0001193125-07-211022.txt : 20120820
0001193125-07-211022.hdr.sgml : 20120818
20071001164801
ACCESSION NUMBER: 0001193125-07-211022
CONFORMED SUBMISSION TYPE: 485APOS
PUBLIC DOCUMENT COUNT: 3
FILED AS OF DATE: 20071001
DATE AS OF CHANGE: 20071001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: iSHARES TRUST
CENTRAL INDEX KEY: 0001100663
IRS NUMBER: 943351276
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 485APOS
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-09729
FILM NUMBER: 071146396
BUSINESS ADDRESS:
STREET 1: 400 HOWARD STREET
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94105
BUSINESS PHONE: (415) 670-2000
MAIL ADDRESS:
STREET 1: 400 HOWARD STREET
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94105
FORMER COMPANY:
FORMER CONFORMED NAME: ISHARES TRUST
DATE OF NAME CHANGE: 19991213
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: iSHARES TRUST
CENTRAL INDEX KEY: 0001100663
IRS NUMBER: 943351276
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 485APOS
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-92935
FILM NUMBER: 071146397
BUSINESS ADDRESS:
STREET 1: 400 HOWARD STREET
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94105
BUSINESS PHONE: (415) 670-2000
MAIL ADDRESS:
STREET 1: 400 HOWARD STREET
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94105
FORMER COMPANY:
FORMER CONFORMED NAME: ISHARES TRUST
DATE OF NAME CHANGE: 19991213
0001100663
S000019898
iShares MSCI Kokusai Index Fund
C000055846
iShares MSCI Kokusai Index Fund
485APOS
1
d485apos.txt
FORM 485APOS
As filed with the Securities and Exchange Commission on October 1, 2007
File Nos. 333-92935 and 811-09729
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 103 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 103 [X]
(Check appropriate box or boxes)
-----------------
iShares(R) Trust
(Exact Name of Registrant as Specified in Charter)
-----------------
c/o State Street Bank and Trust Company
200 Clarendon Street
Boston, MA 02116
(Address of Principal Executive Office)(Zip Code)
Registrant's Telephone Number, including Area Code: (415) 597-2000
The Corporation Trust Company
1209 Orange Street
Wilmington, DE 19801
(Name and Address of Agent for Service)
-----------------
With Copies to:
MARGERY K. NEALE, ESQ. BENJAMIN J. HASKIN, ESQ. KEVIN SMITH, ESQ.
WILLKIE FARR & GALLAGHER LLP WILLKIE FARR & GALLAGHER BARCLAYS GLOBAL INVESTORS, N.A.
787 SEVENTH AVENUE LLP 45 FREMONT STREET
NEW YORK, NY 10019-6099 1875 K STREET, NW SAN FRANCISCO, CA 94105
WASHINGTON, DC 20006-1238
-----------------
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] On (date) pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (a)(1)
[ ] On (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[ ] The post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES DESCRIBED HEREIN MAY NOT BE
SOLD UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE IN WHICH THE OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL.
iShares(Reg. TM)
iShares Trust
ISHARES TRUST (the "Trust") is a registered investment company that consists of
over ___ separate investment portfolios called "Funds." This Prospectus relates
to the following Fund:
iShares MSCI Kokusai Index Fund
The Fund issues and redeems shares at their net asset value ("NAV") only in
blocks of [50,000] shares or multiples thereof ("Creation Units"). Only certain
large institutional investors known as Authorized Participants may purchase or
redeem Creation Units directly with the Fund at NAV. These transactions are
usually in exchange for a basket of securities similar to the Fund's portfolio
and an amount of cash. EXCEPT WHEN AGGREGATED IN CREATION UNITS, SHARES OF THE
FUND ARE NOT REDEEMABLE SECURITIES. SHAREHOLDERS WHO ARE NOT AUTHORIZED
PARTICIPANTS MAY NOT REDEEM SHARES DIRECTLY FROM THE FUND AT NAV.
iShares(Reg. TM) is a registered trademark of Barclays Global Investors, N.A.
("BGI").
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
PROSPECTUS DATED [________________], 2007
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Table of Contents
Introduction ........................................................ 1
Description of the iShares
MSCI Kokusai Index
Fund ................................................................ 2
Investment Objective of the ......................................... 2
Fund
Principal Investment ................................................ 2
Strategies of the Fund
Principal Risks of the Fund ......................................... 4
Portfolio Holdings Information ...................................... 8
Performance Information ............................................. 9
Fees and Expenses ................................................... 9
Management .......................................................... 9
Shareholder Information ............................................. 10
Distribution ........................................................ 16
Financial Highlights ................................................ 16
Index Provider ...................................................... 16
Disclaimers ......................................................... 17
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"MSCI Kokusai Index" is a trademark of Morgan Stanley Capital International
("MSCI") and is a mark that has been licensed for use for certain purposes by
BGI.
i
[THIS PAGE INTENTIONALLY LEFT BLANK]
Introduction
This Prospectus contains important information about investing in the Fund.
Please read this Prospectus carefully before you make any investment decisions.
Additional information regarding the Fund is available at www.iShares.com.
Barclays Global Fund Advisors ("BGFA") is the investment adviser to the Fund.
BGFA is a subsidiary of BGI. The shares of the Fund are listed and trade at
market prices on a national securities exchange such as the American Stock
Exchange, the Chicago Board Options Exchange, the New York Stock Exchange
("NYSE") or the NYSE Arca, Inc. The market price for a share of the Fund may be
different from the Fund's most recent NAV per share. The Fund has its own CUSIP
number and exchange trading symbol.
The Fund is an exchange traded fund (commonly referred to as an "ETF"). ETFs
are funds that trade like other publicly-traded securities and are designed to
track an index. Similar to shares of an index mutual fund, each share of the
Fund represents a partial ownership in an underlying portfolio of securities
intended to track a market index. Unlike shares of a mutual fund, which can be
bought and redeemed from the issuing fund by all shareholders at a price based
on NAV, only Authorized Participants may purchase or redeem shares directly
from the Fund at NAV. Also, unlike shares of a mutual fund, the shares of the
Fund are listed on a national securities exchange and trade in the secondary
market at market prices that change throughout the day.
The Fund invests in a particular segment of the securities markets and seeks to
track the performance of a securities index that generally is not
representative of the market as a whole. The Fund is designed to be used as
part of broader asset allocation strategies. Accordingly, an investment in the
Fund should not constitute a complete investment program.
An investment in the Fund is not a bank deposit and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency, BGFA or any of its affiliates.
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1
Description of the iShares MSCI Kokusai Index Fund
CUSIP:
TRADING SYMBOL:
UNDERLYING INDEX: MSCI Kokusai Index
------------------------------------
Investment Objective of the Fund
The iShares MSCI Kokusai Index Fund (the "Fund") seeks investment results that
correspond generally to the price and yield performance, before fees and
expenses, of the MSCI Kokusai Index (the "Underlying Index"). The Fund's
investment objective and the Underlying Index may be changed without
shareholder approval.
The Underlying Index is sponsored by an organization (the "Index Provider")
that is independent of the Fund and BGFA. The Index Provider determines the
relative weightings of the securities in the Underlying Index and publishes
information regarding the market value of the Underlying Index. The Fund's
Index Provider is MSCI.
Additional information regarding the Index Provider is provided in the INDEX
PROVIDER section of this Prospectus.
Principal Investment Strategies of the Fund
The Underlying Index is designed to measure equity market performance in those
countries that MSCI has classified as having developed economies, excluding
Japan ("DEEJ"). As of June 2006, the MSCI Kokusai Index consisted of the
following 22 country indexes: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United
Kingdom and the United States.
BGFA uses a "passive" or indexing approach to try to achieve the Fund's
investment objective. Unlike many investment companies, the Fund does not try
to "beat" the index it tracks and does not seek temporary defensive positions
when markets decline or appear overvalued.
Indexing eliminates the chance that the Fund may substantially outperform its
Underlying Index, but also may reduce some of the risks of active management,
such as poor security selection. Indexing seeks to achieve lower costs and
better after-tax performance by keeping portfolio turnover low in comparison to
actively managed investment companies.
The Fund generally will invest at least 80% of its assets in the securities of
its Underlying Index or in American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs") or European Depositary Receipts ("EDRs")
(collectively, "Depositary Receipts") or other depositary receipts representing
securities in the Underlying Index. The Fund may invest 20% 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, the Fund may invest in
securities not included in its Underlying Index in order to reflect various
corporate actions (such as mergers) and other changes in its Underlying Index
(such as reconstitutions, additions and deletions). The Fund also may invest
its other assets in futures contracts, options on futures contracts, options
and swaps related to its Underlying Index, as well as cash and cash
equivalents, including shares of money market funds advised by BGFA or its
affiliates.
BGFA uses a representative sampling indexing strategy to manage the Fund as
described below.
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2
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Representative Sampling
"Representative sampling" is an indexing strategy that involves investing in a
representative sample of the securities included in the Underlying Index that
collectively has an investment profile similar to the Underlying Index. The
securities selected are expected to have, in the aggregate, investment
characteristics (based on factors such as market capitalization and industry
weightings), fundamental characteristics (such as return variability and yield)
and liquidity measures similar to those of the Underlying Index. The Fund may
or may not hold all of the securities that are included in the Underlying
Index.
Correlation
An index is a theoretical financial calculation, while the Fund is an actual
investment portfolio. The performance of the Fund and its Underlying Index may
vary somewhat due to transaction costs, foreign currency valuations, asset
valuations, corporate actions (such as mergers and spin-offs), timing variances
and differences between the Fund's portfolio and the Underlying Index resulting
from legal restrictions (such as diversification requirements that apply to the
Fund but not to the Underlying Index) or representative sampling.
BGFA expects that, over time, the correlation between the 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.
The difference between 100% correlation and the Fund's actual correlation with
its Underlying Index is called "tracking error." The Fund's use of a
representative sampling indexing strategy can be expected to result in greater
tracking error than if the Fund used a replication indexing strategy.
"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.
Industry Concentration Policy
The Fund will concentrate its investments (I.E., hold 25% or more of its total
assets) in a particular industry or group of industries only 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) and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
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3
Principal Risks of the Fund
The Fund may be subject to the principal risks noted below. Some or all of
these risks may adversely affect the Fund's NAV, trading price, yield, total
return and its ability to meet its investment objective.
Asian Economic Risk
Certain Asian economies may, at times, experience over-extension of credit,
currency devaluations and restrictions, rising unemployment, high inflation,
decreasing exports and economic recessions. Economic events in any one country
can have a significant effect on the entire region.
Asset Class Risk
The securities in the Underlying Index or the Fund's portfolio may underperform
the returns of other securities or indexes that track other industries, groups
of industries, markets, asset classes or sectors. Various types of securities
or indexes tend to experience cycles of outperformance and underperformance in
comparison to the general securities markets.
Concentration Risk
If the Underlying Index or the Fund's portfolio is concentrated in the
securities of companies in a particular market, industry, group of industries,
sector or asset class, the Fund may be adversely affected by the performance of
those securities and may be subject to increased price volatility and may be
more susceptible to adverse economic, market, political or regulatory
occurrences affecting that market, industry, group of industries, sector or
asset class. An investment in the Fund should not constitute a complete
investment program.
Currency Risk
Because the Fund's NAV is determined on the basis of U.S. dollars, you may lose
money if you invest in the Fund if the currency of a foreign market depreciates
against the U.S. dollar, even if the local currency value of the Fund's
holdings in that market increases.
Custody Risk
Custody risk refers to the process of clearing and settling trades and to the
holding of securities by local agents and depositories. Low trading volumes and
volatile prices in less developed markets make trades harder to complete and
settle. Local agents are held only to the standard of care of the local market.
Governments or trade groups may compel local agents to hold securities in
designated depositories that are not subject to independent evaluation. The
less developed a country's securities market is, the greater the likelihood of
problems occurring.
European Economic Risk
Most developed countries in Western Europe are members of the European Union
("EU") and the Economic and Monetary Union of the EU (the "EMU"). The EMU
requires compliance with restrictions on inflation rates, deficits, interest
rates, debt levels, and fiscal and monetary controls, each of which may
significantly affect every country in Europe. The adoption of the Euro as a
common currency in the EMU member states has increased the likelihood that
economic developments in any one of the EMU member states will be reflected in
the EMU as a whole. Most nations in the region are reliant on trade with other
member states. Decreasing exports, changes in governmental regulation on trade,
changes in the exchange rate of the Euro or recessions among any EU members may
affect the economies of other EU members and DEEJ nations.
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4
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Foreign Investment Risks
Investments in the securities of non-U.S. issuers are subject to the risks of
investing in the markets of such issuers' countries, including market
fluctuations caused by factors such as economic and political developments,
changes in interest rates and perceived trends in stock prices. As a result of
investing in foreign securities, the Fund may be subject to the risks listed
and described below. These risks may decrease the value of your investment.
[ ] Less liquid and less efficient securities markets;
[ ] Greater price volatility;
[ ] Exchange rate fluctuations and exchange controls;
[ ] Less publicly available information about issuers;
[ ] Imposition of withholding or other taxes;
[ ] Imposition of restrictions on the expatriation of funds or other assets of
the Fund;
[ ] Higher transaction and custody costs and delays in attendant settlement
procedures;
[ ] Difficulties in enforcing contractual obligations;
[ ] Lesser levels of regulation of the securities markets;
[ ] Different accounting, disclosure and reporting requirements;
[ ] More substantial government involvement in the economy;
[ ] Higher rates of inflation; and
[ ] Greater social, economic and political uncertainty and the risk of
nationalization or expropriation of assets and risk of war.
Geographic Risk
Some countries in which the Fund invests are located in parts of the world
prone to natural disasters, such as earthquakes, volcanoes or tsunamis, or are
economically sensitive to environmental events. Any such event could cause a
significant impact on their respective economies and investments in these
countries.
Issuer Risk
The performance of the Fund depends on the performance of individual companies
in which the Fund invests. An issuer may perform poorly and the value of its
securities may decline. Poor performance may be caused by poor management
decisions, competitive pressures, changes in technology, disruptions in supply,
labor problems or shortages, corporate restructurings, fraudulent disclosures,
or other factors. Issuers may, in times of distress or on their own discretion,
decide to reduce or eliminate dividends which would also cause their stock
prices to decline.
Legal Enforcement of Shareholder Rights Risk
In countries other than the U.S., legal principles relating to corporate
affairs and the validity of corporate procedures, directors' fiduciary duties
and liabilities and stockholders' rights may differ from those that may apply
in the U.S. Stockholders' rights under the laws of other nations may not be as
extensive as those that exist under the laws of the U.S. The Fund may therefore
have more difficulty asserting its rights as a stockholder of a non-U.S.
company in which it invests than it would as a stockholder of a comparable U.S.
company.
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5
Management Risk
The Fund may be subject to management risk because the Fund does not fully
replicate its Underlying Index and may hold securities that are not included in
its Underlying Index. Management risk is the risk that BGFA's investment
strategy, the implementation of which is subject to a number of constraints,
may not produce the intended results. The Fund is managed in a manner that
seeks to track the Fund's Underlying Index, and is therefore subject to passive
investments risk, which is described below.
Market Risk
The Fund's NAV will react to securities market movements. You could lose money
over short periods due to fluctuation in the Fund's NAV in response to market
movements, and over longer periods during market downturns. Securities may
decline in value due to factors affecting securities markets generally or
particular industries represented in the markets. The value of a security may
decline due to general market conditions or economic trends or events which are
not specifically related to a company or to factors which affect a particular
industry or industries. During a general economic downturn in the securities
markets, multiple asset classes may be negatively affected.
Market Trading Risks
ABSENCE OF ACTIVE MARKET
Although shares of the Fund are listed for trading on a national
securities exchange, there can be no assurance that an active trading
market for such shares will develop or be maintained.
LACK OF MARKET LIQUIDITY
Secondary market trading in Fund shares may be halted by a national
securities exchange because of market conditions or for other reasons. In
addition, trading in Fund shares is subject to trading halts caused by
extraordinary market volatility pursuant to "circuit breaker" rules.
There can be no assurance that the requirements necessary to maintain the
listing of the shares of the Fund will continue to be met or will remain
unchanged.
SHARES OF THE FUND WILL TRADE AT PRICES OTHER THAN NAV
Shares of the Fund trade on exchanges at prices at, above or below their
most recent NAV. The per share NAV of the Fund is calculated at the end
of each business day and fluctuates with changes in the market value of
the Fund's holdings since the most recent calculation. The trading prices
of the Fund's shares fluctuate continuously throughout trading hours
based on market supply and demand rather than NAV. The trading prices of
the Fund's shares may deviate significantly from NAV during periods of
market volatility. ANY OF THESE FACTORS MAY LEAD TO THE FUND'S SHARES
TRADING AT A PREMIUM OR DISCOUNT TO NAV. However, given that shares can
be created and redeemed in Creation Units at NAV (unlike shares of many
closed-end funds, which frequently trade at appreciable discounts from,
and sometimes at premiums to, their NAVs), BGFA believes that large
discounts or premiums to the NAV of the Fund are not likely to be
sustained over the long-term. While the creation/redemption feature is
designed to make it likely that the Fund's shares normally will trade on
exchanges at prices close to the Fund's next calculated NAV, exchange
prices are not expected to correlate exactly with the Fund's NAV due to
timing reasons as well as market supply and demand factors. In addition,
disruptions to creations and redemptions or the existence of extreme
market volatility may result in trading prices that differ significantly
from NAV. If a shareholder purchases at a time when the market price is
at a premium to the NAV or sells at a time when the market price is at a
discount to the NAV, then the shareholder may sustain losses.
COSTS OF BUYING OR SELLING FUND SHARES
Buying or selling Fund shares involves two types of costs that apply to
all securities transactions. When buying or selling shares of the Fund
through a broker, you will incur a brokerage commission
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6
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or other charges imposed by brokers as determined by that broker. In
addition, you will also incur the cost of the "spread" - that is, the
difference between what professional investors are willing to pay for
Fund shares (the "bid" price) and the price at which they are willing to
sell Fund shares (the "ask" price). Because of the costs inherent in
buying or selling Fund shares, frequent trading may detract significantly
from investment results and an investment in Fund shares may not be
advisable for investors who anticipate regularly making small
investments.
Non-Diversification Risk
The Fund is classified as "non-diversified." A non-diversified fund generally
may invest a larger percentage of its assets in the securities of a smaller
number of issuers. As a result, the Fund may be more susceptible to the risks
associated with these particular companies, or to a single economic, political
or regulatory occurrence affecting these companies.
Passive Investments Risk
The Fund is not actively managed. The Fund may be affected by a general decline
in the stock market segments or foreign market segments relating to its
Underlying Index. The Fund invests in the securities included in, or
representative of, its Underlying Index regardless of their investment merits.
BGFA does not attempt to take defensive positions in declining markets.
Reliance on Exports Risk
The Fund invests in securities of companies that are located in or whose
securities are principally traded in the markets of the DEEJ regions. The
economies of DEEJ nations are dependent on each other and on Japan as key
trading partners. Reduction in spending on the products and services of the
DEEJ regions or changes in any of these economies may cause an adverse impact
on the companies in which the Fund invests.
Secondary Market Trading Risk
Shares of the Fund may trade in the secondary market on days when the Fund does
not accept orders to purchase or redeem shares. On such days, shares may trade
in the secondary market with more significant premiums or discounts than might
be experienced on days when the Fund accepts purchase and redemption orders.
Security Risk
Some national economies have experienced acts of terrorism or have strained
international relations due to territorial disputes, historical animosities or
other defense concerns. These situations may cause uncertainty in the markets
of developed nations and may affect the performance of their economies.
Tracking Error Risk
Imperfect correlation between the Fund's securities and those in its Underlying
Index, rounding of prices, changes to the Underlying Index and regulatory
requirements may cause the Fund's performance to diverge from the performance
of its Underlying Index. This is called "tracking error." Tracking error also
may result because the Fund incurs fees and expenses while its Underlying Index
does not incur such expenses.
U.S. Economic Risk
The United States is a significant, and in some cases the most significant,
trading partner of or foreign investor in certain DEEJ nations and the
economies of these countries may be particularly affected by
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7
changes in the U.S. economy. Decreasing U.S. imports, new trade regulations,
changes in the dollar exchange rate or a recession in the United States may
have a widespread effect on economies of DEEJ nations.
Valuation Risk
Because foreign exchanges may be open on days when the Fund does not price its
shares, the value of the securities in the Fund's portfolio may change on days
when shareholders will not be able to purchase or sell the Fund's shares.
Portfolio Holdings Information
A description of the Trust's policies and procedures with respect to the
disclosure of the Fund's portfolio securities is available in the Fund's
Statement of Additional Information ("SAI"). The top holdings of the Fund can
be found at www.iShares.com. Fund fact sheets provide information regarding the
Fund's top holdings and may be requested by calling 1-800-iShares
(1-800-474-2737).
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8
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Performance Information
As of the date of this Prospectus, the Fund has been in operation for less than
one full calendar year and therefore does not report its performance
information.
Fees and Expenses
The following table describes the fees and expenses that you will incur if you
own shares of the Fund. You will also incur usual and customary brokerage
commissions when buying or selling shares of the Fund:
ANNUAL FUND OPERATING EXPENSES/2/
----------------------------------------------------------------
DISTRIBUTION AND TOTAL ANNUAL FUND
SHAREHOLDER MANAGEMENT SERVICE (12B-1) OTHER OPERATING
FUND FEES/1/ FEES FEES EXPENSES/3/ EXPENSES
--------------------------------- ------------- ------------ ------------------ ------------- ------------------
iShares MSCI Kokusai Index Fund None 0.25% None None 0.25%
--------
/1/ Fees paid directly from your investment.
/2/ Expenses that are deducted from the Fund's assets, expressed as a
percentage of average net assets.
/3/ The Trust's Investment Advisory Agreement provides that BGFA will pay all
operating expenses of the Fund, except interest expense and taxes (both
expected to be DE MINIMIS), any brokerage expenses, future distribution
fees or expenses, and extraordinary expenses.
Example
This Example is intended to help you compare the cost of owning shares of the
Fund with the cost of investing in other funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then sell all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
FUND 1 YEAR 3 YEARS
-------------------------------- -------- --------
iShares MSCI Kokusai Index Fund $26 $80
Management
Investment Adviser
As investment adviser, BGFA has overall responsibility for the general
management and administration of the Trust. BGFA provides an investment program
for the Fund and manages the investment of the Fund's assets. In seeking to
achieve the Fund's investment objective, BGFA uses teams of portfolio managers,
investment strategists and other investment specialists. This team approach
brings together many disciplines and leverages BGFA's extensive resources. BGFA
also arranges for transfer agency, custody, fund administration and all other
non-distribution related services necessary for the Fund to operate.
Under the Investment Advisory Agreement, BGFA is responsible for substantially
all expenses of the Trust, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, except interest expense and
taxes, brokerage expenses, distribution fees or expenses and extraordinary
expenses.
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9
BGFA is entitled to receive management fees from the Fund based on a percentage
of the Fund's average daily net assets, as shown in the following table:
FUND MANAGEMENT FEE
-------------------------------- ---------------
iShares MSCI Kokusai Index Fund 0.25%
--------
1 Because the Fund has been in operation for less than one full fiscal year,
this percentage reflects the rate at which BGFA will be
paid.
BGFA is located at 45 Fremont Street, San Francisco, CA 94105. It is a
wholly-owned subsidiary of BGI, which in turn is a majority-owned subsidiary of
Barclays Bank PLC. As of [________], 2007, BGI and its affiliates, including
BGFA, provided investment advisory services for assets in excess of $__
trillion. BGI, BGFA, Barclays Global Investors Services, Barclays Bank PLC and
their affiliates deal, trade and invest for their own accounts in the types of
securities in which the Fund may also invest.
A discussion regarding the basis for the Board of Trustees' approval of the
Investment Advisory Agreement with BGFA is available in the Fund's annual
report for the period ended [___________].
Portfolio Managers
Patrick O'Connor and S. Jane Leung (the "Portfolio Managers") are primarily
responsible for the day-to-day management of the Fund. Each Portfolio Manager
is responsible for various functions related to portfolio management,
including, but not limited to, investing cash inflows, coordinating with
members of his or her team to focus on certain asset classes, implementing
investment strategy, researching and reviewing investment strategy, and
overseeing members of his or her portfolio management team with more limited
responsibilities.
Patrick O'Connor is an employee of BGFA and BGI and, together with the other
Portfolio Manager, will be primarily responsible for the day-to-day management
of the Fund since its inception. Mr. O'Connor has been a senior portfolio
manager with BGFA and BGI since 1999.
S. Jane Leung is an employee of BGFA and BGI and, together with the other
Portfolio Manager, will be primarily responsible for the day-to-day management
of the Fund since its inception. Ms. Leung has been a senior portfolio manager
with BGFA and BGI since 2004 and a portfolio manager with BGFA and BGI from
2001 to 2004.
{PM BIO 5}
The Fund's SAI provides additional information about the Portfolio Managers'
compensation, other accounts managed by the Portfolio Managers, and the
Portfolio Managers' ownership (if any) of shares in the Fund.
Administrator, Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street") is the administrator,
custodian and transfer agent for the Fund.
Shareholder Information
ADDITIONAL SHAREHOLDER INFORMATION, INCLUDING HOW TO BUY AND SELL SHARES OF THE
FUND, IS AVAILABLE FREE OF CHARGE BY CALLING TOLL-FREE: 1-800-ISHARES
(1-800-474-2737) OR VISITING OUR WEBSITE WWW.ISHARES.COM.
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[GRAPHIC APPEARS HERE]
Buying and Selling Shares
Shares of the Fund trade on a national securities exchange during the trading
day. Shares can be bought and sold throughout the trading day like shares of
other publicly-traded companies. The Trust does not impose any minimum
investment for shares of the Fund purchased on an exchange. Buying or selling
Fund shares involves two types of costs that apply to all stock transactions.
When buying or selling shares of the Fund through a broker, you will incur a
brokerage commission determined by your broker. In addition, you will also
incur the cost of the "spread" - that is, the difference between the bid price
and the ask price. The commission is frequently a fixed amount, and may be a
significant proportional cost for investors seeking to buy or sell small
amounts of shares. The spread varies over time for the shares of the Fund based
on its trading volume and market liquidity, and is generally lower if the Fund
has a lot of trading volume and market liquidity and higher if the Fund has
little trading volume and market liquidity. The Fund's shares trade under the
trading symbol listed for the Fund in the DESCRIPTION OF THE FUND section of
this Prospectus.
Shares of the Fund may be acquired or redeemed directly from the Fund only in
Creation Units or multiples thereof, as discussed in the CREATIONS AND
REDEMPTIONS section of this Prospectus. Once created, shares of the Fund
generally trade in the secondary market in amounts less than a Creation Unit.
The Trust's Board of Trustees has adopted a policy of not monitoring for
frequent purchases and redemptions of Fund shares ("frequent trading") that
appear to attempt to take advantage of a potential arbitrage opportunity
presented by a lag between a change in the value of the Fund's portfolio
securities after the close of the primary markets for the Fund's portfolio
securities and the reflection of that change in the Fund's NAV ("market
timing"), because the Fund sells and redeems its shares directly through
transactions that are in-kind and/or for cash, with a deadline for placing
cash-related transactions no later than the close of the primary markets for
the Fund's portfolio securities. The Board of Trustees has not adopted a policy
of monitoring for other frequent trading activity because shares of the Fund
are listed and traded on national securities exchanges.
The national securities exchange on which the Fund's shares are listed is open
for trading Monday through Friday and is closed on weekends and the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Fund's primary listing exchange is [ _____ ].
Section 12(d)(1) of the Investment Company Act of 1940, as amended, restricts
investments by registered investment companies in the securities of other
investment companies, including shares of the Fund. Registered investment
companies are permitted to invest in the Fund beyond the limits set forth in
Section 12(d)(1), subject to certain terms and conditions set forth in an SEC
exemptive order issued to the Trust, including that such investment companies
enter into an agreement with the Trust.
Book Entry
Shares of the Fund are held in book-entry form, which means that no stock
certificates are issued. The Depository Trust Company ("DTC"), or its nominee,
is the record owner of all outstanding shares of the Fund and is recognized as
the owner of all shares for all purposes.
Investors owning shares of the Fund are beneficial owners as shown on the
records of DTC or its participants. DTC serves as the securities depository for
all shares of the Fund. Participants include DTC, securities brokers and
dealers, banks, trust companies, clearing corporations and other institutions
that directly or indirectly maintain a custodial relationship with DTC. As a
beneficial owner of shares, you are not entitled to receive physical delivery
of stock certificates or to have shares registered in your name, and you are
not considered a registered owner of shares. Therefore, to exercise any right
as an owner of shares, you must rely upon the procedures of DTC and its
participants. These procedures are the same as those that apply to any other
securities that you hold in book-entry or "street name" form.
--------------------------------------------------------------------------------
11
Share Prices
The trading prices of the Fund's shares in the secondary market generally will
differ from the Fund's daily NAV per share and are affected by market forces
such as supply and demand, economic conditions and other factors. Information
regarding the intraday value of shares of the Fund, also known as the
"indicative optimized portfolio value" ("IOPV"), is disseminated every 15
seconds throughout the trading day by the national securities exchange on which
the Fund is listed or by market data vendors or other information providers.
The IOPV is based on the current market value of the securities and cash
required to be deposited in exchange for a Creation Unit. The IOPV does not
necessarily reflect the precise composition of the current portfolio of
securities held by the Fund at a particular point in time nor the best possible
valuation of the current portfolio. Therefore, the IOPV should not be viewed as
a "real-time" update of the NAV, which is computed only once a day. The IOPV is
generally determined by using both current market quotations and/or price
quotations obtained from broker-dealers that may trade in the portfolio
securities held by the Fund. The quotations of certain Fund holdings may not be
updated during U.S. trading hours if such holdings do not trade in the U.S. The
Fund is not involved in, or responsible for, the calculation or dissemination
of the IOPV and makes no representation or warranty as to its accuracy.
Determination of Net Asset Value
The NAV for the Fund will generally be determined once daily Monday through
Friday generally as of the regularly scheduled close of business of the NYSE
(normally 4:00 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 Securities Industry and Financial Markets Association
announces an early closing time. The NAV of the Fund is calculated by dividing
the value of the net assets of the 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 the Fund's NAV, the Fund's investments are generally valued
using market valuations. A market valuation generally means a valuation (i)
obtained from an exchange, a pricing service, or a major market maker (or
dealer), (ii) based on a price quotation or other equivalent indication of
value supplied by an exchange, a pricing service, or a major market maker (or
dealer), or (iii) based on amortized cost. In the case of shares of funds that
are not traded on an exchange, a market valuation means such fund's published
net asset value per share. BGFA may use various pricing services or discontinue
the use of any pricing service. A price obtained from a pricing service based
on such pricing service's valuation matrix may be considered a market
valuation.
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 Board of Trustees. The frequency with which the
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 of 1933, as amended (the "Securities
Act")); (iii) a security whose trading has been suspended or which has been
de-listed 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
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12
[GRAPHIC APPEARS HERE]
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.
Valuing the Fund's investments using fair value pricing will result in using
prices for those investments that may differ from current market valuations.
Use of fair value prices and certain current market valuations could result in
a difference between the prices used to calculate the Fund's NAV and the prices
used by the Fund's Underlying Index, which, in turn, could result in a
difference between the Fund's performance and the performance of the Fund's
Underlying Index.
The value of assets denominated in foreign currencies is converted into U.S.
dollars using exchange rates deemed appropriate by BGFA as investment adviser.
Dividends and Distributions
GENERAL POLICIES. Dividends from net investment income, if any, are declared
and paid at least annually by the Fund. The Fund generally distributes its net
capital gains, if any, to shareholders annually. The Fund also reserves the
right to declare special distributions if, in its reasonable discretion, such
action is necessary or advisable to preserve its status as a regulated
investment company or to avoid imposition of income or excise taxes on
undistributed income.
Dividends and other distributions on shares are distributed on a PRO RATA basis
to beneficial owners of such shares. Dividend payments are made through DTC
participants to beneficial owners then of record with proceeds received from
the Fund.
DIVIDEND REINVESTMENT SERVICE. No dividend reinvestment service is provided by
the Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by beneficial owners of the Fund for reinvestment
of their dividend distributions. Beneficial owners should contact their broker
to determine the availability and costs of the service and the details of
participation therein. Brokers may require beneficial owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole shares of the Fund purchased in the secondary
market.
Taxes
As with any investment, you should consider how your investment in shares of
the Fund will be taxed. The tax information in this Prospectus is provided as
general information. You should consult your own tax professional about the tax
consequences of an investment in shares of the Fund.
Unless your investment in shares is made through a tax-exempt entity or
tax-deferred retirement account, such as an IRA, you need to be aware of the
possible tax consequences when the Fund makes distributions or you sell Fund
shares.
Taxes on Distributions
Distributions from the Fund's net investment income (other than qualified
dividend income), including distributions out of the Fund's net short-term
capital gains, if any, and distributions of income from securities lending, are
taxable to you as ordinary income. Distributions by the Fund of net long-term
capital gains in excess of net short-term capital losses (capital gain
dividends) are taxable to you as long-term capital gains, regardless of how
long you have held the Fund's shares. Distributions by the Fund that qualify as
qualified dividend income are taxable to you at long-term capital gain rates.
Under current law, the taxation of qualified dividend income at long-term
capital gain rates will no longer apply for taxable years beginning after
December 31, 2010.
In order for a distribution by the Fund to be treated as qualified dividend
income, the Fund must meet holding period and other requirements with respect
to its dividend paying securities, and you must meet holding period
requirements and other requirements with respect to the Fund's shares. A
dividend will not
--------------------------------------------------------------------------------
13
be treated as qualified dividend income if the dividend is received with
respect to any share of stock held for fewer than 61 days during the 121-day
period beginning at the date which is 60 days before the date on which such
share becomes ex-dividend with respect to such dividend or in the case of
certain preferred stock 91 days during the 181-day period beginning 90 days
before such date. In general, your distributions are subject to federal income
tax for the year when they are paid. Certain distributions paid in January,
however, may be treated as paid on December 31 of the prior year.
If the Fund's distributions exceed current and accumulated earnings and
profits, all or a portion of the distributions made in the taxable year may be
recharacterized as a return of capital to shareholders. A return of capital
distribution generally will not be taxable but will reduce the shareholder's
cost basis and result in a higher capital gain or lower capital loss when those
shares on which the distribution was received are sold.
If you are neither a resident nor a citizen of the United States or if you are
a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies, provided,
however, that withholding tax will generally not apply to any gain or income
realized by a non-U.S. shareholder in respect of any distributions of long-term
capital gains or upon the sale of other disposition of shares of the Fund. In
addition, for taxable years of the Fund beginning on or before December 31,
2007, U.S.-source interest-related dividends and short-term capital gain
dividends may not be subject to such U.S. withholding tax. In order for a
distribution to qualify as an interest-related dividend or a short-term capital
gain dividend, the Fund must designate it as such in writing to shareholders;
depending on its circumstances, the Fund may designate all, some or none of its
potentially eligible dividends as such qualified net interest income or as
qualified short-term capital gains, and/or treat such dividends, in whole or in
part, as ineligible for this exemption from withholding. In order to qualify
for this exemption from withholding, a non-U.S. shareholder will need to comply
with applicable certification requirements relating to its non-U.S. status
(including, in general, furnishing an IRS Form W-8BEN or substitute Form). In
the case of shares held through an intermediary, the intermediary may withhold
even if the Fund designates the payment as qualified net interest income or
qualified short-term capital gain. Non-U.S. shareholders should contact their
intermediaries with respect to the application of these rules to their
accounts.
Dividends and interest received by the Fund with respect to foreign securities
may give rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Since more than 50% of the total assets of the Fund will
almost certainly consist of foreign stocks or securities, the Fund will "pass
through" to you certain foreign income taxes (including withholding taxes) paid
by the Fund. This means that you will be considered to have received as an
additional dividend your share of such foreign taxes, but you may be entitled
to either a corresponding tax deduction in calculating your taxable income, or,
subject to certain limitations, a credit in calculating your federal income
tax.
Taxes When Shares are Sold
Currently, any capital gain or loss realized upon a sale of shares is generally
treated as a long-term gain or loss if shares have been held for more than one
year. Any capital gain or loss realized upon a sale of shares held for one year
or less is generally treated as short-term gain or loss, except that any
capital loss on the sale of shares held for six months or less is treated as
long-term capital loss to the extent that capital gain dividends were paid with
respect to such shares.
THE FOREGOING DISCUSSION SUMMARIZES SOME OF THE CONSEQUENCES UNDER U.S. CURRENT
FEDERAL TAX LAW OF AN INVESTMENT IN THE FUND. IT IS NOT A SUBSTITUTE FOR
PERSONAL TAX ADVICE. YOU MAY ALSO BE SUBJECT TO STATE AND LOCAL TAXATION ON
FUND DISTRIBUTIONS AND SALES OF SHARES. CONSULT YOUR PERSONAL TAX ADVISER ABOUT
THE POTENTIAL TAX CONSEQUENCES OF AN INVESTMENT IN SHARES OF THE FUND UNDER ALL
APPLICABLE TAX LAWS.
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14
[GRAPHIC APPEARS HERE]
Creations and Redemptions
The shares that trade in the secondary market are "created" at NAV by market
makers, large investors and institutions only in block-size Creation Units of
[50,000] shares or multiples thereof. Each "creator" or "Authorized
Participant" enters into an authorized participant agreement with the Fund's
distributor, SEI Investments Distribution Co. (the "Distributor"). A creation
transaction which is subject to acceptance by the transfer agent takes place
when an Authorized Participant deposits into the Fund a portfolio of securities
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 securities held by the 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 authorized participant agreement.
The Fund intends to 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 will be sold in transactions that would be exempt
from registration under the Securities Act. Further, an Authorized Participant
that is not a "qualified institutional buyer," as such term is defined under
Rule 144A of the Securities Act, will not be able to receive Fund securities
that are restricted securities eligible for resale under Rule 144A.
Creations and redemptions must be made through a firm that is either a member
of the Continuous Net Settlement System of the National Securities Clearing
Corporation or a DTC participant, and in either case, has executed an agreement
with the Distributor with respect to creations and redemptions of Creation Unit
aggregations. 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.
Because new shares may be created and issued on an ongoing basis, at any point
during the life of the Fund a "distribution," as such term is used in the
Securities Act, may be occurring. Broker-dealers and other persons are
cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in a
manner that could render them statutory underwriters and subject to the
prospectus delivery and liability provisions of the Securities Act.
Nonetheless, any determination of whether one is an underwriter must take into
account all the relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who are not "underwriters," but
are participating in a distribution (as contrasted to ordinary secondary
transactions), and thus dealing with shares that are part of an "unsold
allotment" within the meaning of Section 4(3)(C) of the Securities Act, would
be unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the Securities Act. For delivery of prospectuses to exchange
members, the prospectus delivery mechanism of Rule 153 under the Securities Act
is only available with respect to transactions on a national securities
exchange.
Transaction Fees
The Fund will impose a creation transaction fee and a redemption transaction
fee to offset transfer and other transaction costs associated with the issuance
and redemption of Creation Units. Purchasers and redeemers of Creation Units
for cash are required to pay an additional variable charge to compensate for
brokerage and market impact expenses. The creation and redemption transaction
fees for creations and redemptions in-kind for the Fund are discussed below.
The standard creation transaction fee is charged to each purchaser on the day
such purchaser creates a Creation Unit. The fee is a single charge and will be
the amount indicated below regardless of the number of Creation Units purchased
by an investor on the same day. BGFA may, from time to time, at its own
expense, compensate purchasers of Creation Units who have purchased substantial
amounts of Creation Units and other financial institutions for administrative
or marketing services. Similarly, the standard redemption transaction fee will
be the amount indicated
--------------------------------------------------------------------------------
15
regardless of the number of Creation Units redeemed that day. The standard
creation and redemption transaction fees for creations and redemptions through
DTC for cash (when cash creations and redemptions are available or specified)
will also be subject to an additional variable charge up to the maximum amount
shown below under "Maximum Creation/Redemption Transaction Fee." In addition,
purchasers of shares in Creation Units are responsible for payment of the costs
of transferring securities to the Fund. Redeemers of shares in Creation Units
are responsible for the costs of transferring securities from the Fund.
Investors who use the services of a broker or other such intermediary may pay
fees for such services. The following table also shows, as of [___________],
2007, the approximate value of one Creation Unit per Fund, including the
standard creation and redemption transaction fee:
STANDARD MAXIMUM
APPROXIMATE CREATION/ CREATION/
VALUE OF A CREATION REDEMPTION REDEMPTION
FUND CREATION UNIT UNIT SIZE TRANSACTION FEE TRANSACTION FEE
-------------------------------- --------------- ----------- ----------------- ----------------
iShares MSCI Kokusai Index Fund $ [50,000] $[___] $[____]
Householding
Householding is an option available to certain Fund investors. Householding is
a method of delivery, based on the preference of the individual investor, in
which a single copy of certain shareholder documents can be delivered to
investors who share the same address, even if their accounts are registered
under different names. Please contact your broker-dealer if you are interested
in enrolling in householding and receiving a single copy of prospectuses and
other shareholder documents, or if you are currently enrolled in householding
and wish to change your householding status.
Distribution
The Distributor distributes Creation Units for the Fund on an agency basis. The
Distributor does not maintain a secondary market in shares of the Fund. The
Distributor has no role in determining the policies of the Fund or the
securities that are purchased or sold by the Fund. The Distributor's principal
address is One Freedom Valley Drive, Oaks, PA 19456.
Financial Highlights
As of the date of this Prospectus, the Fund has been in operation for less than
one full calendar year and therefore does not report its financial highlights.
Index Provider
MSCI is a leading provider of global indexes and benchmark related products and
services to investors worldwide. Morgan Stanley, a global financial services
firm and a market leader in securities, asset management, and credit services,
is the majority shareholder of MSCI, and The Capital Group Companies, Inc., a
global investment management group, is the minority shareholder. MSCI is not
affiliated with the Trust, BGI, BGFA, State Street, or the Distributor.
BGI has entered into a license agreement with the Index Provider to use the
Underlying Index. BGI is sub-licensing rights in the Underlying Index to the
Trust at no charge.
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16
[GRAPHIC APPEARS HERE]
Disclaimers
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI. MSCI MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF SHARES OF THE
TRUST OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE
UNDERLYING INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. MSCI'S ONLY
RELATIONSHIP TO THE TRUST, BGI AND BGFA IS THE LICENSING OF CERTAIN TRADEMARKS
AND TRADE NAMES OF MSCI AND OF THE UNDERLYING INDEX WHICH IS DETERMINED,
COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THE TRUST, BGI, BGFA OR THE
FUND. MSCI HAS NO OBLIGATION TO TAKE THE NEEDS OF BGFA, BGI OR THE OWNERS OF
SHARES OF THE FUND INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING
THE UNDERLYING INDEX. MSCI IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN
THE DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE
ISSUANCE OR SALE OF THE FUND OR IN THE DETERMINATION OR CALCULATION OF THE
EQUATION BY WHICH SHARES OF THE FUND ARE TO BE CONVERTED INTO CASH. MSCI HAS NO
OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING, OR
TRADING OF THE FUND. MSCI DOES NOT GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN AND MSCI
SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
MSCI MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
BGI, OWNERS OF SHARES OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN. MSCI MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE UNDERLYING INDEX
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL MSCI HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) RESULTING FROM THE USE OF THE
UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
SHARES OF THE FUND ARE NOT SPONSORED, ENDORSED OR PROMOTED BY THE [LISTING
EXCHANGE]. THE [LISTING EXCHANGE] MAKES NO REPRESENTATION OR WARRANTY, EXPRESS
OR IMPLIED, TO THE OWNERS OF THE SHARES OF THE FUND OR ANY MEMBER OF THE PUBLIC
REGARDING THE ABILITY OF THE FUND TO TRACK THE TOTAL RETURN PERFORMANCE OF THE
UNDERLYING INDEX OR THE ABILITY OF THE UNDERLYING INDEX IDENTIFIED HEREIN TO
TRACK STOCK MARKET PERFORMANCE. THE [LISTING EXCHANGE] IS NOT RESPONSIBLE FOR,
NOR HAS IT PARTICIPATED IN, THE DETERMINATION OF THE COMPILATION OR THE
CALCULATION OF ANY UNDERLYING INDEX, NOR IN THE DETERMINATION OF THE TIMING OF,
PRICES OF, OR QUANTITIES OF THE SHARES OF THE FUND TO BE ISSUED, NOR IN THE
DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE SHARES ARE
REDEEMABLE. THE [LISTING EXCHANGE] HAS NO OBLIGATION OR LIABILITY TO OWNERS OF
THE SHARES OF THE FUND IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR
TRADING OF THE SHARES OF THE FUND.
THE [LISTING EXCHANGE] DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF ANY UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN. THE [LISTING EXCHANGE]
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
TRUST ON BEHALF OF ITS FUNDS AS LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE SHARES OF THE TRUST, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE SUBJECT INDICES OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE RIGHTS LICENSED AS DESCRIBED HEREIN OR FOR ANY OTHER USE.
THE [LISTING EXCHANGE] MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO ANY UNDERLYING INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE [LISTING
EXCHANGE] HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
BGFA DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE UNDERLYING
INDEX OR ANY DATA INCLUDED THEREIN AND BGFA SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
BGFA MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
FUND, TO THE OWNERS OF THE SHARES OF THE FUND, OR TO ANY OTHER PERSON OR
ENTITY, FROM THE USE OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN. BGFA
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
--------------------------------------------------------------------------------
17
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL BGFA HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, DIRECT, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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18
[GRAPHIC APPEARS HERE]
Copies of the Prospectus, SAI, and recent shareholder reports can be found on
our website at www.iShares.com. For more detailed information about the Trust
and shares of the Fund, you may request a copy of the SAI. The SAI provides
detailed information about the Fund, and is incorporated by reference into this
Prospectus. This means that the SAI, for legal purposes, is a part of this
Prospectus.
Additional information about the Fund's investments is available in the Fund's
Annual or Semi-Annual reports to shareholders. In the Fund's Annual Report, you
will find a discussion of the market conditions and investments strategies that
significantly affected the Fund's performance during the last fiscal year.
If you have any questions about the Trust or shares of the Fund or you wish to
obtain the SAI, Semi-Annual or Annual report free of charge, please:
Call: 1-800-iShares
(toll free) 1-800-474-2737
Monday through Friday
8:30 a.m. to 6:30 p.m. (Eastern Time)
E-mail: iSharesfunds@seic.com
Write: iShares Trust
c/o SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, PA 19456
Information about the Fund (including the SAI) can be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C., and information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-551-8090. Reports and other information about the Fund are available on
the EDGAR Database on the SEC's website at www.sec.gov, and copies of this
information may be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
SEC's Public Reference Section, Washington, D.C. 20549-0102.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
ABOUT THE FUND AND ITS SHARES NOT CONTAINED IN THIS PROSPECTUS AND YOU SHOULD
NOT RELY ON ANY OTHER INFORMATION. READ AND KEEP THE PROSPECTUS FOR FUTURE
REFERENCE.
Investment Company Act File No.: 811-09729
For more information visit
Our website or call
1-800-iShares (1-800-474-2737)
WWW.ISHARES.COM
BGI-F-___-_____
[GRAPHIC APPEARS HERE]
[GRAPHIC APPEARS HERE]
The information in this Statement of Additional Information is not complete and
may be changed. A registration statement relating to these securities has been
filed with the Securities and Exchange Commission. The securities described
herein may not be sold until the registration statement becomes effective. This
Statement of Additional Information is not an offer to sell or the solicitation
of an offer to buy securities and is not soliciting an offer to buy these
securities in any State in which the offer, solicitation or sale would be
unlawful.
iShares(R) Trust
Statement of Additional Information
Dated __________, 2007
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current prospectus ("Prospectus") for the
iShares MSCI Kokusai Index Fund (the "Fund") of iShares Trust (the "Trust") as
such Prospectus may be revised or supplemented from time to time.
The Prospectus for the Fund listed above is dated __________, 2007. Capitalized
terms used herein that are not defined have the same meaning as in the
Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained
without charge by writing to the Trust's distributor, SEI Investments
Distribution Co. (the "Distributor"), at One Freedom Valley Drive, Oaks, PA
19456, calling 1-800-iShares (1-800-474-2737) or visiting www.iShares.com.
iShares(R) is a registered trademark of Barclays Global Investors, N.A. ("BGI").
Page
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General Description of the Trust and the Fund............................. 1
Exchange Listing and Trading.............................................. 1
Investment Strategies and Risks........................................... 2
Lack of Diversification of the Fund.................................... 2
Lending Portfolio Securities........................................... 2
Repurchase Agreements.................................................. 2
Reverse Repurchase Agreements.......................................... 3
Currency Transactions.................................................. 3
Foreign Securities..................................................... 3
Short-Term Instruments and Temporary Investments....................... 4
Securities of Investment Companies and REITs........................... 4
Illiquid Securities.................................................... 4
Futures and Options.................................................... 4
Options on Futures Contracts........................................... 4
Swap Agreements........................................................ 5
Tracking Stocks........................................................ 5
Future Developments.................................................... 5
General Considerations and Risks.......................................... 5
Risks of Derivatives................................................... 5
Risks of Equity Securities............................................. 5
Risks of Futures and Options Transactions.............................. 6
Risks of Investing in Non-U.S. Equity Securities....................... 6
Risks of Swap Agreements............................................... 7
Dividend Risk.......................................................... 7
Proxy Voting Policy....................................................... 7
Portfolio Holdings Information............................................ 8
Construction and Maintenance Standards for the Underlying Index........... 9
The MSCI Indexes Generally................................................ 9
MSCI Kokusai Index..................................................... 11
Investment Limitations.................................................... 11
Continuous Offering....................................................... 12
Management................................................................ 13
Trustees and Officers.................................................. 13
Committees of the Board of Trustees.................................... 17
Remuneration of Trustees............................................... 17
Investment Adviser..................................................... 18
Portfolio Managers..................................................... 19
Codes of Ethics........................................................ 20
Administrator, Custodian and Transfer Agent............................ 20
Distributor............................................................ 21
Index Provider......................................................... 21
Brokerage Transactions.................................................... 21
Additional Information Concerning the Trust............................... 22
Shares................................................................. 22
Termination of the Trust or the Fund................................... 22
1
Page
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DTC as Securities Depository for the Shares of the Trust............... 22
Creation and Redemption of Creation Unit Aggregations..................... 23
Creation............................................................... 23
Fund Deposit........................................................... 23
Procedures for Creation of Creation Unit Aggregations.................. 24
Placement of Creation Orders for Domestic Funds Using the Clearing
Process.............................................................. 24
Placement of Creation Orders for Domestic Funds Outside the Clearing
Process.............................................................. 25
Placement of Creation Orders for Foreign Funds......................... 26
Acceptance of Orders for Creation Unit Aggregations.................... 26
Creation Transaction Fee............................................... 26
Redemption of Shares in Creation Unit Aggregations..................... 27
Placement of Redemption Orders for Domestic Funds Using the Clearing
Process.............................................................. 27
Placement of Redemption Orders for Domestic Funds Outside the Clearing
Process.............................................................. 27
Placement of Redemption Orders for Foreign Funds....................... 28
Redemption Transaction Fee............................................. 29
Taxes..................................................................... 29
Registered Investment Company Qualification............................ 29
Taxation of RICs....................................................... 30
Excise Tax............................................................. 30
Taxation of Certain Derivatives........................................ 30
Taxation of U.S. Shareholders.......................................... 30
Back-Up Withholding.................................................... 31
Sections 351 and 362................................................... 31
Qualified Dividend Income.............................................. 31
Corporate Dividends Received Deduction................................. 32
Net Capital Loss Carryforwards......................................... 32
Excess Inclusion Income................................................ 32
Foreign Investments.................................................... 32
Passive Foreign Investment Companies................................... 32
Federal Tax Treatment of Complex Securities............................ 33
Sales of Shares........................................................ 33
Other Taxes............................................................ 34
Taxation of Non-U.S. Shareholders...................................... 34
Reporting.............................................................. 34
Financial Statements...................................................... 34
Miscellaneous Information................................................. 35
Counsel................................................................ 35
Independent Registered Public Accounting Firm.......................... 35
Shareholder Communication to the Board................................. 35
2
General Description of the Trust and the Fund
The Trust currently consists of over [______] investment portfolios. The Trust
was organized as a Delaware statutory trust on December 16, 1999 and is
authorized to have multiple series or portfolios. The Trust is an open-end
management investment company, registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended
(the "1940 Act"). The offering of the Trust's shares is registered under the
Securities Act of 1933, as amended (the "Securities Act"). This SAI relates
solely to the iShares MSCI Kokusai Index Fund.
The investment objective of the Fund is to provide investment results that
correspond generally to the price and yield performance, before fees and
expenses, of a specified benchmark index (the "Underlying Index") representing
publicly traded equity securities of companies in a particular broad market,
market segment, market sector or group of industries. The Fund is managed by
Barclays Global Fund Advisors ("BGFA" or the "Investment Adviser"), a
subsidiary of BGI.
The Fund offers and issues shares at their net asset value per share ("NAV")
only in aggregations of a specified number of shares (each, a "Creation Unit"
or a "Creation Unit Aggregation"), generally in exchange for a basket of equity
securities included in its Underlying Index (the "Deposit Securities"),
together with the deposit of a specified cash payment (the "Cash Component").
The shares of the Fund are listed and traded on the [__________("__________")],
a national securities exchange. Shares trade in the secondary market and
elsewhere at market prices that may be at, above or below NAV. Shares are
redeemable only in Creation Unit Aggregations, and, generally, in exchange for
portfolio securities and a specified cash payment. Creation Units typically are
a specified number of shares, generally [__________] or multiples thereof.
The Trust reserves the right to offer a "cash" option for creations and
redemptions of shares although it has no current intention of doing so. Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions including a requirement to maintain on deposit with the Trust cash
at least equal to 105%, which BGFA may change from time to time, of the market
value of the missing Deposit Securities. See the Creation and Redemption of
Creation Unit Aggregations section of this SAI. In each instance of such cash
creations or redemptions, transaction fees may be imposed that will be higher
than the transaction fees associated with in-kind creations or redemptions. In
all cases, such conditions and fees will be limited in accordance with the
requirements of SEC applicable to management investment companies offering
redeemable securities.
Exchange Listing and Trading
A discussion of exchange listing and trading matters associated with an
investment in the Fund is contained in the Shareholder Information section of
the Prospectus. The discussion below supplements, and should be read in
conjunction with, that section of the Prospectus.
Shares of the Fund are listed on the [__________] (the "Listing Exchange") and
traded throughout the day on the Listing Exchange and other secondary markets.
Shares of the Fund may also be listed on certain non-U.S. exchanges. There can
be no assurance that the requirements of the Listing Exchange necessary to
maintain the listing of shares of any Fund will continue to be met. Although
listing requirements may vary among exchanges, the Listing Exchange may, but is
not required to, remove the shares of a Fund from listing if (i) following the
initial 12-month period beginning upon the commencement of trading of a Fund,
there are fewer than 50 beneficial owners of the shares of a Fund for 30 or
more consecutive trading days; (ii) the value of the Underlying Index on which
the Fund is based is no longer calculated or available; (iii) the "indicative
optimized portfolio value" ("IOPV") of the Fund is no longer calculated or
available; or (iv) any other event shall occur or condition shall exist that,
in the opinion of the Listing Exchange, makes further dealings on the Listing
Exchange inadvisable. The Listing Exchange will remove the shares of the Fund
from listing and trading upon termination of such Fund.
As in the case of other publicly-traded securities, when you buy or sell shares
through a broker, you will incur a brokerage commission determined by that
broker.
In order to provide additional information regarding the indicative value of
shares of the Fund, the Listing Exchange disseminates every 15 seconds through
the facilities of the Consolidated Tape Association an updated IOPV for the
Fund as calculated by an information provider or market data vendors. The Trust
is not involved in or responsible for any aspect of the calculation or
dissemination of the IOPVs, and makes no representation or warranty as to the
accuracy of the IOPVs.
An IOPV has an equity securities component and a Cash Component. The equity
securities values included in an IOPV are the values of the Deposit Securities
for the Fund. While the IOPV reflects the current market value of the Deposit
Securities required to be deposited in connection with the purchase of a
Creation Unit Aggregation, it does not necessarily reflect the precise
composition of the current portfolio of securities held by the Fund at a
particular point in time, because the current portfolio of the Fund may include
securities that are not a part of the current Deposit Securities. Therefore,
the Fund's IOPV disseminated during the Listing Exchange trading hours should
not be viewed as a real-time update of the Fund's NAV, which is calculated only
once a day.
In addition to the equity component described in the preceding paragraph, the
IOPV for the Fund includes a Cash Component consisting of estimated accrued
dividend and other income, less expenses.
1
The Trust reserves the right to adjust the share prices of the Fund in the
future to maintain convenient trading ranges for investors. Any adjustments
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of the Fund.
Investment Strategies and Risks
The Fund seeks to achieve its objective by investing primarily in securities
issued by companies that comprise the Underlying Index and through transactions
that provide substantially similar exposure to securities in the Underlying
Index. The Fund operates as an index fund and will not be actively managed. The
adverse performance of a security in the Fund's portfolio will ordinarily not
result in the elimination of the security from the Fund's portfolio.
The Fund engages in "representative sampling," which is investing in a
representative sample of the securities in the Underlying Index, selected by
BGFA to have a similar investment profile as the Underlying Index. Securities
selected have aggregate investment characteristics (based on market
capitalization and industry weightings), fundamental characteristics (such as
return variability, earnings valuation and yield) and liquidity measures
similar to those of the Underlying Index. Funds that use representative
sampling generally do not hold all of the securities that are included in the
relevant Underlying Index.
Lack of Diversification of the Fund. The Fund is a non-diversified fund. A
"non-diversified" classification means that the Fund is not limited by the 1940
Act with regard to the percentage of its assets that may be invested in the
securities of a single issuer. The securities of a particular issuer (or
securities of issuers in particular industries) may dominate the Underlying
Index and, consequently, the Fund's investment portfolio. This may adversely
affect the Fund's performance or subject the Fund's shares to greater price
volatility than that experienced by more diversified investment companies.
The Fund, however, intends to maintain the required level of diversification
and otherwise conduct its operations so as to qualify as a Registered
Investment Company ("RIC") for purposes of the U.S. Internal Revenue Code of
1986, as amended (the "IRC"), and to relieve the Fund of any liability for U.S.
federal income tax to the extent that its earnings are distributed to
shareholders. Compliance with the diversification requirements of the IRC may
limit the investment flexibility of the Fund and may make it less likely that
the Fund will meet its investment objective.
Lending Portfolio Securities. The Fund may lend portfolio securities to certain
creditworthy borrowers, including borrowers affiliated with BGFA. The borrowers
provide collateral that is maintained in an amount at least equal to the
current market value of the securities loaned. The Fund may terminate a loan at
any time and obtain the return of the securities loaned. The Fund receives the
value of any interest or cash or non-cash distributions paid on the loaned
securities.
With respect to loans that are collateralized by cash, the borrower will be
entitled to receive a fee based on the amount of cash collateral. The Fund is
compensated by the difference between the amount earned on the reinvestment of
cash collateral and the fee paid to the borrower. In the case of collateral
other than cash, the Fund is compensated by a fee paid by the borrower equal to
a percentage of the market value of the loaned securities. Any cash collateral
may be reinvested in certain short-term instruments either directly on behalf
of the Fund or through one or more joint accounts or money market funds,
including those managed by BGFA. Securities lending involves exposure to
certain risks, including operational risk (i.e., the risk of losses resulting
from problems in the settlement and accounting process), "gap" risk (i.e., the
risk of a mismatch between the return on cash collateral reinvestments and the
fees the Fund has agreed to pay a borrower), and credit, legal, counterparty
and market risk.
In the event a borrower does not return the Fund's securities as agreed, the
Fund may experience losses if the proceeds received from liquidating the
collateral does not at least equal the value of the loaned security at the time
the collateral is liquidated plus the transaction costs incurred in purchasing
replacement securities.
The Fund may pay a portion of the interest or fees earned from securities
lending to a borrower as described above and to a securities lending agent who
administers the lending program in accordance with guidelines approved by the
Board. BGI acts as securities lending agent for the Fund subject to the overall
supervision of BGFA. BGI receives a portion of the revenues generated by
securities lending activities as compensation for its services in this regard.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain counterparties. Repurchase agreements involve an agreement to purchase
financial instruments and to resell those instruments back to the same
counterparty at an agreed-upon date and price, which price reflects a rate of
interest unrelated to a coupon rate or maturity of the purchased instruments.
The value of the instruments purchased may be more or less than the price at
which the counterparty has agreed to repurchase them. As protection against the
risk that the counterparty will not fulfill its obligation, the instruments are
marked to market daily and are maintained at a value at least equal to the sale
price plus the accrued incremental amount. Delays or losses could result if the
counterparty to the repurchase agreement defaults or becomes insolvent. The
Fund will only engage in repurchase agreements with counterparties whose
creditworthiness has been reviewed and found satisfactory by BGFA.
2
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, which involve the sale of securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment
and have the characteristics of borrowing. Generally, the effect of such
transactions is that the Fund can recover all or most of the cash invested in
the portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases the Fund is able to keep some of the interest
income associated with those securities. Such transactions are only
advantageous if the Fund has an opportunity to earn a greater rate of interest
on the cash derived from these transactions than the interest cost of obtaining
the same amount of cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be paid may not
always be available and the Fund intend to use the reverse repurchase technique
only when BGFA believes it will be advantageous to the Fund. The use of reverse
repurchase agreements may exaggerate any interim increase or decrease in the
value of the Fund's assets. The Fund's exposure to reverse repurchase
agreements will be covered by securities having a value equal to or greater
than such commitments. The Fund maintains liquid assets in connection with
reverse repurchase agreements. Under the 1940 Act, reverse repurchase
agreements are considered borrowings.
Currency Transactions. The Fund does not expect to engage in currency
transactions for the purpose of hedging against declines in the value of the
Fund's assets that are denominated in a foreign currency. The Fund may enter
into foreign currency forward and foreign currency futures contracts to
facilitate local securities settlements or to protect against currency exposure
in connection with its distributions to shareholders, but may not enter into
such contracts for speculative purposes.
A forward currency contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency futures contract is a contract involving an obligation to
deliver or acquire the specified amount of a specific currency, at a specified
price and at a specified future time. Futures contracts may be settled on a net
cash payment basis rather than by the sale and delivery of the underlying
currency.
Foreign exchange transactions involve a significant degree of risk and the
markets in which foreign exchange transactions are effected are highly
volatile, highly specialized and highly technical. Significant changes,
including changes in liquidity and prices, can occur in such markets within
very short periods of time, often within minutes. Foreign exchange trading
risks include, but are not limited to, exchange rate risk, counterparty risk,
maturity gap, interest rate risk and potential interference by foreign
governments through regulation of local exchange markets, foreign investment or
particular transactions in foreign currency. If BGFA utilizes foreign exchange
transactions at an inappropriate time or judges market conditions, trends or
correlations incorrectly, foreign exchange transactions may not serve their
intended purpose of improving the correlation of the Fund's return with the
performance of the Underlying Index and may lower the Fund's return. The Fund
could experience losses if the value of its currency forwards, options and
futures positions were poorly correlated with its other investments or if it
could not close out its positions because of an illiquid market. In addition,
the Fund could incur transaction costs, including trading commissions, in
connection with certain foreign currency transactions.
Foreign Securities. The Fund may purchase publicly-traded common stocks of
foreign corporations. The Fund's investment in common stock of foreign
corporations represented in the Underlying Index may also be in the form of
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs") (collectively, "Depositary Receipts").
Depositary Receipts are receipts, typically issued by a bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation. For ADRs, the depository is typically a U.S. financial institution
and the underlying securities are issued by a foreign issuer. For other
Depositary Receipts, the depository may be a foreign or a U.S. entity and the
underlying securities may be issued by a foreign or a U.S. issuer. Depositary
Receipts are not necessarily denominated in the same currency as their
underlying securities. Generally, ADRs, issued in registered form, are designed
for use in the U.S. securities markets and EDRs, issued in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the
United States and in Europe and are designed for use throughout the world.
To the extent the Fund invests in ADRs, such ADRs will be listed on a national
securities exchange, and to the extent the Fund invests in GDRs or EDRs, such
GDRs and EDRs will be listed on a foreign exchange. The Fund will not invest in
any unlisted Depositary Receipt or any Depositary Receipt that BGFA deems to be
illiquid or for which pricing information is not readily available. In
addition, all Depositary Receipts generally must be sponsored, however the Fund
may invest in unsponsored Depositary Receipts under certain limited
circumstances. The issuers of unsponsored Depositary Receipts are not obligated
to disclose material information in the United States, and, therefore, there
may be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
include differences in accounting, auditing and financial reporting standards,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries, and potential restrictions on the
flow of international capital. Foreign companies may be subject to less
governmental regulation than U.S. companies. Moreover, individual
3
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
Short-Term Instruments and Temporary Investments. The Fund may invest in
short-term instruments, including money market instruments, on an ongoing basis
to provide liquidity or for other reasons. Money market instruments are
generally short-term investments that may include but are not limited to:
(i) shares of money market funds (including those advised by BGFA);
(ii) obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities (including government-sponsored enterprises);
(iii) negotiable certificates of deposit (CDs), bankers' acceptances, fixed
time deposits and other obligations of U.S. and foreign banks (including
foreign branches) and similar institutions; (iv) commercial paper rated at the
date of purchase "Prime-1" by Moody's(R) Investors Service, Inc. ("Moody's") or
"A-1" by Standard & Poors(R) Rating Service, a division of The McGraw-Hill
Companies, Inc. ("S&P(R)"), or if unrated, of comparable quality as determined
by BGFA; (v) non-convertible corporate debt securities (e.g., bonds and
debentures) with remaining maturities at the date of purchase of not more than
397 days and that satisfy the rating requirements set forth in Rule 2a-7 under
the 1940 Act; (vi) repurchase agreements; and (vii) short-term U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) that,
in the opinion of BGFA, are of comparable quality to obligations of U.S. banks
which may be purchased by the Fund. Any of these instruments may be purchased
on a current or a forward-settled basis. Time deposits are non-negotiable
deposits maintained in banking institutions for specified periods of time at
stated interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international transactions.
BGFA received an exemptive order from the SEC that permits the funds it
manages, including the Fund, to invest in shares of money market funds advised
by BGFA. Pursuant to this order, the Fund is permitted to invest in shares of
money market funds advised by BGFA for cash management purposes.
Securities of Investment Companies and REITs. The Fund may invest in the
securities of other investment companies (including money market funds) and
real estate investment trusts ("REITs") to the extent allowed by law. Under the
1940 Act, the Fund's investment in investment companies is limited to, subject
to certain exceptions: (i) 3% of the total outstanding voting stock of any one
investment company; (ii) 5% of the Fund's total assets with respect to any one
investment company; and (iii) 10% of the Fund's total assets with respect to
investment companies in the aggregate. The Fund does not intend to invest more
than 5% of its total assets in investment companies. To the extent allowed by
law or regulation, the Fund may invest its assets in the securities of
investment companies that are money market funds, including those advised by
BGFA or otherwise affiliated with BGFA, in excess of the limits discussed
above. Other investment companies in which the Fund invests can be expected to
incur fees and expenses for operations, such as investment advisory and
administration fees, that would be in addition to those incurred by the Fund.
Illiquid Securities. The Fund may invest up to an aggregate amount of 15% of
its net assets in illiquid securities. Illiquid securities include securities
subject to contractual or other restrictions on resale and other instruments
that lack readily available markets.
Futures and Options. The Fund may enter into U.S. futures contracts, options
and options on futures contracts. These futures contracts and options will be
used to simulate full investment in the respective Underlying Index, to
facilitate trading or to reduce transaction costs. The Fund will only enter
into futures contracts and options on futures contracts that are traded on a
U.S. or foreign exchange. The Fund will not use futures or options for
speculative purposes. The Fund intends to use futures and options in accordance
with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of
the Fund, has filed a notice of eligibility for exclusion from the definition
of the term "commodity pool operator" in accordance with Rule 4.5 so that the
Fund is not subject to registration or regulation as a commodity pool operator
under the CEA.
A call option gives a holder the right to purchase a specific security at a
specified price ("exercise price") within a specified period of time. A put
option gives a holder the right to sell a specific security at a specified
price within a specified period of time. The initial purchaser of a call option
pays the "writer" a premium, which is paid at the time of purchase and is
retained by the writer whether or not such option is exercised. The Fund may
purchase put options to hedge its portfolio against the risk of a decline in
the market value of securities held and may purchase call options to hedge
against an increase in the price of securities it is committed to purchase. The
Fund may write put and call options along with a long position in options to
increase its ability to hedge against a change in the market value of the
securities it holds or is committed to purchase. Investments in futures
contracts, and other investments that contain leverage, may require the Fund to
maintain liquid assets in the amount of the Fund's obligation under the
contract.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific instrument or index at a
specified future time and at a specified price. Stock index contracts are based
on indexes that reflect the market value of common stock of the firms included
in the indexes. The Fund may enter into futures contracts to purchase security
indexes when BGFA anticipates purchasing the underlying securities and believes
prices will rise before the purchase will be made. Assets committed to futures
contracts will be miantained to the extent required by law.
Options on Futures Contracts. An option on a futures contract, as contrasted
with the direct investment in such a contract, gives the purchaser the right,
in return for the premium paid, to assume a position in the underlying futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the
4
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account that represents the amount by which the market price of the
futures contract exceeds (in the case of a call) or is less than (in the case
of a put) the exercise price of the option on the futures contract. The
potential for loss related to the purchase of an option on a futures contract
is limited to the premium paid for the option plus transaction costs. Because
the value of the option is fixed at the point of sale, there are no daily cash
payments by the purchaser to reflect changes in the value of the underlying
contract; however, the value of the option changes daily and that change would
be reflected in the NAV of the Fund. The potential for loss related to writing
call options is unlimited.
The Fund may purchase and write put and call options on futures contracts that
are traded on a U.S. exchange as a hedge against changes in value of its
portfolio securities, or in anticipation of the purchase of securities, and may
enter into closing transactions with respect to such options to terminate
existing positions. There is no guarantee that such closing transactions can be
effected.
Upon entering into a futures contract, the Fund will be required to deposit
with the broker an amount of cash or cash equivalents known as "initial
margin," which is in the nature of a performance bond or good faith deposit on
the contract and is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Subsequent
payments, known as "variation margin", to and from the broker will be made
daily as the price of the index underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." The Fund may also have asset
segregation requirements. At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
Swap Agreements. Swap agreements are contracts between parties in which one
party agrees to make periodic payments to the other party based on the change
in market value or level of a specified rate, index or asset. In return, the
other party agrees to make periodic payments to the first party based on the
return of a different specified rate, index or asset. Swap agreements will
usually be performed on a net basis, with the Fund receiving or paying only the
net amount of the two payments. The net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each swap is accrued
on a daily basis and an amount of liquid assets having an aggregate value at
least equal to the accrued excess will be maintained by the Fund.
The use of interest-rate and index swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. These transactions generally do not
involve the delivery of securities or other underlying assets or principal.
Tracking Stocks. A tracking stock is a separate class of common stock whose
value is linked to a specific business unit or operating division within a
larger company and which is designed to "track" the performance of such
business unit or division. The tracking stock may pay dividends to shareholders
independent of the parent company. The parent company, rather than the business
unit or division, generally is the issuer of tracking stock. However, holders
of the tracking stock may not have the same rights as holders of the company's
common stock.
Future Developments. The Board of Trustees (the "Board") may, in the future,
authorize the Fund to invest in securities contracts and investments other than
those listed in this SAI and in the Prospectus, provided they are consistent
with the Fund's investment objective and do not violate any investment
restrictions or policies.
General Considerations and Risks
A discussion of some of the risks associated with an investment in the Fund is
contained in the Prospectus.
An investment in the Fund should be made with an understanding that the value
of the Fund's portfolio securities may fluctuate in accordance with changes in
the financial condition of the issuers of the portfolio securities, the value
of preferred or common stocks in general, and other factors that affect the
market.
Risks of Derivatives. A derivative is a financial contract, the value of which
depends on, or is derived from, the value of an underlying asset such as a
security or an index. The Fund may invest in stock index futures contracts and
other derivatives. Compared to conventional securities, derivatives can be more
sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus the Fund's losses may be greater if it invests in derivatives
than if it invests only in conventional securities.
Risks of Equity Securities. An investment in a Fund should be made with an
understanding that the value of the Fund's portfolio securities may fluctuate
in accordance with changes in the financial condition of the issuers of the
portfolio securities, the value of preferred or common stocks in general, and
other factors that affect the market. An investment in a Fund should also be
made with an understanding of the risks inherent in an investment in equity
securities, including the risk that the financial condition of issuers may
become impaired or that the general condition of the stock market may
deteriorate
5
(either of which may cause a decrease in the value of the portfolio securities
and thus in the value of shares of a Fund). Common stocks are susceptible to
general stock market fluctuations and to volatile increases and decreases in
value as market confidence and perceptions of their issuers change. These
investor perceptions are based on various and unpredictable factors, including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. Holders of common stocks incur
more risk than holders of preferred stocks and debt obligations because common
stockholders, as owners of the issuer generally have inferior rights to receive
payments from the issuer in comparison with the rights of creditors or holders
of debt obligations or preferred stocks. Further, unlike debt securities, which
typically have a stated principal amount payable at maturity (whose value,
however, is subject to market fluctuations prior to maturity), or preferred
stocks, which typically have a liquidation preference and which may have stated
optional or mandatory redemption provisions, common stocks have neither a fixed
principal amount nor a maturity. Common stock values are subject to market
fluctuations as long as the common stock remains outstanding.
Risks of Futures and Options Transactions. There are several risks accompanying
the utilization of futures contracts and options on futures contracts. First, a
position in futures contracts and options on futures contracts may be closed
only on the exchange on which the contract was made (or a linked exchange).
While the Fund plans to utilize futures contracts only if an active market
exists for such contracts, there is no guarantee that a liquid market will
exist for the contract at a specified time. Furthermore, because, by
definition, futures contracts project price levels in the future and not
current levels of valuation, market circumstances may result in a discrepancy
between the price of the stock index future and the movement in the Underlying
Index. In the event of adverse price movements, the Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to deliver the
instruments underlying the future contracts it has sold.
The risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g., selling uncovered stock index futures contracts) is
potentially unlimited. The Fund does not plan to use futures and options
contracts in this way. The risk of a futures position may still be large as
traditionally measured due to the low margin deposits required. In many cases,
a relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required
margin deposit. The Fund, however, intend to utilize futures and options
contracts in a manner designed to limit their risk exposure to levels
comparable to a direct investment in the types of stocks in which they invest.
Utilization of futures and options on futures by the Fund involves the risk of
imperfect or even negative correlation to the Underlying Index if the index
underlying the futures contract differs from the Underlying Index. There is
also the risk of loss by the Fund of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in the futures contract or
option. The purchase of put or call options will be based upon predictions by
BGFA as to anticipated trends, which predictions could prove to be incorrect.
Because the futures market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by speculators in the
futures market could result in price fluctuations. Certain financial futures
exchanges limit the amount of fluctuation permitted in futures contract prices
during a single trading day. The daily limit establishes the maximum amount by
which the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting the Fund to substantial losses. In the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin.
Although the Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time.
Risks of Investing in Non-U.S. Equity Securities. An investment in the Fund
involves risks similar to those of investing in broad-based portfolios of
equity securities traded on exchanges in the respective countries covered by
the Fund. These risks include market fluctuations caused by such factors as
economic and political developments, changes in interest rates and perceived
trends in stock prices. Investing in securities issued by companies domiciled
in countries other than the domicile of the investor and denominated in
currencies other than an investor's local currency entails certain
considerations and risks not typically encountered by the investor in making
investments in its home country and in that country's currency. These
considerations include favorable or unfavorable changes in interest rates,
currency exchange rates, exchange control regulations and the costs that may be
incurred in connection with conversions between various currencies. Investing
in the Fund whose portfolio contains non-U.S. issuers involves certain risks
and considerations not typically associated with investing in the securities of
U.S. issuers. These risks include generally less liquid and less efficient
securities markets; generally greater price volatility; less publicly available
information about issuers; the imposition of withholding or other taxes; the
imposition of restrictions on the expatriation of funds or other assets of the
Fund; higher transaction and custody
6
costs; delays and risks attendant in settlement procedures; difficulties in
enforcing contractual obligations; lesser liquidity and significantly smaller
market capitalization of most non-U.S. securities markets; different accounting
and disclosure standards; lesser levels of regulation of the securities
markets; more substantial government interference with the economy; higher
rates of inflation; greater social, economic, and political uncertainty; and
the risk of nationalization or expropriation of assets and risk of war.
Risks of Swap Agreements. The risk of loss with respect to swaps generally is
limited to the net amount of payments that the Fund is contractually obligated
to make. Swap agreements are subject to the risk that the swap counterparty
will default on its obligations. If such a default occurs, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
However, such remedies may be subject to bankruptcy and insolvency laws which
could affect the Fund's rights as a creditor (e.g., the Fund may not receive
the net amount of payments that it contractually is entitled to receive).
Dividend Risk. There is no guarantee that the issuers of the stocks held by the
Fund will declare dividends in the future or that, if declared, they will
either remain at current levels or increase over time.
Proxy Voting Policy
The Trust has adopted as its proxy voting policies for the Fund the proxy
voting guidelines of BGFA, the investment adviser to the Fund. The Trust has
delegated to BGFA the responsibility for voting proxies on the portfolio
securities held by the Fund. The remainder of this section discusses the Fund's
proxy voting guidelines and BGFA's role in implementing such guidelines. BGFA
votes (or refrains from voting) proxies for the Fund in a manner that BGFA, in
the exercise of its independent business judgment, concludes is in the best
economic interests of the Fund. In some cases, BGFA may determine that it is in
the best economic interests of the Fund to refrain from exercising the Fund's
proxy voting rights (such as, for example, proxies on certain non-U.S.
securities that might impose costly or time-consuming in-person voting
requirements). With regard to the relationship between securities lending and
proxy voting, BGFA's approach is also driven by our clients' economic
interests. The evaluation of the economic desirability of recalling loans
involves balancing the revenue producing value of loans against the likely
economic value of casting votes. Based on our evaluation of this relationship,
we believe that the likely economic value of casting a vote generally is less
than the securities lending income, either because the votes will not have
significant economic consequences or because the outcome of the vote would not
be affected by BGFA recalling loaned securities in order to ensure they are
voted. Periodically, BGFA analyzes the process and benefits of voting proxies
for securities on loan, and will consider whether any modification of its proxy
voting policies or procedures are necessary in light of any regulatory changes.
BGFA will normally vote on specific proxy issues in accordance with its proxy
voting guidelines. BGFA's proxy voting guidelines provide detailed guidance as
to how to vote proxies on certain important or commonly raised issues. BGFA
may, in the exercise of its business judgment, conclude that the proxy voting
guidelines do not cover the specific matter upon which a proxy vote is
requested, or that an exception to the proxy voting guidelines would be in the
best economic interests of the Fund. BGFA votes (or refrains from voting)
proxies without regard to the relationship of the issuer of the proxy (or any
shareholder of such issuer) to the Fund, the Fund's affiliates (if any), BGFA
or BGFA's affiliates, or the Distributor or the Distributor's affiliates. When
voting proxies, BGFA attempts to encourage companies to follow practices that
enhance shareholder value and increase transparency and allow the market to
place a proper value on their assets. With respect to certain specific issues:
. The Fund generally supports the board's nominees in the election of
directors and generally supports proposals that strengthen the
independence of boards of directors;
. The Fund generally does not support proposals on social issues that lack
a demonstrable economic benefit to the issuer and the Fund investing in
such issuer; and
. The Fund generally votes against anti-takeover proposals and proposals
that would create additional barriers or costs to corporate transactions
that are likely to deliver a premium to shareholders.
BGFA maintains institutional policies and procedures that are designed to
prevent any relationship between the issuer of the proxy (or any shareholder of
the issuer) and the Fund, the Fund's affiliates (if any), BGFA or BGFA's
affiliates, or the Distributor or the Distributor's affiliates, from having
undue influence on BGFA's proxy voting activity. In certain instances, BGFA may
determine to engage an independent fiduciary to vote proxies as a further
safeguard against potential conflicts of interest or as otherwise required by
applicable law. The independent fiduciary may either vote such proxies or
provide BGFA with instructions as to how to vote such proxies. In the latter
case, BGFA votes the proxy in accordance with the independent fiduciary's
determination.
Information with respect to how BGFA voted Fund proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available: (i) without charge, upon request, by calling 1-800-iShares
(1-800-474-2737) or through the Fund's website at www.iShares.com; and (ii) on
the SEC's website at www.sec.gov.
7
Portfolio Holdings Information
The Board has adopted a policy regarding the disclosure of the Fund's portfolio
holdings information that requires that such information be disclosed in a
manner that: (a) is consistent with applicable legal requirements and in the
best interests of the Fund's respective shareholders; (b) does not put the
interests of BGFA, the Distributor, or any affiliated person of the Fund, the
Investment Adviser or the Distributor, above those of Fund shareholders;
(c) does not advantage any current or prospective Fund shareholders over any
other current or prospective Fund shareholders, except to the extent that
certain Entities (as described below) may receive portfolio holdings
information not available to other current or prospective Fund shareholders in
connection with the dissemination of information necessary for transactions in
Creation Units, as contemplated by the iShares Exemptive Orders as discussed
below; and (d) does not provide selective access to portfolio holdings
information except pursuant to the procedures outlined below and to the extent
appropriate confidentiality arrangements limiting the use of such information
are in effect. The "Entities" referred to in sub-section (c) above are
generally limited to National Securities Clearing Corporation ("NSCC") members
and subscribers to various fee-based subscription services, including those
large institutional investors (known as "Authorized Participants") that have
been authorized by the Distributor to purchase and redeem large blocks of
shares (known as Creation Units or a Creation Unit Aggregation) pursuant to
legal requirements, including exemptive orders granted by the SEC pursuant to
which the Fund offers and redeems their shares ("iShares Exemptive Orders"),
and other institutional market participants and entities that provide
information services.
Each business day, the Fund's portfolio holdings information will be provided
to the Distributor or other agent for dissemination through the facilities of
the NSCC and/or other fee-based subscription services to NSCC members and/or
subscribers to those other fee-based subscription services, including
Authorized Participants, and to entities that publish and/or analyze such
information in connection with the process of purchasing or redeeming Creation
Units or trading shares of the Fund in the secondary market. This information
typically reflects the Fund's anticipated holdings on the following business
day.
Daily access to information concerning the Fund's portfolio holdings is
permitted (i) to certain personnel of those service providers that are involved
in portfolio management and providing administrative, operational, risk
management, or other support to portfolio management, including affiliated
broker-dealers and/or Authorized Participants and (ii) to other personnel of
the Investment Adviser and the Fund's distributor, administrator, custodian and
fund accountant who deal directly with, or assist in, functions related to
investment management, administration, custody and fund accounting, as may be
necessary to conduct business in the ordinary course in a manner consistent
with the iShares Exemptive Orders, agreements with the Fund, and the terms of
the Fund's current registration statement. In addition, the Fund discloses its
portfolio holdings and the percentages they represent of the Fund's net assets
at least monthly, but as often as each day the Funds are open for business at
www.iShares.com. More information about this disclosure is available at
www.iShares.com.
From time to time, information concerning portfolio holdings, other than
portfolio holdings information made available in connection with the
creation/redemption process, as discussed above, may also be provided to other
entities that provide additional services to the Fund, including, among others,
rating or ranking organizations, in the ordinary course of business, no earlier
than one business day following the date of the information. Portfolio holdings
information made available in connection with the creation/redemption process
may be provided to other entities that provide additional services to the Fund
in the ordinary course of business after it has been disseminated to the NSCC.
The Fund will disclose its complete portfolio holdings schedule in public
filings with the SEC on a quarterly basis, based on the Fund's fiscal year,
within 70 days of the end of the quarter, and will provide that information to
shareholders, as required by federal securities laws and regulations
thereunder. The Fund, however, may voluntarily disclose all or part of its
portfolio holdings other than in connection with the creation/redemption
process, as discussed above, in advance of required filings with the SEC,
provided that such information is made generally available to all shareholders
and other interested parties in a manner that is consistent with the above
policy for disclosure of portfolio holdings information. Such information may
be made available through a publicly-available website or other means that make
the information available to all likely interested parties in a contemporaneous
manner.
The Trust's Chief Compliance Officer may authorize disclosure of portfolio
holdings information pursuant to the above policy and procedures.
The Board reviews the policy and procedures for disclosure of portfolio
holdings information at least annually.
8
Construction and Maintenance Standards for the Underlying Index
The Fund invests substantially all of its assets in securities represented in
the MSCI Kokusai Index. A brief description of the Underlying Index is provided
below.
The MSCI Indexes Generally
In General. The MSCI indexes were founded in 1969 by Capital International S.A.
as the first international performance benchmarks constructed to facilitate
accurate comparison of world markets. Morgan Stanley acquired rights to the
indexes in 1986. In November 1998, Morgan Stanley transferred all rights to the
MSCI indexes to Morgan Stanley Capital International Inc. ("MSCI"), a Delaware
corporation of which Morgan Stanley is the majority owner and The Capital Group
of Companies, Inc. is the minority shareholder. The MSCI single country
standard equity indexes have covered the world's developed markets since 1969,
and in 1988, MSCI commenced coverage of the emerging markets.
Local stock exchanges traditionally calculated their own indexes that were
generally not comparable with one another due to differences in the
representation of the local market, mathematical formulas, base dates and
methods of adjusting for capital changes. MSCI, however, applies the same
calculation methodology across all markets for all single country standard
equity indexes, developed and emerging.
MSCI has announced enhancements to the methodology of the MSCI Standard
Indexes, which includes the MSCI Kokusai Index. MSCI will expand the number of
securities included in the indexes, eliminate industry sector classifications
in favor of market capitalization size segmentation and eliminate overlapping
market capitalization size segmentation among its indexes. These enhancements
are being phased in over two stages: 50% of the transition is expected to be
completed on November 30, 2007 and the remaining transition is expected to be
completed on May 30, 2008. The MSCI Standard Indexes, which will include the
MSCI Global Large Cap Indexes and MSCI Global Mid-Cap Indexes, are intended to
cover all investable large and mid-cap securities and include approximately 85%
of each market's free float-adjusted market capitalization. MSCI is also
combining its MSCI Standard Indexes and MSCI Small Cap Indexes to form the MSCI
Global Investable Market Indexes (the "MSCI GIMI"). The enhanced MSCI Global
Small Cap Index is intended to cover all companies with a market capitalization
lower than that of the companies in the MSCI Global Standard Indexes and
include an additional 14% coverage of each market's free-float adjusted market
capitalization. The Underlying Index of the Fund at its inception will be an
index of the MSCI Standard Index.
Following are descriptions of the MSCI Standard Equity Indexes.
MSCI Single Country Standard Equity Indexes
Weighting. All single-country MSCI Standard Indexes are free-float weighted,
i.e., companies are included in the indexes at the value of their free public
float (free float multiplied by security price). MSCI defines "free float" as
total shares excluding shares held by strategic investors and shares subject to
foreign ownership restrictions. MSCI's Standard Indexes generally seek to
include 85% of the free float-adjusted market capitalization of a country's
stock market represented in each industry group of each country.
Regional Weights. Market capitalization weighting, combined with a consistent
target of 85% of free float-adjusted market capitalization, helps ensure that
each country's weight in regional and international indexes approximates its
weight in the total universe of developing and emerging markets.
Selection Criteria. MSCI's index construction process 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.
(i) Defining the Equity Universe. The current index construction process
starts at the country level with the identification of all listed
securities for that country. Currently, MSCI creates international
equity country indexes for 48 countries. In general, companies and their
respective securities are classified as belonging only to the country in
which they are incorporated. This allows securities to be sorted
distinctly by country. All listed equity securities and 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.
9
(ii) Adjusting the Total Market Capitalization of Securities in the Equity
Universe 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.
(iii) Classifying Securities under the GICS. All securities in the equity
universe are also assigned to an industry-based hierarchy, the GICS.
This comprehensive classification scheme provides a universal approach
to industries worldwide and forms the basis for achieving MSCI's
objective of broad industry representation in its indexes.
(iv) Selecting Securities for Index Inclusion. MSCI targets an 85% free
float-adjusted market representation level in each industry group of
each country. The security selection process within each industry group
is based on the 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 the securities of the company and (iii) the estimated free
float for the company and its individual share classes. MSCI targets for
inclusion the most sizable and liquid securities in an industry group.
MSCI generally does not consider securities with inadequate liquidity
and/or securities that do not have an estimated free float greater than
15% unless exclusion of the security of a large company would compromise
the index's ability to fully and fairly represent the characteristics of
the underlying market. In its Small Cap Index Series, MSCI targets 40%
of the full market capitalization of the eligible small cap universe in
each industry group, of each country.
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's inclusion
factor is equal to its estimated free float rounded-up to the closest 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%.
Additions and Deletions. Potential additions to the indexes are analyzed with
respect to their industry group and sub-industry group, in order to represent a
wide range of economic and business activities. In assessing deletions, it is
important to emphasize that indexes must represent the full-investment cycle,
including both bull and 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.
Price and Exchange Rates
Prices. The prices used to calculate the MSCI indexes 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.
Exchange Rates. MSCI currently uses the FX rates published by WM Reuters at
4:00 p.m., London time. MSCI uses WM Reuters rates for all developed and
emerging markets. Exchange rates are taken daily at 4:00 p.m., London time by
the WM Company 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 4:00 p.m. WM Reuters provides closing
bid and offer rates. MSCI uses these rates to calculate the mid-point to five
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.
Changes to the Indexes. The MSCI indexes are maintained with the objective of
reflecting, on a timely basis, the evolution of the underlying equity markets.
In maintaining the MSCI indexes, emphasis is also placed on continuity,
replicability and minimizing turnover in the indexes. Maintaining the MSCI
indexes involves many aspects including: (i) additions to, and deletions from,
the indexes; (ii) and changes in number of shares; and (iii) changes in Foreign
Inclusion Factors ("FIFs") as a result of updated free float estimates.
10
Index maintenance can be described by three broad categories of implementation
of changes:
. Annual full country index reviews, conducted on a fixed annual
timetable, that systematically re-assess the various dimensions of the
equity universe for all countries;
. Quarterly index reviews, aimed at promptly reflecting other significant
market events; and
. Ongoing event-related changes, such as mergers and acquisitions, which
generally are implemented in the indexes 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 all the MSCI single country standard
international equity indexes 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 only on three dates
throughout the year: as of the close of the last business day of February,
August and November. Any single country indexes may be impacted at the
quarterly index review. MSCI Index additions and deletions due to quarterly
index rebalancing are generally announced at least two weeks in advance.
MSCI Kokusai Index
Number of Components: approximately [__]
Index Description. The MSCI Kokusai Index is designed to measure equity market
performance in those countries that MSCI has classified as having developed
markets, excluding Japan. As of June 2006, the MSCI Kokusai Index consisted of
the following 22 developed market country indexes: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy,
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States.
Investment Limitations
The Board has adopted as a non-fundamental policy the investment objective of
the Fund. Therefore, the Fund may change its investment objective and its
Underlying Index without a shareholder vote. The Board has adopted as
fundamental policies the Fund's investment restrictions numbered one through
six below. The restrictions for the Fund cannot be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities. A
vote of a majority of the outstanding voting securities is defined in the 1940
Act as the lesser of (a) 67% or more of the voting securities present at a fund
meeting, if the holders of more than 50% of the outstanding voting securities
are present or represented by proxy, or (b) more than 50% of outstanding voting
securities of the fund.
The Fund will not:
1. Concentrate its investments (i.e., invest 25% or more of its total assets in
the securities of a particular industry or group of industries), except that
the Fund will concentrate to approximately the same extent that its
Underlying Index concentrates in the securities of such particular industry
or group of industries. 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.
2. Borrow money, except that (i) the Fund may borrow from banks for temporary
or emergency (not leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of
securities, and (ii) the Fund may, to the extent consistent with its
investment policies, enter into repurchase agreements, reverse repurchase
agreements, forward roll transactions and similar investment strategies and
techniques. To the extent that it engages in transactions described in
(i) and (ii), the Fund will be limited so that no more than 33 1/3% of the
value of its total assets (including the amount borrowed) is derived from
such transactions. Any borrowings which come to exceed this amount will be
reduced in accordance with applicable law.
3. Issue any senior security, except as permitted under the 1940 Act and as
interpreted, modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
4. Make loans, except as permitted under the 1940 Act, as interpreted, modified
or otherwise permitted by regulatory authority having jurisdiction, from
time to time.
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this restriction shall not prevent the
Fund from investing in securities of companies engaged in the real estate
business or
11
securities or other instruments backed by real estate or mortgages), or
commodities or commodity contracts (but this restriction shall not prevent
the Fund from trading in futures contracts and options on futures contracts,
including options on currencies to the extent consistent with the Fund's
investment objective and policies).
6. Engage in the business of underwriting securities issued by other persons,
except to the extent that the Fund may technically be deemed to be an
underwriter under the Securities Act, in disposing of portfolio securities.
In addition to the investment restrictions adopted as fundamental policies set
forth above, the Fund as a non-fundamental policy will not invest in the
securities of a company for the purpose of exercising management or control or
purchase or otherwise acquire any illiquid security, except as permitted under
the 1940 Act, which currently permits up to 15% of the Fund's net assets to be
invested in illiquid securities.
BGFA monitors the liquidity of restricted securities in the Fund's portfolio.
In reaching liquidity decisions, BGFA considers the following factors:
. The frequency of trades and quotes for the security;
. The number of dealers wishing to purchase or sell the security and the
number of other potential purchasers;
. Dealer undertakings to make a market in the security; and
. The nature of the security and the nature of the marketplace in which it
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
If any percentage restriction described above is complied with at the time of
an investment, a later increase or decrease in percentage resulting from a
change in values of assets will not constitute a violation of such restriction.
The Fund has adopted a non-fundamental investment policy in accordance with
Rule 35d-1 under the 1940 Act to invest, under normal circumstances, at least
80% of the value of its net assets, plus the amount of any borrowings for
investment purposes, in securities in the Fund's Underlying Index and in ADRs
based on securities in the Underlying Index. The Fund also has adopted a policy
to provide its shareholders with at least 60 days' prior written notice of any
change in such policy. If, subsequent to an investment, the 80% requirement is
no longer met, the Fund's future investments will be made in a manner that will
bring the Fund into compliance with this policy.
Continuous Offering
The method by which Creation Unit Aggregations of shares are created and traded
may raise certain issues under applicable securities laws. Because new Creation
Unit Aggregations of shares are issued and sold by the Fund on an ongoing
basis, at any point a "distribution," as such term is used in the Securities
Act, may occur. Broker-dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner which could render them
statutory underwriters and subject them to the prospectus delivery requirement
and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
the Distributor, breaks them down into constituent shares, and sells such
shares directly to customers, or if it chooses to couple the creation of a
supply of new shares with an active selling effort involving solicitation of
secondary market demand for shares. A determination of whether one is an
underwriter for purposes of the Securities Act must take into account all the
facts and circumstances pertaining to the activities of the broker-dealer or
its client in the particular case, and the examples mentioned above should not
be considered a complete description of all the activities that could lead to a
categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters"
but are effecting transactions in shares, whether or not participating in the
distribution of shares, generally are required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the Securities Act
is not available in respect of such transactions as a result of Section 24(d)
of the 1940 Act. Firms that incur a prospectus delivery obligation with respect
to shares of the Fund are reminded that, pursuant to Rule 153 under the
Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the
Securities Act owed to an exchange member in connection with a sale on the
Listing Exchange is satisfied by the fact that the prospectus is available at
the Listing Exchange upon request. The prospectus delivery mechanism provided
in Rule 153 is only available with respect to transactions on an exchange.
12
Management
Trustees and Officers. The Board has responsibility for the overall management
and operations of the Fund, including general supervision of the duties
performed by BGFA and other service providers. Each Trustee serves until his or
her successor is duly elected or appointed and qualified.
iShares Trust, iShares, Inc., Master Investment Portfolio ("MIP"), Barclays
Global Investors Funds ("BGIF") and Barclays Foundry Investment Trust ("BFIT"),
each an open-end management investment company registered under the 1940 Act,
are considered to be members of the same fund complex, as defined in Form N-1A
under the 1940 Act. Each Trustee also serves as a Director for iShares, Inc.
and, as a result, oversees a total of __Funds within the fund complex. In
addition, Lee T. Kranefuss serves as a Trustee for MIP, BGIF and BFIT and, as a
result, oversees an additional 24 portfolios within the fund complex. The
address of each Trustee and Officer, unless otherwise indicated, is 45 Fremont
Street, San Francisco, CA 94105. The Board has designated George G.C. Parker as
its Lead Independent Trustee.
Principal Occupation(s) During the Other Directorships Held by
Name (Year of Birth) Position Past 5 Years Trustee/Officer
-------------------- --------------------------- ---------------------------------- ------------------------------
Interested Trustees
*Lee T. Kranefuss (1961) Trustee and Chairman (since Chief Executive Officer of the Director (since 2003) of
2003) Intermediary Investor and iShares, Inc.; Trustee (since
Exchange Traded Products 2001) of BGIF and MIP;
Business of BGI (since 2003); Trustee (since 2007) of BFIT;
Director of BGFA (since Director (since 2003) of BGI
2005); Director, President and Cayman Prime Money Market
Chief Executive Officer of Fund, Ltd.
Barclays Global Investors
International, Inc. (since
2005); Director, Chairman and
Chief Executive Officer of
Barclays Global Investors
Services (since 2005); Chief
Executive Officer of the
Individual Investor Business
of BGI (1999-2003).
*John E. Martinez (1962) Trustee (since 2003) Co-Chief Executive Officer of Director (since 2003) of
Global Index and Markets iShares, Inc.; Director (since
Group of BGI (2001-2003); 2005) of Real Estate Equity
Chairman of Barclays Global Exchange.
Investors Services (2000-
2003).
--------
* Lee T. Kranefuss and John E. Martinez are deemed to be "interested persons"
(as defined in the 1940 Act) of the Trust due to their affiliations with
BGFA, the Fund's investment adviser, BGI, the parent company of BGFA, and
Barclays Global Investors Services, an affiliate of BGFA and BGI.
13
Principal Occupation(s) During the Other Directorships Held by
Name (Year of Birth) Position Past 5 Years Trustee/Officer
-------------------- -------------------------- ---------------------------------- ------------------------------
Independent Trustees
George G.C. Parker (1939) Trustee (since 2000) Lead Dean Witter Distinguished Director (since 2002) of
Independent Trustee (since Professor of Finance, Emeritus iShares, Inc.; Director (since
2006) (since 1994); Formerly Senior 1996) of Continental Airlines,
Associate Dean for Academic Inc.; Director (since 1995) of
Affairs, Director of MBA Community First Financial
Program, Stanford University: Group; Director (since 1999)
Graduate School of Business of Tejon Ranch Company;
(1993-2001). Director (since 2003) of First
Republic Bank; Director (since
2004) of Threshold
Pharmaceuticals; Director
(since 2007) of NETGEAR,
Inc.
Cecilia H. Herbert (1949) Trustee (since 2005) Member if Finance Council, Director (since 2005) of
Archdiocese of San Francisco iShares, Inc.
(1999-2006); Chair of
Investment Committee,
Archdiocese of San Francisco
(1994-2005); Director (since
1998) and President (since
2007) of the Board of
Directors, Catholic Charities
CYO; Trustee (2004-2005) of
Pacific Select Funds; Trustee
(1992-2003) of the
Montgomery Funds; Trustee
(since 2005) and Chair of
Finance and Invesment
Committee (since 2006) of the
Thacher School.
Charles A. Hurty (1943) Trustee (since 2005) Retired; Partner, KPMG, LLP Director (since 2005) of
(1968-2001). iShares, Inc.; Director (since
2002) of GMAM Absolute
Return Strategy Fund (1
portfolio); Director (since
2002) of Citigroup Alternative
Investments Multi-Adviser
Hedge Fund Portfolios LLC (1
portfolio); Director (since
2005) of CSFB Alternative
Investments Fund (6
portfolios).
John E. Kerrigan (1955) Trustee (since 2005) Chief Investment Officer, Director (since 2005) of
Santa Clara University (since iShares, Inc.; Member (since
2002); Managing Director, 2004) of Advisory Council for
Merrill Lynch (1994-2002). Common fund Distressed Debt
Partners II.
14
Principal Occupation(s) During the Other Directorships Held by
Name (Year of Birth) Position Past 5 Years Trustee/Officer
-------------------- ----------------------------- ---------------------------------- ------------------------------
Robert H. Silver (1955) Trustee (since March 2007) President and Co-Founder of Director (since March 2007)
The of iShares, Inc.; Director and
Bravitas Group, Inc. (since Member of the Audit and
2006); Member, Non-Investor Compensation Committee of
Advisory Board of Russia EPAM Systems, Inc. (since
Partners II, LP (since 2006); 2006).
President and Chief Operating
Officer (2003-2005) and
Director (1999-2005)
of UBS Financial Services,
Inc.; President and Chief
Executive Officer of UBS
Services USA, LLC (1999-
2005); Managing Director,
UBS America, Inc. (2000-
2005); Director and Vice
Chairman of the YMCA of
Greater NYC (since 2001);
Broadway Producer (since
2006).
Name (Year of Birth) Principal Occupation(s) During the
Officers Position Past 5 Years
-------------------- ----------------------------- ----------------------------------
Officers
Michael A. Latham (1965) President (since 2007) Head of Americas iShares
(since 2007); Chief Operating
Officer of the Intermediary
Investors and Exchange
Traded Products Business of
BGI (since 2003-2007);
Director of Mutual Fund
Delivery in the U.S. Individual
Investor Business of BGI
(2000-2003); Head of
Operations, BGI Europe
(1997-2000).
Geoffrey D. Flynn (1956) Treasurer and Chief Financial Director, Mutual Fund
Officer (since 2007) Operations, BGI (since 2007);
President, Van Kampen
Investors Services (2003-
2007); Managing Director,
Morgan Stanley (2002-2007);
President, Morgan Stanley
Trust, FSB (2002-2007).
Eilleen M. Clavere (1952) Secretary (since 2007) Head of Legal
Administration-- IIB, and
BGI (since 2006); Legal
Counsel and Vice President of
Atlas Funds, Atlas Advisers,
Inc. and Atlas Securities, Inc.
(2005-2006); Counsel,
Kirkpatrick & Lockhart LLP
(2001-2005).
Ira P. Shapiro (1963) Vice President and Chief Associate General Counsel,
Legal Officer (since 2007) BGI (since 2004); First Vice
President, Merrill Lynch
Investment Managers (1993-
2004).
Amy Schioldager (1962) Executive Vice President Head of U.S. Indexing, BGI
(since 2007) (since 2006); Head of
Domestic Equity Portfolio
Management, BGI (2001-
2006).
H. Michael Williams (1960) Executive Vice President Head, Global Index and
(since 2007) Markets Group, BGI (since
January 2006); Global Head of
Securities Lending, BGI
(2002-2006).
Patrick O'Connor (1967) Vice President (since 2007) Head of iShares Portfolio
Management, BGI (since
2006); Senior Portfolio
Manager, BGI (since 1999).
Lee Sterne (1965) Vice President (since 2007) Senior Portfolio Manager, BGI
(since 2004); Portfolio
Manager, BGI (2001-2004).
Matt Tucker (1972) Vice President (since 2007) Head of U.S. Fixed Income
Investment Solutions, BGI
(since 2005); Fixed Income
Investment Strategist, BGI
(2003-2005); Fixed Income
Portfolio Manager, BGI
(1997-2003).
15
The following table sets forth, as of December 31, 2006, the dollar range of
equity securities beneficially owned by each Trustee in the Fund and in other
registered investment companies overseen by the Trustee within the same family
of investment companies as the Trust:
Aggregate Dollar Range of Equity
Securities in all Registered
Dollar Range of Investment Companies Overseen by
Equity Securities Trustee in Family of Investment
Name of Trustee* Name of Index Fund in the Fund Companies
---------------- ---------------------------------------- ----------------- --------------------------------
Lee T. Kranefuss iShares Lehman 1-3 Year Treasury Bond $50,001-$100,000 Over $100,000
iShares Russell 3000 Over $100,000
iShares iBoxx $Investment Grade $10,001-$50,000
Corporate Bond $10,001-$50,000
iShares Dow Jones Select Dividend
John E. Martinez iShares MSCI EAFE Over $100,000 Over $100,000
iShares Russell 1000 Over $100,000
iShares Russell 1000 Value Over $100,000
iShares Russell 2000 Over $100,000
iShares S&P 500 Over $100,000
George G.C. Parker iShares Dow Jones Select Dividend Over $100,000 Over $100,000
iShares FTSE/Xinhua China 25 Over $100,000
iShares iBoxx $ Investment Grade Over $100,000
Corporate Bond
iShares Lehman 1-3 Year Treasury Bond $1-$10,000
iShares MSCI EAFE Over $100,000
iShares MSCI Emerging Markets Over $100,000
iShares MSCI Mexico Over $100,000
iShares Russell 1000 Value Over $100,000
iShares Russell 2000 $50,001-$100,000
iShares Russell 2000 Value Over $100,000
iShares S&P 100 Over $100,000
iShares S&P 500 Over $100,000
iShares S&P 500 Growth $10,001-$50,000
iShares S&P 500 Value Over $100,000
iShares S&P Midcap 400 Value Over $100,000
iShares S&P Global 100 $10,001-$50,000
Cecilia H. Herbert iShares MSCI Hong Kong $10,001-$50,000 Over $100,000
iShares MSCI Japan $10,001-$50,000
iShares Dow Jones Consumer Goods Sector $10,001-$50,000
iShares FTSE/Xinhua China 25 $10,001-$50,000
iShares S&P 500 Over $100,000
Charles A. Hurty iShares S&P 500 Index $10,001-$50,000 Over $100,000
iShares FTSE/Xinhua China 25 $10,001-$50,000
iShares Dow Jones Financial Sector $10,001-$50,000
iShares Dow Jones U.S. Energy Sector $10,001-$50,000
iShares Dow Jones U.S. Technology Sector $10,00 1-$50,000
iShares MSCI EAFE $10,001-$50,000
iShares MSCI Japan $10,001-$50,000
John E. Kerrigan iShares Russell 1000 Over $100,000 Over $100,000
iShares MSCI Japan Over $100,000
iShares MSCI Pacific ex-Japan Over $100,000
iShares MSCI EAFE Over $100,000
--------
* The dollar range of equity securities beneficially owned by Robert H. Silver
is not reflected in the table because he was elected to serve as an
Independent Trustee of the Trust effective March 9, 2007.
16
As of December 31, 2006, none of the Trustees who are not interested persons
(as defined in the 1940 Act) of the Trust ("Independent Trustees") or their
immediate family members owned beneficially or of record any securities of BGFA
(the Fund's investment adviser), the Distributor (the Fund's distributor) or
any person controlling, controlled by or under control with BGFA or the
Distributor.
Committees of the Board of Trustees. Each Independent Trustee serves on the
Audit Committee and Nominating and Governance Committee of the Board. The
purposes of the Audit Committee are to assist the Board (i) in its oversight of
the Trust's accounting and financial reporting principles and policies and
related controls and procedures maintained by or on behalf of the Trust;
(ii) in its oversight of the Trust's financial statements and the independent
audit thereof; (iii) in selecting, evaluating and, where deemed appropriate,
replacing the independent accountants (or nominating the independent
accountants to be proposed for shareholder approval in any proxy statement);
(iv) in evaluating the independence of the independent accountants; (v) in
complying with legal and regulatory requirements that relate to the Trust's
accounting and financial reporting, internal controls and independent audits;
and (vi) to assume such other responsibilities as may be delegated by the
Board. The Audit Committee of the Trust met four times during the calendar year
ended December 31, 2006.
The Nominating and Governance Committee nominates individuals for Independent
Trustee membership on the Board. The Nominating and Governance Committee
functions include, but are not limited to, the following (i) reviewing the
qualifications of any person properly identified or nominated to serve as an
Independent Trustee; (ii) recommending to the Board and current Independent
Trustees the nominee(s) for appointment as an Independent Trustee by the Board
and current Independent Trustees and/or for election as Independent Trustees by
shareholders to fill any vacancy for a position of Independent Trustee(s) on
the Board; (iii) recommending to the Board and current Independent Trustees the
size and composition of the Board and Board committees and whether they comply
with applicable laws and regulations; (iv) recommending a current Independent
Trustee to the Board and current Independent Trustees to serve as Lead
Independent Trustee; (v) periodic review of the Board's retirement policy; and
(vi) recommending an appropriate level of compensation for the Independent
Trustees for their services as Trustees, members or chairpersons of committees
of the Board, Lead Independent Trustee, Chairperson of the Board and any other
positions as the Nominating and Governance Committee considers appropriate. The
Nominating and Governance Committee does not consider Board nomination(s)
recommended by shareholders (acting solely in their capacity as a shareholder
and not in any other capacity). The Nominating and Governance Committee is
comprised of all members of the Board that are Independent Trustees. The
Nominating and Governance Committee met three times during the calendar year
ended December 31, 2006.
Remuneration of Trustees. The Trust pays each Independent Trustee and John
Martinez, an Interested Trustee, an annual fee of $75,000 for meetings of the
Board attended by the Trustee; also the Trust pays Charles Hurty an annual fee
of $20,000 for service as the chairperson of the Board's Audit Committee and
George G. C. Parker an annual fee of $25,000 for service as the Board's Lead
Independent Trustee. During the period January 1, 2006 through December 31,
2006, the Trust paid each Independent Trustee and John Martinez, an Interested
Trustee, an annual fee of $60,000 for meetings of the Board attended by the
Trustee; also the Trust paid Charles Hurty an annual fee of $12,500 for service
as the chairperson of the Board's Audit Committee and George G. C. Parker an
annual fee of $25,000 for service as the Board's Lead Independent Trustee. The
Trust also reimburses each Trustee for travel and other out-of-pocket expenses
incurred by him/her in connection with attending such meetings.
The table below sets forth the total compensation paid to each Interested
Trustee for the calendar year ended December 31, 2006:
Pension or
Aggregate Retirement Total
Compensation Benefits Accrued As Estimated Annual Compensation
from the Part of Trust Benefits Upon From the Fund
Name of Interested Trustee Trust Expenses* Retirement* and Fund Complex**
-------------------------- ------------ ------------------- ---------------- ------------------
Lee T. Kranefuss*** $ 0 Not Applicable Not Applicable $ 0
John E. Martinez $60,000 Not Applicable Not Applicable $120,000
--------
* No Trustee or Officer is entitled to any pension or retirement benefits
from the Trust.
** Includes compensation for service on the Board of Directors of iShares, Inc.
*** Lee T. Kranefuss was not compensated by the Trust due to his employment
with BGI during the time period reflected in the table.
17
The table below sets forth the compensation paid to each Independent Trustee
for the calendar year ended December 31, 2006:
Pension or
Aggregate Retirement Total
Compensation Benefits Accrued As Estimated Annual Compensation
from the Part of Trust Benefits Upon From the Fund
Name of Independent Trustee/3/ Trust Expenses* Retirement* and Fund Complex**
----------------------------- ------------ ------------------- ---------------- ------------------
Richard K. Lyons/1/ $ 50,869 Not Applicable Not Applicable $ 154,413***
George G. C. Parker $ 85,000 Not Applicable Not Applicable $ 170,000
W. Allen Reed/2/ $ 36,250 Not Applicable Not Applicable $ 72,500
John E. Kerrigan $ 60,000 Not Applicable Not Applicable $ 120,000
Charles A. Hurty $ 66,250 Not Applicable Not Applicable $ 132,500
Cecilia H. Herbert $ 60,000 Not Applicable Not Applicable $ 120,000
--------
* No Trustee or Officer is entitled to any pension or retirement benefits
from the Trust.
** Includes compensation for service on the Board of Directors of iShares, Inc.
*** Includes compensation as Trustee for BGIF and MIP, investment companies
with 24 Funds also advised by BGFA and/or for which BGFA provides
administration services.
/1/ Served as Trustee through November 6, 2006.
/2/ Served as Trustee through June 30, 2006.
/3/ Compensation is not shown for Robert H. Silver because he was elected to
serve as an Independent Trustee of the Trust effective March 9, 2007.
The Trustees and officers of the Trust do not own any outstanding shares of the
Fund subject to this SAI as of the date hereof.
Investment Adviser. BGFA serves as investment adviser to the Fund pursuant to
an Investment Advisory Agreement between the Trust and BGFA. BGFA is a
California corporation indirectly owned by Barclays Bank PLC and is registered
as an investment adviser under the Investment Advisers Act of 1940. Under the
Investment Advisory Agreement, BGFA, subject to the supervision of the Board
and in conformity with the stated investment policies of the Fund, manages and
administers the Trust and the investment of the Fund's assets. BGFA is
responsible for placing purchase and sale orders and providing continuous
supervision of the investment portfolio of the Fund.
Under the Investment Advisory Agreement, BGFA is responsible for all expenses
of the Fund, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, except interest expense, and
taxes, brokerage expenses, distribution fees or expenses and extraordinary
expenses. For its investment management services to the Fund, BGFA is paid a
management fee at the annual rates (as a percentage of the Fund's average net
assets) of:
Fund Management Fee
---- --------------
iShares MSCI Kokusai Index Fund............................. 0.25%
The Investment Advisory Agreement with respect to the Fund continues in effect
for two years from its effective date, and thereafter is subject to annual
approval by (i) the Board or (ii) the vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, provided that in
either event such continuance also is approved by a majority of the Board who
are not interested persons (as defined in the 1940 Act) of the Fund, by a vote
cast in person at a meeting called for the purpose of voting on such approval.
The Investment Advisory Agreement with respect to the Fund is terminable
without penalty, on 60-days notice, by the Board or by a vote of the holders of
a majority of the Fund's outstanding voting securities (as defined in the 1940
Act). The Investment Advisory Agreement is also terminable upon 60 days notice
by BGFA and will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
Current interpretations of federal banking laws and regulations (i) may
prohibit Barclays Bank PLC, BGI and BGFA from controlling or underwriting the
shares of the Fund, but (ii) would not prohibit Barclays Bank PLC or BGFA
generally from acting as an investment adviser, administrator, transfer agent
or custodian to the Fund or from purchasing shares as agent for and upon the
order of a customer.
BGFA believes that it may perform advisory and related services for the Trust
without violating applicable banking laws or regulations. However, the legal
requirements and interpretations about the permissible activities of banks and
their affiliates may change in the future. These changes could prevent BGFA
from continuing to perform services for the Trust. If this happens, the Board
would consider selecting other qualified firms. Any new investment advisory
agreement would be subject to shareholder approval.
If current restrictions on bank activities with mutual funds were relaxed,
BGFA, or its affiliates, would consider performing additional services for the
Trust. BGFA cannot predict whether these changes will be enacted, or the terms
under which BGFA, or its affiliates, might offer to provide additional services.
18
Portfolio Managers. Patrick O'Connor and S. Jane Leung (the "Portfolio
Managers") are primarily responsible for the day-to-day management of the
Funds. As of ______, 2007, the Portfolio Managers were also primarily
responsible for the day-to-day management of other iShares Funds and certain
other portfolios and/or accounts as indicated in the table below:
Patrick O'Connor
Types of Accounts Number Total Assets
----------------- ----------------- -----------------
Registered Investment Companies $
Other Pooled Investment Vehicles $
Other Accounts $
Companies, Vehicles or Accounts with
Incentive-Based Fee Arrangements $
S. Jane Leung
Types of Accounts Number Total Assets
----------------- ----------------- -----------------
Registered Investment Companies $
Other Pooled Investment Vehicles $
Other Accounts $
Companies, Vehicles or Accounts with
Incentive-Based Fee Arrangements $
Each of the portfolios or accounts for which the Portfolio Managers are
primarily responsible for the day-to-day management seeks to track the rate of
return, risk profile and other characteristics of independent third-party
indexes by either replicating the same combination of securities that
constitute those indexes or through a representative sampling of the securities
that constitute those indexes based on objective criteria and data. The
Portfolio Managers are required to manage each portfolio or account to meet
those objectives. Pursuant to BGI and BGFA policy, investment opportunities are
allocated equitably among the Fund and other portfolios and accounts. For
example, under certain circumstances, an investment opportunity may be
restricted due to limited supply on the market, legal constraints or other
factors, in which event the investment opportunity will be allocated equitably
among those portfolios and accounts, including the Fund, seeking such
investment opportunity. As a consequence, from time to time the Fund may
receive a smaller allocation of an investment opportunity than they would have
if the Portfolio Managers and BGFA and its affiliates did not manage other
portfolios or accounts.
Like the Fund, the other portfolios or accounts for which the Portfolio
Managers are primarily responsible for the day-to-day portfolio management
generally pay an asset-based fee to BGFA or BGI, as applicable, for its
advisory services. One or more of those other portfolios or accounts, however,
may pay BGI an incentive-based fee in lieu of, or in addition to, an
asset-based fee for its advisory services. A portfolio or account with an
incentive-based fee would pay BGI a portion of that portfolio's or account's
gains, or would pay BGI more for its services than would otherwise be the case
if BGI meets or exceeds specified performance targets. By their very nature,
incentive-based fee arrangements could present an incentive for BGI to devote
greater resources, and allocate more investment opportunities, to the
portfolios or accounts that have those fee arrangements, relative to other
portfolios or accounts, in order to earn larger fees. Although BGI has an
obligation to allocate resources and opportunities equitably among portfolios
and accounts and intends to do so, shareholders of the Fund should be aware
that, as with any group of portfolios and accounts managed by an investment
adviser and/or its affiliates pursuant to varying fee arrangements, including
incentive-based fee arrangements, there is the potential for a
conflict-of-interest that may result in the Portfolio Manager's favoring those
portfolios or accounts with incentive-based fee arrangements.
The below table reflects, for each Portfolio Manager, the number of portfolios
or accounts of the types enumerated in the above table and the aggregate of
total assets in those portfolios or accounts with respect to which the
investment management fees for those portfolios or accounts are based on the
performance of those portfolios or accounts, as of __________, 2007:
Patrick O'Connor
Number of Other Accounts with
Performance Fees Managed Aggregate of Total Assets
----------------------------- -------------------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
19
S. Jane Leung
Number of Other Accounts with Aggregate of
Performance Fees Managed Total Assets
----------------------------- -----------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
As of __________, 2007, with respect to all iShares Funds and other portfolios
and/or accounts managed by the Portfolio Managers, on behalf of BGFA, the
Portfolio Managers receive a salary and are eligible to receive an annual
bonus. Each Portfolio Manager's salary is a fixed amount generally determined
annually based on a number of factors, including, but not limited to, the
Portfolio Manager's title, scope of responsibilities, experience and knowledge.
Each Portfolio Manager's bonus is a discretionary amount determined annually
based on the overall profitability of the various BGI companies worldwide, the
performance of the Portfolio Manager's business unit, and an assessment of the
Portfolio Manager's individual performance. Each Portfolio Manager's salary and
annual bonus are paid in cash. In addition, a Portfolio Manager may be paid a
signing bonus or other amounts in connection with initiation of employment with
BGFA. If a Portfolio Manager satisfied the requirements for being part of a
"select group of management or highly compensated employees (within the meaning
of ERISA section 401(a))" as so specified under the terms of BGI's Compensation
Deferral Plan, the Portfolio Manager may elect to defer a portion of his or her
bonus under that Plan.
Portfolio Managers may be selected, on a fully discretionary basis, for awards
under BGI's Compensation Enhancement Plan ("CEP"). Under CEP, these awards are
determined annually, and vest after two years. At the option of the CEP
administrators, the award may be "notionally invested" in funds managed by BGI,
which means that the final award amount may be increased or decreased according
to the performance of the BGI-managed funds over the two-year period. If the
award is not notionally invested, the original award amount is paid once vested.
A Portfolio Manager may be granted options to purchase shares in Barclays
Global Investors UK Holdings Limited ("BGI UK Holdings"), a company organized
under the laws of England and Wales that directly or indirectly owns all of the
Barclays Global
Investors companies worldwide, which options vest in three equal installments
over three years and are generally exercisable during prescribed exercise
windows. Shares purchased must generally be held 355 days prior to sale. For
such purposes, the value of BGI UK Holdings is based on its fair value as
determined by an independent public accounting firm.
As of __________, 2007, Patrick O'Connor and S. Jane Leung beneficially owned
shares of the Fund for which he or she is primarily responsible for the
day-to-day management in the amounts reflected in the following table:
Patrick O'Connor
Dollar Range
-----------------------------------------------------------------------
$10,001 to $50,001 to $100,001 to $500,001 to over
Fund None $1 to $10k $50k $100k $500k $1million $1million
---- ---- ---------- ---------- ---------- ----------- ----------- ---------
iShares MSCI Kokusai Index
Fund
S. Jane Leung
Dollar Range
-----------------------------------------------------------------------
$10,001 to $50,001 to $100,001 to $500,001 to over
Fund None $1 to $10k $50k $100k $500k $1million $1million
---- ---- ---------- ---------- ---------- ----------- ----------- ---------
iShares MSCI Kokusai Index
Fund
Codes of Ethics. The Trust, BGFA and the Distributor have adopted Codes of
Ethics pursuant to Rule 17j-1 under the 1940 Act. The Codes of Ethics permit
personnel subject to the Codes of Ethics to invest in securities, subject to
certain limitations, including securities that may be purchased or held by the
Fund. The Codes of Ethics are on public file with, and are available from, the
SEC.
Administrator, Custodian and Transfer Agent. State Street Bank and Trust
Company ("State Street") serves as administrator, custodian and transfer agent
for the Fund. State Street's principal address is 200 Clarendon Street, Boston,
MA 02116. Under the Administration Agreement with the Trust, State Street
provides necessary administrative, legal, tax,
20
accounting services, and financial reporting for the maintenance and operations
of the Trust and the Fund. In addition, State Street makes available the office
space, equipment, personnel and facilities required to provide such services.
Under the Custodian Agreement with the Trust, State Street maintains in
separate accounts cash, securities and other assets of the Trust and the Fund,
keeps all necessary accounts and records, and provides other services. State
Street is required, upon the order of the Trust, to deliver securities held by
State Street and to make payments for securities purchased by the Trust for the
Fund. Also, under a Delegation Agreement, State Street is authorized to appoint
certain foreign custodians or foreign custody managers for Fund investments
outside the United States. Pursuant to a Transfer Agency and Service Agreement
with the Trust, State Street acts as a transfer agent for the Fund's authorized
and issued shares of beneficial interest, and as dividend disbursing agent of
the Trust. As compensation for the foregoing services, State Street receives
certain out-of-pocket costs, transaction fees and asset-based fees which are
accrued daily and paid monthly by BGFA from its management fee.
Distributor. The Distributor's principal address is One Freedom Valley Drive,
Oaks, PA 19456. The Distributor has entered into a Distribution Agreement with
the Trust pursuant to which it distributes shares of the Fund. The Distribution
Agreement will continue for two years from its effective date and is renewable
annually. Shares are continuously offered for sale by the Fund through the
Distributor only in Creation Unit Aggregations, as described in the Prospectus
and below in the Creation and Redemption of Creation Units Aggregations
section. Shares in less than Creation Unit Aggregations are not distributed by
the Distributor. The Distributor will deliver the Prospectus and, upon request,
the SAI to persons purchasing Creation Unit Aggregations and will maintain
records of both orders placed with it and confirmations of acceptance furnished
by it. The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934 (the "1934 Act") and a member of the National Association
of Securities Dealers (the "NASD").
The Distribution Agreement for the Fund provides that it may be terminated at
any time, without the payment of any penalty, on at least 60-days prior written
notice to the other party (i) by vote of a majority of the Independent Trustees
or (ii) by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Fund. The Distribution Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations
of shares. Such Soliciting Dealers may also be Authorized Participants (as
defined below), DTC Participants (as defined below) and/or Investor Services
Organizations.
BGFA or BGI may, from time to time and from its own resources, pay, defray or
absorb costs relating to distribution, including payments out of its own
resources to the Distributor, or to otherwise promote the sale of shares.
Index Provider. The Fund is based upon a particular index compiled by MSCI.
MSCI is not affiliated with the Fund or with BGI or its affiliates. The Fund is
entitled to use its Underlying Index pursuant to a sub-licensing agreement with
BGI, which in turn has a licensing agreement with MSCI. BGI has provided the
applicable sub-licenses to the Fund without charge.
Brokerage Transactions
BGFA assumes general supervision over placing orders on behalf of the Fund for
the purchase and sale of portfolio securities. In selecting brokers or dealers
for any transaction in portfolio securities, BGFA's policy is to make such
selection based on factors deemed relevant, including but not limited to, the
breadth of the market in the security, the price of the security, the
reasonableness of the commission or mark-up or mark-down, if any, execution
capability, settlement capability, back office efficiency and the financial
condition of the broker or dealer, both for the specific transaction and on a
continuing basis. The overall reasonableness of brokerage commissions paid is
evaluated by BGFA based upon its knowledge of available information as to the
general level of commissions paid by other institutional investors for
comparable services. Brokers may also be selected because of their ability to
handle special or difficult executions, such as may be involved in large block
trades, less liquid securities, broad distributions, or other circumstances.
BGFA does not consider the provision or value of research, products or services
a broker or dealer may provide, if any, as a factor in the selection of a
broker or dealer or the determination of the reasonableness of commissions paid
in connection with portfolio transactions. The Trust has adopted policies and
procedures that prohibit the consideration of sales of the Fund's shares as a
factor in the selection of a broker or a dealer to execute its portfolio
transactions.
The Fund's purchase and sale orders for securities may be combined with those
of other investment companies, clients or accounts that BGFA manages or
advises, and for which it has brokerage placement authority. If purchases or
sales of portfolio securities of the Fund and one or more other accounts
managed or advised by BGFA are considered at or about the same time,
transactions in such securities are allocated among the Fund and the other
accounts in a manner deemed equitable to all by BGFA. In some cases, this
procedure could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. However, in other cases, it is
possible that the ability to participate in volume transactions and to
negotiate lower transaction costs will be beneficial to the Fund. BGFA may
deal, trade and invest for its own account in the types of securities in which
the Fund may invest. BGFA may, from time to time, effect trades on behalf of
and for the account of the Fund with brokers or dealers that are affiliated
with BGFA, in conformity with the 1940 Act and SEC rules
21
and regulations. Under these provisions, any commissions paid to affiliated
brokers or dealers must be reasonable and fair compared to the commissions
charged by other brokers or dealers in comparable transactions. The Fund will
not deal with affiliates in principal transactions unless permitted by
applicable SEC rule or regulation or by SEC exemptive order.
Portfolio turnover may vary from year to year, as well as within a year. High
turnover rates may result in comparatively greater brokerage expenses.
Additional Information Concerning the Trust
Shares. The Trust currently is comprised of over 100 Funds. The Trust issues
shares of beneficial interest in the Fund with no par value. The Board may
designate additional Funds.
Each share issued by the Fund has a pro rata interest in the assets of the
Fund. Shares have no preemptive, exchange, subscription or conversion rights
and are freely transferable. Each share is entitled to participate equally in
dividends and distributions declared by the Board with respect to the Fund, and
in the net distributable assets of the Fund on liquidation.
Each share has one vote with respect to matters upon which a shareholder vote
is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of the Fund vote together as a single class
except that, if the matter being voted on affects only the Fund, and, if a
matter affects the Fund differently from other funds, the Fund will vote
separately on such matter.
Under Delaware law, the Trust is not required to hold an annual meeting of
shareholders unless required to do so under the 1940 Act. The policy of the
Trust is not to hold an annual meeting of shareholders unless required to do so
under the 1940 Act. All shares (regardless of the Fund) have noncumulative
voting rights for the Board. Under Delaware law, Trustees of the Trust may be
removed by vote of the shareholders.
Following the creation of the initial Creation Unit Aggregation(s) of shares of
the Fund and immediately prior to the commencement of trading in the Fund's
shares, a holder of shares may be a "control person" of the Fund, as defined in
the 1940 Act. The Fund cannot predict the length of time for which one or more
shareholders may remain a control person of the Fund.
Shareholders may make inquiries by writing to the Trust, c/o the Distributor,
SEI Investments Distribution Co., at One Freedom Valley Drive, Oaks, PA 19456.
Absent an applicable exemption or other relief from the SEC or its staff,
beneficial owners of more than 5% of the shares of a Fund may be subject to the
reporting provisions of Section 13 of the 1934 Act and the SEC's rules
promulgated thereunder. In addition, absent an applicable exemption or other
relief from the SEC staff, officers and Trustees of a Fund and beneficial
owners of 10% of the shares of such Fund ("Insiders") may be subject to the
insider reporting, short-swing profit and short sale provisions of Section 16
of the 1934 Act and the SEC's rules promulgated thereunder. Beneficial owners
and Insiders should consult with their own legal counsel concerning their
obligations under Sections 13 and 16 of the 1934 Act.
Termination of the Trust or the Fund. The Trust or the Fund may be terminated
by a majority vote of the Board or the affirmative vote of a supermajority of
the holders of the Trust or the Fund entitled to vote on termination. Although
the shares are not automatically redeemable upon the occurrence of any specific
event, the Trust's organizational documents provide that the Board will have
the unrestricted power to alter the number of shares in a Creation Unit
Aggregation. In the event of a termination of the Trust or the Fund, the Board,
in its sole discretion, could determine to permit the shares to be redeemable
in aggregations smaller than Creation Unit Aggregations or to be individually
redeemable. In such circumstance, the Trust may make redemptions in-kind, for
cash, or for a combination of cash or securities.
DTC as Securities Depository for the Shares of the Trust. Shares of the Fund
are represented by securities registered in the name of DTC or its nominee and
deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of its
participants ("DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities'
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange, the
American Stock Exchange and the NASD. Access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly ("Indirect Participants").
Beneficial ownership of shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and
Indirect Participants. Ownership of beneficial interests in shares (owners of
such beneficial interests
22
are referred to herein as "Beneficial Owners") is shown on, and the transfer of
ownership is effected only through, records maintained by DTC (with respect to
DTC Participants) and on the records of DTC Participants (with respect to
Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written
confirmation relating to their purchase of shares.
Conveyance of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the shares of the Fund held
by each DTC Participant. The Trust shall inquire of each such DTC Participant
as to the number of Beneficial Owners holding shares, directly or indirectly,
through such DTC Participant. The Trust shall provide each such DTC Participant
with copies of such notice, statement or other communication, in such form,
number and at such place as such DTC Participant may reasonably request, in
order that such notice, statement or communication may be transmitted by such
DTC Participant, directly or indirectly, to such Beneficial Owners. In
addition, the Trust shall pay to each such DTC Participant a fair and
reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares of the Trust. DTC or its nominee, upon receipt
of any such distributions, shall credit immediately DTC Participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in shares of the Fund as shown on the records of DTC or its nominee. Payments
by DTC Participants to Indirect Participants and Beneficial Owners of shares
held through such DTC Participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in a "street name", and will
be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or
for any other aspect of the relationship between DTC and the DTC Participants
or the relationship between such DTC Participants and the Indirect Participants
and Beneficial Owners owning through such DTC Participants. DTC may decide to
discontinue providing its service with respect to shares of the Trust at any
time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
Creation and Redemption of Creation Unit Aggregations
Creation. The Trust issues and sells shares of the 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 (as defined
below), of an order in proper form.
A "Business Day" with respect to the Fund is any day the Listing Exchange on
which the Fund is listed for trading is open for business. As of the date of
this SAI, the Listing Exchange observes the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Fund Deposit. The consideration for purchase of Creation Unit Aggregations of
the Fund generally consists of the in-kind deposit of a designated portfolio of
equity securities, (i.e., the Deposit Securities), which constitutes a
substantial replication, or a portfolio sampling representation, of the
securities involved in the relevant Fund's Underlying Index and 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 the
Fund.
The Cash Component is sometimes also referred to as the "Balancing Amount." The
Cash Component serves the function of compensating 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," which
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 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 shall be the sole responsibility of the Authorized
Participant (as described below).
23
BGFA, through the NSCC, makes available on each Business Day, prior to the
opening of business on the applicable Listing 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 the Fund. Such Deposit Securities are applicable, subject to
any adjustments as described below, in order to effect creations of Creation
Unit Aggregations of the 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 the Fund changes as rebalancing adjustments, corporate action
events are reflected from time to time by BGFA with a view to the investment
objective of the 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 Underlying Index.
The Trust reserves the right to permit or require the substitution of an amount
of cash (i.e., a "cash in lieu" amount) to be added to the 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 or the Clearing Process (discussed below). 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 (as described below) 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 or resulting from certain corporate actions.
Procedures for Creation of Creation Unit Aggregations. To be eligible to place
orders with the Distributor and to create a Creation Unit Aggregation of the
Fund, an entity must be: (i) a "Participating Party," i.e., a broker-dealer or
other participant in the clearing process through the Continuous Net Settlement
System of the NSCC (the "Clearing Process"), a clearing agency that is
registered with the SEC; or (ii) a DTC Participant (see the Book-Entry Only
System section), and, in each case, must have executed an agreement with the
Distributor with respect to creations and redemptions of Creation Unit
Aggregations ("Participant Agreement") (discussed below). A Participating Party
and DTC Participant who has executed a Participant Agreement are collectively
referred to as an "Authorized Participant." Investors should contact the
Distributor for the names of Authorized Participants that have signed a
Participant Agreement. All shares of a Fund, however created, will be entered
on the records of DTC in the name of Cede & Co. for the account of a DTC
Participant.
All orders to create shares must be placed for one or more Creation Unit
Aggregations. Orders to create Creation Unit Aggregations of the Fund cannot be
placed through the Clearing Process. All orders to create Creation Unit
Aggregations, whether through the Clearing Process (through a Participating
Party) or outside the Clearing Process (through a DTC Participant), must be
received by the Distributor no later than the closing time of the regular
trading session on the Listing Exchange ("Closing Time") (ordinarily 4:00 p.m.,
Eastern time) in each case on the date such order is placed in order for
creation of Creation Unit Aggregations to be effected based on the NAV of
shares of the Fund as next determined on such date after receipt of the order
in proper form. The date on which an order to create Creation Unit Aggregations
(or an order to redeem Creation Unit Aggregations, as discussed below) is
placed is referred to as the "Transmittal Date." Orders must be transmitted by
an Authorized Participant by telephone or other transmission method acceptable
to the Distributor pursuant to procedures set forth in the Participant
Agreement, as described below. Economic or market disruptions or changes, or
telephone or other communication failure, may impede the ability to reach the
Distributor or an Authorized Participant.
All orders to create Creation Unit Aggregations shall be placed with an
Authorized Participant, as applicable, in the form required by such Authorized
Participant. In addition, the Authorized Participant may request the investor
make certain representations or enter into agreements with respect to the
order, (e.g., to provide for payments of cash), when required. Investors should
be aware that their particular broker may not have executed a Participant
Agreement and, therefore, orders to create Creation Unit Aggregations of the
Fund may have to be placed by the investor's broker through an Authorized
Participant that has executed a Participant Agreement. In such cases, there may
be additional charges to such investor. At any given time, there may be only a
limited number of broker-dealers that have executed a Participant Agreement
and, to the extent needed, only a small number of such Authorized Participants
may have international capabilities.
Those placing orders for Creation Unit Aggregations of the Fund should
ascertain the applicable deadline for cash transfers by contacting the
operations department of the broker or depositary institution making the
transfer of the Cash Component. This deadline is likely to be significantly
earlier than the Closing Time of the regular trading session on the Listing
Exchange. Investors should be aware that the Authorized Participant may require
orders for Creation Units placed with it to be in the form required by the
individual Authorized Participant, which form may not be the same as the form
of purchase order specified by the Trust that the Authorized Participant must
deliver to the Distributor.
Placement of Creation Orders for Domestic Funds Using the Clearing Process. The
Clearing Process is the process of creating or redeeming Creation Unit
Aggregations. Fund Deposits made through the Clearing Process must be delivered
through a Participating Party that has executed a Participant Agreement. The
Participant Agreement authorizes the
24
Distributor to transmit through State Street to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit
Securities and the Cash Component to the Trust, together with such additional
information as may be required by the Distributor. An order to create Creation
Unit Aggregations through the Clearing Process is deemed received by the
Distributor on the Transmittal Date if: (i) such order is received by the
Distributor not later than the Closing Time on such Transmittal Date; and
(ii) all other procedures set forth in the Participant Agreement are properly
followed.
Placement of Creation Orders for Domestic Funds Outside the Clearing Process.
Fund Deposits made outside the Clearing Process must be delivered through a DTC
Participant that has executed a Participant Agreement. A DTC Participant who
wishes to place an order creating Creation Unit Aggregations to be effected
outside the Clearing Process does not need to be a Participating Party, but
such orders must state that the DTC Participant is not using the Clearing
Process and that the creation of Creation Unit Aggregations will instead be
effected through a transfer of securities and cash directly through DTC. The
Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal
Date 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
2:00 p.m., Eastern time, on the "Settlement Date". The Settlement Date is
typically the third Business Day following the Transmittal Date. However, the
Settlement Date for certain funds based on international indexes is typically
the second Business Day following the Transmittal Date and the Fund reserves
the right to settle transactions on a basis other than T+3. In certain cases
Authorized Participants will create and redeem Creation Unit Aggregations of
the same Fund on the same trade date. In these instances, the Trust reserves
the right to settle these transactions on a net basis.
All questions as to the number of Deposit Securities to be delivered, and the
validity, form and eligibility (including time of receipt) for the deposit of
any tendered securities, will be determined by the Trust, whose determination
shall be final and binding. The amount of cash equal to the Cash Component must
be transferred directly to State Street through the Federal Reserve Bank wire
transfer system in a timely manner so as to be received by State Street no
later than 2:00 p.m., Eastern time, on the Settlement Date. An order to create
Creation Unit Aggregations outside the Clearing Process is deemed received by
the Distributor on the Transmittal Date if: (i) such order is received by the
Distributor not later than the Closing Time on such Transmittal Date; and
(ii) all other procedures set forth in the Participant Agreement are properly
followed. However, if State Street does not receive both the required Deposit
Securities and the Cash Component by 2:00 p.m., Eastern time on the Settlement
Date, such order may be canceled. Upon written notice to the Distributor, such
canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then current NAV of the Fund. The
delivery of Creation Unit Aggregations so created generally will occur no later
than the Settlement Date.
An additional charge of up to three (3) times the normal transaction fee (for a
total charge of up to four (4) times the normal transaction fee) may be imposed
with respect to transactions effected outside the Clearing Process (through a
DTC participant) and in the limited circumstances in which any cash can be used
in lieu of Deposit Securities to create Creation Units. This charge is subject
to a limit not to exceed 0.1% (10 basis points) of the value of one Creation
Unit at the time of creation.
Creation Unit Aggregations of funds based on domestic indexes may be created in
advance of receipt by the Trust of all or a portion of the applicable Deposit
Securities as described below. In these circumstances, the initial deposit will
have a value greater than the NAV of the shares on the date the order is placed
in proper form since, in addition to available Deposit Securities, cash must be
deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) at
least 105%, which BGFA may change from time to time, of the market value of the
undelivered Deposit Securities (the "Additional Cash Deposit") with the Fund
pending delivery of any missing Deposit Securities.
If an Authorized Participant determines to post an additional cash deposit as
collateral for any undelivered Deposit Securities, such Authorized Participant
must deposit with State Street the appropriate amount of federal funds by 2:00
p.m., Eastern time, on the date of requested settlement. If the Authorized
Participant does not place its purchase order by the closing time or State
Street does not receive federal funds in the appropriate amount by such time,
then the order may be deemed to be rejected and the Authorized Participant
shall be liable to the Fund for losses, if any, resulting therefrom. An
additional amount of cash shall be required to be deposited with State Street,
pending delivery of the missing Deposit Securities to the extent necessary to
maintain the Additional Cash Deposit with the Trust in an amount at least equal
to 105%, which BGFA may change from time to time, of the daily marked to market
value of the missing Deposit Securities. To the extent that missing Deposit
Securities are not received by 2:00 p.m., Eastern time, on the Settlement Date
or in the event a marked-to-market payment is not made within one Business Day
following notification by the Distributor that such a payment is required, the
Trust may use the cash on deposit to purchase the missing Deposit Securities.
Authorized Participants will be liable to the Trust for the costs incurred by
the Trust in connection with any such purchases. These costs will be deemed to
include the amount by which the actual purchase price of the Deposit Securities
exceeds the market value of such Deposit Securities on the transmittal date
plus the brokerage and related transaction costs associated with such
purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by State Street or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee, as listed below,
25
will be charged in all cases. The delivery of Creation Unit Aggregations so
created generally will occur no later than the Settlement Date.
Placement of Creation Orders for Foreign Funds. Fund Deposits in connection
with the Fund will not be made either through the Clearing Process or through
DTC. For the Fund, State Street shall cause the sub-custodian of the Fund to
maintain an account into which the Authorized Participant shall deliver, on
behalf of itself or the party on whose behalf it is acting, the securities
included in the designated Fund Deposit (or the cash value of all or part of
such securities, in the case of a permitted or required cash purchase or "cash
in lieu" amount), with any appropriate adjustments as advised by the Trust.
Deposit Securities must be delivered to an account maintained at the applicable
local sub-custodian(s). Orders to purchase Creation Unit Aggregations must be
received by the Distributor from an Authorized Participant on its own or
another investor's behalf by the closing time of the regular trading session on
the applicable Listing Exchange on the relevant Business Day. However, when a
relevant local market is closed due to local market holidays, the local market
settlement process will not commence until the end of the local holiday period.
Settlement must occur by 2:00 p.m., Eastern time, on the contractual settlement
date.
The Authorized Participant must also make available no later than 2:00 p.m.,
Eastern time, on the contractual settlement date, by means satisfactory to the
Trust, immediately-available or same-day funds estimated by the Trust to be
sufficient to pay the Cash Component next determined after acceptance of the
purchase order, together with the applicable purchase transaction fee. Any
excess funds will be returned following settlement of the issue of the Creation
Unit Aggregation.
To the extent contemplated by the applicable Participant Agreement, Creation
Unit Aggregations of the Fund will be issued to such Authorized Participant
notwithstanding the fact that the corresponding Fund Deposits have not been
received in part or in whole, in reliance on the undertaking of the Authorized
Participant to deliver the missing Deposit Securities as soon as possible,
which undertaking shall be secured by such Authorized Participant's delivery
and maintenance of collateral consisting of cash in the form of U.S. dollars in
immediately available funds having a value (marked to market daily) at least
equal to 110%, which BGFA may change from time to time of the value of the
missing Deposit Securities. Such cash collateral must be delivered no later
than 2:00 p.m., Eastern time, on the contractual settlement date. The
Participant Agreement will permit the Fund to buy the missing Deposit
Securities at any time and will subject the Authorized Participant to liability
for any shortfall between the cost to the Trust of purchasing such securities
and the value of the collateral.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves the
absolute right to reject a creation order transmitted to it by the Distributor
in respect of the Fund if: (i) the order is not in proper form; (ii) the
investor(s), upon obtaining the shares ordered, would own 80% or more of the
currently outstanding shares of the Fund; (iii) the Deposit Securities
delivered are not as disseminated through the facilities of the NSCC for that
date by BGFA, as described above; (iv) acceptance of the Deposit Securities
would have certain adverse tax consequences to the Fund; (v) acceptance of the
Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of
the Fund Deposit would otherwise, in the discretion of the Trust or BGFA, have
an adverse effect on the Trust or the rights of Beneficial Owners; or (vii) in
the event that circumstances outside the control of the Trust, State Street,
the Distributor or BGFA makes it, for all practical purposes, impossible to
process creation orders. Examples of such circumstances include acts of God;
public service or utility problems such as fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the Trust,
BGFA, the Distributor, DTC, NSCC, State Street or sub-custodian or any other
participant in the creation process; and similar extraordinary events. The
Distributor shall notify a prospective creator of a Creation Unit and/or the
Authorized Participant acting on behalf of the creator of a Creation Unit
Aggregation of its rejection of the order of such person. The Trust, State
Street, a sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall any of them incur any liability for the failure to give any such
notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of
any securities to be delivered shall be determined by the Trust, and the
Trust's determination shall be final and binding.
Creation Transaction Fee. A purchase transaction fee is imposed for the
transfer and other transaction costs of the Fund 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 a purchaser on the same
day. Purchasers of Creation Units of shares for cash are required to pay an
additional variable charge to compensate for brokerage and market impact
expenses. Where the Trust permits an in-kind purchaser to substitute cash in
lieu of depositing a portion of the Deposit Securities, the purchaser will be
assessed the additional variable charge for cash purchases on the "cash in
lieu" portion of its investment. Investors will also bear the costs of
transferring the Deposit Securities to the Trust. Investors who use the
services of a broker or other such intermediary may be charged a fee for such
services.
26
The following table sets forth the standard and maximum creation transaction
fees for the Fund:
Standard Creation Maximum Creation
Fund Transaction Fee* Transaction Fee*
---- ----------------- ----------------
iShares MSCI Kokusai Index Fund $[ ] $[ ]
--------
* If a Creation Unit is purchased outside the usual process through the NSCC or
for cash, a variable fee will be charged up to four times the standard
creation or redemption transaction fee.
Redemption of Shares in Creation Units 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 the Fund through State Street and
only on a Business Day. The 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. There can be no assurance, however, that
there will be sufficient liquidity in the public trading market at any time to
permit assembly of a Creation Unit Aggregation. Investors should expect to
incur brokerage and other costs in connection with assembling a sufficient
number of shares to constitute a redeemable Creation Unit Aggregation.
With respect to the Fund, BGFA, through the NSCC and the Distributor, makes
available immediately prior to the opening of business on the applicable
Listing Exchange (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 (as
described below) on that day ("Fund Securities"). 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 the 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 as listed below. In the event that
the Fund Securities have a value greater then the NAV of the shares, a
compensating cash payment equal to the difference is required to be made by or
through an Authorized Participant by the redeeming shareholder.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and the Fund (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Unit
Aggregations for cash to the extent that the Trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first
registering the Fund Securities under such laws. An Authorized Participant or
an investor for which it is acting subject to a legal restriction with respect
to a particular stock included in the Fund Securities applicable to the
redemption of a Creation Unit Aggregation may be paid an equivalent amount of
cash. This would specifically prohibit delivery of Fund Securities that are not
registered in reliance upon Rule 144A under the Securities Act to a redeeming
Beneficial Owner that is not a "qualified institutional buyer", as such term is
defined under Rule 144A of the Securities Act. The Authorized Participant may
request the redeeming Beneficial Owner of the shares to complete an order form
or to enter into agreements with respect to such matters as compensating cash
payment.
The right of redemption may be suspended or the date of payment postponed with
respect to the Fund: (i) for any period during which the Listing Exchange is
closed (other than customary weekend and holiday closings); (ii) for any period
during which trading on the Listing Exchange is suspended or restricted;
(iii) for any period during which an emergency exists as a result of which
disposal of the shares of the Fund or determination of the Fund's NAV is not
reasonably practicable; or (iv) in such other circumstances as is permitted by
the SEC.
Placement of Redemption Orders for Domestic Funds Using the Clearing Process.
Orders to redeem Creation Unit Aggregations of funds based on domestic indexes
through the Clearing Process must be delivered through a Participating Party
that has executed the Participant Agreement. An order to redeem Creation Unit
Aggregations using the Clearing Process is deemed received by the Trust on the
Transmittal Date if (i) such order is received by State Street not later than
the Closing Time on such Transmittal Date; and (ii) all other procedures set
forth in the Participant Agreement are properly followed. Such order will be
effected based on the NAV of the Fund as next determined. An order to redeem
Creation Unit Aggregations using the Clearing Process made in proper form but
received by the Trust after the Closing Time, will be deemed received on the
next Business Day immediately following the Transmittal Date and will be
effected at the NAV next determined on such Business Day. The requisite Fund
Securities and the Cash Redemption Amount will be transferred by the third NSCC
Business Day following the date on which such request for redemption is deemed
received.
Placement of Redemption Orders for Domestic Funds Outside the Clearing Process.
Orders to redeem Creation Unit Aggregations of funds based on domestic indexes
outside the Clearing Process must be delivered through a DTC Participant that
has executed the Participant Agreement. A DTC Participant who wishes to place
an order for redemption of Creation Unit Aggregations to be effected outside
the Clearing Process does not need to be a Participating Party, but such orders
must state that the DTC Participant is not using the Clearing Process and that
redemption of Creation Unit Aggregations will instead be effected through
transfer of shares directly through DTC. An order to redeem Creation Unit
Aggregations outside
27
the Clearing Process is deemed received by the Trust on the Transmittal Date
if: (i) such order is received by State Street not later than the Closing Time
on such Transmittal Date; (ii) such order is accompanied or followed by the
requisite number of shares of the Fund specified in such order, which delivery
must be made through DTC to State Street no later than 11:00 a.m., Eastern
time, on the contracted settlement date; and (iii) all other procedures set
forth in the Participant Agreement are properly followed. After the Trust has
deemed an order for redemption outside the Clearing Process received, the Trust
will initiate procedures to transfer the requisite Fund Securities which are
expected to be delivered within three Business Days and the Cash Redemption
Amount to the Authorized Participant on behalf of the redeeming Beneficial
Owner by the Settlement Date. In certain cases Authorized Participants will
redeem and create Creation Unit Aggregations of the same Fund on the same trade
date. In these instances, the Trust reserves the right to settle these
transactions on a net basis.
Placement of Redemption Orders for Foreign Funds. Orders to redeem Creation
Unit Aggregations of the Fund must be delivered through an Authorized
Participant that has executed a Participant Agreement. Investors other than
Authorized Participants are responsible for making arrangements for a
redemption request to be made through an Authorized Participant. An order to
redeem Creation Unit Aggregations of the Fund is deemed received by the Trust
on the Transmittal Date if: (i) such order is received by State Street not
later than the Closing Time on the Transmittal Date; (ii) such order is
accompanied or followed by the requisite number of shares of the Fund specified
in such order, which delivery must be made through DTC to State Street no later
than 10:00 a.m., Eastern time, on the next Business Day following the
Transmittal Date; and (iii) all other procedures set forth in the Participant
Agreement are properly followed. Deliveries of Fund Securities to redeeming
investors generally will be made within three Business Days. Due to the
schedule of holidays in certain countries, however, the delivery of in-kind
redemption proceeds for the Fund may take longer than three Business Days after
the day on which the redemption request is received in proper form. In such
cases, the local market settlement procedures will not commence until the end
of the local holiday periods.
In connection with taking delivery of shares of Fund Securities upon redemption
of shares of the Fund, a redeeming Beneficial Owner, or Authorized Participant
acting on behalf of such Beneficial Owner must maintain appropriate security
arrangements with a qualified broker-dealer, bank or other custody provider in
each jurisdiction in which any of the Fund Securities are customarily traded,
to which account such Fund Securities will be delivered.
To the extent contemplated by an Authorized Participant's agreement, in the
event the Authorized Participant has submitted a redemption request in proper
form but is unable to transfer all or part of the Creation Unit Aggregation to
be redeemed to the Fund's Transfer Agent, the Distributor will nonetheless
accept the redemption request in reliance on the undertaking by the Authorized
Participant to deliver the missing shares as soon as possible. Such undertaking
shall be secured by the Authorized Participant's delivery and maintenance of
collateral consisting of cash having a value (marked to market daily) at least
equal to 110%, which BGFA may change from time to time, of the value of the
missing shares.
The current procedures for collateralization of missing shares require, among
other things, that any cash collateral shall be in the form of U.S. dollars in
immediately-available funds and shall be held by State Street and marked to
market daily, and that the fees of State Street and any sub-custodians in
respect of the delivery, maintenance and redelivery of the cash collateral
shall be payable by the Authorized Participant. The Authorized Participant's
agreement will permit the Trust, on behalf of the affected Fund, to purchase
the missing shares or acquire the Deposit Securities and the Cash Component
underlying such shares at any time and will subject the Authorized Participant
to liability for any shortfall between the cost to the Trust of purchasing such
shares, Deposit Securities or Cash Component and the value of the collateral.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by State Street on the
Business Day on which a redemption order is deemed received by the Trust.
Therefore, if a redemption order in proper form is submitted to State Street by
a DTC Participant not later than Closing Time on the Transmittal Date, and the
requisite number of shares of the Fund are delivered to State Street prior to
the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash
Redemption Amount to be delivered will be determined by State Street on such
Transmittal Date. If, however, a redemption order is submitted to State Street
by a DTC Participant not later than the Closing Time on the Transmittal Date
but either (i) the requisite number of shares of the relevant Fund are not
delivered by the DTC Cut-Off-Time, as described above, on such Transmittal
Date, or (ii) the redemption order is not submitted in proper form, then the
redemption order will not be deemed received as of the Transmittal Date. In
such case, the value of the Fund Securities and the Cash Redemption Amount to
be delivered will be computed on the Business Day that such order is deemed
received by the Trust, (i.e., the Business Day on which the shares of the
relevant Fund are delivered through DTC to State Street by the DTC
Cut-Off-Time) on such Business Day pursuant to a properly submitted redemption
order.
If it is not possible to effect deliveries of the Fund Securities, the Trust
may in its discretion exercise its option to redeem such shares in cash, and
the redeeming Beneficial Owner will be required to receive its redemption
proceeds in cash. In addition, an investor may request a redemption in cash
that the Fund may, in its sole discretion, permit. In either case, the investor
will receive a cash payment equal to the NAV of its shares based on the NAV of
shares of the relevant Fund next determined after the redemption request is
received in proper form (minus a redemption transaction fee and additional
charge for requested cash redemptions specified above, to offset the Trust's
brokerage and other transaction costs associated with the
28
disposition of Fund Securities). A Fund may also, in its sole discretion, upon
request of a shareholder, provide such redeemer a portfolio of securities that
differs from the exact composition of the Fund Securities but does not differ
in NAV.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and the Fund (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Unit
Aggregations for cash to the extent that the Trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first
registering the Fund Securities under such laws. An Authorized Participant or
an investor for which it is acting subject to a legal restriction with respect
to a particular stock included in the Fund Securities applicable to the
redemption of a Creation Unit Aggregation may be paid an equivalent amount of
cash. The Authorized Participant may request the redeeming Beneficial Owner of
the shares to complete an order form or to enter into agreements with respect
to such matters as compensating cash payment.
Because the Portfolio Securities of the Fund may trade on the relevant
exchange(s) on days that the Listing Exchange for the Foreign Fund is closed or
are otherwise not Business Days for the Fund, stockholders may not be able to
redeem their shares of the Fund, or to purchase and sell shares of the Fund on
the Listing Exchange for the Fund, on days when the NAV of the Fund could be
significantly affected by events in the relevant foreign markets.
Redemption Transaction Fee. A redemption transaction fee is imposed to offset
transfer and other transaction costs that may be incurred by the Fund. The fee
is a single charge and will be the same regardless of the number of Creation
Units redeemed by an investor on the same day. The redemption transaction fees
for redemptions in kind and for cash and the additional variable charge for
cash redemptions (when cash redemptions are available or specified) are listed
below. 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 following table sets forth the standard and maximum redemption transaction
fees for the Fund:
Standard Redemption Maximum Redemption
Fund Transaction Fee* Transaction Fee*
---- ------------------- ------------------
iShares MSCI Kokusai Index Fund $[ ] $[ ]
--------
* If a Creation Unit is redeemed outside the usual process through the NSCC or
for cash, a variable fee will be charged up to four times the standard
creation or redemption transaction fee.
Taxes
Registered Investment Company Qualifications. The Fund intends to qualify for
and to elect treatment as a separate RIC under Subchapter M of the IRC. To
qualify for treatment as a RIC, the Fund must annually distribute at least 90%
of its net investment company taxable income (which includes dividends,
interest and net short-term capital gains) and meet several other requirements.
Among such other requirements are the following: (i) at least 90% of the Fund's
annual gross income must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies, and net income derived from
an interest in a qualified publicly traded partnership (i.e., a partnership
that is traded on an established securities market or tradable on a secondary
market, other than a partnership that derives 90% of its income from interest,
dividends, capital gains and other traditional permitted mutual fund income);
and (ii) at the close of each quarter of the company's taxable year, (a) at
least 50% of the market value of the Fund's total assets must be represented by
cash and cash items, U.S. government securities, securities of other RICs 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 each 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
each Fund's total assets may be invested in the securities of any one issuer,
of two or more issuers of which the Fund holds 20% or more of the voting stock,
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 RICs) or the securities of one or more qualified publicly traded
partnerships. The Fund's investments in partnerships, including in qualified
publicly traded partnerships, may result in the Fund being subject to state,
local or foreign income, franchise or withholding tax liabilities.
29
Taxation of RICs. As aRIC, the Fund will not be subject to U.S. federal income
tax on the portion of its taxable investment income and capital gains that it
distributes to its shareholders. Although the Fund intends to distribute
substantially all of its net investment income and its capital gains for each
taxable year, the Fund will be subject to federal income taxation to the extent
any such income or gains are not distributed. If the Fund fails to qualify for
any taxable year as a RIC, all of its taxable income will be subject to tax at
regular corporate income tax rates without any deduction for distributions to
shareholders, and such distributions generally will be taxable to shareholders
as ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. In such event, distributions to individuals should be
eligible to be treated as qualified dividend income for taxable years beginning
prior to January 1, 2001, and distributions to corporate shareholders generally
should be eligible for the dividends-received deduction. Moreover, if the Fund
fails to qualify as a RIC in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a RIC. If the Fund fails
to qualify as a RIC for a period greater than two taxable years, the Fund may
be required to recognize any net built-in gains with respect to certain of its
assets (i.e., the excess of the aggregate gains, including items of income,
over aggregate losses that would have been realized with respect to such assets
if the Fund had been liquidated) if it qualifies as a RIC in a subsequent year.
If the Fund's distribution exceed its current and accumulated earnings and
profits, all or a portion of the distributors made in the taxable year may be
recharacterized as a return of capital to shareholders. A return of capital
distribution generally will not be taxable but will reduce the shareholder's
cost basis and result in a higher capital gain or lower capital loss when those
shares on which the distribution was received are sold.
Excise Tax. The Fund will be subject to a 4% excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year at least 98% of its ordinary income for the calendar year plus
98% of its capital gain net income for the twelve months ended October 31 of
such year. The Fund intends to declare and distribute dividends and
distributions in the amounts and at the times necessary to avoid the
application of this 4% excise tax.
Taxation of Certain Derivatives. The Fund's transactions in zero coupon
securities, foreign currencies, forward contracts, options and futures
contracts (including options and futures contracts on foreign currencies), to
the extent permitted, will be subject to special provisions of the Code
(including provisions relating to "hedging transactions" and "straddles") that,
among other things, may affect the character of gains and losses realized by
the Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer Fund losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out at the end of each year) and (b) may cause the Fund to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. The Fund will monitor its transactions, will
make the appropriate tax elections and will make the appropriate entries in its
books and records when it acquires any foreign currency, forward contract,
futures contract or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a RIC.
The Fund's investment in so-called "section 1256 contracts," such as regulated
futures contracts, most foreign currency forward contracts traded in the
interbank market and options on most stock indexes, are subject to special tax
rules. All section 1256 contracts held by the Fund at the end of its taxable
year are required to be marked to their market value, and any unrealized gain
or loss on those positions will be included in the Fund's income as if each
position had been sold for its fair market value at the end of the taxable
year. The resulting gain or loss will be combined with any gain or loss
realized by the Fund from positions in section 1256 contracts closed during the
taxable year. Provided such positions were held as capital assets and were not
part of a "hedging transaction" nor part of a "straddle," 60% of the resulting
net gain or loss will be treated as long-term capital gain or loss, and 40% of
such net gain or loss will be treated as short-term capital gain or loss,
regardless of the period of time the positions were actually held by the Fund.
As a result of entering into swap contracts, the Fund may make or receive
periodic net payments. The Fund may also make or receive a payment when a swap
is terminated prior to maturity through an assignment of the swap or other
closing transaction. Periodic net payments will generally constitute ordinary
income or deductions, while termination of a swap will generally result in
capital gain or loss (which will be a long-term capital gain or loss if the
Fund has been a party to the swap for more than one year). The tax treatment of
many types of credit default swaps is uncertain.
Taxation of U.S. Shareholders. Dividends and other distributions by the Fund
are generally treated under the IRC as received by the shareholders at the time
the dividend or distribution is made. However, any dividend or distribution
declared by the Fund in October, November or December of any calendar year and
payable to shareholders of record on a specified date in such a month shall be
deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by the Fund not later than such
December 31, provided such dividend is actually paid by the Fund during January
of the following calendar year.
The Fund intends to distribute annually to its shareholders substantially all
of its investment company taxable income, and any net realized long-term
capital gains in excess of net realized short-term capital losses (including
any capital loss carryovers). However, if the Fund retains for investment an
amount equal to all or a portion of its net long-term capital gains in excess
of its net short-term capital losses (including any capital loss carryovers),
it will be subject to a corporate tax
30
(currently at a maximum rate of 35%) on the amount retained. In that event, the
Fund will designate such retained amounts as undistributed capital gains in a
notice to its shareholders who (a) will be required to include in income for
U.S. federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (b) will be entitled to
credit their proportionate shares of the 35% tax paid by the Fund on the
undistributed amount against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent their credits exceed their liabilities, if
any, and (c) will be entitled to increase their tax basis, for U.S. federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income. Organizations
or persons not subject to U.S. federal income tax on such capital gains will be
entitled to a refund of their pro rata share of such taxes paid by the Fund
upon filing appropriate returns or claims for refund with the Internal Revenue
Service (the "IRS").
Distributions of net realized long-term capital gains, if any, that the Fund
designates as capital gains dividends are taxable as long-term capital gains,
whether paid in cash or in shares and regardless of how long a shareholder has
held shares of the Fund. All other dividends of the Fund (including dividends
from short-term capital gains) from its current and accumulated earnings and
profits ("regular dividends") are generally subject to tax as ordinary income,
subject to the discussion of qualified dividend income below.
If an individual receives a regular dividend qualifying for the long-term
capital gains rates and such dividend constitutes an "extraordinary dividend,"
and the individual subsequently recognizes a loss on the sale or exchange of
stock in respect of which the extraordinary dividend was paid, then the loss
will be long-term capital loss to the extent of such extraordinary dividend. An
"extraordinary dividend" on common stock for this purpose is generally a
dividend (i) in an amount greater than or equal to 10% of the taxpayer's tax
basis (or trading value) in a share of stock, aggregating dividends with
ex-dividend dates within an 85-day period; or (ii) in an amount greater than
20% of the taxpayer's tax basis (or trading value) in a share of stock,
aggregating dividends with ex-dividend dates within a 365-day period.
Distributions in excess of the Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital to the extent of a shareholder's basis in his shares of the Fund, and
as a capital gain thereafter (if the shareholder holds his shares of the Fund
as capital assets). Shareholders receiving dividends or distributions in the
form of additional shares should be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or capital gain
distribution should be aware that, although the price of shares just purchased
at that time may reflect the amount of the forthcoming distribution, such
dividend or distribution may nevertheless be taxable to them. If the Fund is
the holder of record of any stock on the record date for any dividends payable
with respect to such stock, such dividends will be included in the Fund's gross
income not as of the date received but as of the later of (a) the date such
stock became ex-dividend with respect to such dividends (i.e., the date on
which a buyer of the stock would not be entitled to receive the declared, but
unpaid, dividends); or (b) the date the Fund acquired such stock. Accordingly,
in order to satisfy its income distribution requirements, the Fund may be
required to pay dividends based on anticipated earnings, and shareholders may
receive dividends in an earlier year than would otherwise be the case.
Back-Up Withholding. In certain cases, the Fund will be required to withhold at
the applicable withholding rate, currently 28%, and remit to the U.S. Treasury
such amounts withheld from any distributions paid to a shareholder who: (1) has
failed to provide a correct taxpayer identification number; (2) is subject to
back-up withholding by the IRS; (3) has failed to certify to the Fund that such
shareholder is not subject to back-up withholding; or (4) has not certified
that such shareholder is a U.S. person (including a U.S. resident alien).
Sections 351 and 362. The Trust on behalf of the Fund has the right to reject
an order for a purchase of shares of the Fund if the purchaser (or group of
purchasers) would, upon obtaining the shares so ordered, own 80% or more of the
outstanding shares of the Fund and if, pursuant to Sections 351 and 362 of the
IRC, the Fund would have a basis in the securities different from the market
value of such securities on the date of deposit. If the Fund's basis in such
securities on the date of deposit was less than market value on such date, the
Fund, upon disposition of the securities, would recognize more taxable gain or
less taxable loss than if its basis in the securities had been equal to market
value. It is not anticipated that the Trust will exercise the right of
rejection except in a case where the Trust determines that accepting the order
could result in material adverse tax consequences to the Fund or its
shareholders. The Trust also has the right to require information necessary to
determine beneficial share ownership for purposes of the 80% determination.
Qualified Dividend Income. Distributions by the Fund of investment company
taxable income whether received in cash or shares will be taxable either as
ordinary income or as qualified dividend income, eligible for the reduced
maximum rate to individuals of 15% (5% for individuals in lower tax brackets)
to the extent the Fund receives qualified dividend income on the securities it
holds and the Fund designates the distribution as qualified dividend income.
Qualified dividend income is, in general, dividend income from taxable domestic
corporations but generally not U.S. REITs and certain foreign corporations
(e.g., foreign corporations which are not "passive foreign investment
companies" and which are incorporated in a possession
31
of the United States or in certain countries with a comprehensive tax treaty
with the United States, or the stock of which is readily tradable on an
established securities market in the United States). A dividend will not be
treated as qualified dividend income to the extent that (i) the Fund or the
shareholder has not held the shares on which the dividend was paid for 61 days
during the 121-day period that begins on the date that is 60 days before the
date on which the shares become ex dividend with respect to such dividend (and
the Fund also satisfies those holding period requirements with respect to the
securities it holds that paid the dividends distributed to the shareholder),
(ii) the Fund or the shareholder is under an obligation (whether pursuant to a
short sale or otherwise) to make related payments with respect to substantially
similar or related property, or (iii) the shareholder elects to treat such
dividend as investment income under section 163(d)(4)(B) of the IRC. Dividends
received by a Fund from a REIT or RIC may be treated as qualified dividend
income only to the extent the dividends are attributable to qualified dividend
income received by the REIT. Such amounts are not expected to be material.
After further legislation, the maximum 15% rate on qualified dividend income
will not apply to dividends received in taxable years beginning after
December 31, 2010. Distributions by the Fund of its net short-term capital
gains will generally be taxable as ordinary income.
Corporate Dividends Received Deduction. The Fund's dividends that are paid to
its corporate shareholders and are attributable to qualifying dividends it
received from U.S. domestic corporations may be eligible, in the hands of such
shareholders, for the corporate dividends received deduction, subject to
certain holding period requirements and debt financing limitations.
Net Capital Loss Carryforwards. Net capital loss carryforwards may be applied
against any net realized capital gains in each succeeding year, or until their
respective expiration dates, whichever occurs first.
Excess Inclusion Income. Certain types of income received by the Fund from
REITs, real estate mortgage investment conduits, taxable mortgage pools or
other investments may cause the Fund to designate some or all of its
distributions as "excess inclusion income." To Fund shareholders, such excess
inclusion income may (1) constitute taxable income, as "unrelated business
taxable income" for those shareholders who would otherwise be tax-exempt such
as individual retirement accounts, 401(k) accounts, Keogh plans, pension plans
and certain charitable entities; (2) not be offset against net operating losses
for tax purposes; (3) not be eligible for reduced U.S. withholding for non-
U.S. shareholders even from tax treaty countries; and (4) cause the Fund to be
subject to tax if certain "disqualified organizations" as defined by the IRC
are Fund shareholders.
Foreign Investments. Dividends or other income (including, in some cases,
capital gains) received by the Fund from investments in foreign securities may
be subject to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes in some cases. If more than 50% of the Fund's total assets
at the close of its taxable year consists of stock or securities of foreign
corporations, the Fund may elect for U.S. income tax purposes to treat foreign
income taxes paid by it as paid by its shareholders. The Fund may qualify for
and make this election in some, but not necessarily all, of its taxable years.
If the Fund were to make an election, shareholders of the Fund would be
required to take into account an amount equal to their pro rata portions of
such foreign taxes in computing their taxable income and then treat an amount
equal to those foreign taxes as a U.S. federal income tax deduction or as a
foreign tax credit against their U.S. federal income taxes. Shortly after any
year for which it makes such an election, the Fund will report to its
shareholders the amount per share of such foreign income tax that must be
included in each shareholder's gross income and the amount which will be
available for the deduction or credit. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. Certain limitations
will be imposed on the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
Under Section 988 of the IRC, gains or losses attributable to fluctuations in
exchange rates between the time the Fund accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such income or pays such liabilities are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on
foreign currency, foreign currency forward contracts, certain foreign currency
options or futures contracts and the disposition of debt securities denominated
in foreign currency, to the extent attributable to fluctuations in exchange
rates between the acquisition and disposition dates, are also treated as
ordinary income or loss unless the Fund were to elect otherwise.
Passive Foreign Investment Companies. If the Fund purchases shares in certain
foreign investment entities, called "passive foreign investment companies"
("PFICs"), it may be subject to U.S. federal income tax on a portion of any
"excess distribution" or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains.
If the Fund were to invest in a PFIC and elect to treat the PFIC as a
"qualified electing fund" under the IRC, in lieu of the foregoing requirements,
the Fund might be required to include in income each year a portion of the
ordinary earnings and net capital gains of the qualified electing fund, even if
not distributed to the Fund, and such amounts would be subject to the 90%
32
and excise tax distribution requirements described above. In order to make this
election, the Fund would be required to obtain certain annual information from
the PFICs in which it invests, which may be difficult or impossible to obtain.
Alternatively, the Fund may make a mark-to-market election that will result in
the Fund being treated as if it had sold and repurchased its PFIC stock at the
end of each year. In such case, the Fund would report any such gains as
ordinary income and would deduct any such losses as ordinary losses to the
extent of previously recognized gains. The election must be made separately for
each PFIC owned by the Fund and, once made, would be effective for all
subsequent taxable years, unless revoked with the consent of the IRS. By making
the election, the Fund could potentially ameliorate the adverse tax
consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock. The Fund may have to distribute this "phantom" income and gain to
satisfy the 90% distribution requirement and to avoid imposition of the 4%
excise tax.
The Fund will make the appropriate tax elections, if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Federal Tax Treatment of Complex Securities. The Fund may invest in complex
securities. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by the
Fund are treated as ordinary income or capital gain, accelerate the recognition
of income to the Fund and/or defer the Fund's ability to recognize losses. In
turn, these rules may affect the amount, timing or character of the income
distributed to you by the Fund.
The Fund is required, for federal income tax purposes, to mark-to-market and
recognize as income for each taxable year its net unrealized gains and losses
on certain futures and options contracts as of the end of the year as well as
those actually realized during the year. Gain or loss from futures and options
contracts on broad-based investments required to be marked-to-market will be
60% long-term and 40% short-term capital gain or loss. Application of this rule
may alter the timing and character of distributions to shareholders. The Fund
may be required to defer the recognition of losses on futures contracts, option
contracts and swaps to the extent of any unrecognized gains on offsetting
positions held by the Fund.
As a result of entering into swap contracts, the Fund may make or receive
periodic net payments. The Fund may also make or receive a payment when a swap
is terminated prior to maturity through an assignment of the swap or other
closing transaction. Periodic net payments will generally constitute ordinary
income or deductions, while termination of a swap will generally result in
capital gain or loss (which will be a long-term capital gain or loss if the
Fund has been a party to the swap for more than one year). The tax treatment of
many types of credit default swaps is uncertain.
It is anticipated that any net gain realized from the closing out of futures or
options contracts will be considered qualifying income for purposes of the 90%
requirement for the Fund to qualify as a RIC.
The Fund intends to distribute to shareholders annually any net capital gains
that have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures or options transactions.
Such distributions are combined with distributions of capital gains realized on
the Fund's other investments and shareholders are advised on the nature of the
distributions.
Sales of Shares. Upon the sale or exchange of his or her shares, a shareholder
will realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his or her shares. A redemption of shares by the Fund
will be treated as a sale for this purpose. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the Fund, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of the shares. In such a case, the basis
of the shares acquired will be increased to reflect the disallowed loss. Any
loss realized by a shareholder on the sale of the Fund share held by the
shareholder for six months or less will be treated for U.S. federal income tax
purposes as a long-term capital loss to the extent of any distributions or
deemed distributions of long-term capital gains received by the shareholder
with respect to such share. If a shareholder incurs a sales charge in acquiring
shares of the Fund, disposes of those shares within 90 days and then acquires
shares in a fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (e.g., an exchange privilege), the original
sales charge will not be taken into account in computing gain/loss on the
original shares to the extent the subsequent sales charge is reduced. Instead,
the disregarded portion of the original sales charge will be added to the tax
basis of the newly-acquired shares. Furthermore, the same rule also applies to
a disposition of the newly acquired shares made within 90 days of the second
acquisition. This provision prevents a shareholder from immediately deducting
the sales charge by shifting his or her investment within a family of funds.
33
Other Taxes. Dividends, distributions and redemption proceeds may also be
subject to additional state, local and foreign taxes depending on each
shareholder's particular situation.
Taxation of Non-U.S. Shareholders. Dividends paid by the Fund to non-U.S.
shareholders are generally subject to withholding tax at a 30% rate or a
reduced rate specified by an applicable income tax treaty to the extent derived
from investment income and short-term capital gains. In order to obtain a
reduced rate of withholding, a non-U.S. shareholder will be required to provide
an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The
withholding tax does not apply to regular dividends paid to a non-U.S.
shareholder who provides a Form W-8ECI, certifying that the dividends are
effectively connected with the non-U.S. shareholder's conduct of a trade or
business within the United States. Instead, the effectively connected dividends
will be subject to regular U.S. income tax as if the non-U.S. shareholder were
a U.S. shareholder. A non-U.S. corporation receiving effectively connected
dividends may also be subject to additional "branch profits tax" imposed at a
rate of 30% (or lower treaty rate). A non-U.S. shareholder who fails to provide
an IRS Form W-8BEN or other applicable form may be subject to back-up
withholding at the appropriate rate.
In general, United States federal withholding tax will not apply to any gain or
income realized by a non-U.S. shareholder in respect of any distributions of
net long-term capital gains over net short-term capital losses, exempt-interest
dividends, or upon the sale or other disposition of shares of the Fund.
For taxable years beginning before January 1, 2008, properly-designated
dividends are generally exempt from United States federal withholding tax where
they (i) are paid in respect of the Fund's "qualified net interest income"
(generally, the Fund's U.S. source interest income, other than certain
contingent interest and interest from obligations of a corporation or
partnership in which the Fund is at least a 10% shareholder, reduced by
expenses that are allocable to such income) or (ii) are paid in respect of the
Fund's "qualified short-term capital gains" (generally, the excess of the
Fund's net short-term capital gain over the Fund's long-term capital loss for
such taxable year). However, depending on its circumstances, the Fund may
designate all, some or none of its potentially eligible dividends as such
qualified net interest income or as qualified short-term capital gains, and/or
treat such dividends, in whole or in part, as ineligible for this exemption
from withholding. In order to qualify for this exemption from withholding, a
non-U.S. shareholder will need to comply with applicable certification
requirements relating to its non-U.S. status (including, in general, furnishing
an IRS Form W-8BEN or substitute Form). In the case of shares held through an
intermediary, the intermediary may withhold even if the Fund designates the
payment as qualified net interest income or qualified short-term capital gain.
Non-U.S. shareholders should contact their intermediaries with respect to the
application of these rules to their accounts.
A distribution from the Fund to foreign shareholders who have held more than 5%
of the Fund at any time during the one-year period ending on the date of the
distribution is treated as real property gain subject to 35% withholding tax
and treated as income effectively connected to a U.S. trade or business with
certain tax filing requirements applicable if such distribution is attributable
to a distribution of real property gain received by the Fund from a REIT and if
50% or more of the value of the Fund's assets are invested in REITs and other
U.S. real property holding corporations. A distribution paid prior to 2008
attributable to the Fund's sale of a REIT or other U.S. real property holding
company will also be treated as real property gain if 50% or more of the value
of the Fund's assets are invested in REITs and other U.S. real property holding
corporations and if the foreign shareholder has held more than 5% of a class of
stock at any time during the one-year period ending on the date of the
distribution. Restrictions apply regarding wash sales and substitute payment
transactions.
Reporting. If a shareholder recognizes a loss with respect to the Fund's shares
of $2 million or more for an individual shareholder or $10 million or more for
a corporate shareholder, the shareholder must file with the IRS a disclosure
statement on Form 8886. Direct shareholders of portfolio securities are in many
cases exempted from this reporting requirement, but under current guidance,
shareholders of a RIC are not exempted. The fact that a loss is reportable
under these regulations does not affect the legal determination of whether the
taxpayer's treatment of the loss is proper. Shareholders should consult their
tax advisors to determine the applicability of these regulations in light of
their individual circumstances.
The foregoing discussion is a summary only and is not intended as a substitute
for careful tax planning. Purchasers of shares should consult their own tax
advisers as to the tax consequences of investing in such shares, including
under state, local and foreign tax laws. Finally, the foregoing discussion is
based on applicable provisions of the IRC, regulations, judicial authority and
administrative interpretations in effect on the date of this SAI. Changes in
applicable authority could materially affect the conclusions discussed above,
and such changes often occur.
Financial Statements
Financial statements for the Fund are not available because, as of the date of
this SAI, the Fund has no financial information to report.
34
Miscellaneous Information
Counsel. Willkie Farr & Gallagher LLP, located at 787 Seventh Avenue, New York,
NY 10019, is counsel to the Trust.
Independent Registered Public Accounting Firm. [______], located at [______],
serves as the Trust's independent registered public accounting firm, audits the
Fund's financial statements, and may perform other services.
Shareholder Communication to the Board. The Board has established a process for
shareholders to communicate with the Board. Shareholders may contact the Board
by mail. Correspondence should be addressed to: iShares Board of Trustees, c/o
Barclays Global Investors, N.A.-Mutual Fund Administration, 45 Fremont Street,
San Francisco, CA 94105. Shareholder communications to the Board should include
the following information: (a) the name and address of the shareholder; (b) the
number of shares owned by the shareholder; (c) the Fund or Funds of which the
shareholder owns shares; and (d) if these shares are owned indirectly through a
broker, financial intermediary or other record owner, the name of the broker,
financial intermediary or other record owner. All correspondence received as
set forth above shall be reviewed by the Secretary of the Trust and reported to
the Board.
35
iShares Trust
File Nos. 333-92935 and 811-09729
Part C
Other Information
Item 23. Exhibits: PEA # 103
Exhibit
Number Description
------- ----------------------------------------------------------------------
(a) Agreement and Declaration of Trust, dated September 13, 2006, is
incorporated herein by reference to Post-Effective Amendment No. 53,
filed September 19, 2006 ("PEA No. 53").
(a.1) Restated Certificate of Trust, dated September 13, 2006 is
incorporated herein by reference to PEA No. 53.
(b) Amended and Restated By-Laws, dated December 8, 2006 are incorporated
herein by reference to Post-Effective Amendment No. 74, filed March
23, 2007 ("PEA No. 74").
(c) Not applicable.
(d.1) Investment Advisory Agreement between the Trust and Barclays Global
Fund Advisors ("BGFA") is incorporated herein by reference to
Post-Effective Amendment No. 2, filed May 12, 2000 ("PEA No. 2").
(d.2) Schedule A to the Investment Advisory Agreement between the Trust and
BGFA is incorporated herein by reference to Post-Effective Amendment
No. 102 filed October 1, 2007 ("PEA No. 102").
(d.3) Fee Waiver Agreement, dated August 30, 2007, between BGFA and the
Trust with respect to the iShares S&P National Municipal Bond Fund is
herein incorporated by reference to Post-Effective Amendment No. 99,
filed September 6, 2007 ("PEA No. 99").
(e.1) Distribution Agreement between the Trust and SEI Investments
Distribution Company ("SEI") is incorporated herein by reference to
PEA No. 2.
(e.2) Exhibit A to the Distribution Agreement between the Trust and SEI to
be filed by amendment.
(f) Not applicable.
(g.1) Custodian Agreement between the Trust and Investors Bank & Trust
Company ("IBT")/1/ is incorporated herein by reference to PEA No. 2.
(g.2) Amendment, dated December 31, 2002, to the Custodian Agreement is
incorporated herein by reference to Post-Effective Amendment No. 45,
filed June 28, 2006 ("PEA No. 45").
(g.3) Amendment, dated May 21, 2002, to the Custodian Agreement is
incorporated herein by reference to PEA No. 45.
(g.4) Amendment, dated January 1, 2006, to the Custodian Agreement is
incorporated herein by reference to PEA No. 45.
(g.5) Appendix A to the Custodian Agreement between the Trust and IBT/1/ to
be filed by amendment.
(h.1) Securities Lending Agency Agreement, dated April 2, 2007, between the
Trust and iShares, Inc. and Barclays Global Investors (" BGI") is
incorporated herein by reference to Post-Effective Amendment No. 78,
filed April 23, 2007 ("PEA No. 78").
(h.2) Appendix A to Securities Lending Agency Agreement between BGI and the
Trust to be filed by amendment.
(h.3) Delegation Agreement between the Trust and IBT/1/ is incorporated
herein by reference to Exhibit (g.3) to PEA No. 2.
(h.4) Administration Agreement between the Trust and IBT/1/ is incorporated
herein by reference to Exhibit (h.1) to PEA No. 2.
(h.5) Appendix A to the Administration Agreement between the Trust and
IBT/1/ to be filed by amendment.
(h.6) Amendment, dated May 21, 2002, to the Administration Agreement is
incorporated herein by reference to PEA No. 45.
Exhibit
Number Description
------- -----------------------------------------------------------------------
(h.7) Amendment, dated January 1, 2006, to the Administration Agreement is
incorporated herein by reference to PEA No. 45.
(h.8) Amendment, dated January 1, 2007, to the Administration Agreement is
incorporated herein by reference to Post-Effective Amendment No. 75,
filed March 26, 2007.
(h.9) Transfer Agency and Service Agreement between the Trust and IBT/1/ is
incorporated herein by reference to Exhibit (h.2) to PEA No. 2.
(h.10) Appendix A to the Transfer Agency and Service Agreement between the
Trust and IBT/1/ to be filed by amendment.
(h.11) Amendment, dated May 21, 2002, to the Transfer Agency Agreement is
incorporated herein by reference to PEA No. 45.
(h.12) Amendment, dated August 18, 2004, to the Transfer Agency Agreement is
incorporated herein by reference to PEA No. 45.
(h.13) Amendment, dated January 1, 2006, to the Transfer Agency Agreement is
incorporated herein by reference to PEA No. 45.
(h.14) Sublicense Agreement, dated April 25, 2000, between BGI and the Trust
for iShares S&P Funds is incorporated herein by reference to Exhibit
(h.3.i) to PEA No. 2.
(h.15) Amendment to Sublicense Agreement between BGI and the Trust for the
iShares S&P Funds is incorporated herein by reference to PEA No. 99.
(h.16) Sublicense Agreement, dated April 25, 2000, between BGI and the Trust
for iShares Dow Jones Funds is incorporated herein by reference to
Exhibit (h.7) to PEA No. 37.
(h.17) Exhibit A to the Sublicense Agreement, dated April 1, 2006, between
BGI and the Trust for iShares Dow Jones Funds is incorporated herein
by reference to Exhibit (h.8) to Post-Effective Amendment No. 43,
filed April 17, 2006 ("PEA No. 43").
(h.18) Sublicense Agreement between BGI and the Trust for iShares Dow Jones
Funds to be filed by amendment.
(h.19) Sublicense Agreement, dated April 25, 2000, between BGI and the Trust
for iShares Russell Funds is incorporated herein by reference to
Exhibit (h.8) to PEA No. 37.
(h.20) Exhibit A to the Sublicense Agreement between BGI and the Trust for
iShares Russell Funds to be filed by amendment.
(h.21) Sublicense Agreement between BGI and the Trust for iShares MSCI EAFE
Index Fund is incorporated herein by reference to Exhibit (h.9) to
Post-Effective Amendment No. 10, filed June 1, 2001.
(h.22) Sublicense Agreement between BGI and the Trust for iShares Nasdaq
Biotechnology Index Fund is incorporated herein by reference to
Exhibit (h.10) to Post-Effective Amendment No. 13, filed July 31, 2001.
(h.23) Sublicense Agreement between BGI and the Trust for iShares S&P
GSSI/GSTI Funds to be filed by amendment.
(h.24) Sublicense Agreement between BGI and the Trust for iShares Lehman
Brothers 1-3 year Treasury Index Fund, iShares Lehman Brothers 7-10
year Treasury Index Fund, iShares Lehman Brothers 20+ year Treasury
Index Fund, iShares Lehman Brothers Treasury Index Fund, iShares
Lehman Brothers Government/Credit Index Fund and iShares U.S. Credit
Index Fund is incorporated herein by reference to Exhibit (h.12) to
PEA No. 16.
(h.25) Sublicense Agreement between BGI and the Trust for iShares iBoxx $
High Yield Corporate Bond Index Fund and iShares iBoxx $ Investment
Grade Corporate Bond Fund to be filed by amendment.
(h.26) Sublicense Agreement between BGI and the Trust for iShares Cohen &
Steers Realty Majors Index Fund is incorporated herein by reference to
Exhibit (h.15) to PEA No. 37.
(h.27) Sublicense Agreement between BGI and the Trust for iShares Dow Jones
Transportation Average Index Fund and iShares Dow Jones Select
Dividend Index Fund is incorporated herein by reference to Exhibit
(h.17) to PEA No. 37.
(h.28) Sublicense Agreement between BGI and the Trust for iShares NYSE 100
Index Fund and iShares NYSE Composite Index Fund is incorporated
herein by reference to Exhibit (h.19) to PEA No. 37.
Exhibit
Number Description
------- ----------------------------------------------------------------------
(h.29) Sublicense Agreement between BGI and the Trust for iShares FTSE/Xinhua
China 25 Index Fund is incorporated herein by reference to Exhibit
(h.20) to PEA No. 37.
(h.30) Sublicense Agreement between BGI and the Trust for iShares Morningstar
Funds is incorporated herein by reference to Exhibit (h.21) to PEA No.
37.
(h.31) Sublicense Agreement between BGI and the Trust for iShares KLD Select
Social Index Fund is incorporated herein by reference to Exhibit
(h.22) to PEA No. 37.
(h.32) Exhibit A to the Sublicense Agreement between BGI and the Trust for
iShares KLD 400 Social Index Fund to be filed by amendment.
(h.33) Exhibit A to the Sublicense Agreement between BGI and the Trust for
iShares Lehman Brothers Funds is incorporated herein by reference to
Exhibit (h.32) to Post-Effective Amendment No. 67, filed January 5,
2007.
(h.34) Exhibit A to the Sublicense Agreement between BGI and the Trust for
iShares MSCI EAFE Funds is incorporated herein by reference to Exhibit
(h.22) to Post-Effective Amendment No. 40, filed August 24, 2005.
(h.35) Exhibit A to the Sublicense Agreement between BGI and the Trust for
iShares Dow Jones EPAC Select Dividend Index Fund is incorporated
herein by reference to Exhibit (h.38) to Post-Effective Amendment No.
93, filed July 30, 2007.
(h.36) Sublicense Agreement between BGI and the Trust for FTSE/NAREIT Funds
to be filed by amendment.
(h.37) Sublicense Agreement between BGI and the Trust for iShares MSCI EAFE
Small Cap Index Fund to be filed by amendment.
(h.38) Sublicense Agreement between BGI and the Trust for iShares JPMorgan
Emerging Markets Bond Fund is incorporated herein by reference to
Exhibit (h.38) to Post-Effective Amendment No. 101, filed September
27, 2007.
(h.39) Sublicense Agreement between BGI and the Trust for iShares MSCI
Kokusai Index Fund to be filed by amendment.
(i) Legal Opinion and Consent of Richards, Layton & Finger P.A. is filed
herein.
(j) Consent of PricewaterhouseCoopers, LLP to be filed by amendment.
(k) Not applicable.
(l.1) Subscription Agreement between the Trust and SEI is incorporated
herein by reference to PEA No. 2.
(l.2) Letter of Representations between the Trust and Depository Trust
Company is incorporated herein by reference to PEA No. 2.
(l.3) Amendment of Letter of Representations between the Trust and
Depository Trust Company for iShares S&P Global 100 Index Fund and
iShares Cohen & Steers Realty Majors Index Fund is incorporated herein
by reference to Post-Effective Amendment No. 11, filed July 2, 2001.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
(p.1) iShares Trust Code of Ethics is incorporated herein by reference to
Post-Effective Amendment No. 41, filed November 23, 2005.
(p.2) BGI Code of Ethics is incorporated herein by reference to PEA No. 39.
(p.3) Code of Ethics for SEI is incorporated herein by reference to PEA No.
45.
(q.1) Powers of Attorney, each dated September 18, 2007, for Michael A.
Latham, Lee T. Kranefuss, John E. Martinez, George G.C. Parker,
Cecilia H. Herbert, John E. Kerrigan, Charles A. Hurty, and Robert H.
Silver are incorporated herein by reference to PEA No. 102.
Item 24. Persons Controlled By or Under Common Control with Registrant:
Percentage of
Ownership
-------------
iShares Dow Jones EPAC Select Dividend Index Fund
Goldman Sachs Execution & Clearing, L.P........................... 61.67%
iShares Dow Jones U.S. Aerospace & Defense Index Fund
Merrill Lynch Safekeeping......................................... 27.37%
iShares FTSE NAREIT Industrial/Office Index Fund
Fortis Clearing Americas LLC...................................... 92.41%
iShares FTSE NAREIT Mortgage REITs Index Fund
Goldman Sachs Execution & Clearing, L.P........................... 66.71%
iShares FTSE NAREIT Real Estate 50 Index Fund
Credit Suisse Securities (USA) LLC................................ 35.94%
Goldman, Sachs & Co............................................... 44.36%
iShares FTSE NAREIT Residential Index Fund
Timber Hill LLC................................................... 98.55%
iShares FTSE NAREIT Retail Index Fund
Fortis Clearing Americas LLC...................................... 91.01%
iShares iBoxx $ High Yield Corporate Bond Fund
First Clearing, LLC............................................... 33.65%
iShares Lehman 1-3 Year Treasury Bond Fund
Deutsche Bank Securities Inc./Cedear.............................. 29.60%
iShares Lehman 3-7 Year Treasury Bond Fund
Northern Trust Company, The....................................... 30.01%
iShares Lehman Credit Bond Fund
Merrill Lynch Safekeeping......................................... 50.72%
iShares Lehman Government/Credit Bond Index Fund
Citigroup Global Markets Inc...................................... 81.85%
iShares Lehman Intermediate Credit Bond Fund
Citigroup Global Markets Inc...................................... 25.42%
iShares Lehman MBS Fixed-Rate Bond Fund
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 26.98%
iShares Morningstar Mid Growth Index Fund
First Clearing, LLC............................................... 44.31%
iShares NYSE 100 Index Fund
First Clearing, LLC............................................... 80.27%
iShares Russell 1000 Index Fund
Charles Schwab & Co., Inc......................................... 27.18%
iShares Russell 2000 Index Fund
Barclays Global Investors, N.A.................................... 58.18%
iShares S&P Global Consumer Discretionary Sector Index Fund
Goldman Sachs Execution & Clearing, L.P........................... 62.94%
iShares S&P Preferred Stock Index Fund
Charles Schwab & Co., Inc......................................... 28.73%
Item 25. Indemnification:
The Trust (also referred to in this section as the "Fund") is organized as a
Delaware statutory trust and is operated pursuant to an Agreement and
Declaration of Trust, (the "Declaration of Trust"), that permits the Trust to
indemnify its trustees and officers under certain circumstances. Such
indemnification, however, is subject to the limitations imposed by the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company
Act of 1940 (the "1940 Act"). The Declaration of Trust provides that officers
and trustees of the Trust shall be indemnified by the Trust against liabilities
and expenses incurred or paid in connection with any claim, action, suit, or
proceedings against them by reason of the fact that they each serve as an
officer or trustee of the Trust or as an officer or trustee of another entity
at the request of the entity. This indemnification is subject to the following
conditions:
(a) no trustee or officer of the Trust is indemnified against any liability to
the Trust or its security holders that was the result of any willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office; and
(b) officers and trustees of the Trust are indemnified only for actions taken
in good faith that the officers and trustees believed were in or not opposed to
the best interests of the Trust.
The Declaration of Trust provides that if indemnification is not ordered by a
court, indemnification may be authorized upon determination by shareholders, or
by a majority vote of a quorum of the trustees who were not parties to the
proceedings or, if this quorum is not obtainable, if directed by a quorum of
disinterested trustees, or by independent legal counsel in a written opinion,
that the persons to be indemnified have met the applicable standard.
The Administration Agreement provides that IBT/1/ shall indemnify and hold the
Fund, its Board of Trustees, officers and employees and its agents harmless
from and against any and all Claims to the extent any such Claim arises out of
the negligent acts or omissions, bad faith, willful misconduct or material
breach of the Administration Agreement by IBT/1/, its officers, directors or
employees or any of its agents or subcustodians in connection with the
activities undertaken pursuant to the Administration Agreement, provided that
IBT's/1/ indemnification obligation with respect to the acts or omissions of
its subcustodians shall not exceed the indemnification provided by the
applicable subcustodian to IBT/1/.
The Custodian Agreement provides that IBT/1/ shall indemnify and hold the Fund,
its Board of Trustees, officers and employees and its agents harmless from and
against any and all Claims to the extent any such Claim arises out of the
negligent acts or omissions, bad faith, willful misconduct or material breach
of the Custodian Agreement by IBT/1/, its officers, directors or employees or
any of its agents or subcustodians in connection with the activities undertaken
pursuant to the Custodian Agreement, provided that IBT's/1/ indemnification
obligation with respect to the acts or omissions of its subcustodians shall not
exceed the indemnification provided by the applicable subcustodian to IBT/1/.
The Distribution Agreement provides that SEI agrees to indemnify, defend and
hold the Fund, its several officers and Board members, and any person who
controls the Fund within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Fund, its officers or Board members, or any such controlling person, may incur
under the 1933 Act, the 1940 Act, or under common law or otherwise, but only to
the extent that such liability or expense incurred by the Fund, its officers or
Board members, or such controlling person resulting from such claims or
demands, (a) shall arise out of or be based upon any information, statements or
representations made or provided SEI in any sales literature or advertisements,
or any Disqualifying Conduct by SEI in connection with the offering and sale of
any Shares, (b) shall arise out of or be based upon any untrue, or alleged
untrue, statement of a material fact contained in information furnished in
writing by SEI to the Fund specifically for use in the Fund's registration
statement and used in the answers to any of the items of the registration
statement or in the corresponding statements made in the prospectus or
statement of additional information, or shall arise out of or be based upon any
omission, or alleged omission, to state a material fact in connection with such
information furnished in writing by SEI to the Fund and required to be stated
in such answers or necessary to make such information not misleading,
(c) arising out of SEI's breach of any obligation, representation or warranty
pursuant to this Agreement, or (d) SEI's failure to comply in any material
respect with applicable securities laws.
The Authorized Participant Agreement provides that the Participant agrees to
indemnify and hold harmless the Fund and its respective subsidiaries,
affiliates, directors, officers, employees and agents, and each person, if any,
who controls such persons within the meaning of Section 15 of the 1933 Act
(each an "Indemnified Party") from and against any loss, liability, cost and
expense (including attorneys' fees) incurred by such Indemnified Party as a
result of (i) any breach by the Participant of any provision of the Authorized
Participant Agreement that relates to the Participant; (ii) any failure on the
part of the Participant to perform any of its obligations set forth in the
Authorized Participant Agreement; (iii) any failure by the Participant to
comply with applicable laws, including rules and regulations of self-regulatory
organizations; or (iv) actions of such Indemnified Party in reliance upon any
instructions issued in accordance with Annex II, III or IV (as each may be
amended from time to time) of the Authorized Participant Agreement reasonably
believed by the distributor and/or the transfer agent to be genuine and to have
been given by the Participant.
The Securities Lending Agency Agreement provides that BGI shall indemnify and
hold harmless each client, Lender, its Board of Trustees and its agents and
BGFA from any and all loss, liability, costs, damages, actions, and claims
("Loss") to the extent that any such Loss arises out of the material breach of
this Agreement by or negligent acts or omissions or willful misconduct of BGI,
its officers, directors or employees or any of its agents or subcustodians in
connection with the securities lending activities undertaken pursuant to this
Agreement, provided that BGI's indemnification obligation with respect to the
acts or omissions of its subcustodians shall not exceed the indemnification
provided by the applicable subcustodian to BGI.
Insofar as indemnification for liabilities arising under the 1940 Act may be
permitted to directors, officers and controlling persons of the Trust pursuant
to foregoing provisions, or otherwise, the Trust has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1940 Act and is, therefore,
unenforceable. In the event that a claim for Fund expenses incurred or paid by
a director, officer or controlling person of the Fund in the successful defense
of any action, suit or proceeding is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Trust will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of
such issue.
Item 26. (a) Business and Other Connections of the Investment Adviser:
The Trust is advised by BGFA, a wholly-owned subsidiary of BGI, 45 Fremont
Street, San Francisco, CA 94105. BGFA's business is that of a registered
investment adviser to certain open-end, management investment companies and
various other institutional investors.
The directors and officers of BGFA consist primarily of persons who during the
past two years have been active in the investment management business. Each of
the directors and executive officers of BGFA will also have substantial
responsibilities as directors and/or officers of BGI. To the knowledge of the
Registrant, except as set forth below, none of the directors or executive
officers of BGFA is or has been at any time during the past two fiscal years
engaged in any other business, profession, vocation or employment of a
substantial nature.
Name and Position Principal Business(es) During the Last Two Fiscal Years
----------------- -------------------------------------------------------
Blake Grossman Director and Chairman of the Board of Directors of
Chairman BGFA and Chief Executive Officer and Director of BGI,
45 Fremont Street, San Francisco, CA 94105
Frank Ryan Chief Financial Officer of BGFA and Chief Financial
Officer Officer and Cashier of BGI, 45 Fremont Street, San
Francisco, CA 94105
Rohit Bhagat Director and Chief Operating Officer of BGFA and BGI,
Director 45 Fremont Street, San Francisco, CA 94105
Item 27. Principal Underwriters:
(i) Furnish the name of each investment company (other than the Registrant) for
which each principal underwriter currently distributing the securities of
the Registrant also acts as a principal underwriter, distributor or
investment adviser.
Registrant's distributor, SEI Investments Distribution Co. ("SEI") acts as
distributor for:
SEI Daily Income Trust July 15, 1982
SEI Liquid Asset Trust November 29, 1982
SEI Tax Exempt Trust December 3, 1982
SEI Index Funds July 10, 1985
SEI Institutional Managed Trust January 22, 1987
SEI Institutional International Trust August 30, 1988
The Advisors' Inner Circle Fund November 14, 1991
The Advisors' Inner Circle Fund II January 28, 1993
Bishop Street Funds January 27, 1995
SEI Asset Allocation Trust April 1, 1996
SEI Institutional Investments Trust June 14, 1996
HighMark Funds February 15, 1997
Oak Associates Funds February 27, 1998
CNI Charter Funds April 1, 1999
iShares Inc. January 28, 2000
JohnsonFamily Funds, Inc. November 1, 2000
Causeway Capital Management Trust September 20, 2001
The Japan Fund, Inc. October 7, 2002
Barclays Global Investors Funds March 31, 2003
The Arbitrage Funds May 17, 2005
The Turner Funds January 1, 2006
ProShares Trust November 14, 2005
Community Reinvestment Act Qualified Investment Fund January 8, 2007
SEI provides numerous financial services to investment managers, pension
plan sponsors, and bank trust departments. These services include portfolio
evaluation, performance measurement and consulting services ("Funds
Evaluation") and automated execution, clearing and settlement of securities
transactions ("MarketLink").
(b) Furnish the information required by the following table with respect to
each director, officer or partner of each principal underwriter named in the
answer to Item 20 of Part B. Unless otherwise noted, the business address of
each director or officer is One Freedom Valley Drive, Oaks, PA 19456.
Positions and Offices
Name Position and Office with Underwriter with Registrant
---- ---------------------------------------- ---------------------
William M. Doran Director --
Edward D. Loughlin Director --
Wayne M. Withrow Director --
Kevin Barr President & Chief Executive Officer --
Maxine Chou Chief Financial Officer & Treasurer --
Thomas Rodman Chief Operations Officer --
John Munch General Counsel & Secretary --
Karen LaTourette Chief Compliance Officer, Anti-Money
Laundering Officer & Assistant Secretary --
Mark J. Held Senior Vice President --
Lori L. White Vice President & Assistant Secretary --
Robert Silvestri Vice President --
John Coary Vice President & Assistant Secretary --
Michael Farrell Vice President --
Mark McManus Vice President --
(c) Not applicable.
Item 28. Location of Accounts and Records:
(a) The Trust maintains accounts, books and other documents required by
Section 31(a) of the 1940 Act and the rules thereunder (collectively, the
"Records") at the offices of State Street Bank and Trust Company ("State
Street"), 200 Clarendon Street, Boston, MA 02116.
(b) BGFA maintains all Records relating to its services as investment adviser
at 45 Fremont Street, San Francisco, CA, 94105.
(c) SEI Investments Distribution Company maintains all Records relating to its
services as distributor at One Freedom Valley Drive, Oaks, PA 19456.
(d) State Street maintains all Records relating to its services as transfer
agent, fund accountant and custodian at 200 Clarendon Street, Boston, MA 02116.
Item 29. Management Services:
Not applicable.
Item 30. Undertakings:
Not applicable.
--------
/1/ On July 2, 2007, State Street Corporation acquired Investors Financial
Services Corporation, the parent company of IBT which provides
administrative, custodial and transfer agency services for the Funds.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment No. 103 to the Registration Statement to be signed on
its behalf by the undersigned, duly authorized, in the City of San Francisco
and the State of California on the 1/st/ day of October, 2007.
By:
-----------------------------
Michael A. Latham*
President
Date: October 1, 2007
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 103 to the Registration Statement has been signed
below by the following persons in the capacity and on the dates indicated.
By:
-----------------------------
Lee T. Kranefuss*
Trustee
Date: October 1, 2007
-----------------------------
John E. Martinez*
Trustee
Date: October 1, 2007
-----------------------------
George G. C. Parker*
Trustee
Date: October 1, 2007
-----------------------------
Cecilia H. Herbert*
Trustee
Date: October 1, 2007
-----------------------------
Charles A. Hurty*
Trustee
Date: October 1, 2007
-----------------------------
John E. Kerrigan*
Trustee
Date: October 1, 2007
-----------------------------
Robert H. Silver*
Trustee
Date: October 1, 2007
-----------------------------
Michael A. Latham*
President
Date: October 1, 2007
/s/ Geoffrey D. Flynn
-----------------------------
Geoffrey D. Flynn
Treasurer
Date: October 1, 2007
*By: /s/ Geoffrey D. Flynn
-----------------------------
Geoffrey D. Flynn
Attorney-in-fact
Date: October 1, 2007
--------
* Signature affixed by Geoffrey D. Flynn, pursuant to powers of attorney dated
September 18, 2007 and incorporated herein by reference to PEA No. 102.
Exhibit Index
(i)Legal Opinion and Consent of Richards, Layton & Finger P.A.
EX-99.(I)
2
dex99i.txt
LEGAL OPINION OF RICHARDS, LAYTON & FINGER, P.A.
EXHIBIT (i)
[LETTERHEAD OF RICHARDS, LAYTON & FINGER, P.A.]
September 27, 2007
iShares Trust
c/o Barclays Global Fund Advisors
45 Fremont Street
San Francisco, CA 94105
Re: iShares MSCI Kokusai Index Fund
Ladies and Gentlemen:
We have acted as special Delaware counsel for iShares Trust, a Delaware
statutory trust (the "Trust"), in connection with the matters set forth herein.
At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents has been limited to the examination of originals or copies of the
following:
(a) The Certificate of Trust of the Trust, as filed with the office of the
Secretary of State of the State of Delaware (the "Secretary of State")
on December 16, 1999, as amended and restated by the Restated
Certificate of Trust of the Trust (the "Certificate of Trust"), as
filed with the office of the Secretary of State on September 15, 2006;
(b) The Agreement and Declaration of Trust, dated December 16, 1999, made
by the trustee named therein, as amended and restated by the Agreement
and Declaration of Trust (the "Trust Instrument"), dated September 13,
2006, made by the trustees named therein;
(c) Post-Effective Amendment No. 103, to be filed with the Securities and
Exchange Commission on or about the date hereof (the "Amendment"), to
the Trust's Registration Statement on Form N-1A (File Nos. 333-92935
and 811-09729), filed with the Securities and Exchange Commission on
December 16, 1999 (as amended by the Amendment, the "Registration
Statement");
iShares Trust
September 27, 2007
Page 2
(d) The Amended and Restated By-Laws of the Trust in effect on the date
hereof (the "By-laws") as approved by the Board of Trustees of the
Trust (the "Board") on December 8, 2006;
(e) Copies of certain resolutions (the "Resolutions") adopted by the Board
at meetings held on September 17-18, 2007, with respect to the
creation of that certain series of the Trust to be known as iShares
MSCI Kokusai Index Fund (the "Fund") and the issuance of certain
shares of beneficial interest in such Fund (each, a "Share," and
collectively, the "Shares");
(f) A certificate of an officer of the Trust with respect to certain
matters, dated September 27, 2007; and
(g) A Certificate of Good Standing for the Trust, dated September 27,
2007, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used
as defined in the Trust Instrument.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed in paragraphs (a) through (g) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (g) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our
own but rather have relied solely upon the foregoing documents, the statements
and information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust Instrument
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation and
termination of the Trust, and that the Trust Instrument, the By-laws and the
Certificate of Trust are in full force and effect and will not be amended,
(ii) except to the extent provided in paragraph 1 below, the due organization
or due formation, as the case may be, and valid existence in good standing of
each party to the documents examined by us under the laws of the jurisdiction
governing its organization or formation, (iii) the legal capacity of natural
persons who are parties to the documents examined by us, (iv) that each of the
parties (other than the Trust) to the documents examined by us has the power
and authority to execute and deliver, and to perform its obligations under,
such documents, (v) the due authorization, execution and delivery by all
parties thereto of all documents examined by us, (vi) the payment by each
Person to whom a Share is to be issued by
iShares Trust
September 27, 2007
Page 3
the Trust (collectively, the "Shareholders") for such Share, in accordance with
the Trust Instrument and the Resolutions and as contemplated by the
Registration Statement, and (vii) that the Shares are issued and sold to the
Shareholders in accordance with the Trust Instrument and the Resolutions and as
contemplated by the Registration Statement. We have not participated in the
preparation of the Registration Statement and assume no responsibility for its
contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal
laws and rules and regulations relating thereto. Our opinions are rendered only
with respect to Delaware laws and rules, regulations and orders thereunder
which are currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good standing
as a statutory trust under the Delaware Statutory Trust Act, 12 Del. C. (S)
3801, et. seq.
2. The Shares of the Trust have been duly authorized and, when issued, will
be validly issued, fully paid and nonassessable beneficial interests in the
Trust.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. In giving the foregoing
consent, we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Richards, Layton & Finger, P.A.
RJF/MCG
CORRESP
3
filename3.txt
[LOGO OF WILLKIE FARR & GALLAGHER LLP]
1875 K Street, NW
Washington, DC 20006-1238
Tel: 202 303 1000
Fax: 202 303 2000
VIA EDGAR
October 1, 2007
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: iShares Trust
File Nos. 333-92935, 811-09729
Post-Effective Amendment No. 103
Ladies and Gentlemen:
On behalf of the iShares Trust (the "Trust"), we hereby transmit for filing
with the Securities and Exchange Commission under the Securities Act of 1933
(the "1933 Act") and the Investment Company Act of 1940 (the "1940 Act"),
Post-Effective Amendment No. 103 to the Trust's Registration Statement on Form
N-1A.
The Amendment is being filed for the purpose of adding one new fund to the
Trust: iShares MSCI Kokusai Index Fund (the "Fund").
The Amendment is being filed pursuant to Rule 485(a)(2) under the 1933 Act and
will become automatically effective 75 days after the filing, but the Trust
expects to submit an acceleration request for an effective date on or about
December 1, 2007.
The following information is provided to assist the Staff of the Commission in
its review of the Amendment to the Registration Statement.
(1) Investment Objective and Underlying Index
The underlying index of the Fund is the MSCI Kokusai Index (the "Index"). The
Index is designed to measure equity market performance in those countries that
MSCI has classified as having developed economies, excluding Japan. As of June
2006, the Index consisted of the following 22 developed market country indices:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.
The Fund seeks results that correspond generally to the price and yield
performance, before fees and expenses, of the Index.
(2) Other Changes from Recent Filings
The Fund's description of its investment strategy (i.e., the Fund, using
representative sampling, will invest at least 90% of its assets in the
securities of the Index or in American Depositary Receipts, Global Depositary
Receipts or European Depositary Receipts or other depositary receipts
representing securities in the Index) and risk factors are specific to the
Fund. The portfolio managers are also specific to the Fund.
(3) Prior Filings with Similar Disclosure
Much of the disclosure in the Amendment is substantially similar to that in
previous filings submitted by iShares Trust and reviewed by the Staff. In
particular, we invite your attention to Post-Effective Amendment No. 74, filed
pursuant to Rule 485(a) on March 23, 2007, relating to the iShares S&P World
ex-U.S. Property Index Fund (and the related amendment under Rule 485(b), filed
and effective on July 30, 2007).
The disclosures applicable to the Fund and iShares Trust included in the
Amendment that are substantially similar to those in the referenced prior
filing relate to descriptions of shares, the investment manager and other
attributes under the headings "Management - Investment Adviser," "Management -
Administrator, Custodian and Transfer Agent," "Shareholder Information,"
"Determination of NAV," "Dividends and Distribution," and "Distribution,"
included in the Prospectus, and under the headings "Proxy Voting," "Portfolio
Holdings Information," "Continuous Offering," "Management - Investment
Adviser," "Management - Code of Ethics," "Management - Administrator, Custodian
and Transfer Agent," "Management - Distributor," "Brokerage Transactions,"
"Financial Statements" and "Miscellaneous Information," included in the
Statement of Additional Information.
* * * * *
The operations of the Fund, the description of the shares offered and the other
information that is typically common in a fund complex do not appear to raise
novel issues or problem areas that warrant particular attention of the Staff in
reviewing the Registration Statement. Consequently, on behalf of the Trust, in
accordance with Investment Company Act Release No. 13768, we request that the
Registration Statement be given selective review.
If you have any questions or comments concerning the Amendment, please call me
at (202) 303-1124.
Sincerely,
/s/ Benjamin J. Haskin
-------------------------
Benjamin J. Haskin