

[Federal Register: February 13, 2006 (Volume 71, Number 29)]
[Notices]               
[Page 7594-7602]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe06-113]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53230; File No. PCX-2005-116]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
and Amendment Nos. 1, 2, and 3 Thereto To List and Trade Shares of the 
iShares MSCI Australia Index Fund, iShares MSCI Austria Index Fund, 
iShares MSCI Canada Index Fund, iShares MSCI EMU Index Fund, iShares 
MSCI Germany Index Fund, and iShares MSCI Mexico Index Fund

February 6, 2006.
    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 11, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE'' or ``Corporation''), 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 PCX filed Amendment No. 1 to the proposed rule change on December 
13, 2005.\3\ The PCX filed Amendment No. 2 to the proposed rule change 
on December 14, 2005.\4\ The PCX filed Amendment No. 3 to the proposed 
rule change on January 24, 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, as amended, on 
an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ Amendment No. 2 made clarifying changes to Amendment No. 1.
    \5\ Amendment No. 3 made clarifying changes to Amendment No. 1.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through its wholly-owned subsidiary, PCXE, proposes 
to amend its rules governing the Archipelago Exchange (``ArcaEx''), the 
equities trading facility of PCXE, to list and trade the following 
iShares[reg] \6\ MSCI\SM\ \7\ Series Index Funds, which are Investment 
Company Units (``ICUs''), governed by PCXE Rule 5.2(j)(3): iShares MSCI 
Australia Index Fund, iShares MSCI Austria Index Fund, iShares MSCI 
Canada Index Fund, iShares MSCI EMU Index Fund,\8\ iShares MSCI Germany 
Index Fund, and iShares MSCI Mexico Index Fund (the ``Funds'').
---------------------------------------------------------------------------

    \6\ iShares is a registered trademark of Barclays Global 
Investors, N.A.
    \7\ The MSCI and MSCI indices are registered service marks of 
Morgan Stanley & Co., Incorporated.
    \8\ The iShares MSCI EMU Index Fund is based on the MSCI EMU 
Index, which is currently comprised of companies from eleven of the 
twelve European Economic and Monetary Union, or ``EMU'' countries 
(i.e., all of the EMU countries except Luxembourg), as follows: 
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, 
the Netherlands, Portugal, and Spain.
---------------------------------------------------------------------------

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 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 IV 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 ICUs, 
which are consistent with the listing criteria currently used by the 
American Stock Exchange (``Amex'') and other exchanges.\9\ The Exchange 
now proposes to list and trade on the basis more fully set forth herein 
shares of the Funds, which are ICUs, \10\ governed by PCXE Rule 
5.2(j)(3).
---------------------------------------------------------------------------

    \9\ In October 1999, the Commission approved PCXE Rule 
5.2(j)(3), which sets forth the rules related to the listing and 
trading criteria for ICUs. See Securities Exchange Act Release No. 
41983 (October 6, 1999), 64 FR 56008 (October 15, 1999) (SR-PCX-
1998-29). In July 2001, the Commission also approved the Exchange's 
generic listing standards for the listing and trading, or the 
trading pursuant to unlisted trading privileges (``UTP''), of ICUs 
under PCX Rule 5.2(j)(3). See Securities Exchange Act Release No. 
44551 (July 12, 2001), 66 FR 37716-01 (July 19, 2001) (SR-PCX-2001-
14).
    \10\ The definition of an ICU is set forth under PCXE Rule 
5.1(b)(15) (noting that an ICU is a security representing an 
interest in a registered investment company that could be organized 
as a unit investment trust, an open-end management investment 
company or a similar entity).
---------------------------------------------------------------------------

a. Description of the Funds
    The Funds are currently listed and traded on the Amex\11\ and trade 
on other securities exchanges \12\ and in the over-the-counter market. 
The information below describes how the Funds were created and are 
traded.\13\
---------------------------------------------------------------------------

    \11\ The Index Funds were formerly known as World Entity 
Benchmark Shares or WEBS. The iShares MSCI Australia, Austria, 
Canada, Germany, and Mexico Index Funds were initially approved for 
listing and trading on the Amex in 1996. See Securities Exchange Act 
Release No. 36947 (March 8, 1996), 61 FR 10606 (March 14, 1996) (SR-
Amex-95-43). The iShares MSCI EMU Index Fund was initially approved 
for listing and trading on the Amex in 2000. See Securities Exchange 
Act Release No. 42748 (May 2, 2000), 65 FR 30155 (May 10, 2000) (SR-
Amex-98-49).
    \12\ See, e.g., Securities Exchange Act Release No. 50142 
(August 3, 2004), 69 FR 48539 (August 10, 2004) (SR-NYSE-2004-27) 
(approving the UTP trading of certain iShares MSCI Index Funds and 
the S&P Europe 350 Index Fund).
    \13\ See iShares, Inc. Prospectus and Statement of Additional 
Information dated January 1, 2005 (as revised September 23, 2005) 
and the Web sites of the Amex (http://www.amex.com) and iShares (http://www.iShares.com). Fund information relating to net asset 

value (``NAV''), returns, dividends, component stock holdings and 
the like is updated on a daily basis on the Web sites.
---------------------------------------------------------------------------

    The shares of the Funds are issued by iShares, Inc. iShares, Inc. 
is an open-ended management investment company. Each Fund seeks 
investment results that correspond generally to the price and yield 
performance, before fees and expenses, of the applicable underlying 
index. The Funds utilize representative sampling to invest in a 
representative sample of securities in the applicable underlying index. 
Barclays Global Fund Advisors (``BGFA''), a subsidiary of Barclays 
Global Investors, N.A. (``BGI''), is the investment adviser for each 
Fund. BGI is a wholly-owned indirect subsidiary of Barclays Bank PLC of 
the United Kingdom. BGFA and its affiliates are not affiliated with the 
index provider, MSCI. Investors Bank and Trust Company (``Investors 
Bank'') serves as administrator, custodian and transfer

[[Page 7595]]

agent for each Fund, and SEI Investments Distribution Co. (the 
``Distributor'') is the principal underwriter and distributor of shares 
of the Funds. Neither Investors Bank nor the Distributor is affiliated 
with iShares, Inc., MSCI, or the Exchange.
    iShares, Inc. will issue and redeem the shares of the Funds only in 
aggregations of substantial size, which varies for the various Funds 
but is at least 50,000 shares (each aggregation of shares is a 
``Creation Unit''; one or more Creation Units are sometimes referred to 
as ``Creation Unit Aggregations''). As of December 5, 2005, the value 
of a Creation Unit of each of the Funds is as follows: The iShares MSCI 
Australia Index Fund--$3,861,867; the iShares MSCI Austria Index Fund--
$2,710,144; the iShares MSCI Canada Index Fund--$2,159,521; the iShares 
MSCI EMU Index Fund--$3,826,520; the iShares MSCI Germany Index Fund--
$5,920,760; and the iShares MSCI Mexico Index Fund--$3,582,278. Each 
Fund issues and sells shares of each Fund only in Creation Units 
through the Distributor on an ongoing basis at prices based on the next 
calculation of NAV after an order is received. Creation Unit 
Aggregations may be purchased only by or through a participant that has 
entered into an authorized participant agreement with the Distributor 
(``Authorized Participant''). Each Authorized Participant must be 
either a member of the Continuous Net Settlement System of the National 
Securities Clearing Corporation (``NSCC'') or a Depository Trust 
Company (``DTC'') participant. Authorized Participants must place an 
irrevocable purchase order for Creation Units of each of the Funds 
before 4 p.m. (ET) on any Business Day \14\ to receive that Business 
Day's NAV.
---------------------------------------------------------------------------

    \14\ A ``Business Day'' with respect to each Fund is any day on 
which ArcaEx is open for business.
---------------------------------------------------------------------------

    An Authorized Participant wishing to purchase newly-issued Creation 
Units from a Fund may do so in exchange for: (i) An in-kind deposit of 
a portfolio of equity securities constituting an optimized 
representation of the Fund's underlying index (the ``Deposit 
Securities''), and (ii) a cash component more fully described below 
(together, the ``Portfolio Deposit''). The cash component is an amount 
equal to the ``Dividend Equivalent Payment'' (as described below), plus 
or minus, as the case may be, a ``Balancing Amount'' (as described 
below). The ``Dividend Equivalent Payment'' is an amount equal, on a 
per Creation Unit basis, to the dividends on all the portfolio 
securities of the Fund with ex-dividend dates within the accumulation 
period for such distribution, net of expenses and liabilities for such 
period, as if all of the portfolio securities had been held by iShares, 
Inc. for the entire period. The ``Balancing Amount'' is an amount equal 
to the difference between (a) the NAV per Creation Unit of the Fund and 
(b) the sum of (i) the Dividend Equivalent Payment and (ii) the market 
value per Creation Unit of the securities deposited with iShares, Inc. 
(the sum of (i) and (ii) is referred to as the ``Deposit Amount''). The 
Balancing Amount serves the function of compensating for any 
differences between the NAV per Creation Unit and the value of the 
Deposit Amount.
    Each Fund reserves the right to permit or require the substitution 
of an amount of cash or the substitution of any security to replace any 
Deposit Security that may be unavailable or unavailable in sufficient 
quantity for delivery to iShares, Inc. or for other similar reasons.
    BGFA makes available through the NSCC daily, prior to the opening 
of business (currently 9:30 a.m. Eastern time (``ET'')),\15\ the names 
and required number of shares of each Deposit Security to be included 
in the current Portfolio Deposit for each Fund (``New Basket Amount''). 
It is anticipated that Portfolio Deposits will be made primarily by 
institutional investors and arbitrageurs. Creation Units are separable 
upon issuance into identical shares that will be listed and traded on 
the Exchange by professionals and institutional and retail investors.
---------------------------------------------------------------------------

    \15\ Usually, NSCC disseminates the estimated Portfolio 
Securities and Cash Amount between 6 p.m. and 8 p.m. (ET) on the 
prior business day for both creation and redemption request placed 
the following day. Telephone Conference between David Strandberg, 
Attorney, Archipelago, and Florence E. Harmon, Senior Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
on February 2, 2006.
---------------------------------------------------------------------------

    Shares of the Funds will only be redeemable in Creation Unit 
Aggregations through each Fund. To redeem, an investor will have to 
accumulate enough shares of a Fund to constitute a Creation Unit 
Aggregation. An investor redeeming a Creation Unit Aggregation 
generally will receive Deposit Securities as announced by BGFA on the 
day of the redemption request, plus cash in an amount equal to the 
difference between the NAV of the shares being redeemed and the value 
of the Deposit Securities, less a redemption transaction fee, noted 
below. With respect to each Fund BGFA makes available through the NSCC 
prior to 9:30 a.m. (ET) on each business day, the Portfolio Securities 
that will be applicable (subject to possible amendment or correction) 
to redemption requests received in proper form by 4 p.m. (ET) on any 
business day.\16\
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

    Investors purchasing Creation Unit Aggregations are charged a 
standard creation transaction fee, regardless of how many Creation 
Units are purchased on a particular day. The transaction fees are 
$2,400 for the iShares MSCI Australia Index Fund, $600 for the iShares 
MSCI Austria Index Fund, $1,900 for the iShares MSCI Canada Index Fund, 
$8,000 for the iShares MSCI EMU Index Fund, $1,500 for the iShares MSCI 
Germany Index Fund, and $1,400 for the iShares MSCI Mexico Index Fund. 
Likewise, investors redeeming Creation Unit Aggregations at NAV are 
also charged a standard redemption transaction fee, regardless of how 
many Creation Units are redeemed on a particular day. The redemption 
transaction fees are the same as the creation transaction fees noted 
above.
    Each Fund makes distributions of dividends from net investment 
income, including net foreign currency gains, if any, at least 
annually. The Funds will not make the DTC book-entry Dividend 
Reinvestment Service (the ``Service'') available for use by beneficial 
owners for reinvestment of their cash proceeds, but certain individual 
brokers may make the Service available to their clients.
b. MSCI Indices
i. Generally
    The MSCI indices are owned and compiled by Morgan Stanley Capital 
International Inc., a Delaware corporation of which Morgan Stanley is 
the majority owner, and The Capital Group of Companies, Inc. is the 
minority shareholder. MSCI is not affiliated with iShares, Inc., BGI, 
BGFA, Investors Bank, the Distributor, or the Exchange. MSCI and Morgan 
Stanley do not share any employees that are directly involved in the 
index compilation. MSCI employees directly involved in the index 
compilation do not report directly to any Morgan Stanley personnel. 
MSCI has established policies and procedures for the handling and 
monitoring the dissemination of confidential, non-public information 
relating to the MSCI indices. These policies and procedures include 
specific ``firewall'' procedures regulating the flow of information 
between MSCI and Morgan Stanley personnel. BGI and its affiliates have 
no involvement in selection of component stocks in the underlying 
indices.
    MSCI applies the same criteria and calculation methodology across 
all

[[Page 7596]]

markets for all equity indices. The MSCI indices are calculated 
assuming that dividends (net of taxes) paid by the securities in the 
index are reinvested in index securities.\17\
---------------------------------------------------------------------------

    \17\ See the iShares, Inc. Prospectus and Statement of 
Additional Information dated January 1, 2005 (as revised September 
23, 2005).
---------------------------------------------------------------------------

ii. Weighting
    The underlying indices for the Funds are market capitalization 
weighted. All single-country MSCI indices are free-float weighted, 
i.e., companies are included in the indices at the value of their free 
public float (free float multiplied by price). MSCI defines ``free 
float'' as total shares excluding shares held by strategic investors 
such as governments, corporations, controlling shareholders and 
management, and shares subject to foreign ownership restrictions. 
MSCI's standard equity indices generally seek to have 85% of the free 
float-adjusted market capitalization of a country's stock market 
reflected in the MSCI index for such country.\18\ With respect to the 
MSCI EMU Index, market capitalization weighting, combined with a 
consistent target of 85% of free float-adjusted market capitalization, 
seeks to ensure that each country's weight in the MSCI EMU Index 
approximates its weight in the total universe of developing and 
emerging markets.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

iii. Selection Criteria
    MSCI undertakes an index construction process, which involves: (i) 
Defining the equity universe; (ii) adjusting the total market 
capitalization of all securities in the universe for free float 
available to foreign investors; (iii) classifying the universe of 
securities under the Global Industry Classification Standard (the 
``GICS''); and (iv) selecting securities for inclusion according to 
MSCI's index construction rules and guidelines.
    The index construction process starts at the country level, with 
the identification of all listed securities for that country. MSCI 
classifies each company and its securities in only one country. This 
allows securities to be sorted distinctly by their respective 
countries. In general, companies and their respective securities are 
classified as belonging to the country in which they are incorporated. 
All listed equity securities, or listed securities that exhibit 
characteristics of equity securities, except investment trusts, mutual 
funds and equity derivatives, are eligible for inclusion in the 
universe. Shares of non-domiciled companies generally are not eligible 
for inclusion in the universe.
iv. Adjusting Total Market Capitalization for Free Float
    After identifying the universe of securities, MSCI calculates the 
free float-adjusted market capitalization of each security in that 
universe using publicly available information. The process of free 
float adjusting market capitalization involves (i) defining and 
estimating the free float available to foreign investors for each 
security, using MSCI's definition of free float, (ii) assigning a free 
float-adjustment factor to each security, and (iii) calculating the 
free float-adjusted market capitalization of each security.
v. GICS Classification
    In addition to the free float-adjustment of market capitalization, 
all securities in the universe are assigned to an industry-based 
hierarchy that describes their business activities. To this end, MSCI 
has designed, in conjunction with Standard & Poor's, the GICS. This 
comprehensive classification scheme provides a universal approach to 
industries worldwide and forms the basis for achieving MSCI's objective 
of reflecting broad and fair industry representation in its indices.
vi. Selection of Securities
    In an attempt to ensure a broad and fair representation in the 
indices of the diversity of business activities in the universe, MSCI 
follows a ``bottom-up'' approach to index construction, building 
indices up to the industry group level. The bottom-up approach to index 
construction requires a thorough analysis and understanding of the 
characteristics of the universe. This analysis drives the individual 
security selection decisions, which aim to reflect the overall features 
of the universe in the country index. MSCI targets an 85% free float-
adjusted market representation level within each industry group, within 
each country.
    The security selection process within each industry group is based 
on the careful analysis of: (i) Each company's business activities and 
the diversification that its securities would bring to the index; (ii) 
the size (based on free float-adjusted market capitalization) and 
liquidity of securities; \19\ and (iii) the estimated free float for 
the company and its individual share classes. Only securities of 
companies with estimated free float greater than 15% are, in general, 
considered for inclusion. Exceptions to this general rule are made only 
in significant cases, where not including a security of a large company 
would compromise the index's ability to fully and fairly represent the 
characteristics of the underlying market.
---------------------------------------------------------------------------

    \19\ All else being equal, MSCI targets for inclusion the most 
sizable and liquid securities in an indusry group. In addition, 
securities that do not meet the minimum size guidelines discussed 
below and/or securities with inadequate liquidity are not considered 
for inclusion. Telephone Conference between David Strandberg, 
Attorney, Archipelago, and Florence E. Harmon, Senior Special 
Counsel, Division, Commission, on January 31, 2006 (correcting 
typographical error).
---------------------------------------------------------------------------

vii. Free Float
    MSCI defines the free float of a security as the proportion of 
shares outstanding that are deemed to be available for purchase in the 
public equity markets by international investors. In practice, 
limitations on free float available to international investors include: 
(i) Strategic and other shareholdings not considered part of available 
free float and (ii) limits on share ownership for foreigners.
    Under MSCI's free float-adjustment methodology, a constituent 
inclusion factor is equal to its estimated free float rounded-up to the 
closet 5% for constituents with free float equal to or exceeding 15%. 
For example, a constituent security with a free float of 23.2% will be 
included in the index at 25% of its market capitalization. For 
securities with a free float of less than 15% that are included on an 
exceptional basis, the estimated free float is adjusted to the nearest 
1%.
viii. Changes to the Indices
    According to the Registration Statement, the MSCI indices are 
maintained with the objective of reflecting, on a timely basis, the 
evolution of the underlying equity markets. In maintaining the MSCI 
indices, emphasis is also placed on continuity, replicability and 
minimizing turnover in the indices. Maintaining the MSCI indices 
involves many aspects, including additions to and deletions from the 
indices and changes in number of shares and changes in Foreign 
Inclusion Factors (``FIFs'') as a result of updated free float 
estimates.
    Potential additions are analyzed not only with respect to their 
industry group, but also with respect to their industry or sub-industry 
group, in order to represent a wide range of economic and business 
activities. All additions are considered in the context of MSCI's 
methodology, including the index constituent eligibility rules and 
guidelines.
    In assessing deletions, it is important to emphasize that indices 
must

[[Page 7597]]

represent the full-investment cycle, including bull as well as bear 
markets. Out-of-favor industries and their securities may exhibit 
declining prices, declining market capitalization, and/or declining 
liquidity, and yet are not deleted because they continue to be good 
representatives of their industry group.
    As a general policy, changes in number of shares are coordinated 
with changes in FIFs to accurately reflect the investability of the 
underlying securities. In addition, MSCI continuously strives to 
improve the quality of its free float estimates and the related FIFs. 
Additional shareholder information may come from better disclosure by 
companies or more stringent disclosure requirements by a country's 
authorities. It may also come from MSCI's ongoing examination of new 
information sources for the purpose of further enhancing free float 
estimates and better understanding shareholder structures. When MSCI 
identifies useful additional sources of information, it seeks to 
incorporate them into its free float analysis.
    Overall, index maintenance can be described by three broad 
categories of implementation of changes: (i) Annual full country index 
reviews that systematically re-assess the various dimensions of the 
equity universe for all countries and are conducted on a fixed annual 
timetable; (ii) quarterly index reviews, aimed at promptly reflecting 
other significant market events; and (iii) ongoing event-related 
changes, such as mergers and acquisitions, which are generally 
implemented in the indices rapidly as they occur.
    Potential changes in the status of countries (stand-alone, 
emerging, developed) follow their own separate timetables. These 
changes are normally implemented in one or more phases at the regular 
annual full country index review and quarterly index review dates.
    The annual full country index review for the MSCI standard country 
indices is carried out once every 12 months and implemented as of the 
close of the last business day of May. The implementation of changes 
resulting from a quarterly index review occurs on only three dates 
throughout the year, as of the close of the last business day of 
February, August, and November. Any country indices may be impacted at 
the quarterly index review. MSCI index additions and deletions due to 
quarterly index rebalancings are announced at least two weeks in 
advance. The intra-day values of the underlying indexes are 
disseminated every 60 seconds \20\ throughout the trading day by 
organizations authorized by the index providers and are available 
through major financial information vendors.
---------------------------------------------------------------------------

    \20\ See Amendment No. 3.
---------------------------------------------------------------------------

ix. Recent Data for the MSCI Indices
    As of November 30, 2005, the iShares MSCI Australia Index's top 
three holdings were BHP Billiton Ltd., Commonwealth Bank of Australia, 
and National Australia Bank Ltd. The Index's top three industries were 
diversified banks, diversified metals and mining, and real estate 
investment trusts.\21\ The Index components had a total market 
capitalization of approximately $521.6 billion. The average total 
market capitalization was approximately $6.3 billion. The ten largest 
constituents represented approximately 51.1% of the Index weight. The 
five highest weighted stocks, which represented 37.8% of the Index 
weight, had an average daily trading volume of 7,726,309 shares during 
the past two months. Each of the component stocks had a daily trading 
volume of at least 26,690 shares for any given trading day in the six 
months ended November 30, 2005.\22\
---------------------------------------------------------------------------

    \21\ Each reference to market capitalization in this section 
(``Recent Data for the MSCI Indices'') is a reference to free-float 
adjusted market capitalization. According to the Statement of 
Additional Information for iShares, Inc. dated January 1, 2006, MSCI 
defines ``free float'' as total shares excluding shares held by 
strategic investors such as governments, corporations, controlling 
shareholders and management, and shares subject to foreign ownership 
restrictions. MSCI calculates the free float-adjusted market 
capitalization of each security using publicly available 
information. The process of free float adjusting market 
capitalization involves: (i) Defining and estimating the free float 
available to foreign investors for each security, using MSCI's 
definition of free float; (ii) assigning a free float-adjustment 
factor to each security; and (iii) calculating the free float-
adjusted market capitalization of each security. See Amendment No. 
3.
    \22\ See Amendment No. 3.
---------------------------------------------------------------------------

    As of November 30, 2005, the iShares MSCI Austria Index's top three 
holdings were OMV AG, Telekom Austria AG, and Erste Bank Der Oester 
Spark. The Index's top three industries were integrated oil and gas, 
integrated telecommunications services, and diversified banks. The 
Index components had a total market capitalization of approximately 
$40.1 billion. The average total market capitalization was 
approximately $3.1 billion. The ten largest constituents represented 
approximately 95.5% of the Index weight. The five highest weighted 
stocks, which represented 74.2% of the Index weight, had an average 
daily trading volume of 654,786 shares during the past two months. Each 
of the component stocks had a daily trading volume of at least 1,874 
shares for any given day in the six months ended November 30, 2005.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    As of November 30, 2005, the iShares MSCI Canada Index's top three 
holdings were Royal Bank of Canada, Manulife Financial Corp., and 
Encana Corp. The Index's top three industries were diversified banks, 
oil and gas exploration and production, and life and health insurance. 
The Index components had a total market capitalization of approximately 
$741.3 billion. The average total market capitalization was 
approximately $7.9 billion. The ten largest constituents represented 
approximately 47.7% of the Index weight. The five highest weighted 
stocks, which represented 26.9% of the Index weight, had an average 
daily trading volume of 2,101,668 shares during the past two months. 
Each of the component stocks had a daily trading volume of at least 
1,230 shares for any given day in the six months ended November 30, 
2005.\24\
---------------------------------------------------------------------------

    \24\ Id.
---------------------------------------------------------------------------

    As of November 30, 2005, the iShares MSCI EMU Index's top three 
holdings were Total SA, Sanofi Aventis, and Nokia OYJ. The Index's top 
three industries were diversified banks, integrated oil and gas, and 
integrated telecommunications services. The Index components had a 
total market capitalization of approximately $3,099.9 billion. The 
average total market capitalization was approximately $9.9 billion. The 
ten largest constituents represented approximately 25.5% of the Index 
weight. The five highest weighted stocks, which represented 14.5% of 
the Index weight, had an average daily trading volume of 32,013,459 
shares during the past two months. Each of the component stocks had a 
daily trading volume of at least 398 shares for any given day in the 
six months ended November 30, 2005.\25\
---------------------------------------------------------------------------

    \25\ Id.
---------------------------------------------------------------------------

    As of November 30, 2005, the iShares MSCI Germany Index's top three 
holdings were Siemens AG-REG, E.ON AG, and Allianz AG-REG. The Index's 
top three industries were automobile manufacturers, diversified 
chemicals, and industrial conglomerates. The Index components had a 
total market capitalization of approximately $663.8 billion. The 
average total market capitalization was approximately $13.3 billion. 
The ten largest constituents represented approximately 67.7% of the 
Index weight. The five highest weighted stocks, which represented 40.6% 
of the Index weight, had an average daily

[[Page 7598]]

trading volume of 4,312,091 shares during the past two months. Each of 
the component stocks had a daily trading volume of at least 2,847 
shares for any given day in the six months ended November 30, 2005.\26\
---------------------------------------------------------------------------

    \26\ Id.
---------------------------------------------------------------------------

    As of November 30, 2005, the iShares MSCI Mexico Index's top three 
holdings were America Movil SA DE CV--SER L, Cemex SA-CPO, and 
Telefonos de Mexico SA--SER L. The Index's top three industries were 
wireless telecommunication services, construction materials, and 
integrated telecommunication services. The Index components had a total 
market capitalization of approximately $100.7 billion. The average 
total market capitalization was approximately $4.6 billion. The ten 
largest constituents represented approximately 89.2% of the Index 
weight. The five highest weighted stocks, which represented 75.9% of 
the Index weight, had an average daily trading volume of 12,691,256 
shares during the past two months. Each of the component stocks had a 
daily trading volume of at least 13 shares for any given day in the six 
months ended November 30, 2005.\27\
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

x. Prices and Exchange Rates
    The prices used to calculate the MSCI indices are the official 
exchange closing prices or those figures accepted as such. MSCI 
reserves the right to use an alternative pricing source on any given 
day.
    The MSCI indices are calculated by MSCI for each trading day in the 
applicable foreign exchange markets based on official closing prices in 
such exchange markets. For exchange rates for the MSCI indices, MSCI 
uses the FX rates published by WM Reuters at 4 p.m. London time. MSCI 
uses WM Reuters' rates for all developed and emerging markets. Exchange 
rates are taken daily at 4 p.m. London time by the WM Reuters and are 
sourced whenever possible from multi-contributor quotes on Reuters. 
Representative rates are selected for each currency based on a number 
of ``snapshots'' of the latest contributed quotations taken from the 
Reuters service at short intervals around 4 p.m. WM Reuters provides 
closing bid and offer rates. MSCI uses these to calculate the mid-point 
to 5 decimal places.
    MSCI continues to monitor exchange rates independently and may, 
under exceptional circumstances, elect to use an alternative exchange 
rate if the WM Reuters rate is believed not to be representative for a 
given currency on a particular day.\28\
---------------------------------------------------------------------------

    \28\ If MSCI elects, under exceptional circumstances, to use 
alternative sources of exchange rates when the WM Reuters rates are 
not available or MSCI determines that such rates are not reflective 
of market circumstances for a given currency on a particular day, 
the Exchange believes that it is unnecessary for a filing pursuant 
to Section 19(b) under the Act to be submitted to the Commission. 
The Exchange submits that under exceptional circumstances, it may be 
appropriate for MSCI to make such an election. However, the Exchange 
represents that if the use of an alternative exchange rate source is 
more than of a temporary nature, a rule filing will be submitted 
pursuant to Section 19(b) of the Act. See Amendment No. 3.
---------------------------------------------------------------------------

c. Funds' Assets and Industry Concentration
    The Funds' prospectus states that each Fund will typically invest 
at least 95% of its assets in the component securities of its 
underlying index and American Depositary Receipts (``ADRs'') based on 
such component securities. Each of the iShares MSCI Canada, EMU, and 
Germany Index Funds will invest at all times at least 90% of its assets 
in the component securities of its underlying index and ADRs based on 
such component securities. Each of the iShares MSCI Australia, Austria, 
and Mexico Index Funds will invest at all times at least 80% of its 
assets in the component securities of its underlying index and ADRs 
based on such component securities, and at least 90% of its assets in 
the component securities of its underlying index or in securities 
included in the relevant market, but not in its underlying index, or in 
ADRs based on the component securities of the underlying index. 
Therefore, each of the iShares MSCI Australia, Austria and Mexico Index 
Funds will invest not more than 10% of fund assets in ADRs and other 
securities, which are not included in or based on the component 
securities of its Underlying Index and are also not included in the 
relevant market.\29\
---------------------------------------------------------------------------

    \29\ Telephone Conference between David Strandberg, Attorney, 
Archipelago, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on February 2, 2006.
---------------------------------------------------------------------------

    The NAV for the Funds will be calculated directly by Investors Bank 
as of the close of regular trading (normally 4 p.m. (ET)), according to 
the Funds' prospectus. The NAV of each Fund is calculated by dividing 
the value of the net assets of such Fund (total assets less total 
liabilities) by the total number of outstanding shares of the Fund. 
Generally, each Fund's investments are valued using market valuations. 
If current market valuations are not available or such valuations do 
not reflect current market values, the affected investments will be 
valued using fair value pricing. The value of assets denominated in 
foreign currencies is converted into U.S. dollars using exchange rates 
selected by BGFA. The NAV will be available to the public on http://www.iShares.com
, from iShares, Inc. by means of a toll-free number, and 

to NSCC participants through data made available from the NSCC.
    Each of the Funds will not concentrate its investments (i.e., hold 
25% or more of its total assets in the stocks of a particular industry 
or group of industries), except that, to the extent practicable, the 
Fund will concentrate to approximately the same extent that its 
underlying index concentrates in the stocks of such particular industry 
or group of industries. As of October 31, 2005, the iShares MSCI 
Australia Index Fund held 25% or more of its total assets in banks; the 
iShares MSCI Canada Index Fund held 25% or more of its total assets in 
energy; and the iShares SCI Mexico Index Fund held 25% or more of its 
total assets in the telecommunications industry.\30\ Each Fund's top 
portfolio holdings can be found at http://www.iShares.com.

---------------------------------------------------------------------------

    \30\ Industry concentration is a function of the market 
capitalization of the companies in the particular industry divided 
by the total market capitalization of the index. The total market 
capitalization of an index does not determine its industry 
concentration, nor does the total market capitalization of the index 
reflect the total market capitalization of the country. Each index 
uses a bottom-up sampling approach (rules based) to achieve a 
balance between fair market representation and investability. See 
Amendment No. 3.
---------------------------------------------------------------------------

    Each Fund will maintain regulated investment company compliance, 
which requires, among other things, that, at the close of each quarter 
of the Fund's taxable year, not more than 25% of its total assets may 
be invested in the securities of any one issuer. In order for a Fund to 
qualify for tax treatment as a regulated investment company, it must 
meet several requirements under the Internal Revenue Code. Among these 
is the requirement that, at the close of each quarter of the Fund's 
taxable year, (a) at least 50% of the market value of the Fund's total 
assets must be represented by cash items, U.S. government securities, 
securities of other regulated investment companies and other 
securities, with such other securities limited for purposes of this 
calculation in respect of any one issuer to an amount not greater than 
5% of the value of the Fund's assets and not greater than 10% of the 
outstanding voting securities of such issuer, and (b) not more than 25% 
of the value of its total assets may be invested in the securities of 
any one issuer or of two or more issuers that are

[[Page 7599]]

controlled by the particular Fund (within the meaning of Section 
851(b)(3)(B) of the Internal Revenue Code) and that are engaged in the 
same or similar trades or businesses or related trades or businesses 
(other than U.S. government securities or the securities of other 
regulated investment companies) or for taxable years beginning after 
October 24, 2004, the securities of one or more qualified publicly 
traded partnerships.
    The Exchange believes that these requirements and policies prevent 
any Fund from being excessively weighted in any single security or 
small group of securities and significantly reduce concerns that 
trading in the shares of a Fund could become a surrogate for trading in 
unregistered securities.
d. Tracking Error
    According to the Funds' prospectus, 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 
figure of 100% would indicate perfect correlation. Any correlation of 
less than 100% is called ``tracking error.'' A Fund using a 
representative sampling strategy (which all of the Funds utilize) can 
be expected to have a greater tracking error than a Fund using a 
replication strategy. Replication is a strategy in which a Fund invests 
in substantially all of the securities in its underlying index in 
approximately the same proportions as in the underlying index.
    The Funds have chosen to pursue a representative sampling strategy 
that, by its very nature, entails some risk of tracking error. Fund 
expenses, the timing of cash flows, and other factors all contribute to 
tracking error. The Web site for the Funds, http://www.iShares.com, 

contains detailed information on the performance and the tracking error 
for each Fund.
e. Availability of Information Regarding Funds and Underlying Indexes
    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 or 
major market data vendor, which will be made available prior to the 
opening of trading on the Exchange. Information with respect to recent 
NAV, shares outstanding, estimated cash amount and total cash amount 
per Creation Unit Aggregation will be made available prior to 9:30 a.m. 
(ET). In addition, the Web site for the Funds, http://www.iShares.com, 

which will be publicly accessible at no charge, will contain the 
following information, on a per iShare basis, for the Funds: (i) The 
prior business day's NAV and the mid-point of the bid-ask price at the 
time of calculation of such NAV (``Bid/Ask Price'') \31\ and a 
calculation of the premium or discount of such price against such NAV; 
and (ii) 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.\32\
---------------------------------------------------------------------------

    \31\ The Bid-Ask Price of the Funds is determined using the 
highest bid and lowest offer on the Exchange as of the time of 
calculation of the Funds' NAV.
    \32\ Telephone Conference between David Strandberg, Attorney, 
Archipelago, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on February 2, 2006 (as to additional 
information disseminated about the Funds).
---------------------------------------------------------------------------

    The closing prices of the Funds' Deposit Securities are readily 
available from, as applicable, the relevant exchanges, automated 
quotation systems, published or other public sources in the relevant 
country, or online 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.\33\
---------------------------------------------------------------------------

    \33\ Telephone Conference between David Strandberg, Attorney, 
Archipelago, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on February 2, 2006 (as to closing price and 
exchange rate).
---------------------------------------------------------------------------

    The value of each underlying index will be updated intra-day on a 
real time basis as individual component securities of that index change 
in price. The intra-day values of the indices will be disseminated 
every 60 seconds throughout the trading day by organizations authorized 
by the index providers and major financial information vendors when 
foreign market hours overlap with ArcaEx trading hours from 9:30 a.m. 
(ET) to 8 p.m. (ET).\34\ When the foreign market is closed during the 
ArcaEx trading hours from 9:30 a.m. (ET) to 8 p.m. (ET), investors may 
refer to the closing index values provided by MSCI at http://www.msci.com.
 The values of the MSCI Australia Index, the MSCI Canada 

Index, and the MSCI Germany Index are reported daily in The Wall Street 
Journal.
---------------------------------------------------------------------------

    \34\ The index value may be disseminated through either the 
Consolidated Tape Association or one or more major market data 
vendors. PCXE Rule 5.2(j)(3), Commentary .01(b)(3). See Securities 
Exchange Act Release No. 52806 (November 18, 2005), 70 FR 71358 
(November 28, 2005) (SR-PCX 2005-88). Telephone Conference between 
David Strandberg, Attorney, Archipelago, and Florence E. Harmon, 
Senior Special Counsel, Division, Commission, on January 31, 2006.
---------------------------------------------------------------------------

    To provide current Fund pricing information, the Exchange will 
disseminate through the facilities of the Consolidated Tape Association 
or one or more major market data vendors \35\ an indicative optimized 
portfolio value (``IOPV'') for the Funds. The IOPV is 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.\36\ The IOPV will be 
calculated by an independent third party, such as Bloomberg, L.P. The 
IOPV will be disseminated every 15 seconds between 9:30 a.m. and 4:15 
p.m. (ET).\37\ The IOPV likely will not reflect the value of all 
securities included in the applicable indices. In addition, the IOPV 
will not necessarily reflect the precise composition of the current 
portfolio of securities held by the Funds at a particular moment. In 
addition, the foreign exchange rate used in computing NAV of a Fund may 
differ materially from that used by the IOPV calculator. Thus, the IOPV 
should not be viewed as a real-time update of the NAV of the Funds, 
which is calculated only once a day. It is expected, however, that 
during the trading day the IOPV will closely approximate the value per 
share of the portfolio of securities for the Funds except under unusual 
circumstances.
---------------------------------------------------------------------------

    \35\ The IOPV may be disseminated through either the 
Consolidated Tape Association or one or more major market data 
vendors pursuant to PCXE Rule 5.2(c). See Securities Exchange Act 
Release No. 52809 (November 18, 2005), 70 FR 71590 (November 29, 
2005) (SR-PCX-2005-108). Telephone Conference between David 
Strandberg, Attorney, Archipelago, and Florence E. Harmon, Senior 
Special Counsel, Division, Commission, on January 31, 2006.
    \36\ Telephone Conference between David Strandberg, Attorney, 
Archipelago, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on February 2, 2006 (as to description of 
IOPV).
    \37\ The Commission expects any exchange listing and trading 
shares of exchange traded funds (``ETFs'') or similar products to do 
so only when the underlying index value and IOPV is updated and 
disseminated on a real time basis. For these products, however, the 
Commission has permitted index dissemination every 60 seconds when 
the applicable foreign market is open, which would be applicable to 
ArcaEx's after-hours trading sessions. However, since NSCC does not 
disseminate the New Basket Amount until approximately 6 p.m. to 8 
p.m., an updated IOPV after the 4 p.m. NAV determination is not 
possible during ArcaEx's late trading session from 4 p.m. to 8 p.m. 
Accordingly, the Commission will permit ArcaEx to trade these EFTs 
without dissemination of the IOPV in its late trading session. 
However, to trade in all other ArcaEx trading sessions, an IOPV must 
be disseminated at least every 15 seconds. Telephone Conference 
between David Strandberg, Attorney, Archipelago, and Florence E. 
Harmon, Senior Special Counsel, Division, Commission, on February 2, 
2006.
---------------------------------------------------------------------------

    For the iShares MSCI Australia Index Fund, there is no overlap in 
trading

[[Page 7600]]

hours between the foreign and U.S. markets. Therefore, for this Fund, 
the IOPV calculator will utilize closing prices (denominated in the 
foreign currency) in the principal foreign market for securities in the 
Fund's portfolio and convert the price to U.S. dollars.\38\ This IOPV 
will be updated every 15 seconds from 9:30 a.m. to 4:15 p.m. (ET) to 
reflect changes in currency exchange rates between the U.S. dollar and 
the applicable foreign currency.
---------------------------------------------------------------------------

    \38\ The IOPV Calculator at the time of this filing is 
Bloomberg, L.P. (``Bloomberg''). When determining the foreign 
exchange rate, Bloomberg uses an aggregation of bank provided rates 
that may differ from the aggregation of bank provided rates utilized 
by WM Reuters in determining the foreign exchange rate. See 
Amendment No. 3.
---------------------------------------------------------------------------

    For the iShares MSCI Austria, Canada, EMU, Germany, and Mexico 
Index Funds, there is an overlap in trading hours between the foreign 
and U.S. markets. Therefore, during any overlap period that occurs 
between 9:30 a.m. and 4:15 p.m. (ET), the IOPV calculator will update 
the applicable IOPV every 15 seconds to reflect price changes in the 
applicable foreign market or markets and convert such prices into U.S. 
dollars based on the currency exchange rate. When the foreign market or 
markets are closed between 9:30 a.m. and 4:15 p.m. (ET), the IOPV will 
be updated every 15 seconds to reflect changes in currency exchange 
rates after the foreign market closes.
    For each Fund, in addition to having an equity securities value 
component, the IOPV will also include the applicable cash component 
consisting of estimated accrued dividend and other income, less 
expenses. The Exchange believes that dissemination of the IOPV based on 
the Deposit Securities provides additional information regarding the 
Funds that is not otherwise available to the public and is useful to 
professionals and investors in connection with trading shares of the 
Funds on the Exchange or the creation or redemption of Fund shares.\39\
---------------------------------------------------------------------------

    \39\ Telephone Conference between David Strandberg, Attorney, 
Archipelago, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on February 2, 2006.
---------------------------------------------------------------------------

f. Information Circular
    In connection with the trading of the Funds, the PCX intends to 
inform its equity trading permit holders (``ETP Holders'') in an 
Information Circular of the special characteristics and risks 
associated with trading the Funds, including how shares in the Funds 
are created and redeemed, the requirement that ETP Holders deliver a 
prospectus to investors purchasing shares of the Funds prior to or 
concurrently with the confirmation of a transaction, applicable 
Exchange rules, how information regarding the per share IOPV is 
disseminated, trading information, and the applicability of suitability 
rules (as set forth in PCXE Rule 9.2(a)-(b)).\40\ The circular will 
also discuss exemptive, no-action and interpretive relief granted by 
the Commission from certain rules under the Act.
---------------------------------------------------------------------------

    \40\ The Commission has issued an order (``Order'') granting the 
Funds an exemption from Section 24(d) of the Investment Company Act 
of 1940. See, e.g., Investment Company Act Release No. 25623 (June 
25, 2002). Any Product Description used in reliance on the Section 
24(d) exemptive order will comply with all representations made and 
all conditions contained in the Application for the Order.
---------------------------------------------------------------------------

    g. Initial Share Issuance and Continued Trading
    The Funds are subject to the criteria for initial and continued 
listing of ICUs pursuant to PCXE Rule 5.2(j)(3), Commentary .01 (d), 
which requires that a minimum of 100,000 shares of a series of ICUs be 
outstanding at commencement of trading. As noted in the Funds' 
prospectus, one Creation Unit consists of 300,000 shares with respect 
to the iShares MSCI Germany Index Fund; 200,000 shares with respect to 
the iShares MSCI Australia Index Fund; 100,000 shares with respect to 
each of the iShares MSCI Austria, Canada and Mexico Index Funds; and 
50,000 shares with respect to the iShares MSCI EMU Index Fund. 
Therefore, one Creation Unit outstanding at the commencement of trading 
of each country-specific Fund on the Exchange, and two Creation Units 
outstanding at the commencement of trading of the iShares MSCI EMU 
Index Fund on the Exchange, will satisfy the Exchange's initial listing 
criteria. The Exchange believes that the proposed number of shares 
outstanding at the commencement of trading for each Fund is sufficient 
to provide market liquidity and to further the Funds' investment 
objective.
    As the listing exchange for the Funds, the PCX will consider the 
halting of trading and delisting of a Fund in any of the following 
circumstances: (i) Following the initial twelve-month period beginning 
upon the commencement of trading of the Fund, there are fewer than 50 
record and/or beneficial holders of the Fund for 30 or more consecutive 
trading days; (ii) the value of the underlying index is no longer 
calculated or available; or (iii) such other event occurs or condition 
exists that, in the opinion of the Exchange, makes further dealings on 
the Exchange inadvisable. The Exchange will halt trading in a Fund if 
the Index Value or IOPV applicable to such Fund is no longer calculated 
or disseminated.\41\ In addition, the PCX will remove a Fund from 
trading and listing upon termination of the Fund that issued the shares 
of the Fund.\42\
---------------------------------------------------------------------------

    \41\ In the event an Index value or IOPV is no longer calculated 
or disseminated from 9:30 a.m. (ET) to 4:15 p.m. (ET), the Exchange 
would immediately contact the Commission to discuss measures that 
may be appropriate under the circumstances. As stated, the Funds may 
trade in ArcaEx's late trading session without dissemination of the 
IOPV in its late trading session. However, to trade in all other 
ArcaEx trading session, an IOPV must be disseminated at least every 
15 seconds. Telephone Conference between David Strandberg, Attorney, 
Archipelago, and Florence E. Harmon, Senior Special Counsel, 
Division, Commission, on February 2, 2006.
    \42\ PCXE Rule 5.5(g)(2).
---------------------------------------------------------------------------

h. Initial Listing and Annual Listing Maintenance Fees
    The Exchange initial listing fee applicable to the listing of the 
Funds is $20,000, which covers all of the Funds.\43\ In addition, the 
annual listing maintenance fee applicable to the Funds will be based 
upon the year-end aggregate total shares outstanding of the Funds.\44\
---------------------------------------------------------------------------

    \43\ The initial listing fee covers all funds listed by a fund 
issuer or ``family.'' There will be no initial listing fees for any 
subsequent funds that may be listed on the Exchange by iShares, Inc. 
See Securities Exchange Act Release No. 34-50591 (October 26, 2004), 
69 FR 63427 (November 1, 2004) (SR-PCX-2004-63) (approving adoption 
of new listings fees for exchange-traded funds and closed-end 
funds); Securities Exchange Act Release No. 34-51519 (April 11, 
2005), 70 FR 20199 (April 18, 2005) (SR-PCX-2005-37) (extending 
implementation date to April 1, 2005).
    \44\ Id. The calculation of the aggregate total shares 
outstanding will also include the shares outstanding of any 
subsequent funds that may be listed on the Exchange by iShares, Inc.
---------------------------------------------------------------------------

i. Surveillance Procedures
    The Exchange will closely monitor activity in the trading of the 
shares of the Funds to identify and deter any potential improper 
trading activity in the Funds. Additionally, the Exchange represents 
that its surveillance procedures are adequate to properly monitor the 
trading of the Funds. Specifically, the Exchange will rely on its 
existing surveillance procedures governing equities and exchange-traded 
funds, which have been deemed adequate under the Act. The Exchange has 
developed procedures to closely monitor activity in the shares of the 
Funds to identify and deter potential improper trading activity.
    The Exchange also has a general policy prohibiting the distribution 
of material, non-public information by its employees. As detailed above 
in the description of the generic standards, if the issuer or a broker-
dealer is responsible for maintaining (or has a role in maintaining) 
the underlying

[[Page 7601]]

index, such issuer or broker-dealer is required to erect and maintain a 
``firewall'' in a form satisfactory to the Exchange, in order to 
prevent the flow of information regarding the underlying index from the 
index production personnel to sales and trading personnel. In addition, 
the Exchange will require that calculation of underlying indexes be 
performed by an independent third party who is not a broker-dealer.
j. Exchange Trading Rules and Policies
    As ICUs under PCXE Rule 5.2(j)(3), the shares of the Funds will be 
treated as equity instruments and will be subject to all Exchange rules 
governing the trading of equity securities. With respect to trading 
halts, the PCX may consider all relevant factors in exercising its 
discretion to halt trading in the Funds. Trading on the PCX in the 
Funds may be halted because of market conditions or for reasons that, 
in the view of the PCX, make trading in the Funds inadvisable. These 
may include (1) the extent to which trading is not occurring in the 
underlying securities or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\45\ In addition, PCXE Rule 7.12 sets forth the 
trading parameters, i.e., ``circuit breakers,'' applicable to the Funds 
in periods of extraordinary market volatility.
---------------------------------------------------------------------------

    \45\ See supra note 41.
---------------------------------------------------------------------------

    Shares of the Funds will trade on ArcaEx from 9:30 a.m. (ET) until 
8 p.m., even if the IOPV is not disseminated from 4:15 p.m. (ET) until 
8 p.m. (ET). Shares of the Funds will trade in a minimum price 
variation of $0.01 pursuant to PCXE Rule 7.6. Trading pertaining to 
odd-lot trading in Exchange equities (PCXE Rule 7.38) will also apply. 
Shares of the Funds will be deemed ``Eligible Securities'' as defined 
in PCXE Rule 7.55(a)(3), for purposes of the Intermarket Trading System 
(``ITS'') Plan, and therefore will be subject to the trade-through 
provisions of PCXE Rule 7.56, which require that ETP Holders avoid 
initiating trade-throughs for ITS securities.
k. Due Diligence
    The Information Circular will note that, pursuant to PCX Rule 
9.2(a), each ETP Holder, through a general partner, a principal 
executive officer or a designated authorized person, shall use due 
diligence to learn the essential facts relative to every customer, 
every order, every account accepted or carried by such ETP Holder and 
every person holding power of attorney over any account accepted or 
carried by such ETP Holder.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \46\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5),of the Act,\47\ in particular, because it 
is designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and to remove impediments and 
perfect the mechanisms of a free and open market and to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b).
    \47\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange requests the Commission to find good cause to 
accelerate effectiveness of this rule filing pursuant to Section 
19(b)(2) of the Act for approving the proposed rule change prior to the 
30th day after publication of the proposed rule change in the Federal 
Register. The Funds are substantially the same in structure as other 
iShares index funds, which have an established and active trading 
history on the exchanges. The Exchange believes that its proposal will 
facilitate transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national system, 
and, in general, protect investors and the public interest.

IV. Solicitation of Comments

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

Electronic Comments

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

File Number SR-PCX-2005-116 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-PCX-2005-116. 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 also will be available for inspection and copying at the 
principal office of the Exchange. 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-PCX-2005-116 and should be submitted on or before March 
6, 2006.

V. Commission Findings

    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 exchange.\48\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act \49\ and will promote just 
and equitable principles of trade, and facilitate transactions in 
securities,

[[Page 7602]]

and, in general, protect investors and the public interest. The 
Commission believes that the Exchange's listing standards, trading 
rules, suitability and disclosure rules for the Funds are consistent 
with the Act. The Commission also believes that the proposed rule 
change raises no issues that have not been previously considered by the 
Commission. The Commission notes that it previously approved the 
original listing and trading of the Funds on the Amex.\50\ Further, 
with respect to each of the following key issues, the Commission 
believes that the Funds satisfy established standards.
---------------------------------------------------------------------------

    \48\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \49\ 15 U.S.C. 78f(b)(5).
    \50\ See Securities Exchange Act Release No. 36947 (March 8, 
1996), 61 FR 10606 (March 14, 1996) (SR-Amex-95-43).
---------------------------------------------------------------------------

A. Surveillance

    The Commission notes that the Underlying Indexes are broad-based 
and are composed of securities having significant trading volumes and 
market capitalization, thus impeding improper trading practices in the 
Shares, the ability to use the Shares to manipulate the underlying 
securities, and the ability to use the Shares as a surrogate to trade 
one or a few unregistered securities. Nevertheless, the PCX represents 
that its surveillance procedures applicable to trading in the proposed 
iShares are adequate to properly monitor the trading of the Funds. The 
Exchange also 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 Commission notes that the Exchange 
may obtain trading information via the Intermarket Surveillance Group 
(``ISG'') from other exchanges who are members or affiliates of the 
ISG.
    As stated, when a broker-dealer, or a broker-dealer's affiliate 
such as MSCI, is involved in the development and maintenance of a stock 
index upon which a product such as iShares is based, the broker-dealer 
or its affiliate should have procedures designed specifically to 
address the improper sharing of information. The Commission notes that 
the Exchange has represented that MSCI has implemented procedures to 
prevent the misuse of material, non-public information regarding 
changes to component stocks in the MSCI Indices.

B. Dissemination of Information About the Shares

    In approving the Funds for listing and trading on the PCX, the 
Commission notes that the Underlying Indexes are broad-based indexes. 
If there is an overlap between the foreign jurisdiction and the PCX 
trading hours, these index values are disseminated through various main 
market data vendors at least every 60 seconds during such overlap in 
trading hours. Otherwise, the Funds provide the Index closing value at 
http://www.iShares.com. Additionally, the Commission notes that the 

Exchange will disseminate through the facilities of CTA during NYSE 
trading hours at least every 15 seconds a calculation of the IOPV 
(which will reflect price changes in the applicable foreign market and 
changes in currency exchange rates), along with an updated market value 
of the Shares. Comparing these two figures will help investors to 
determine whether, and to what extent, the Shares may be selling at a 
premium or discount to NAV and thus will facilitate arbitrage of the 
Shares in relation to the Index component securities.
    The Commission also notes that the Web site for the Funds (http://www.iShares.com
), which is and will be publicly accessible at no 

charge, will contain the Shares' prior business day NAV, the reported 
closing price, and a calculation of the premium or discount of such 
price in relation to the closing NAV.

C. Listing and Trading

    The Commission finds that the Exchange's rules and procedures for 
the proposed listing and trading of the Funds are consistent with the 
Act. Shares of the Funds will trade as equity securities subject to PCX 
rules including, among others, rules governing trading halts, 
prospectus delivery, and customer suitability requirements. In 
addition, the Funds will be subject to PCX listing and delisting/halt 
rules and procedures governing the trading of Index Fund Shares on the 
Exchange. The Commission believes that listing and delisting criteria 
for the Shares should help to maintain a minimum level of liquidity and 
therefore minimize the potential for manipulation of the Shares. 
Finally, the Commission believes that the Information Circular the 
Exchange will distribute will inform members and member organizations 
about the terms, characteristics, and risks in trading the Shares, 
including suitability and prospectus delivery requirements.

D. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\51\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register. The Commission notes that the proposal is consistent with the 
listing and trading standards in PCXE Rule 5.2(j)(3) (ICUs), and the 
Commission has previously approved the listing of these securities on 
the Amex.\52\ Therefore, the Commission does not believe that the 
proposed rule change raises issues that have not been previously 
considered by the Commission.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78s(b)(2).
    \52\ See Securities Exchange Act Release No. 36947 (March 8, 
1996), 61 FR 10606 (March 14, 1996) (approving the listing and 
trading of the ICUs for trading on the Amex).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\53\ that the proposed rule change (SR-PCX-2005-116), as amended, 
is hereby approved on an accelerated basis.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-1931 Filed 2-10-06; 8:45 am]

BILLING CODE 8010-01-P
