall be deemed not to be a participant in a 
distribution of such securities within the meaning of section 
4(3)(C) of the Act and not to be an underwriter of such securities 
within the meaning of section 2(11) of the Act, and such securities 
shall be deemed not to have been offered to the public within the 
meaning of section 4(3)(A) of the Act.'' 17 CFR 230.144A. Among the 
conditions to be met in paragraph (d) is that the ``securities are 
offered or sold only to a qualified institutional buyer or to an 
offeree or purchaser that the seller and any person acting on behalf 
of the seller reasonably believe is a qualified institutional 
buyer.'' Id.
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Index Provider

    The Index Provider for each Fund, Lehman Brothers, is a broker-
dealer. Therefore, appropriate firewalls must exist around the 
personnel who have access to information concerning changes and 
adjustments to an index and the trading personnel of the broker-dealer. 
Lehman Brothers has represented to the Exchange that it will (1) 
implement and maintain procedures designed to prevent the misuse and 
dissemination, in violation of applicable laws, rules and regulations, 
of material non-public information relating to the Indexes licensed by 
BGI; and (2) periodically check the application of such procedures, 
including the application of such procedures as they relate to those 
persons directly responsible for changes in the composition or 
calculation of the relevant Index.\21\
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    \21\ See November 20 Telephone Conference, supra note 14.
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    The Exchange notes that, while there is not an independent 
calculation agent for the Indexes, the securities included in the 
Indexes are U.S. government, U.S. credit and investment-grade corporate 
debt issues that are traded in highly liquid, transparent markets and 
subject to multiple pricing sources, as described below.\22\
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    \22\ See Amendment No. 1, supra note 4.
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    For each of the Indexes, the applicable Index constituents are 
reset on the last business day of each month and remain static 
throughout the month. The universe of Index constituents adjust for 
securities that become ineligible for inclusion in an Index during the 
month (e.g., because of downgrades or called bonds) or for issues that 
are newly eligible (e.g., up-grades or newly issued bonds) on the last 
business day of each month. The Indexes are valued using end of day bid 
side prices, as marked by Lehman Brothers. Intra-month cash flows 
contribute to monthly returns, but they are not reinvested during the 
month and do not earn a reinvestment return. Total returns are 
calculated based on the sum of price changes, gain/loss on repayments 
of principal, and coupon received or accrued, expressed as a percentage 
of beginning market value. The Indexes are calculated once a day and 
are available from major data vendors.
    The Exchange states that Lehman Brothers has represented to BGI 
that, in calculating the Indexes, it utilizes multiple contributor 
sources to verify bond prices.\23\ The primary price for

[[Page 76012]]

each security is analyzed and compared to other third-party pricing 
sources through both statistical routines and scrutiny by the Lehman 
Brothers research staff. Significant discrepancies are researched and 
corrected, as necessary.
---------------------------------------------------------------------------

    \23\ See id.
---------------------------------------------------------------------------

Net Asset Value

    The Exchange states that, 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. 
Investors Bank calculates the NAV for each Fund once daily Monday 
through Friday generally as of the regularly scheduled close of 
business of the NYSE (normally 4 p.m., Eastern Time) on each day that 
the NYSE is open for trading, based on prices at the time of closing, 
provided that (a) any assets or liabilities denominated in currencies 
other than the U.S. dollar shall be translated into U.S. dollars at the 
prevailing market rates on the date of valuation, as quoted by one or 
more major banks or dealers that makes a two-way market in such 
currencies (or a data service provider based on quotations received 
from such banks or dealers); and (b) U.S. fixed-income assets may be 
valued as of the announced closing time for trading in fixed-income 
instruments on any day that the Bond Market Association announces an 
early closing time. The NAV of each Fund is calculated by dividing the 
value of the net assets of such Fund (i.e., the value of its total 
assets less total liabilities) by the total number of outstanding 
shares of the Fund, generally rounded to the nearest cent. In 
calculating a Fund's NAV, a Fund's investments are generally valued 
using market valuations. In the event that current market valuations 
are not readily available or such valuations do not reflect current 
market values, the affected investments will be valued using fair value 
pricing pursuant to the pricing policy and procedures approved by the 
Trust's Board of Trustees. The frequency with which a Fund's 
investments are valued using fair value pricing is primarily a function 
of the types of securities and other assets in which the Fund invests 
pursuant to its investment objective, strategies and limitations.
    Investments that may be valued using fair value pricing include, 
but are not limited to: (i) An unlisted security related to corporate 
actions; (ii) a restricted security (i.e., one that may not be publicly 
sold without registration under the Securities Act); (iii) a security 
whose trading has been suspended or which has been delisted from its 
primary trading exchange; (iv) a security that is thinly traded; (v) a 
security in default or bankruptcy proceedings for which there is no 
current market quotation; (vi) a security affected by currency controls 
or restrictions; and (vii) a security affected by a significant event 
(i.e., an event that occurs after the close of the markets on which the 
security is traded but before the time as of which the Fund's NAV is 
computed and that may materially affect the value of the Fund's 
investments). Examples of events that may be ``significant events'' are 
government actions, natural disasters, armed conflict, acts of 
terrorism, and significant market fluctuations.

Continuous Distribution

    Shares of the Funds will be issued on a continuous offering basis 
in groups of 50,000 to 100,000 iShares (as specified for each Fund), or 
multiples thereof. These ``groups'' of shares are called ``Creation 
Unit Aggregations'' (also, ``Creation Units''). The anticipated price 
at which the iShares will initially trade is approximately $100. The 
Funds will issue and redeem iShares only in Creation Unit 
Aggregations.\24\
---------------------------------------------------------------------------

    \24\ A Creation Unit Aggregation of 50,000 iShares would have an 
estimated initial value of approximately $5,000,000.
---------------------------------------------------------------------------

    The Shares that trade in the secondary market are ``created'' at 
NAV by market makers, large investors, and institutions (known as 
``Authorized Participants'') only in Creation Unit Aggregations. Each 
``creator'' enters into an authorized participant agreement 
(``Participant Agreement'') with SEI, the Funds'' distributor, which is 
subject to acceptance by the transfer agent, and then deposits into the 
applicable Fund a portfolio of bonds closely approximating the holdings 
of the Fund and a specified amount of cash in exchange for a specified 
number of Creation Units.
    Similarly, Shares can only be redeemed in a specified number of 
Creation Units, principally in-kind for a portfolio of bonds held by a 
Fund and a specified amount of cash. Except when aggregated in Creation 
Units, shares are not redeemable. The prices at which creations and 
redemptions occur are based on the next calculation of NAV after an 
order is received in a form described in the Participant Agreement.
    Creations and redemptions must be made through a firm that is a 
Depository Trust Company (``DTC'') participant and has the ability to 
clear through the Federal Reserve System. Information about the 
procedures regarding creation and redemption of Creation Units 
(including the cut-off times for receipt of creation and redemption 
orders) is included in the SAI. Each Fund will impose a purchase 
transaction fee and a redemption transaction fee to offset transfer and 
other transaction costs associated with the issuance and redemption of 
Creation Units of shares.
    All orders to purchase and redeem 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 (the ``Clearing Process''), a clearing agency that is 
registered with the Commission, or a DTC participant, and in each case, 
must enter into a Participant Agreement.\25\
---------------------------------------------------------------------------

    \25\ Such participant, if not registered as a broker-dealer, 
must be exempt from being (or otherwise not required to be) 
registered as a broker-dealer. See November 20 Telephone Conference, 
supra note 14.
---------------------------------------------------------------------------

Issuance of Creation Unit Aggregations

    The Trust issues and sells Shares of each Fund only in Creation 
Unit Aggregations on a continuous basis through the Distributor, 
without a sales load, at the NAV next determined after receipt, on any 
business day (any day the NYSE is open for trading), of an order in 
proper form.
    The consideration for purchase of Creation Unit Aggregations of a 
Fund generally consists of the in-kind deposit of a designated 
portfolio of securities (the ``Deposit Securities''), which constitutes 
a substantial replication, or a portfolio sampling representation, of 
the securities involved in the relevant Fund's Underlying Index (``Fund 
Securities'') and an amount of cash (the ``Cash Component'') computed 
as described below. Together, the Deposit Securities and the Cash 
Component constitute the ``Fund Deposit,'' which represents the minimum 
initial and subsequent investment amount for a Creation Unit 
Aggregation of any Fund.
    The Cash Component is sometimes also referred to as the ``Balancing 
Amount.'' The function of the cash component is to compensate for any 
differences between the NAV per Creation Unit Aggregation and the 
Deposit Amount (as defined below). The Cash Component is an amount 
equal to the difference between the NAV of the shares (per Creation 
Unit Aggregation) and the ``Deposit Amount'' is an amount equal to the 
market value of the Deposit Securities. If the Cash Component is a 
positive number (i.e., the NAV per Creation Unit Aggregation exceeds 
the

[[Page 76013]]

Deposit Amount), the creator will deliver the Cash Component. If the 
Cash Component is a negative number (i.e., the NAV per Creation Unit 
Aggregation is less than the Deposit Amount), the creator will receive 
the Cash Component. Computation of the Cash Component excludes any 
stamp duty or other similar fees and expenses payable upon transfer of 
beneficial ownership of the Deposit Securities, which are the sole 
responsibility of the Authorized Participant.
    BGFA, through the NSCC, makes available on each business day, prior 
to the opening of business on the Exchange (currently 9:30 a.m., 
Eastern Time), the list of the names and the required number of shares 
(subject to possible amendments or corrections) of each Deposit 
Security to be included in the current Fund Deposit (based on 
information at the end of the previous business day) for each Fund.
    Such Deposit Securities are applicable, subject to any adjustments 
as described below, in order to effect creations of Creation Unit 
Aggregations of a given Fund until such time as the next-announced 
composition of the Deposit Securities is made available. The identity 
and number of shares of the Deposit Securities required for a Fund 
Deposit for each Fund changes as rebalancing adjustments, corporate 
action events, and interest payments on underlying bonds are reflected 
from time to time by BGFA with a view to the investment objective of 
the relevant Fund. The composition of the Deposit Securities may also 
change in response to adjustments to the weighting or composition of 
the component securities of the relevant Underlying Index.
    In addition, the Trust reserves the right to permit or require the 
substitution of an amount of cash (a ``cash in lieu'' amount) to be 
added to the Cash Component to replace any Deposit Security that may 
not be available in sufficient quantity for delivery or that may not be 
eligible for transfer through the systems of DTC for corporate bonds or 
the Federal Reserve System for U.S. Treasury securities. 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 BGFA 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 being tracked by the relevant Fund or resulting from certain 
corporate actions.
    Fund Deposits must be delivered through the Federal Reserve System 
(for cash and government securities) and through DTC (for corporate 
securities) by an Authorized Participant. The Fund Deposit transfer 
must be ordered by the DTC Participant in a timely fashion so as to 
ensure the delivery of the requisite number of Deposit Securities 
through DTC to the account of the Fund by no later than 3 p.m., Eastern 
Time, on the Settlement Date. The ``Settlement Date'' for all Funds is 
generally the third business day after the Transmittal Date.
    A purchase transaction fee is imposed for the transfer and other 
transaction costs of the Funds associated with the issuance of Creation 
Units of shares. The fee is a single charge and will be the same 
regardless of the number of Creation Units purchased by an investor on 
the same day in the amount specified in the Funds' prospectus or SAI.

Redemptions of Creation Unit Aggregations

    Shares may be redeemed only in Creation Unit Aggregations at their 
NAV next determined after receipt of a redemption request in proper 
form by a Fund only on a business day. A Fund will not redeem shares in 
amounts less than Creation Unit Aggregations. Beneficial owners must 
accumulate enough shares in the secondary market to constitute a 
Creation Unit Aggregation in order to have such shares redeemed by the 
Trust.
    With respect to each Fund, BGFA, through the NSCC, makes available 
immediately prior to the opening of business on the NYSE (currently 
9:30 a.m., Eastern Time) on each business day, the identity of the fund 
securities that will be applicable (subject to possible amendment or 
correction) to redemption requests received in proper form on that day. 
Fund Securities received on redemption may not be identical to Deposit 
Securities that are applicable to creations of Creation Unit 
Aggregations.
    Unless cash redemptions are available or specified for a Fund, the 
redemption proceeds for a Creation Unit Aggregation generally consist 
of Fund Securities--as announced on the business day of the request for 
redemption received in proper form--plus cash in an amount equal to the 
difference between the NAV of the shares being redeemed, as next 
determined after a receipt of a request in proper form, and the value 
of the Fund Securities (the ``Cash Redemption Amount''), less a 
redemption transaction fee. A redemption transaction fee is imposed to 
offset transfer and other transaction costs that may be incurred by the 
Funds. The fee is a single charge and will be as set forth in the 
Funds' prospectus and SAI, and is the same regardless of the number of 
Creation Units redeemed by an investor on the same day. Investors will 
also bear the costs of transferring the Fund Securities from the Trust 
to their account or on their order. Investors who use the services of a 
broker or other such intermediary may be charged a fee for such 
services. The standard creation and redemption fee for each Fund is 
$500; however, as stated in the Fund's Registration Statement, if a 
Creation Unit is purchased or redeemed outside the usual process 
through NSCC or for cash, a variable fee may be charged up to four 
times the standard creation or redemption fee.

Compliance With Securities Laws--Creations and Redemptions; Rule 144A 
Securities \26\

    The Exchange represents that the statutory prospectus for the Funds 
will state that the Funds must comply with the federal securities laws 
in accepting securities for deposits and satisfying redemptions with 
redemption securities, including that the securities accepted for 
deposits and the securities used to satisfy redemption requests are 
sold in transactions that would be exempt from registration under the 
Securities Act.
---------------------------------------------------------------------------

    \26\ See Amendment No. 2, supra note 5.
---------------------------------------------------------------------------

    The Exchange further represents that the Funds must comply with the 
federal securities laws in accepting Deposit Securities and satisfying 
redemptions with Fund Securities, including that the Deposit Securities 
and Fund Securities are sold in transactions that would be exempt from 
registration under the Securities Act. In accepting Deposit Securities 
and satisfying redemptions with Fund Securities that are restricted 
securities eligible for resale pursuant to Rule 144A under the 
Securities Act, the Funds will comply with the conditions of Rule 144A, 
including in satisfying redemptions with such Rule 144A eligible 
restricted Fund Securities. The prospectus for the Funds will also 
state that ``An Authorized Participant that is not a Qualified 
Institutional Buyer (``QIB'') will not be able to receive Fund 
Securities that are restricted securities eligible for resale under 
Rule 144A.''

[[Page 76014]]

Availability of Information Regarding iShares and Each Underlying Index

    As stated above, 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 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 
``Intraday Optimized Portfolio Value'' or ``IOPV'') will be calculated 
by an independent third party that is a major market data vendor (the 
``Value Calculator''), such as Bloomberg L.P., at least every 15 
seconds \27\ during the Exchange's regular trading hours and 
disseminated at least every 15 seconds on the Consolidated Tape.
---------------------------------------------------------------------------

    \27\ See November 20 Telephone Conference, supra note 14.
---------------------------------------------------------------------------

    Because the Funds will utilize a representative sampling strategy, 
the Exchange states that the IOPV may not reflect the value of all 
securities included in the Underlying Indexes. In addition, the IOPV 
does not necessarily reflect the precise composition of the current 
portfolio of securities held by the Funds 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 Funds, which is 
calculated only once a day. While the IOPV disseminated by the Exchange 
at 9:30 a.m. 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 each Fund may 
diverge from the Deposit Securities values during any trading day. In 
such case, the IOPV will not precisely reflect the value of each Fund's 
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 each 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 Adviser).
    The IOPV will be updated throughout the day to reflect changing 
bond prices, using multiple prices from independent third party pricing 
sources. Information about the intra-day prices for the Deposit 
Securities of each Fund is readily available to the marketplace.\28\ 
The Exchange represents that the Adviser has represented that: (1) IOPV 
will be calculated by an independent third party; (2) IOPV will be 
calculated using prices obtained from multiple independent third-party 
pricing sources (such as broker-dealers) throughout the day; and (3) 
IOPV will be calculated in accordance with pre-determined criteria and 
set parameters so that an individual bond ``price'' based on an 
analysis of multiple pricing sources is obtained for each security in 
the Portfolio Deposit.\29\ The Exchange states that closing prices of 
the Funds' Deposit Securities are readily available from published or 
other public sources, such as the NYSE's Automated Bond System 
(ABS[supreg]), the Trace Reporting and Compliance Engine (``TRACE''), 
or on-line client-based information services provided by Credit Suisse, 
Goldman Sachs, Lehman Brothers, IDC, Merrill Lynch, Reuters, Bloomberg, 
TradeWeb, and other pricing services commonly used by bond mutual 
funds.\30\
---------------------------------------------------------------------------

    \28\ The Exchange states that Authorized Participants and other 
market participants have a variety of ways to access the intra-day 
security prices that form the basis of the Funds' IOPV calculation. 
For example, intra-day prices for treasury securities and agency 
securities are available from Bloomberg, TradeWeb, ABS[supreg] and 
TRACE. Intra-day prices of callable agency securities are available 
from TradeWeb. Intra-day prices of corporate bonds are available 
from ABS[supreg] and TRACE. In addition, intra-day prices for each 
of these securities are available by subscription or otherwise to 
Authorized Participants and clients of major U.S. broker-dealers 
(such as Credit Suisse, Goldman Sachs, and Lehman Brothers).
    \29\ For example, the Exchange states that Bloomberg Generic 
Prices could be used. Bloomberg Generic Prices are current prices on 
individual bonds as determined by Bloomberg using a proprietary 
automated pricing program that analyzes multiple bond prices 
contributed to Bloomberg by third-party price contributors (such as 
broker-dealers).
    \30\ The Exchange understands that Credit Suisse, Goldman Sachs, 
Lehman Brothers, Merrill Lynch, IDC, Reuters, Bloomberg, and 
TradeWeb provide prices for each type of Deposit Security. 
ABS[supreg] and TRACE provide prices for corporate bonds. See also 
Telephone conference between Florence Harmon, Senior Special 
Counsel, Division of Market Regulation, Commission, and Michael 
Cavalier, Assistant General Counsel, NYSE, on November 21, 2006 
(authorizing removal from this proposed rule change of language in 
which the Funds disclaim responsibility for IOPV calculation).
---------------------------------------------------------------------------

    The Exchange also intends to disseminate a variety of data with 
respect to each Fund on a daily basis by means of CTA and CQ High Speed 
Lines; 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, there will be disseminated, through major market data 
vendors, a value for the Underlying Indexes once each trading day, 
based on closing prices in the relevant market. The NAV for each Fund 
will be calculated and disseminated daily. The Funds' NAV will be 
calculated by IBT. IBT will disseminate the information to BGI, SEI, 
and others. The Funds' NAV will be published in a number of places, 
including http://www.iShares.com and on the Consolidated Tape.

    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 each Fund: (a) The prior business day's NAV and 
the mid-point of the 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. The Exchange states that the 
Adviser for the Funds has represented to the Exchange that the Funds 
will make the NAV for the Fund Shares available to all market 
participants at the same time.\31\
---------------------------------------------------------------------------

    \31\ See November 20 Telephone Conference, supra note 14.
---------------------------------------------------------------------------

Dividends and Distributions

    Dividends will be paid out to investors at least monthly by the 
Funds and may be paid out on a more frequent basis. Distributions of 
net capital gains, if any, will be distributed to investors annually. 
Dividends and other distributions on iShares of the Funds will be 
distributed on a pro rata basis to beneficial owners of such iShares. 
Dividend payments will be made through the Depository and to the DTC 
Participants to beneficial owners then of record with amounts received 
from the Fund.
    The Exchange represents that the Trust currently does not intend to 
make the DTC book-entry Dividend Reinvestment Service (the ``Service'') 
available for use by beneficial owners for reinvestment of their cash 
proceeds, but certain individual brokers may make the Service available 
to their clients. 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

[[Page 76015]]

broker such necessary details. The Shares 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 
the Funds.
    Beneficial owners of the Funds 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, and IRS Form 1099-DIVs. 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.

Other Issues

    (a) Criteria for Initial and Continued Listing. The Shares are 
subject to the criteria for initial and continued listing of ICUs in 
Section 703.16 of the Manual. A minimum of 100,000 iShares for each 
Fund will be required to be outstanding at the start of trading. This 
minimum number of shares of each Fund 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 shares of each Fund outstanding at the 
start of trading is sufficient to provide market liquidity and to 
further the Funds' investment objective to seek to provide investment 
results that correspond generally to the price and yield performance of 
the Underlying Index.
    (b) Original and Annual Listing Fees. The original listing fees 
applicable to the Shares of the Funds for listing on the Exchange is 
$5,000 for each Fund, and the continuing fees would be $2,000 for each 
Fund.
    (c) Stop and Stop Limit Orders. Commentary .30 to NYSE 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 on 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.
    (d) NYSE Rule 460.10. NYSE Rule 460.10 generally precludes certain 
business relationships between an issuer and the specialist in the 
issuer's securities. Exceptions in the Rule permit specialists in 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 net asset 
value of the Fund shares. A specialist may acquire a position in excess 
of 10% of the outstanding issue of a Fund's Shares, provided, however, 
that a specialist registered in a security issued by an investment 
company may purchase and redeem the ICU or securities that can be 
subdivided or converted into such unit, from the investment company as 
appropriate to facilitate the maintenance of a fair and orderly market 
in the subject security.
    (e) Prospectus Delivery.\32\ The Commission has granted the Trust 
an exemption from certain prospectus delivery requirements under 
Section 24(d) of the Investment Company Act.\33\ The Exchange states 
that any product description used in reliance on a Section 24(d) 
exemptive order will comply with all representations made therein and 
all conditions thereto. The Exchange, in an Information Memo to 
Exchange members and member organizations, will inform members and 
member organizations, prior to commencement of trading of the Shares, 
of the prospectus or product description delivery requirements 
applicable to the Shares of the Funds and will refer members and member 
organizations to NYSE Rule 1100(b), which requires that members and 
member organizations provide to purchasers a written description of the 
terms and characteristics of the securities not later than the time of 
a confirmation of the first transaction is delivered to the purchaser. 
There is not currently a product description available for the Funds. 
Therefore, the Information Memo will also advise members and member 
organizations that delivery of a prospectus to customers in lieu of a 
product description would satisfy the requirements of NYSE Rule 
1100(b).
---------------------------------------------------------------------------

    \32\ See Amendment No. 1, supra note 4.
    \33\ See In the Matter of iShares, Inc., et al., Investment 
Company Act Release No. 25623 (June 25, 2002).
---------------------------------------------------------------------------

    (f) Information Memo. The Exchange will distribute an Information 
Memo to its members in connection with the trading of the iShares. The 
Memo will discuss the special characteristics and risks of trading this 
type of security. Specifically, the Information Memo, among other 
things, will discuss what the Funds are, how the Funds' shares are 
created and redeemed, prospectus or Product Description delivery 
requirements applicable to the Funds, applicable NYSE rules, 
dissemination information, trading information and the applicability of 
suitability rules (including NYSE Rule 405). The Information Memo 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, Regulation SHO, 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.
    (g) Trading Halts. In order to halt the trading of the Shares of 
the Funds, the Exchange may consider, among other things, factors such 
as the extent to which trading is not occurring in underlying 
security(s) and whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present. In addition, trading in the Funds' shares is subject to 
trading halts caused by extraordinary market volatility pursuant to 
NYSE Rule 80B. If the end-of-day Index value or the intraday IOPV \34\ 
applicable to a Fund is not being disseminated as required, the 
Exchange may halt trading during the day in which the interruption to 
the dissemination of the Index value or IOPV occurs. If the 
interruption to the dissemination of the Index value or intraday IOPV 
persists past the trading day in which it occurred, the Exchange will 
halt trading no later than the beginning of the trading day following 
the interruption.\35 \
---------------------------------------------------------------------------

    \34\ See November 20 Telephone Conference, supra note 14.
    \35\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------

    (h) Due Diligence. The Exchange represents that the Information 
Memo to members will note, for example, Exchange responsibilities 
including that before an Exchange member, member organization, or 
employee thereof recommends a transaction in the Funds, a determination 
must be made that the recommendation is in compliance with all 
applicable Exchange and federal rules and regulations, including due 
diligence obligations under NYSE Rule 405.
    (i) Purchases and Redemptions in Creation Unit Size. In the Memo 
referenced above, members and member organizations will be informed 
that procedures for purchases and redemptions of shares of the Funds in 
Creation Unit Size are described in the Funds' prospectus and SAI, and 
that shares of the Funds are not individually redeemable but are 
redeemable only in

[[Page 76016]]

Creation Unit Size aggregations or multiples thereof.
    (j) 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 Shares of the Funds.
    (k) Hours of Trading/Minimum Price Variation. The Funds will trade 
on the Exchange until 4:15 p.m. (Eastern Time). The minimum price 
variation for quoting will be $.01.
2. Statutory Basis
    NYSE believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \36\ 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.
---------------------------------------------------------------------------

    \36\ 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, as 
amended, will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change, as amended.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send e-mail to rule-comments@sec.gov. Please include File 

Number SR-NYSE-2006-70 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2006-70. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also 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-2006-70 and should be submitted on or before 
January 9, 2007.

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

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\37\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of Section 6(b)(5) of the Act,\38\ which requires, among other things, 
that the rules of an exchange be 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.
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    \37\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \38\ 15 U.S.C. 78f(b)(5).
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A. Surveillance

    The NYSE has represented that it has appropriate surveillance 
procedures in place that are designed to monitor the trading of the 
proposed Shares. The Exchange represents that these surveillance 
procedures applicable to trading in the proposed Shares are comparable 
to those applicable to other ICUs currently trading on the Exchange, 
and provide the Exchange with the means to detect and deter 
manipulation of the Shares.\39\ The Commission also notes that certain 
concerns are raised when a broker-dealer, such as Lehman Brothers, is 
involved in the development, maintenance, and calculation of an index 
upon which an exchange traded fund is based. The Exchange has 
represented that Lehman Brothers has represented that it has in place 
procedures to prevent the misuse of material, non-public information 
relating to the Indexes. The Commission believes that these procedures 
should help to minimize concerns raised by Lehman Brothers' involvement 
in the management of the Indexes.
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    \39\ The Commission notes that NYSE specialists are required to 
provide daily trading information to the Exchange on Form 81. See 
NYSE Rule 104A.50.
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B. Dissemination of Information

    The Commission believes that sufficient venues exist for obtaining 
reliable information so that investors in the Funds can monitor the 
value of the Underlying Indexes and securities held by each Fund.
    A value for the Underlying Indexes will be disseminated once each 
trading day, based on closing prices in the relevant market.\40\ In 
addition, the NAV for each Fund will be calculated and disseminated 
daily, and will be published in a number of places, including 
http://www.iShares.com and on the Consolidated Tape. The Commission notes that 

the Exchange will receive a representation from the Advisor to the 
Funds that the NAV will be calculated and made available to all market 
participants at the same time.
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    \40\ Closing prices of the Funds' Deposit Securities are 
available from sources such as ABS[supreg], TRACE, and online 
client-based information services provided by broker-dealers and 
other information providers.
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    Further, an IOPV, calculated by an independent third party, will be 
updated and disseminated throughout the day on the Consolidated Tape to 
reflect changing bond prices. Additionally, information about the 
intra-day prices for the Deposit Securities of each Fund is available. 
For

[[Page 76017]]

example, intra-day prices for treasury securities and agency securities 
are available from Bloomberg, TradeWeb, ABS[supreg] and TRACE. Intra-
day prices of callable agency securities are available from TradeWeb. 
Intra-day prices of corporate bonds are available from ABS[supreg], and 
TRACE. In addition, intra-day prices for these securities are available 
by subscription or otherwise to Authorized Participants and clients of 
major U.S. broker-dealers. If the Underlying Index values or IOPV is 
not disseminated as described, the Exchange may halt trading during the 
day in which the interruption occurs. If the interruption persists past 
the trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the interruption. 
The Commission believes that the trading halt rules, together with the 
NAV dissemination requirements, will facilitate transparency, reduce 
the potential for an unfair informational advantage with respect to the 
Shares, and diminish the potential for manipulation.

C. Listing and Trading

    The Commission finds that the Exchange's rules and procedures for 
the listing and trading of the Shares are consistent with the Act. The 
Shares will be subject to NYSE rules governing the trading of equity 
securities, including, among others, rules governing trading halts, 
customer suitability requirements, and the election of stop and stop 
limit orders. In addition, the Shares 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 the Shares of the Funds should help to maintain a minimum level of 
liquidity and, therefore, minimize the potential for manipulation of 
the Shares. Finally, the Commission notes that the Information Memo 
will inform members about the terms, characteristics, and risks in 
trading the Shares, including their prospectus delivery obligations.
Accelerated Approval
    NYSE has requested that the Commission find good cause for 
approving the proposed rule change, as amended, prior to the thirtieth 
day after the date of publication of notice thereof in the Federal 
Register. The Commission notes that the proposal is consistent with the 
NYSE's listing and trading standards, and the Commission has previously 
approved similar products.\41\ Based on the above, the Commission finds 
good cause to accelerate approval of the proposed rule change, as 
amended.
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    \41\ See Securities Exchange Act Release Nos. 48881 (December 4, 
2003), 68 FR 69739 (December 15, 2003) (SR-NYSE-2003-39) (relating 
to the iShares Lehman U.S. Aggregate Bond Fund and iShares Lehman 
TIPS Bond Fund); and 46299 (August 1, 2002), 67 FR 51907 (August 9, 
2002) (SR-NYSE-2002-26) (relating to the iShares 1-3 Year Treasury 
Index Fund, iShares 7-10 Year Treasury Index Fund, iShares 20+ Year 
Treasury Index Fund, iShares Treasury Index Fund, iShares 
Government/Credit Index Fund, iShares Lehman Corporate Bond Fund, 
and iShares Goldman Sachs Corporate Bond Fund).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\42\ that the proposed rule change, as amended, (SR-NYSE-2006-70) is 
hereby approved on an accelerated basis.
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    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\43\
Nancy M. Morris,
Secretary.
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    \43\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E6-21585 Filed 12-18-06; 8:45 am]

BILLING CODE 8011-01-P