0001193125-10-114843.txt : 20120718
0001193125-10-114843.hdr.sgml : 20120718
20100510172008
ACCESSION NUMBER: 0001193125-10-114843
CONFORMED SUBMISSION TYPE: 485APOS
PUBLIC DOCUMENT COUNT: 3
FILED AS OF DATE: 20100510
DATE AS OF CHANGE: 20100726
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: 10817676
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: 1940 Act
SEC FILE NUMBER: 811-09729
FILM NUMBER: 10817677
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
S000026116
iShares MSCI ACWI ex US Health Care Index Fund
C000078231
iShares MSCI ACWI ex US Health Care Index Fund
485APOS
1
d485apos.txt
FORM 485APOS
As filed with the Securities and Exchange Commission on May 10, 2010
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. 423 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 423 [X]
(Check appropriate box or boxes)
----------
iShares 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. JESSICA BENTLEY, ESQ.
WILLKIE FARR & WILLKIE FARR & BLACKROCK INSTITUTIONAL TRUST
GALLAGHER LLP GALLAGHER LLP COMPANY, N.A.
787 SEVENTH AVENUE 1875 K STREET, NW 400 HOWARD STREET
NEW YORK, NY 10019-6099 WASHINGTON, DC 20006-1238 SAN FRANCISCO, CA 94105
It is proposed that this filing will become effective (check appropriate
box):
[_] Immediately upon filing pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] 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.
2010 PROSPECTUS TO SHAREHOLDERS
iSHARES(Reg. TM) MSCI ACWI ex US
HEALTH CARE INDEX FUND
______, 2010
___ | _______
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
[GRAPHIC APPEARS HERE]
Table of Contents
Fund Overview.................................. S-1
More Information About the Fund................ 1
A Further Discussion of Principal Risks........ 2
Portfolio Holdings Information................. 8
Management..................................... 8
Shareholder Information........................ 9
Distribution................................... 16
Financial Highlights........................... 17
Index Provider................................. 17
Disclaimers.................................... 17
"MSCI All Country World ex USA Health Care Index" is a servicemark of MSCI Inc.
licensed for use for certain purposes by BlackRock Institutional Trust Company,
N.A. ("BTC") (formerly, Barclays Global Investors, N.A.). iShares(Reg. TM) is a
registered trademark of BTC. The Fund is not sponsored, endorsed, sold, or
promoted by MSCI Inc. nor does MSCI Inc. make any representation regarding the
advisability of investing in the Fund.
i
[THIS PAGE INTENTIONALLY LEFT BLANK]
iSHARES(Reg. TM) MSCI ACWI ex US HEALTH CARE INDEX FUND
Ticker: ___ Stock Exchange: _______
INVESTMENT OBJECTIVE
The iShares MSCI ACWI ex US Health Care Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield
performance, before fees and expenses, of the MSCI All Country World ex USA
Health Care Index (the "Underlying Index").
FEES AND EXPENSES
The following table describes the fees and expenses that you will incur if you
own shares of the Fund. The iShares Trust (the "Trust") Investment Advisory
Agreement provides that BlackRock Fund Advisors ("BFA") (formerly, Barclays
Global Fund Advisors) will pay all operating expenses of the Fund, except
interest expense, taxes, any brokerage expenses, future distribution fees or
expenses and extraordinary expenses.
You will also incur usual and customary brokerage commissions when buying or
selling shares of the Fund, which are not reflected in the example that
follows:
ANNUAL FUND OPERATING EXPENSES
(ONGOING EXPENSES THAT YOU PAY EACH YEAR AS A
PERCENTAGE OF THE VALUE OF YOUR INVESTMENTS)
--------------------------------------------------------
DISTRIBUTION TOTAL ANNUAL
AND FUND
MANAGEMENT SERVICE (12B-1) OTHER OPERATING
FEES FEES EXPENSES EXPENSES
---------- ----------------- ---------- -------------
____% None ________ ____%
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:
1 YEAR 3 YEARS
-------- ---------
$___ $___
PORTFOLIO TURNOVER. The Fund pays transaction costs, such as commissions, when
it buys and sells securities (or "turns over" its portfolio). A higher
portfolio turnover rate may indicate higher transaction costs and may result in
higher taxes when Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the example, affect
the Fund's performance.
S-1
PRINCIPAL INVESTMENT STRATEGIES
The Underlying Index is a free float-adjusted market capitalization weighted
index designed to measure the combined equity market performance of the health
care sector of developed and emerging markets countries, excluding the United
States. Component securities include those of health care equipment companies,
health care services companies, pharmaceuticals companies, biotechnology
companies and life sciences companies. As of April 30, 2010, the Underlying
Index consisted of companies in the following countries: Australia, Belgium,
Canada, China, Denmark, Finland, France, Germany, Hungary, India, Ireland,
Israel, Japan, Russia, South Africa, South Korea, Spain, Sweden, Switzerland
and the United Kingdom (together, the "ACWI ex US health care sector
countries"). As of April 30, 2010, the Underlying Index was comprised of 69
securities.
BFA 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 may eliminate the chance that the Fund will 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.
BFA uses a representative sampling indexing strategy to manage the Fund.
"Representative sampling" is an indexing strategy that involves investing in a
representative sample of securities 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 in the
Underlying Index.
The Fund generally invests at least 80% of its assets in securities of the
Underlying Index or in depositary receipts representing securities of the
Underlying Index. The Fund may invest the remainder of its assets in securities
not included in its Underlying Index, but which BFA believes will help the Fund
track its Underlying Index, and 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 affiliated with
BFA.
The Underlying Index is sponsored by an organization (the "Index Provider")
that is independent of the Fund and BFA. The Index Provider determines the
composition and 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 Inc. ("MSCI"). Additional information
regarding the Index Provider is provided in the INDEX PROVIDER section of the
Fund's prospectus (the "Prospectus").
S-2
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 to approximately the same extent that its Underlying Index is
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.
SUMMARY OF PRINCIPAL RISKS
As with any investment, you could lose all or part of your investment in the
Fund, and the Fund's performance could trail that of other investments. The
Fund is subject to the principal risks noted below, any of which may adversely
affect the Fund's net asset value ("NAV"), trading price, yield, total return
and ability to meet its investment objective, as well as numerous other risks
that are described in greater detail in the FURTHER DISCUSSION OF PRINCIPAL
RISKS section of the Prospectus and in the Fund's Statement of Additional
Information ("SAI").
ASSET CLASS RISK. Securities in the Underlying Index or in the Fund's portfolio
may underperform in comparison to the general securities markets or other asset
classes.
CONCENTRATION RISK. To the extent that the Fund's investments are concentrated
in a particular country, market, industry or asset class, the Fund will be
susceptible to loss due to adverse occurrences affecting that country, market,
industry or asset class.
CURRENCY RISK. Because the Fund's NAV is determined in U.S. dollars, the Fund's
NAV could decline if the currency of the non-U.S. market in which the Fund
invests depreciates against the U.S. dollar.
GEOGRAPHIC RISK. A natural disaster could occur in a geographic region in which
the Fund invests.
HEALTH CARE SECTOR RISK. The health care sector may be affected by government
regulations and government health care programs, increases or decreases in the
cost of medical products and services and product liability claims, among other
factors.
ISSUER RISK. Fund performance depends on the performance of individual
securities in which the Fund invests. Changes to the financial condition or
credit rating of an issuer of those securities may cause the value of the
securities to decline.
MANAGEMENT RISK. As the Fund does not fully replicate the Underlying Index, it
is subject to the risk that BFA's investment management strategy may not
produce the intended results.
MARKET RISK. The Fund's NAV could decline over short periods due to short-term
market movements and over longer periods during market downturns.
MARKET TRADING RISKS. The Fund faces numerous market trading risks, including
the potential lack of an active market for Fund shares, losses from trading in
secondary markets, and disruption in the creation/redemption process of the
Fund. ANY OF THESE FACTORS MAY LEAD TO THE FUND'S SHARES TRADING AT A PREMIUM
OR DISCOUNT TO NAV.
MID-CAPITALIZATION COMPANIES RISK. Compared to large-capitalization
S-3
companies, mid-capitalization companies may be less stable and their securities
may be more volatile and less liquid.
NON-DIVERSIFICATION RISK. The Fund may invest a large percentage of its assets
in securities issued by or representing a small number of issuers. As a result,
Fund performance may depend on the performance of a small number of issuers.
NON-U.S. SECURITIES RISK. Investments in the securities of non-U.S. issuers are
subject to the risks associated with investing in those non-U.S. markets, such
as heightened risks of inflation or nationalization. You may lose money due to
political, economic and geographic events affecting a non-U.S. issuer or
market. The Fund is specifically exposed to ASIAN ECONOMIC RISK, AUSTRALASIA
ECONOMIC RISK, EUROPEAN ECONOMIC RISK AND U.S. ECONOMIC RISK.
PASSIVE INVESTMENT RISK. The Fund is not actively managed and BFA does not
attempt to take defensive positions in declining markets.
PRIVATIZATION RISK. Some countries in which the Fund invests have begun a
process of privatizing certain entities and industries; privatized entities may
lose money or be re-nationalized.
RELIANCE ON TRADING PARTNERS RISK. The Fund invests in economies that are
heavily dependent upon trading with key partners. Any reduction in this trading
may cause an adverse impact on the economies in which the Fund invests.
SECURITIES LENDING RISK. Securities lending involves the risk that the borrower
may fail to return the securities in a timely manner or at all. The Fund may
lose money and there may be a delay in recovering the loaned securities. The
Fund could also lose money if it does not recover loaned securities or the
value of the collateral provided for loaned securities or the value of
investments made with cash collateral falls. These events could also trigger
adverse tax consequences for the Fund.
SECURITY RISK. Some geographic areas in which the Fund invests have experienced
security concerns. Incidents involving a country's security may cause
uncertainty in these markets and may adversely affect their economies.
SMALL-CAPITALIZATION COMPANIES RISK. Compared to mid- and large-capitalization
companies, small-capitalization companies may be less stable and their
securities may be more volatile and less liquid.
STRUCTURAL RISK. The economies in which the Fund invests may be subject to
considerable degrees of economic, political and social instability.
TRACKING ERROR RISK. The performance of the Fund may diverge from that of its
Underlying Index.
VALUATION RISK. 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.
PERFORMANCE INFORMATION
As of the date of the Prospectus, the Fund has been in operation for less than
one full calendar year and therefore does not report its performance
information.
MANAGEMENT
INVESTMENT ADVISER. BlackRock Fund Advisors.
S-4
PORTFOLIO MANAGERS. Diane Hsiung and Greg Savage, each a Portfolio Manager, are
primarily responsible for the day-to-day management of the Fund. Each Portfolio
Manager functions as a member of a portfolio manager team. Ms. Hsiung and Mr.
Savage have been Portfolio Managers of the Fund since 2010.
PURCHASE AND SALE OF FUND SHARES
The Fund is an exchange-traded fund (commonly referred to as an "ETF").
Individual Fund shares may only be purchased and sold on a national securities
exchange through a broker-dealer. The price of Fund shares is based on market
price, and because ETF shares trade at market prices rather than NAV, shares
may trade at a price greater than NAV (a premium) or less than NAV (a
discount). The Fund will only issue or redeem shares that have been aggregated
into blocks of __ shares or multiples thereof ("Creation Units") to authorized
participants who have entered into agreements with the Fund's distributor. The
Fund will issue or redeem Creation Units in return for a basket of assets that
the Fund specifies each day.
TAX INFORMATION
The Fund intends to make distributions that may be taxable to you as ordinary
income or capital gains, unless you are investing through a tax-deferred
arrangement such as a 401(k) plan or an individual retirement account ("IRA").
Beginning in 2013, taxable distributions and redemptions will be subject to a
3.8% U.S. federal Medicare tax on "net investment income" for individuals with
income exceeding $200,000 ($250,000 if married and filing jointly). For more
information regarding the tax consequences that may be associated with
investing in the Fund, please refer to the TAXES ON DISTRIBUTIONS section of
the Prospectus.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase the Fund through a broker-dealer or other financial
intermediary (such as a bank), BFA or other related companies may pay the
intermediary for marketing activities and presentations, educational training
programs, conferences, the development of technology platforms and reporting
systems or other services related to the sale or promotion of the Fund. These
payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary's Web
site for more information.
S-5
More Information About the Fund
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.
BFA is the investment adviser to the Fund. Shares of the Fund are listed and
trade at market prices on ____________ (the "Listing Exchange"). The market
price for a share of the Fund may be different from the Fund's most recent NAV
per share.
ETFs are funds that trade like other publicly-traded securities. The Fund is
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, shares of the Fund may be purchased or redeemed directly
from the Fund at NAV solely by authorized participants. Also unlike shares of a
mutual fund, 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 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 due to transaction costs, non-U.S. currency valuation, 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 to the use of representative
sampling. "Tracking error" is the difference between the performance (return)
of the Fund's portfolio and that of its Underlying Index. BFA expects that,
over time, the Fund's tracking error will not exceed 5%. Because the Fund uses
a representative sampling indexing strategy, it can be expected to have a
larger tracking error than if it 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.
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, BFA or any of its affiliates.
The Fund's investment objective and the Underlying Index may be changed without
shareholder approval.
1
A Further Discussion of Principal Risks
The Fund is subject to the principal risks noted below, any of which may
adversely affect the Fund's NAV, trading price, yield, total return and ability
to meet its investment objective. You could lose all or part of your investment
in the Fund, and the Fund could underperform other investments.
ASIAN ECONOMIC RISK. Certain Asian economies have experienced over-extension of
credit, currency devaluations and restrictions, high unemployment, high
inflation, decreased exports and economic recessions. Economic events in any
one Asian country can have a significant economic effect on the entire Asian
region as well as on major trading partners outside Asia, and any adverse event
in the Asian markets may have a significant adverse effect on some or all of
the ACWI ex US health care sector countries.
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.
AUSTRALASIAN ECONOMIC RISK. The economies of Australasia, which includes
Australia and New Zealand, are dependent on exports from the agricultural and
mining sectors. This makes Australasian economies susceptible to fluctuations
in the commodity markets. Australasian economies are also increasingly
dependent on their growing service industries. Because the economies of
Australasia are dependent on the economies of Asia, Europe and the United
States as key trading partners and investors, reduction in spending by any of
these trading partners on Australasian products and services or negative
changes in any of these economies may cause an adverse impact on some or all of
the Australasian economies.
CONCENTRATION RISK. To the extent that the Fund's portfolio reflects its
Underlying Index's concentration in the securities of companies in a particular
market, industry, group of industries, country, region, group of countries,
sector or asset class, the Fund may be adversely affected by the performance of
those securities, 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, country, region, group of
countries, sector or asset class.
CURRENCY RISK. Because the Fund's NAV is determined on the basis of the U.S.
dollar, investors may lose money if the currency of a non-U.S. market in which
the Fund invests depreciates against the U.S. dollar, even if the local
currency value of the Fund's holdings in that market increases.
EUROPEAN ECONOMIC RISK. The Economic and Monetary Union of the European Union
(the "EU") 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. Decreasing imports or exports,
changes in governmental or EU regulations on trade, changes in the exchange
rate of the euro and recessions among EU member countries may have a
significant adverse effect on the
2
economies of other EU member countries and their trading partners, including
some or all of the ACWI ex US health care sector countries.
GEOGRAPHIC RISK. Some markets in which the Fund invests are located in parts of
the world that have historically been prone to natural disasters such as
earthquakes, volcanoes, droughts, floods and tsunamis or are economically
sensitive to environmental events. Any natural disaster could have a
significant adverse impact on the economies of these geographic areas.
HEALTH CARE SECTOR RISK. The Fund invests in companies in the health care
sector, whose profitability may be affected by extensive government regulation,
restrictions on government reimbursement for medical expenses, rising costs of
medical products and services, pricing pressure, an increased emphasis on
outpatient services, limited number of products, industry innovation, changes
in technologies and other market developments. Many health care companies are
heavily dependent on patent protection. The expiration of patents may adversely
affect the profitability of these companies. Many health care companies are
subject to extensive litigation based on product liability and similar claims.
Health care companies are subject to competitive forces that may make it
difficult to raise prices and, in fact, may result in price discounting. Many
new products in the health care sector may be subject to regulatory approvals.
The process of obtaining such approvals may be long and costly.
ISSUER RISK. The performance of the Fund depends on the performance of
individual companies in which the Fund invests. Any issuer may perform poorly,
causing the value of its securities to 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
at their own discretion, decide to reduce or eliminate dividends, which may
also cause their stock prices to decline.
MANAGEMENT RISK. The Fund will not fully replicate its Underlying Index and may
hold securities not included in its Underlying Index. As a result, the Fund is
subject to the risk that BFA's investment management strategy, the
implementation of which is subject to a number of constraints, may not produce
the intended results.
MARKET RISK. The Fund could lose money due to short-term 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, economic trends or events that are not specifically related
to the issuer of the security or to factors that affect a particular industry
or industries. During a general 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
one or more stock exchanges, there can be no assurance that an active trading
market for such shares will develop or be maintained.
RISKS OF SECONDARY LISTINGS. The Fund's shares may be listed or traded on U.S.
and non-U.S. stock exchanges other than the U.S. stock exchange where the
Fund's primary listing is maintained. There can be no assurance that the Fund's
shares will continue to
3
trade on any such stock exchange or in any market or that the Fund's shares
will continue to meet the requirements for listing or trading on any exchange
or in any market. The Fund's shares may be less actively traded in certain
markets than others, and investors are subject to the execution and settlement
risks and market standards of the market where they or their broker direct
their trades for execution. Certain information available to investors who
trade Fund shares on a U.S. stock exchange during regular U.S. market hours may
not be available to investors who trade in other markets, which may result in
secondary market prices in such markets being less efficient.
SECONDARY MARKET TRADING RISKS. Shares of the Fund may trade in the secondary
market at times when the Fund does not accept orders to purchase or redeem
shares. At such times, shares may trade in the secondary market with more
significant premiums or discounts than might be experienced at times when the
Fund accepts purchase and redemption orders.
Secondary market trading in Fund shares may be halted by a stock exchange
because of market conditions or other reasons. In addition, trading in Fund
shares on a stock exchange or in any market may be subject to trading halts
caused by extraordinary market volatility pursuant to "circuit breaker" rules
on the exchange or market. There can be no assurance that the requirements
necessary to maintain the listing or trading of Fund shares will continue to be
met or will remain unchanged.
SHARES OF THE FUND MAY 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, because 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), BFA 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, 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 or other charges imposed by brokers as determined by that broker. In
addition, you will also incur the
4
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.
MID-CAPITALIZATION COMPANIES RISK. Many of the companies included in the
Underlying Index may be considered mid-capitalization companies. Stock prices
of mid-capitalization companies may be more volatile than those of
large-capitalization companies and therefore the Fund's share price may be more
volatile than those of funds that invest a larger percentage of their assets in
stocks issued by large-capitalization companies. Stock prices of
mid-capitalization companies are also more vulnerable than those of
large-capitalization stocks to adverse business or economic developments and
the stocks of mid-capitalization companies may be less liquid, making it
difficult for the Fund to buy and sell them. In addition, mid-capitalization
companies generally have less diverse product lines than large-capitalization
companies and are more susceptible to adverse developments related to their
products.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified." This
means that the Fund may invest a large percentage of its assets in securities
issued by or representing a small number of issuers. As a result, the Fund may
be more susceptible to the risks associated with these particular issuers, or
to a single economic, political or regulatory occurrence affecting these
issuers.
NON-U.S. SECURITIES RISKS. Investments in the securities of non-U.S. issuers
are subject to all of the risks of investing in the market of such issuers,
including market fluctuations caused by economic and political developments. As
a result of investing in non-U.S. securities, the Fund may be subject to
increased risk of loss caused by any of the factors listed below:
[] Lower levels of liquidity and market efficiency;
[] Greater securities price volatility;
[] Exchange rate fluctuations and exchange controls;
[] Less availability of public information about issuers;
[] Limitations on foreign ownership of securities;
[] Imposition of withholding or other taxes;
[] Imposition of restrictions on the expatriation of the funds or other assets
of the Fund;
[] Higher transaction and custody costs and delays in settlement procedures;
[] Difficulties in enforcing contractual obligations;
[] Lower levels of regulation of the securities market;
[] Weaker accounting, disclosure and reporting requirements; and
[] Legal principles relating to corporate governance, directors' fiduciary
duties and
5
liabilities and stockholders' rights in markets in which the Fund invests
may differ and/or may not be as extensive or protective as those that apply
in the United States.
PASSIVE INVESTMENT RISK. The Fund is not actively managed and may be affected
by a general decline in market segments relating to its Underlying Index. The
Fund invests in securities included in, or representative of, its Underlying
Index regardless of their investment merits. BFA does not attempt to take
defensive positions in declining markets.
PRIVATIZATION RISK. Some countries in which the Fund invests have begun a
process of privatizing certain entities and industries. Historically, investors
in some recently privatized entities have suffered losses due to the inability
of the recently privatized company to adjust quickly to a competitive
environment or changing regulatory and legal standards or, in some cases, due
to re-nationalization of such privatized entities. There is no assurance that
such losses will not recur.
RELIANCE ON TRADING PARTNERS RISK. The economies of the ACWI ex US health care
sector countries are dependent on each other and on the United States as key
trading partners. Reduction in spending on the products and services of the
ACWI ex US health care sector countries by any of their key trading partners,
institution of tariffs or other trade barriers or a slowdown in the economies
of any of their key trading partners may cause an adverse impact on the
economies of the ACWI ex US health care sector countries.
SECURITIES LENDING RISK. Securities lending involves the risk that the borrower
may fail to return the securities in a timely manner or at all. The Fund may
lose money and there may be a delay in recovering the loaned securities. The
Fund could also lose money if it does not recover the loaned securities or the
value of the collateral provided for the loaned securities or the value of
investments made with cash collateral falls. These events could also trigger
adverse tax consequences for the Fund.
SECURITY RISK. Some geographic areas in which the Fund invests have experienced
acts of terrorism or strained international relations due to territorial
disputes, historical animosities or other defense concerns. These situations
may cause uncertainty in the markets of these geographic areas and may
adversely affect the performance of their economies.
SMALL-CAPITALIZATION COMPANIES RISK. The Fund may be more volatile (I.E.,
subject to more frequent changes in price) than a fund that invests primarily
in large or mid-capitalized securities because:
o Small-capitalization companies may be less financially secure than larger,
more established companies;
o Small-capitalization companies may depend on a small number of essential
personnel and thus are more vulnerable to personnel losses;
o Small-capitalization companies normally have less diverse product lines than
larger capitalization companies and thus are more susceptible to adverse
developments concerning their products; and
6
o Small-capitalization stocks may be thinly traded and thus may be difficult
for the Fund to buy and sell.
STRUCTURAL RISKS. Certain political, economic, legal and currency risks have
contributed to a high degree of price volatility in the equity markets of the
ACWI ex US health care sector countries and could adversely affect investments
in the Fund:
POLITICAL AND SOCIAL RISK. Disparities of wealth, the pace and success of
democratization and ethnic, religious and racial disaffection, among other
factors, have led to social unrest, violence and labor unrest in some ACWI ex
US health care sector countries. Unanticipated or sudden political or social
developments may result in sudden and significant investment losses.
ECONOMIC RISK. Some ACWI ex US health care sector countries may experience
economic instability, including instability resulting from substantial rates of
inflation or significant devaluations of their currency, or economic recessions
causing a negative effect on the economies and securities markets of their
economies. Some of these countries may also impose restrictions on the exchange
or export of currency or adverse currency exchange rates and may be
characterized by a lack of available currency hedging instruments.
EXPROPRIATION AND/OR NATIONALIZATION RISK. Investments in certain ACWI ex US
health care sector countries may be subject to loss due to expropriation or
nationalization of assets and property or the imposition of restrictions on
foreign investments and repatriation of capital.
LARGE GOVERNMENT DEBT RISK. Chronic structural public sector deficits in some
ACWI ex US health care sector countries may adversely impact investments in the
Fund.
TRACKING ERROR RISK. Imperfect correlation between the Fund's portfolio
securities and those in its Underlying Index, rounding of prices, changes to
the Underlying Index and regulatory requirements may cause tracking error, the
divergence of the Fund's performance from that of its Underlying Index. This
risk may be heightened during times of increased market volatility or other
unusual market conditions. Tracking error also may result because the Fund
incurs fees and expenses while its Underlying Index does not.
U.S. TRADING PARTNER RISK. The United States is a significant, and in some
cases the most significant, trading partner of or foreign investor in certain
ACWI ex US health care sector countries and the economies of these countries
may be particularly affected by changes in the U.S. economy. Decreasing U.S.
imports, new trade regulations, changes in the U.S. dollar exchange rate or a
recession in the United States may have a material adverse effect on the
economies of ACWI ex US health care sector countries.
VALUATION RISK. Because non-U.S. 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.
7
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 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).
Management
INVESTMENT ADVISER. As investment adviser, BFA has overall responsibility for
the general management and administration of the Trust. BFA 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, BFA uses teams
of portfolio managers, investment strategists and other investment specialists.
This team approach brings together many disciplines and leverages BFA's
extensive resources.
Pursuant to the Investment Advisory Agreement between BFA and the Trust
(entered into on behalf of the Fund), BFA is responsible for substantially all
expenses of the Fund, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, except interest expense,
taxes, brokerage expenses, future distribution fees or expenses and
extraordinary expenses.
For its investment advisory services to the Fund, BFA is entitled to receive a
management fee from the Fund based on a percentage of the Fund's average daily
net assets, at the annual rate of ___%. Because the Fund has been in operation
for less than one full fiscal year, this percentage reflects the rate at which
BFA will be paid.
BFA is located at 400 Howard Street, San Francisco, CA 94105. It is a
wholly-owned subsidiary of BTC, which in turn is indirectly wholly-owned by
BlackRock, Inc. ("BlackRock"). As of _____, 2010, BTC and its affiliates,
including BFA and BlackRock, provided investment advisory services for assets
in excess of $__. BFA, BTC, BlackRock Execution Services, BlackRock 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 Trust's Board of Trustees' (the
"Board") approval of the Investment Advisory Agreement with BFA will be
available in the Fund's annual report for the period ending July 31.
PORTFOLIO MANAGERS. Diane Hsiung and Greg Savage (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.
Diane Hsiung is an employee of BFA (formerly, Barclays Global Fund Advisors
("BGFA")) and BTC (formerly, Barclays Global Investors, N.A. ("BGI")) and,
together with the other Portfolio Manager, is primarily responsible for the
day-to-day management of the Fund. Ms. Hsiung has been a senior portfolio
manager for BFA and BTC since 2007. Prior to
8
that, Ms. Hsiung was a portfolio manager from 2002 to 2006 for BGFA and BGI.
Ms. Hsiung has been a Portfolio Manager of the Fund since 2010.
Greg Savage is an employee of BFA and BTC and, together with the other
Portfolio Manager, is primarily responsible for the day-to-day management of
the Fund. Mr. Savage has been a senior portfolio manager for BFA and BTC since
2006. Prior to that, Mr. Savage was a portfolio manager from 2001 to 2006 for
BGFA and BGI. Mr. Savage has been a Portfolio Manager of the Fund since 2010.
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 AT WWW.ISHARES.COM.
BUYING AND SELLING SHARES. Shares of the Fund will be listed for trading 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 may apply to all securities transactions. When buying or selling
shares of the Fund through a broker, you will likely incur a brokerage
commission or other charges determined by your broker. In addition, you may
incur the cost of the "spread" - that is, any 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 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 "___".
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. Only an Authorized Participant (as
defined in the CREATIONS AND REDEMPTIONS section) may engage in creation or
redemption transactions directly with the Fund. Once created, shares of the
Fund generally trade in the secondary market in amounts less than a Creation
Unit.
The Board 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
9
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 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 1940 Act restricts investments by registered investment
companies in the securities of other investment companies. 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
shares of the Fund. DTC participants include 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.
SHARE PRICES. The trading prices of the Fund's shares in the secondary market
generally 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's shares are listed or by market data vendors or other information
providers. The IOPV is based on the current market value of the securities
and/or 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
10
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 of the Fund is generally determined
once daily Monday through Friday generally as of the regularly scheduled close
of business of the New York Stock Exchange ("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.
The securities and other assets of the Fund are valued pursuant to the pricing
policy and procedures approved by the Board. The Fund utilizes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. Inputs may be based on independent market
data ("observable inputs") or they may be internally developed ("unobservable
inputs"). The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). The
three levels of the fair value hierarchy are as follows:
o Level 1 - Inputs that reflect unadjusted quoted prices in active markets for
identical assets or liabilities that the Fund has the ability to access at the
measurement date;
o Level 2 - Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability either directly or indirectly, including
quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not
considered to be active, inputs other than quoted prices that are observable
for the asset or liability and inputs that are derived principally from or
corroborated by observable market data by correlation or other means; and
o Level 3 - Inputs that are unobservable for the asset or liability.
The availability of observable inputs can vary from security to security and is
affected by a wide variety of factors, including, for example, the type of
security, whether the security is new and not yet established in the
marketplace, the liquidity of markets and other characteristics particular to
the security. Inputs may include price information, volatility statistics,
specific and broad credit data, liquidity statistics and other factors. To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised in determining fair
value is greatest for instruments categorized in Level 3 of the fair value
hierarchy.
11
The level of a value determined for a financial instrument within the fair
value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement in its entirety. The categorization of a value
determined for a financial instrument within the hierarchy is based upon the
pricing transparency of the instrument and does not necessarily correspond to
the Fund's perceived risk of that instrument.
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 Underlying Index, which, in turn, could result in a difference
between the Fund's performance and the performance of the Underlying Index.
The value of assets denominated in non-U.S. currencies is converted into U.S.
dollars using exchange rates deemed appropriate by BFA as investment adviser.
Use of a rate different from the rate used by the Index Provider may adversely
affect the Fund's ability to track the Underlying Index.
DIVIDENDS AND DISTRIBUTIONS
GENERAL POLICIES. Dividends from net investment income, if any, are generally
declared and paid semi-annually by the Fund. Distributions of net realized
securities gains, if any, generally are declared and paid once a year, but the
Trust may make distributions on a more frequent basis for the Fund. The Trust
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 ("RIC") or to avoid imposition of income or excise
taxes on undistributed income or realized gains.
Dividends and other distributions on shares of the Fund are distributed on a
PRO RATA basis to beneficial owners of such shares. Dividend payments are made
through DTC participants and indirect 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 Fund 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.
12
TAXES ON DISTRIBUTIONS. Distributions from the Fund's net investment income
(other than qualified dividend income), including distributions of income from
securities lending and distributions out of the Fund's net short-term capital
gains, if any, 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,
generally at a 15% tax rate (0% at certain income levels), 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.
The 15% and 0% tax rates expire for taxable years beginning after December 31,
2010. Maximum long-term capital gain income tax rates are scheduled to rise to
20% in 2011. Recent legislation will impose, beginning in 2013, a new 3.8%
Medicare contribution tax on "net investment income," including interest,
dividends, and capital gains, of U.S. individuals with income exceeding
$200,000 (or $250,000 if married and filing jointly), and of estates and
trusts.
Dividends will be qualified dividend income to you if they are attributable to
qualified dividend income received by the Fund. Generally, qualified dividend
income includes dividend income from taxable U.S. corporations and qualified
non-U.S. corporations, provided that the Fund satisfies certain holding period
requirements in respect of the stock of such corporations and has not hedged
its position in the stock in certain ways. For this purpose, a qualified
non-U.S. corporation means any non-U.S. corporation that is eligible for
benefits under a comprehensive income tax treaty with the United States which
includes an exchange of information program or if the stock with respect to
which the dividend was paid is readily tradable on an established United States
security market. The term excludes a corporation that is a passive foreign
investment company.
Dividends received by the Fund from a real estate investment trust ("REIT") or
another RIC generally are qualified dividend income only to the extent the
dividend distributions are made out of qualified dividend income received by
such REIT or RIC. It is expected that dividends received by the Fund from a
REIT and distributed to a shareholder generally will be taxable to the
shareholder as ordinary income.
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.
For a dividend to be treated as qualified dividend income, the dividend must be
received with respect to a share of stock held without being hedged by the
Fund, and with respect to a share of the Fund held without being hedged by you,
for 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 U.S. 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
13
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 non-U.S. 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 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 or other disposition of shares of the Fund. Beginning in 2013,
withholding on all distributions and redemptions will apply for non-U.S.
entities, unless certain disclosures are made as to any direct and indirect
U.S. ownership.
Dividends and interest received by the Fund with respect to non-U.S. securities
may give rise to withholding and other taxes imposed by non-U.S. countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If, as is expected, more than 50% of the total assets of
the Fund at the close of a year consist of non-U.S. stocks or securities, the
Fund may "pass through" to you certain non-U.S. income taxes (including
withholding taxes) paid by the Fund. This means that you would be considered to
have received as an additional dividend your share of such non-U.S. 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
U.S. federal income tax.
For purposes of foreign tax credits for U.S. shareholders of the Fund, foreign
capital gains taxes may not produce associated foreign source income, limiting
the availability of such credits for U.S. persons.
If you are a resident or a citizen of the United States, by law, back-up
withholding will apply to your distributions and proceeds if you have not
provided a taxpayer identification number or social security number and made
other required certifications.
TAXES WHEN SHARES ARE SOLD. Currently, any capital gain or loss realized upon a
sale of Fund shares is generally treated as a long-term gain or loss if the
shares have been held for more than one year. Any capital gain or loss realized
upon a sale of Fund 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. Beginning in 2013,
any such capital gains will be included in "net investment income" for purposes
of the 3.8% Medicare contribution tax mentioned above.
THE FOREGOING DISCUSSION SUMMARIZES SOME OF THE CONSEQUENCES UNDER CURRENT U.S.
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.
CREATIONS AND REDEMPTIONS. Prior to trading in the secondary market, shares of
the Fund are "created" at NAV by market makers, large investors and
institutions only in
14
block-size Creation Units of __ 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").
Only an Authorized Participant may create or redeem Creation Units directly
with the Fund. A creation transaction, which is subject to acceptance by the
transfer agent, generally takes place when an Authorized Participant deposits
into the Fund a portfolio of securities approximating the holdings of the Fund
and a specified amount of cash in exchange for a specified number of Creation
Units. To the extent practicable, the composition of such portfolio generally
corresponds PRO RATA to the holdings of the Fund.
Similarly, shares can be redeemed only in Creation Units, generally in-kind for
a portfolio of securities held by the Fund ("Fund Securities") and a specified
amount of cash. EXCEPT WHEN AGGREGATED IN CREATION UNITS, SHARES ARE NOT
REDEEMABLE BY THE FUND. 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 U.S. 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 of 1933, as amended (the "1933
Act"). Further, an Authorized Participant that is not a "qualified
institutional buyer," as such term is defined under Rule 144A of the 1933 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 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 1933
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 1933 Act. 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 1933 Act, would be
unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the 1933 Act. For delivery of prospectuses to exchange members,
the prospectus delivery mechanism of Rule 153
15
under the 1933 Act is available only with respect to transactions on a national
securities exchange.
TRANSACTION FEES. Authorized Participants are charged standard creation and
redemption transaction fees 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 (up to the maximum amount shown below) to compensate for brokerage and
market impact expenses. The standard creation and redemption transaction fees
are set forth below. The standard creation transaction fee is charged to each
purchaser on the day such purchaser creates a Creation Unit. The standard
creation transaction fee is the same regardless of the number of Creation Units
purchased by an investor on the same day. Similarly, the standard redemption
transaction fee is the same regardless of the number of Creation Units redeemed
on the same day. Creations and redemptions through DTC for cash (when cash
creations and redemptions are available or specified) are also subject to an
additional variable charge up to the maximum amount shown in the table below.
In addition, purchasers of shares in Creation Units are responsible for payment
of the costs of transferring securities to the Fund and 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 ___________, 2010, the approximate value
of one Creation Unit, including standard and maximum additional creation and
redemption transaction fees:
STANDARD MAXIMUM ADDITIONAL MAXIMUM ADDITIONAL
APPROXIMATE CREATION/ VARIABLE CHARGE VARIABLE CHARGE
VALUE OF A CREATION REDEMPTION FOR FOR
CREATION UNIT UNIT SIZE TRANSACTION FEE CREATIONS* REDEMPTIONS*
--------------- ----------- ----------------- -------------------- -------------------
$_______ __ $ ____ 3.0% 2.0%
----------
* As a percentage of the amount invested and/or redeemed.
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
16
purchased or sold by the Fund. The Distributor's principal address is One
Freedom Valley Drive, Oaks, PA 19456.
In addition, BFA or its affiliates makes payments to broker-dealers, banks or
other financial intermediaries (together, "intermediaries") related to
marketing activities and presentations, educational training programs,
conferences, the development of technology platforms and reporting systems, or
their making shares of the Fund and certain other iShares funds available to
their customers. Such payments, which may be significant to the intermediary,
are not made by the Fund. Rather, such payments are made by BFA or its
affiliates from their own resources, which come directly or indirectly in part
from fees paid by the iShares funds complex. Payments of this type are
sometimes referred to as revenue-sharing payments. A financial intermediary may
make decisions about which investment options it recommends or makes available,
or the level of services provided, to its customers based on the
revenue-sharing payments it is eligible to receive. Therefore, such payments to
an intermediary create conflicts of interest between the intermediary and its
customers and may cause the intermediary to recommend the Fund or other iShares
funds over another investment. More information regarding these payments is
contained in the Fund's SAI. PLEASE CONTACT YOUR SALESPERSON OR OTHER
INVESTMENT PROFESSIONAL FOR MORE INFORMATION REGARDING ANY SUCH PAYMENTS HIS OR
HER FIRM MAY RECEIVE FROM BFA OR ITS AFFILIATES.
Financial Highlights
Financial highlights for the Fund are not available because, as of the
effective date of this Prospectus, the Fund has not commenced operations, and
therefore has no financial highlights to report.
Index Provider
MSCI is a leading provider of global indexes and benchmark related products and
services to investors worldwide. MSCI is not affiliated with the Trust, BTC,
BFA, State Street, the Distributor or any of their respective affiliates.
BTC has entered into a license agreement with the Index Provider to use the
Underlying Index. BTC sublicenses rights in the Underlying Index to the Trust
at no charge.
Disclaimers
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI OR ANY AFFILIATE
OF MSCI. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, TO THE OWNERS OF THIS FUND OR ANY MEMBER OF THE PUBLIC
REGARDING ADVISABILITY OF INVESTING IN FUNDS GENERALLY OR IN THIS FUND
PARTICULARLY OR THE ABILITY OF THE UNDERLYING INDEX TO TRACK GENERAL STOCK
MARKET PERFORMANCE. MSCI IS THE LICENSOR OF CERTAIN TRADEMARKS, SERVICE MARKS
AND TRADE NAMES OF MSCI AND OF THE UNDERLYING INDEX WHICH IS DETERMINED,
COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THE TRUST, BTC, BFA OR THE
FUND. MSCI HAS NO OBLIGATION TO TAKE THE NEEDS OF THE BTC, BFA OR THE OWNERS OF
THE FUND INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE
17
UNDERLYING INDEX. MSCI IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THE FUND TO BE
ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE FUND
IS REDEEMABLE FOR CASH. NEITHER MSCI NOR ANY OTHER PARTY HAS ANY OBLIGATION OR
LIABILITY TO OWNERS OF THE FUND IN CONNECTION WITH THE ADMINISTRATION,
MARKETING OR TRADING OF THE FUND.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEXES FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEXES OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES
ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE FUND, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE INDEXES OR ANY DATA INCLUDED HEREUNDER OR
FOR ANY OTHER USE. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR
IMPLIED WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR DIRECT, INDIRECT,
SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS)
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
SHARES OF THE FUND ARE NOT SPONSORED, ENDORSED OR PROMOTED BY _______. _______
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 TO TRACK STOCK MARKET PERFORMANCE. _______ IS
NOT RESPONSIBLE FOR, NOR HAS IT PARTICIPATED IN, THE DETERMINATION OF THE
COMPILATION OR THE CALCULATION OF THE UNDERLYING INDEX, NOR IN THE
DETERMINATION OF THE TIMING OF, PRICES OF, OR QUANTITIES OF SHARES OF THE FUND
TO BE ISSUED, NOR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH
THE SHARES ARE REDEEMABLE. _______ 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.
_______ DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN. _______ MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST ON BEHALF OF THE
FUND AS LICENSEE, LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE SHARES
OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE SUBJECT INDEX OR
ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED AS DESCRIBED
HEREIN OR FOR ANY OTHER USE. _______ MAKES NO EXPRESS OR IMPLIED WARRANTIES AND
HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE UNDERLYING INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL _______ 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.
18
BFA DOES NOT GUARANTEE THE ACCURACY OR THE COMPLETENESS OF THE UNDERLYING INDEX
OR ANY DATA INCLUDED THEREIN AND BFA SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS OR INTERRUPTIONS THEREIN.
BFA MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF SHARES OF THE FUND
OR TO ANY OTHER PERSON OR ENTITY, AS TO RESULTS TO BE OBTAINED BY THE FUND FROM
THE USE OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN. BFA 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 BFA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
DIRECT, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
19
[GRAPHIC APPEARS HERE]
Dear iShares Shareholder:
Electronic delivery is the easiest, most convenient way to receive reporting on
your iShares holdings. In addition, it's a way we can all care for our
environment. To that end, we are pleased to offer shareholder reports and
prospectuses online.
Once you have enrolled, you will no longer receive shareholder reports and
prospectuses in the mail. Instead, you will receive e-mail notifications
announcing that the shareholder report or prospectus has been posted on the
iShares website at www.iShares.com and is available to be viewed or downloaded.
---------------
To sign up for electronic delivery, please follow these simple steps:
1. Go to www.icsdelivery.com.
-------------------
2. From the main page, select the first letter of your brokerage firm's
name.
3. Select your brokerage institution from the list that follows. If your
brokerage firm is not listed, electronic delivery may not be available.
Please contact your brokerage firm or financial adviser.
4. Fill out the appropriate information and provide the e-mail address where
you would like your notifications sent.
Your information and e-mail address will be kept confidential and only used to
deliver documents to you. If at any time you are not satisfied, you can cancel
electronic delivery at www.icsdelivery.com and once again receive physical
-------------------
delivery of your materials. If you have any questions, please contact your
brokerage firm or financial adviser.
FOR MORE INFORMATION:
WWW.iSHARES.COM
1-800-iShares (1-800-474-2737)
Copies of the Prospectus, SAI and other information can be found on our website
at www.iShares.com. For more information about 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.
If you have any questions about the Trust or shares of the Fund or you wish to
obtain the SAI free of charge, please:
Call: 1-800-iShares or 1-800-474-2737 (toll free)
Monday through Friday, 8:30 a.m. to 6:30 p.m. (Eastern time)
E-mail: iSharesETFs@blackrock.com
Write: 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 to
the SEC's Public Reference Section, Washington, D.C. 20549-1520.
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
IS-P-___-_________
[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(Reg. TM) TRUST
Statement of Additional Information
Dated ______, 2010
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current prospectus ( the "Prospectus") for the
following fund of iShares Trust (the "Trust"), as such Prospectus may be
revised or supplemented from time to time:
FUND TICKER STOCK EXCHANGE
------------------------------------------------------------- -------- ---------------
iShares MSCI ACWI ex US Health Care Index Fund (the "Fund") ___ _______
The Prospectus for the Fund is dated __________, 2010. Capitalized terms used
herein that are not defined have the same meaning as in the Prospectus, unless
otherwise noted. The financial statements and notes contained in the Annual
Report of the Trust for the above listed fund is incorporated by reference into
and are deemed to be part of this SAI. 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(Reg. TM) is a registered trademark of BlackRock Institutional Trust
Company, N.A. ("BTC") (formerly, Barclays Global Investors, N.A. ("BGI").
TABLE OF CONTENTS
PAGE
-----
General Description of the Trust and the Fund 1
Exchange Listing and Trading 1
Investment Strategies and Risks 2
Diversification Status 2
Lending Portfolio Securities 2
Repurchase Agreements 3
Reverse Repurchase Agreements 3
Currency Transactions 4
Securities of Investment Companies 4
Non-U.S. Securities 4
Illiquid Securities 5
Short-Term Instruments and Temporary Investments 5
Futures and Options 5
Options on Futures Contracts 6
Swap Agreements 6
Tracking Stocks 6
Future Developments 6
General Considerations and Risks 6
Risks of Derivatives 7
Risks of Equity Securities 7
Risks of Futures and Options Transactions 7
Securities Lending Risk 8
Risks of Swap Agreements 8
Risks of Investing in Non-U.S. Equity Securities 8
Dividend Risk 8
Proxy Voting Policy 9
Portfolio Holdings Information 9
Construction and Maintenance of the Underlying Index 10
MSCI Indexes 11
MSCI All Country World ex USA Health Care Index 13
Investment Limitations 13
Continuous Offering 14
Management 15
Trustees and Officers 15
Committees of the Board of Trustees 21
Remuneration of Trustees 24
i
PAGE
-----
Control Persons and Principal Holders of Securities 25
Potential Conflicts of Interest 25
Investment Advisory, Administrative and Distribution Services 31
Investment Adviser 31
Portfolio Managers 32
Codes of Ethics 33
Anti-Money Laundering Requirements 33
Administrator, Custodian and Transfer Agent 34
Distributor 34
Financial Intermediary Compensation 34
Brokerage Transactions 35
Additional Information Concerning the Trust 36
Shares 36
Termination of the Trust or the Fund 36
DTC as Securities Depository for Shares of the Fund 37
Creation and Redemption of Creation Units 37
General 37
Fund Deposit 38
Procedures for Creation of Creation Units 39
Placement of Creation Orders 39
Issuance of a Creation Unit 39
Acceptance of Orders for Creation Units 40
Creation Transaction Fee 40
Redemption of Shares in Creation Units 40
Redemption Transaction Fee 41
Placement of Redemption Orders 41
Taxation on Creation and Redemptions of Creation Units 43
Regular Holidays 43
Redemptions 47
Taxes 48
Regulated Investment Company Qualifications 48
Taxation of RICs 49
Excise Tax 49
Net Capital Loss Carryforwards 49
Taxation of U.S. Shareholders 49
Sales of Shares 50
Back-Up Withholding 51
ii
PAGE
-----
Sections 351 and 362 51
Taxation of Certain Derivatives 51
Qualified Dividend Income 52
Excess Inclusion Income 52
Non-U.S. Investments 53
Passive Foreign Investment Companies 53
Reporting 53
Other Taxes 54
Taxation of Non-U.S. Shareholders 54
Financial Statements 55
Miscellaneous Information 55
Counsel 55
Independent Registered Public Accounting Firm 55
Shareholder Communications to the Board 55
iii
General Description of the Trust and the Fund
The Trust currently consists of more than ___ investment series or 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 "1933 Act"). This SAI relates solely to
the 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 issuers in a particular broad market,
market segment, market sector or group of industries. The Fund is managed by
BlackRock Fund Advisors ("BFA" or the "Investment Adviser") (formerly, Barclays
Global Fund Advisors ("BGFA")), a wholly-owned subsidiary of BTC, which in turn
is indirectly wholly-owned by BlackRock, Inc.
The Fund offers and issues shares at their net asset value per share ("NAV")
only in aggregations of a specified number of shares ("Creation Unit"),
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"). Shares of the Fund are listed
and trade on The NASDAQ Stock Market LLC ("NASDAQ" or the "Listing Exchange"),
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 Units, and, generally, in exchange for portfolio
securities and a Cash Component. 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. Shares may be issued in advance of receipt of Deposit
Securities subject to various conditions, including a requirement to maintain
with the Trust a cash deposit equal to at least 115%, which BFA may change from
time to time, of the market value of the omitted Deposit Securities. See the
CREATION AND REDEMPTION OF CREATION UNITS section of this SAI. Transaction fees
for cash creations or redemptions may be higher than the transaction fees
associated with in-kind creations or redemptions. In all cases, conditions and
fees will be limited in accordance with the requirements of SEC rules and
regulations 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 Fund's Prospectus. The discussion below supplements, and should be read in
conjunction with, that section of the Prospectus.
Shares of the Fund are listed for trading and trade 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 the Fund will continue to be met. The Listing Exchange may, but is
not required to, remove the shares of the Fund from listing if (i) following
the initial 12-month period beginning upon the commencement of trading of Fund
shares, there are fewer than 50 beneficial owners of shares of the 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 also remove shares
of the Fund from listing and trading upon termination of the 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 or a market data vendor disseminates
information every 15 seconds through the facilities of the Consolidated Tape
Association or other widely disseminated means an updated IOPV for the Fund as
calculated by an information provider or market data
1
vendor. 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, 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.
The cash component included in an IOPV consists of estimated accrued interest,
dividends and other income, less expenses. If applicable, each IOPV also
reflects changes in currency exchange rates between the U.S. dollar and the
applicable currency.
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 issuers that comprise its 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.
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 sample of
securities selected by BFA to have a collective investment profile similar to
that of 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 in the Underlying Index.
DIVERSIFICATION STATUS. The Fund is classified as "non-diversified." A
non-diversified fund is a fund that 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 of such a fund 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 intends to maintain the required level of diversification and
otherwise conduct its operations so as to qualify as a Regulated Investment
Company ("RIC") for purposes of the U.S. Internal Revenue Code of 1986, as
amended, (the "Internal Revenue Code") and to relieve the Fund of any liability
for U.S. federal income tax to the extent that its earnings are distributed to
shareholders, provided that the Fund satisfies a minimum distribution
requirement. Compliance with the diversification requirements of the Internal
Revenue Code 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 BFA. The
borrowers provide collateral that is maintained in an amount at least equal to
the current market value of the securities loaned. No securities loan shall be
made on behalf of the Fund if, as a result, the aggregate value of all
securities loans of the Fund exceeds one-third of the value of the Fund's total
assets (including the value of the collateral received). 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
2
certain short-term instruments either directly on behalf of the Fund or through
one or more joint accounts or money market funds, including those affiliated
with BFA; such reinvestments are subject to investment risk.
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 pays 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
Trust's Board of Trustees (the "Board" or the "Trustees"). To the extent that
the Fund engages in securities lending, BTC acts as securities lending agent
for the Fund subject to the overall supervision of BFA. BTC receives a portion
of the revenues generated by securities lending activities as compensation for
its services.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. A
repurchase agreement is an instrument under which the purchaser (I.E., the
Fund) acquires the security and the seller agrees, at the time of the sale, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the purchaser's holding period. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. If a repurchase
agreement is construed to be a collateralized loan, the underlying securities
will not be considered to be owned by the Fund but only to constitute
collateral for the seller's obligation to pay the repurchase price, and, in the
event of a default by the seller, the Fund may suffer time delays and incur
costs or losses in connection with the disposition of the collateral.
In any repurchase transaction, the collateral for a repurchase agreement may
include: (i) cash items; (ii) obligations issued by the U.S. government or its
agencies or instrumentalities; or (iii) obligations that, at the time the
repurchase agreement is entered into, are rated in the highest rating category
generally by at least two nationally recognized statistical rating
organizations ("NRSRO"), or, if unrated, determined to be of comparable quality
by BFA. Collateral, however, is not limited to the foregoing and may include
for example obligations rated below the highest category by NRSROs. Collateral
for a repurchase agreement may also include securities that the Fund could not
hold directly without the repurchase obligation. Irrespective of the type of
collateral underlying the repurchase agreement, in the case of a repurchase
agreement entered into by a non-money market fund, the repurchase obligation of
a seller must be of comparable credit quality to securities which are rated in
one of the two highest rating categories by any NRSRO.
Repurchase agreements pose certain risks for a fund that utilizes them. Such
risks are not unique to the Fund, but are inherent in repurchase agreements.
The Fund seeks to minimize such risks, but because of the inherent legal
uncertainties involved in repurchase agreements, such risks cannot be
eliminated. Lower quality collateral and collateral with longer maturities may
be subject to greater price fluctuations than higher quality collateral and
collateral with shorter maturities. If the repurchase agreement counterparty
were to default, lower quality collateral may be more difficult to liquidate
than higher quality collateral. Should the counterparty default and the amount
of collateral not be sufficient to cover the counterparty's repurchase
obligation, the Fund would retain the status of an unsecured creditor of the
counterparty (I.E., the position the Fund would normally be in if it were to
hold, pursuant to its investment policies, other unsecured debt securities of
the defaulting counterparty) with respect to the amount of the shortfall. As an
unsecured creditor, the Fund would be at risk of losing some or all of the
principal and income involved in the transaction.
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 advantageous
only if the Fund has an opportunity to earn a rate of interest on the cash
derived from these transactions that is greater 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 intends to use the reverse repurchase
technique only when BFA 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
3
repurchase agreements will be covered by assets 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 non-U.S. currency. The Fund may enter
into non-U.S. currency forward and non-U.S. 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. Currency futures contracts may be settled
on a net cash payment basis rather than by the sale and delivery of the
underlying currency. To the extent required by law, liquid assets committed to
futures contracts will be maintained.
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 non-U.S. currency. If BFA 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 non-U.S. currency transactions.
SECURITIES OF INVESTMENT COMPANIES. The Fund may invest in the securities of
other investment companies (including money market funds) to the extent allowed
by law. Pursuant to 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. 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
or otherwise affiliated with BFA, 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.
NON-U.S. SECURITIES. The Fund intends to purchase publicly-traded common
stocks of non-U.S. issuers. To the extent the Fund invests in stocks of
non-U.S. issuers, the Fund's investment in such stocks may 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 issuer,
which evidence ownership of underlying securities issued by a non-U.S. issuer.
For ADRs, the depository is typically a U.S. financial institution and the
underlying securities are issued by a non-U.S. issuer. For other forms of
Depositary Receipts, the depository may be a non-U.S. or a U.S. entity, and the
underlying securities may be issued by a non-U.S. 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.
The Fund will not invest in any unlisted Depositary Receipt or any Depositary
Receipt that BFA deems illiquid at the time of purchase or for which pricing
information is not readily available. In general, Depositary Receipts must be
sponsored but 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.
Therefore there may be less information available regarding such issuers and
there may be no correlation between available information and the market value
of the Depositary Receipts.
4
Investing in the securities of non-U.S. issuers involves special risks and
considerations not typically associated with investing in U.S. issuers. 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 non-U.S. countries, and potential restrictions on
the flow of international capital. Non-U.S. issuers may be subject to less
governmental regulation than U.S. issuers. Moreover, individual non-U.S.
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.
ILLIQUID SECURITIES. The Fund may invest up to an aggregate amount of 15% of
its net assets in illiquid securities (calculated at the time of investment).
Illiquid securities include securities subject to contractual or other
restrictions on resale and other instruments that lack readily available
markets.
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 BFA or otherwise
affiliated with BFA); (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 non-U.S.
banks (including non-U.S. branches) and similar institutions; (iv) commercial
paper rated, at the date of purchase, "Prime-1" by Moody's(Reg. TM) Investors
Service, Inc. or "A-1" by Standard & Poor's(Reg. TM) (a division of The
McGraw-Hill Companies, Inc.) ("S&P(Reg. TM)"), or if unrated, of comparable
quality as determined by BFA; (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 non-U.S. banks (including U.S. branches)
that, in the opinion of BFA, 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 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.
FUTURES AND OPTIONS. The Fund may enter into futures contracts and options.
These futures contracts and options will be used to simulate investment in the
Underlying Index, to facilitate trading or to reduce transaction costs. The
Fund may enter into futures contracts and options that are traded on a U.S. or
non-U.S. 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 claimed an 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.
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 investments that reflect the market value of common stock of the firms
included in the investments. The Fund may enter into futures contracts to
purchase securities indexes when BFA anticipates purchasing the underlying
securities and believes prices will rise before the purchase will be made. To
the extent required by law, liquid assets committed to futures contracts will
be maintained.
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
exercise 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. Generally, the Fund maintains an amount of liquid
assets equal to its obligations relative to the position involved, adjusted
daily on a marked-to-market basis. With respect to futures contracts that are
contractually required to "cash-settle," the Fund maintains liquid assets in an
amount at least equal to the Fund's daily marked-to-market obligation (I.E.,
the Fund's daily net liability, if any), rather than the contracts' notional
value (I.E., the value of the underlying asset). By maintaining assets equal to
its net obligation under cash-settled futures contracts, the Fund may employ
leverage to a
5
greater extent than if the Fund set aside assets equal to the futures
contracts' full notional value. The Fund bases its asset maintenance policies
on methods permitted by the staff of the SEC and may modify these policies in
the future to comply with any changes in the guidance articulated from time to
time by the SEC or its staff.
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 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
potential for loss related to writing put options is limited to the agreed upon
price per share, also known as the strike price, less the premium received from
writing the put.
The Fund may purchase and write put and call options on futures contracts that
are traded on an 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." 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 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.
6
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 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 the Fund should 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 (either of
which may cause a decrease in the value of the portfolio securities and thus in
the value of shares of the 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 risks than holders of preferred stocks and debt obligations because common
stockholders generally have rights to receive payments from stock issuers
inferior to 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 (the value of which, 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.
Although most of the securities in the Underlying Index are listed on a
national securities exchange, the principal trading market for some may be in
the over-the-counter market. The existence of a liquid trading market for
certain securities may depend on whether dealers will make a market in such
securities. There can be no assurance that a market will be made or maintained
or that any such market will be or remain liquid. The price at which securities
may be sold and the value of the Fund's shares will be adversely affected if
trading markets for the Fund's portfolio securities are limited or absent, or
if bid/ask spreads are wide.
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, intends to utilize futures and options
contracts in a manner designed to limit its risk exposure to levels comparable
to a direct investment in the types of stocks in which it invests.
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
BFA as to anticipated trends, which predictions could prove to be incorrect.
7
Because the futures market generally 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.
SECURITIES LENDING RISK. The Fund may engage in securities lending. Securities
lending involves the risk that the borrower may fail to return the securities
in a timely manner or at all. As a result, the Fund may lose money and there
may be a delay in recovering the loaned securities. The Fund could also lose
money if it does not recover the securities and/or the value of the collateral
falls, including the value of investments made with cash collateral. These
events could trigger adverse tax consequences for the Fund.
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).
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 non-U.S. exchanges. 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 issuers 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 also involves certain risks and
considerations not typically associated with investing in a fund whose
portfolio contains exclusively 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 costs; delays and risks attendant in settlement procedures;
difficulties in enforcing contractual obligations; lower liquidity and
significantly smaller market capitalization; different accounting and
disclosure standards; lower levels of regulation of the securities markets;
more substantial government interference with the economy; higher rates of
inflation; greater social, economic, and political uncertainty; the risk of
nationalization or expropriation of assets; and the risk of war.
DIVIDEND RISK. There is no guarantee that the issuer 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.
CUSTODY RISK. Custody risk refers to the risks inherent in the process of
clearing and settling trades and to the holding of securities by local banks,
agents and depositories. Low trading volumes and volatile prices in less
developed markets make trades harder to complete and settle, and governments or
trade groups may compel local agents to hold securities in designated
depositories that are not subject to independent evaluation. Local agents are
held only to the standards of care of their local markets. The less developed a
country's securities market is, the greater the likelihood of custody problems.
EMERGING MARKETS RISK. Investments in emerging markets are subject to a greater
risk of loss than investments in developed markets. This is due to, among other
things, greater market volatility, lower trading volume, political and economic
instability, greater risk of a market shutdown and more governmental
limitations on foreign investments than typically found in developed markets.
8
Proxy Voting Policy
The Trust has adopted, as its proxy voting policies for the Fund, the proxy
voting guidelines of BFA, the investment adviser to the Fund. The Trust has
delegated to BFA 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 BFA's role in implementing such guidelines.
BFA votes (or refrains from voting) proxies for the Fund in a manner that BFA,
in the exercise of its independent business judgment, concludes is in the best
economic interests of the Fund. In some cases, BFA 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, BFA'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 BFA recalling loaned securities in order to ensure they are
voted. Periodically, BFA 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.
BFA will normally vote on specific proxy issues in accordance with its proxy
voting guidelines. BFA's proxy voting guidelines provide detailed guidance as
to how to vote proxies on certain important or commonly raised issues. BFA 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. BFA 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), BFA or
BFA's affiliates, or the Distributor or the Distributor's affiliates. When
voting proxies, BFA attempts to encourage issuers 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:
o 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;
o 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
o 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.
BFA 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), BFA or BFA's
affiliates (if any) or the Distributor or the Distributor's affiliates, from
having undue influence on BFA's proxy voting activity. In certain instances,
BFA 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 BFA with instructions as to how to vote such proxies. In the
latter case, BFA votes the proxy in accordance with the independent fiduciary's
determination.
Information with respect to how BFA voted proxies relating to the Fund's
portfolio securities during the 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.
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: (i) is consistent with applicable legal requirements and in the
best interests of the Fund's shareholders; (ii) does not put the interests of
BFA, the Distributor or any affiliated person of BFA or the Distributor, above
those of Fund shareholders; (iii) 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
9
information necessary for transactions in Creation Units, as contemplated by
the iShares Exemptive Orders and as discussed below; and (iv) 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 (iii) 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 pursuant to legal
requirements, including exemptive orders granted by the SEC pursuant to which
the Fund offers and redeems its 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 Authorized Participants, and (ii) to other personnel of the
Investment Adviser and the Distributor, administrator, custodian and fund
accountant who deal directly with or assist in, functions related to investment
management, distribution, 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, and as often as each day the Fund is open for business, at
WWW.ISHARES.COM. More information about this disclosure is available at
WWW.ISHARES.COM.
Portfolio holdings information made available in connection with the
creation/redemption process may be provided to other entities that provide
services to the Fund in the ordinary course of business after it has been
disseminated to the NSCC. 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 be provided to
other entities that provide services to the Fund, including rating or ranking
organizations, in the ordinary course of business, no earlier than one business
day following the date of the information.
The Fund discloses its complete portfolio holdings schedule in public filings
with the SEC within 70 days after the end of each fiscal quarter and will
provide that information to shareholders as required by federal securities laws
and regulations thereunder. The Fund may, however, 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
contemporaneously.
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.
Construction and Maintenance of the Underlying Index
A description of the Underlying Index is provided below.
10
MSCI INDEXES
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 equity markets. The MSCI single country standard equity
indexes have covered the world's developed markets since 1969 and in 1987 MSCI
commenced coverage of emerging markets.
Local stock exchanges traditionally calculated their own indexes which 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 to all markets for all single country standard equity
indexes, developed and emerging.
MSCI's Global Investable Market Indexes (the "MSCI GIMI") provide exhaustive
coverage and non-overlapping market segmentation by market capitalization size.
o MSCI Global Standard Indexes cover all investable large and mid cap
securities by including approximately 85% of each market's free
float-adjusted market capitalization.
o MSCI Global Small Cap Indexes provide coverage to all companies with a
market capitalization below that of the companies in the enhanced MSCI
Global Standard Indexes, and targeting up to 99% coverage (by the two groups
of indexes combined) of the free-float adjusted market capitalization in
each market.
MSCI GLOBAL INVESTABLE MARKET INDEXES
WEIGHTING. All single-country indexes of the MSCI GIMI are free-float weighted,
I.E., companies are included in the indexes at weights determined according to
the value of their free public float (free float multiplied by security price).
Indexes of the MSCI GIMI generally seek to include 99% of the free
float-adjusted market capitalization of a single country's stock market.
REGIONAL WEIGHTS. Market capitalization weighting, combined with a consistent
target of 99% 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. A market is
equivalent to a single country except in the developed markets of Europe, where
all markets are aggregated into a single market for index construction
purposes. Individual country indexes of the European developed markets are
derived from the constituents of the MSCI GIMI Europe Index.
SELECTION CRITERIA. MSCI's index construction process involves: (i) defining
the equity universe; (ii) determining the market investable equity universe for
each market; (iii) determining market capitalization size segments for each
market; and (iv) applying index continuity rules for the standard index.
DEFINING THE EQUITY UNIVERSE. MSCI begins with securities listed in countries
in the MSCI Global Index Series. Of these countries, 23 are classified as
developed markets and 22 as emerging markets. All listed equity securities and
listed securities that exhibit characteristics of equity securities, except
mutual funds, exchange traded funds, equity derivatives, limited partnerships
and most investment trusts, are eligible for inclusion in the equity universe.
REITs in some countries and certain income trusts in Canada are also eligible
for inclusion. Each company and its securities (I.E., share classes) are
classified in only one country, which allows for a distinctive sorting of each
company by its respective country.
DETERMINING THE EQUITY UNIVERSE IN EACH MARKET. The equity universe in any
market is derived by applying investability screens to individual companies and
securities in the equity universe of that market. Some investability
requirements are applied at the individual security level and some at the
overall company level, represented by the aggregation of individual securities
of the company. As a result, the inclusion or exclusion of one security does
not imply the automatic inclusion or exclusion of other securities of the same
company.
DETERMINING MARKET CAPITALIZATION SIZE SEGMENTS FOR EACH MARKET. In each market
MSCI creates an Investable Market Index, Standard Index, Large Cap Index, Mid
Cap Index and Small Cap Index. In order to create size components that can be
meaningfully aggregated into composites, individual market size segments
balance the following two objectives:
o Achieving global size integrity by ensuring that companies of comparable and
relevant sizes are included in a given size segment across all markets in a
composite index; and
o Achieving consistent market coverage by ensuring that each market's size
segment is represented in its proportional weight in the composite universe.
11
INDEX CONTINUITY RULES FOR THE STANDARD INDEX. In order to achieve index
continuity as well as provide some basic level of diversification within a
market index, notwithstanding the effect of other index construction rules
contained herein, a minimum number of five constituents will be maintained for
a developed market Standard Index and a minimum number of three constituents
will be maintained for an emerging market Standard Index.
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%.
PRICE AND EXCHANGE RATES
PRICES. The prices used to calculate all 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 foreign exchange 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 up to 15
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) changes in number of shares; and (iii) changes in inclusion
factors as a result of updated free float estimates.
Index maintenance can be described by three broad categories of changes:
o Semi-Annual Index Reviews (SAIRs), conducted on a fixed semi-annual
timetable that systematically re-assess the various dimensions of the equity
universe for all countries;
o Quarterly Index Reviews (QIRs), aimed at promptly reflecting other
significant market events; and
o 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 and
developed) are normally implemented in one or more phases at the regular
semi-annual index review and quarterly index review dates.
The MSCI conducts semi-annual index reviews for all the MSCI single country
international equity indexes as of the close of the last business day of
November and May. During the semi-annual reviews MSCI updates country indexes
based on a fully refreshed equity universe. MSCI also conducts two quarterly
index reviews on two dates throughout the year: as of the close of the last
business day of February and August. During the quarterly index review MSCI
updates country indexes to reflect changes in each country market that were not
reflected at the time of their occurrence, and that are significant enough to
be included before the next semi-annual review. 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.
12
MSCI ALL COUNTRY WORLD EX USA HEALTH CARE INDEX
NUMBER OF COMPONENTS: APPROXIMATELY 69
--------------------------------------
INDEX DESCRIPTION. The MSCI All Country World ex USA Health Care Index is a
free float-adjusted market capitalization weighted index designed to measure
the combined equity market performance of the health care sector of developed
and emerging markets countries, excluding the United States. Component
securities include those of health care equipment companies, health care
services companies, pharmaceuticals companies, biotechnology companies and life
sciences companies. As of April 30, 2010, the Underlying Index consisted of
companies in the following countries: Australia, Belgium, Canada, China,
Denmark, Finland, France, Germany, Hungary, India, Ireland, Israel, Japan,
Russia, South Africa, South Korea, Spain, Sweden, Switzerland and the United
Kingdom.
CALCULATION METHODOLOGY. The Fund utilizes the Underlying Index calculated with
net dividends reinvested. Net dividends means dividends after taxes withheld at
the rate applicable to holders of the underlying stock that are resident in
Luxembourg. Such withholding rates may differ from those applicable to U.S.
residents.
ADDITIONAL INFORMATION. "MSCI," "Morgan Stanley Capital International" and
"MSCI Index" are service marks of Morgan Stanley Capital International and have
been licensed for use by BTC. The Fund is not sponsored, endorsed, sold or
promoted by Morgan Stanley Capital International. Nor does Morgan Stanley
Capital International make any representation regarding the advisability of
investing in the Fund.
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 and (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, as
amended, 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 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).
13
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 1933 Act, in disposing of portfolio securities.
In addition to the investment restrictions adopted as fundamental policies set
forth above, the Fund, has adopted a non-fundamental policy not to 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 (calculated at the time of investment).
BFA monitors the liquidity of restricted securities in the Fund's portfolio. In
reaching liquidity decisions, BFA considers the following factors:
o The frequency of trades and quotes for the security;
o The number of dealers wishing to purchase or sell the security and the
number of other potential purchasers;
o Dealer undertakings to make a market in the security; and
o 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 and Depositary Receipts based on securities
in its 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 Units are created and traded may raise certain
issues under applicable securities laws. Because new Creation Units are issued
and sold by the Fund on an ongoing basis, at any point a "distribution," as
such term is used in the 1933 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 that could render them statutory underwriters and subject them to the
prospectus delivery requirement and liability provisions of the 1933 Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units 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 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 1933 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 1933 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 1933 Act,
a prospectus delivery obligation under Section 5(b)(2) of the 1933 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
available only with respect to transactions on an exchange.
14
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 BFA and other service providers. Each Trustee serves until he or
she resigns, is removed, dies, retires or becomes incapacitated. The President,
Chief Compliance Officer, Treasurer and Secretary shall each hold office until
their successors are chosen and qualified and all other officers shall hold
office until he or she resigns or is removed.
The Trust, iShares, Inc., Master Investment Portfolio ("MIP") and BlackRock
Funds III (formerly, Barclays Global Investors Funds), each an open-end
management investment company registered under the 1940 Act, are considered
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. With the exception of
Robert S. Kapito, the address of each Trustee and officer is c/o BlackRock,
Inc., 400 Howard Street, San Francisco, CA 94105. The address of Mr. Kapito is
c/o BlackRock, Inc., Park Avenue Plaza, 55 East 52nd Street, New York, NY
10055. The Board has designated George G.C. Parker as its Independent Chairman.
15
INTERESTED TRUSTEES
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY TRUSTEE
--------------------- ------------------ --------------------------------------- ----------------------------------------
Robert S. Kapito/1/ Trustee President and Director, BlackRock, Director of iShares, Inc. (since 2009);
(53) (since 2009) Inc. (since 2006 and 2007, Director of BlackRock, Inc. (since
respectively); Vice Chairman of 2007).
BlackRock, Inc. and Head of
BlackRock's Portfolio Management
Group (since its formation in 1998)
and BlackRock's predecessor entities
(since 1988); Trustee, University of
Pennsylvania (since 2009); Chairman,
Hope & Heroes Children's Cancer
Fund (since 2002); President of the
Board of Directors, Periwinkle
Theatre for Youth (since 1983).
Michael Latham/2/ Trustee (since Managing Director, BTC (since 2009); Director of iShares, Inc. (since 2010).
(44) 2010); President Head of Americas iShares, BGI (2007-
(since 2007). 2009); Director and Chief Financial
Officer of Barclays Global Investors
International, Inc. (2005-2009); Chief
Operating Officer of the Intermediary
Investor and Exchange Traded
Products Business of BGI (2003-
2007).
----------
/1/ Robert S. Kapito is deemed to be an "interested person" (as defined in the
1940 Act) of the Trust due to his affiliations with BlackRock, Inc.
/2/ Michael Latham is deemed to be an "interested person" (as defined in the
1940 Act) of the Trust due to his affiliations with BlackRock, Inc. and
its affiliates.
INDEPENDENT TRUSTEES
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY TRUSTEE
-------------------- -------------------- ------------------------------------- ----------------------------------------
George G.C. Parker Trustee (since Dean Witter Distinguished Professor Director of iShares, Inc. (since 2002);
(71) 2000); Independent of Finance, Emeritus, Stanford Independent Chairman of iShares,
Chairman (since University: Graduate School of Inc. (since 2010); Director of
2010). Business (since 1994). Continental Airlines, Inc. (since
1996); Director of Community First
Financial Group (since 1995);
Director of Tejon Ranch Company
(since 1999); Director of Threshold
Pharmaceuticals (since 2004);
Director of NETGEAR, Inc. (since
2007).
John E. Martinez Trustee Director of Real Estate Equity Director of iShares, Inc. (since 2003);
(48) (since 2003). Exchange (since 2005). Chairman, Independent Review
Committee, Canadian iShares Funds
(since 2007).
16
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY TRUSTEE
-------------------- --------------- --------------------------------------- ----------------------------------------
Cecilia H. Herbert Trustee Director (since 1998) and President Director of iShares, Inc. (since 2005);
(61) (since 2005). (since 2007) of the Board of Director, Forward Funds (34
Directors, Catholic Charities CYO; portfolios) (since 2009).
Trustee of Pacific Select Funds
(2004-2005); Trustee (since 2005)
and Chair of the Finance and
Investment Committees (since 2006)
of the Thacher School; Chair of
Investment Committee, Archdiocese
of San Francisco (1994-2005).
Charles A. Hurty Trustee Retired; Partner, KPMG LLP (1968- Director of iShares, Inc. (since 2005);
(66) (since 2005). 2001). Director of GMAM Absolute Return
Strategy Fund (1 portfolio)(since
2002); Director of Citigroup
Alternative Investments Multi-
Adviser Hedge Fund Portfolios LLC (1
portfolio)(since 2002); Director of
CSFB Alternative Investments Fund
(6 portfolios)(since 2005).
John E. Kerrigan Trustee Chief Investment Officer, Santa Clara Director of iShares, Inc. (since 2005).
(54) (since 2005). University (since 2002).
Robert H. Silver Trustee President and Co-Founder of The Director of iShares, Inc. (since 2007).
(54) (since 2007). Bravitas Group, Inc. (since 2006);
Member, Non-Investor Advisory
Board of Russia Partners II, LP (since
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); Co-Founder and Vice
President of Parentgiving Inc. (since
2008); Director and Member of the
Audit and Compensation Committee
of EPAM Systems, Inc. (2006-2009).
Darrell Duffie Trustee Professor, Stanford University: Director of iShares, Inc. (since 2008);
(55) (since 2008). Graduate School of Business (since Director of Moody's Corporation
1984). (since 2008).
17
OFFICERS
PRINCIPAL OCCUPATION(S)
NAME (AGE) POSITION DURING THE PAST 5 YEARS
-------------------- --------------------- ---------------------------------------
Geoffrey D. Flynn Executive Vice Managing Director, BTC (since 2009);
(53) President and Chief Chief Operating Officer, U.S. iShares,
Operating Officer BGI (2007-2009); President, Van
(since 2008). Kampen Investors Services (2003-
2007); Managing Director, Morgan
Stanley (2002-2007); President,
Morgan Stanley Trust, FSB (2002-
2007).
Jack Gee Treasurer and Chief Managing Director, BTC (since 2009);
(50) Financial Officer Senior Director of Fund
(since 2008). Administration of Intermediary
Investor Business of BGI (2009);
Director of Fund Administration of
Intermediary Investor Business of BGI
(2004-2009).
Eilleen M. Clavere Secretary Director, BTC (since 2009); Director
(57) (since 2007). of Legal Administration of
Intermediary Investor Business of BGI
(2006-2009); Legal Counsel and Vice
President of Atlas Funds, Atlas
Advisers, Inc. and Atlas Securities,
Inc. (2005-2006); Counsel of
Kirkpatrick & Lockhart LLP (2001-
2005).
Ira P. Shapiro Vice President and Managing Director, BTC (since 2009);
(46) Chief Legal Officer Associate General Counsel, BGI
(since 2007). (2004-2009).
Amy Schioldager Executive Vice Managing Director, BTC (since 2009);
(47) President Global Head of Index Equity, BGI
(since 2007). (2008-2009); Global Head of U.S.
Indexing, BGI (2006-2008); Head of
Domestic Equity Portfolio
Management, BGI (2001-2006).
Patrick O'Connor Vice President Managing Director, BTC (since 2009);
(42) (since 2007). Head of iShares Portfolio
Management, BGI (2006-2009);
Senior Portfolio Manager, BGI (1999-
2006).
Lee Sterne Vice President Managing Director, BTC (since 2009);
(44) (since 2007). Head of U.S. Fixed Income Index and
iShares, BGI (2007-2009); Senior
Portfolio Manager, BGI (2004-2007).
18
PRINCIPAL OCCUPATION(S)
NAME (AGE) POSITION DURING THE PAST 5 YEARS
------------- ---------------- -------------------------------------
Matt Tucker Vice President Managing Director, BTC (since 2009);
(37) (since 2007). Director of Fixed Income Investment
Strategy, BGI (2009); Head of U.S.
Fixed Income Investment Solutions,
BGI (2005-2008); Fixed Income
Investment Strategist, BGI (2003-
2005).
The Board has concluded that, based on each Trustee's experience,
qualifications, attributes or skills on an individual basis and in combination
with those of the other Trustees, each Trustee should serve as a Trustee of the
Board. Among the attributes common to all Trustees are their ability to review
critically, evaluate, question and discuss information provided to them, to
interact effectively with the Fund's investment adviser, other service
providers, counsel and the independent registered public accounting firm, and
to exercise effective business judgment in the performance of their duties as
Trustees. A Trustee's ability to perform his or her duties effectively may have
been attained through the Trustee's educational background or professional
training; business, consulting, public service or academic positions;
experience from service as a board member of the Fund and the other funds in
the Trust (and any predecessor funds), other investment funds, public
companies, or non-profit entities or other organizations; and/or other life
experiences. Also, set forth below is a brief discussion of the specific
experience, qualifications, attributes or skills of each Trustee that led the
Board to conclude that he or she should serve as a Trustee.
Robert Kapito has been a Trustee of the Trust since 2009. Mr. Kapito has served
as a Director of iShares, Inc. since 2009 and a Director of BlackRock, Inc.
since 2007. In addition, he has over 20 years of experience as part of
BlackRock, Inc. and BlackRock's predecessor entities. Mr. Kapito serves as
President and Director of BlackRock, Inc., and is the Chairman of the Operating
Committee, a member of the Office of the Chairman, the Leadership Committee and
the Corporate Council. He is responsible for day-to-day oversight of
BlackRock's key operating units, including the Account Management and Portfolio
Management Groups, Real Estate Group and BlackRock Solutions(Reg. TM). Prior to
assuming his current responsibilities in 2007, Mr. Kapito served as Head of
BlackRock's Portfolio Management Group. In that role, he was responsible for
overseeing all portfolio management within BlackRock, including the Fixed
Income, Equity, Liquidity, and Alternative Investment Groups. Mr. Kapito serves
as a member of the Board of Trustees of the University of Pennsylvania. He is
also Chairman of the Hope & Heroes Children's Cancer Fund, since 2002, and
President of the Board of Directors for Periwinkle Theatre for Youth, a
national non-profit arts-in-education organization, since 1983. Mr. Kapito
earned a BS degree in economics from the Wharton School of the University of
Pennsylvania in 1979, and an MBA degree from Harvard Business School in 1983.
Michael A. Latham has been a Trustee of the Trust since 2010. Mr. Latham has
served as a Director of iShares, Inc. since 2010. In addition, Mr. Latham has
served as President of the Trust and iShares, Inc. since 2007. He served as
Principal Financial Officer of the Trust and iShares, Inc. from 2002 until
2007. Mr. Latham is head of BlackRock's iShares exchange traded fund business
for the U.S. and Canada. In addition, he has over 15 years of experience as
part of BlackRock, Inc. and BlackRock's predecessor entities. Prior to assuming
his current responsibilities in April 2009, he was Chief Operating Officer for
the US iShares business. He previously held a variety of operating positions
within the firm. Mr. Latham earned a BS degree in business administration from
California State University at San Francisco in 1988.
George G.C. Parker has been a Trustee of the Trust since 2000, and Chairman
since 2010. Mr. Parker served as Lead Independent Trustee of the Trust from
2006 to 2010. Mr. Parker has served as a Director of iShares, Inc. since 2000,
Chairman of iShares, Inc. since 2010 and Lead Independent Director of iShares,
Inc. from 2006 to 2010. Mr. Parker also served as the head of the Nominating
and Governance Committee for the Trust and iShares, Inc. from 2002 to 2010. Mr.
Parker also serves as Director on five other boards. Mr. Parker is the Dean
Witter Distinguished Professor of Finance (Emeritus) at the Stanford Graduate
School of Business. He teaches courses in Corporate Finance in the MBA Program,
Stanford Sloan Program for Executives, and in various other Executive Education
Programs at the School. Mr. Parker's teaching and research interests are
primarily in the field of corporate finance, management of financial
institutions, and corporate governance, and he has written numerous case
studies related to these subjects. He has also authored several articles on
capital structure, risk management, and corporate valuation. Mr. Parker holds
an MBA and PhD degree from the Stanford Business School.
John E. Martinez has been a Trustee of the Trust since 2003. Mr. Martinez has
served as a Director of iShares, Inc. since 2003. Mr. Martinez is a Director of
EquityRock, Inc. (previously Real Estate Equity Exchange, Inc), providing
governance oversight
19
and consulting services to this privately held firm that develops products and
strategies for homeowners in managing the equity in their homes. Mr. Martinez
previously served as Director of Barclays Global Investors (BGI) UK Holdings,
where he provided governance oversight representing BGI's shareholders
(Barclays PLC, BGI management shareholders) through oversight of BGI's
worldwide activities. Since 2007, Mr. Martinez also serves as the Chairman of
the Independent Review Committee for the Canadian iShares Funds. This committee
provides guidance and oversight of potential conflicts of interest between the
mutual fund advisor and shareholders. Since 2003, he is a Director and
Executive Committee Member for Larkin Street Youth Services, providing
governance oversight and strategy development to an agency that provides
emergency and transitional housing, health care, education, job and life skills
training to homeless youth. Mr. Martinez has an AB in economics from The
University of California, Berkeley and holds an MBA in finance and statistics
from the Graduate School of Business, University of Chicago.
Cecilia H. Herbert has been a Trustee of the Trust since 2005. Ms. Herbert has
served as a Director of iShares, Inc. since 2005. She is President of the Board
of the Catholic Charities CYO, among the Bay Area's largest, private social
services organizations serving the homeless, poor, aged, families, children and
AIDS/HIV victims, on which she has served since 1998. Ms. Herbert is a member
of the Finance Council, Archdiocese of San Francisco since 1991, which she
chaired from 1994-2006. She is a Trustee of the Thacher School, since 2002 and
chairs its Investment Committee. She has served on numerous non-profit boards.
Ms. Herbert is also a Director since 2010 and Advisory Board Member since 2009
of the Forward Funds. Ms. Herbert previously served as a Trustee for the
Pacific Select Funds and The Montgomery Funds. Ms. Herbert previously served as
Managing Director of J.P. Morgan/Morgan Guaranty Trust Company responsible for
product development, marketing and credit for U.S. multinational corporations
and as head of its San Francisco office and as Assistant Vice President, Signet
Banking Corporation. Ms. Herbert has a BA in economics and communications from
Stanford University and an MBA in finance from Harvard Business School.
Charles A. Hurty has been a Trustee of the Trust since 2005. Mr. Hurty has
served as a Director of iShares, Inc. since 2005. Mr. Hurty has also served as
the head of the Audit Committee of the Trust and iShares, Inc. since 2006. In
addition, Mr. Hurty serves as Director of the GMAM Absolute Return Strategy
Fund since 2002, Director of the Citigroup Alternative Investments
Multi-Adviser Hedge Fund Portfolios LLC since 2002 and was a Director of the
CSFB Alternative Investment Funds from 2005 to December 2009, when the funds
were liquidated. Mr. Hurty was formerly a Partner at KPMG, LLP from 1968-2001.
Mr. Hurty has a BS in accounting from Kansas University.
John E. Kerrigan has been a Trustee of the Trust since 2005. Mr. Kerrigan has
served as a Director of iShares, Inc. since 2005. Mr. Kerrigan also serves as
the Chair of the Nominating and Governance Committee of the Trust and iShares,
Inc. since 2010. Mr. Kerrigan serves as Chief Investment Officer, Santa Clara
University since 2002. Mr. Kerrigan was formally a Managing Director at Merrill
Lynch & Co, including the following responsibilities: Global Manager of
Institutional Client Division eCommerce, Global Manager of Technology
Specialists Sales and Chair, Performance Measurement, Evaluation & Compensation
Task Force. Mr. Kerrigan is a Trustee, since 2008, of Sacred Heart Schools,
Atherton, CA, and Director, since 1999, of The BASIC Fund (Bay Area
Scholarships for Inner City Children). Mr. Kerrigan has a BA from Boston
College and is a Chartered Financial Analyst.
Robert H. Silver has been a Trustee of the Trust since 2007. Mr. Silver has
served as a Director of iShares, Inc. since 2007. Mr. Silver is President and a
co-founder of The Bravitas Group Inc., a firm dedicated to advising and
investing in emerging business enterprises and to supporting philanthropic
activities that benefit under-served urban youth. Previously, Mr. Silver served
as the President and Chief Operating Officer of UBS Financial Services Inc.,
the registered broker dealer comprising the Wealth Management USA business unit
of UBS AG. Mr. Silver also served on the Board of Directors of EPAM, a provider
of software engineering outsourcing services in Central and Eastern Europe, the
Depository Trust and Clearing Corporation (DTCC) and served as a governor of
the Philadelphia Stock Exchange. In addition, Mr. Silver is a Vice Chairman and
a Member of the Board of Directors for the YMCA of Greater New York and chairs
its Fund Development Committee, since 2001, and Co-Founder and Vice President
of Parentgiving Inc., since 2008. Mr. Silver began his career as a CPA at KPMG
LLP from 1983 until 1997. Mr. Silver has a BS in business administration from
the University of North Carolina.
Darrell Duffie has been a Trustee of the Trust since 2008. Mr. Duffie has
served as a Director of iShares, Inc. since 2008. Mr. Duffie is the Dean Witter
Distinguished Professor of Finance at Stanford Business School, where he has
been a faculty member since 1984. In addition, Mr. Duffie serves as a director
of Moody's Corporation, since 2008, is on the Board of Directors of the Pacific
Institute of Mathematical Sciences, and sits on numerous other scholarly
boards. Mr. Duffie is a member of the Governing Board of the International
Association of Financial Engineers and of the Financial Advisory Roundtable of
the New York Federal Reserve Bank. He is a member of the Executive Committee of
the American Finance
20
Association, of which he was the President in 2009. Mr. Duffie, a Fellow of the
American Academy of Arts and Sciences, has a BS in engineering from the
University of New Brunswick, a Master of Economics from the University of New
England and a Ph.D. in Engineering Economic Systems from Stanford University.
Board - Leadership Structure and Oversight Responsibilities
-----------------------------------------------------------
Overall responsibility for oversight of the Fund rests with the Board. The
Board has engaged BFA to manage the Fund on a day-to day basis. The Board is
responsible for overseeing BFA and other service providers in the operations of
the Fund in accordance with the provisions of the 1940 Act, applicable
provisions of state and other laws and the Trust's charter. The Board is
currently composed of nine members, seven of whom are Independent Trustees
(defined below). The Board currently conducts regular meetings four times a
year. In addition, the Board frequently holds special in-person or telephonic
meetings or informal conference calls to discuss specific matters that may
arise or require action between regular meetings. The Independent Trustees meet
regularly outside the presence of management, in executive session or with
other service providers to the Trust.
The Board has appointed an Independent Trustee to serve in the role of
Chairman. The Chairman's role is to preside at all meetings of the Board and to
act as a liaison with service providers, officers, attorneys, and other
Trustees generally between meetings. The Chairman may also perform such other
functions as may be delegated by the Board from time to time. The Board has
established a Nominating and Governance Committee and an Audit Committee to
assist the Board in the oversight and direction of the business and affairs of
the Fund, and from to time may establish ad-hoc committees or informal working
groups to review and address the policies and practices of the Fund with
respect to certain specified matters. The Board and each standing Committee
conduct annual assessments of their oversight function and structure. The Board
has determined that the Board's leadership structure is appropriate because it
allows the Board to exercise independent judgment over management and it
allocates areas of responsibility among committees of Independent Trustees and
the full Board to enhance effective oversight.
Day-to-day risk management with respect to the Funds is the responsibility of
BFA or other service providers (depending on the nature of the risk), subject
to the supervision of BFA. The Fund is subject to a number of risks, including
investment, compliance, operational and valuation risks, among others. While
there are a number of risk management functions performed by BFA and other
service providers, as applicable, it is not possible to eliminate all of the
risks applicable to the Fund. The Trustees have an oversight role in this area,
satisfying themselves that risk management processes are in place and operating
effectively. Risk oversight forms part of the Board's general oversight of the
Fund and is addressed as part of various Board and committee activities. The
Board, directly or through a committee, also reviews reports from, among
others, management and the independent registered public accounting firm for
the Trust, as appropriate, regarding risks faced by the Fund and management's
risk functions. The Board has appointed a Chief Compliance Officer who oversees
the implementation and testing of the Trust's compliance program and reports to
the Board regarding compliance matters for the Trust and its principal service
providers. In testing and maintaining the compliance program, the Chief
Compliance Officer assesses key compliance risks affecting the Fund, and
addresses them in reports to the Board. The Independent Trustees have engaged
independent legal counsel to assist them in performing their oversight
responsibilities.
COMMITTEES OF THE BOARD OF TRUSTEES. Each Trustee who is not an interested
person (as defined in the 1940 Act) of the Trust ("Independent Trustee") serves
on the Audit Committee and the 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 met four times during the fiscal year ended July
31, 2009.
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
21
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 one time during the fiscal year ended July 31, 2009.
The following table sets forth, as of December 31, 2009, 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. If a fund is not listed below, the
Trustee did not own any securities in that fund as of the date indicated above:
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY TRUSTEE IN FAMILY OF
NAME OF TRUSTEE/1/ FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
-------------------- ------------------------------------------------- ------------------------ ----------------------------
Robert Kapito None None None
John E. Martinez iShares Barclays 7-10 Year Treasury Bond Fund Over $100,000 Over $100,000
iShares Barclays Short Treasury Bond Fund Over $100,000
iShares Barclays TIPS Bond Fund Over $100,000
iShares MSCI All Country Asia ex Japan Index Over $100,000
Fund
iShares MSCI EAFE Index Fund Over $100,000
iShares Russell 1000 Index Fund Over $100,000
iShares Russell 1000 Value Index Fund Over $100,000
iShares S&P 500 Index Fund Over $100,000
iShares S&P Global Consumer Staples Sector Over $100,000
Index Fund
George G.C. Parker iShares Barclays 1-3 Year Treasury Bond Fund $ 1-$10,000 Over $100,000
iShares Barclays Aggregate Bond Fund $ 10,001-$50,000
iShares Dow Jones Select Dividend Index Fund Over $100,000
iShares iBoxx $ Investment Grade Corporate Bond Over $100,000
Fund
iShares MSCI EAFE Index Fund Over $100,000
iShares Russell 2000 Index Fund $50,001-$100,000
iShares S&P 100 Index Fund Over $100,000
iShares S&P 500 Growth Index Fund $ 10,001-$50,000
iShares S&P 500 Index Fund Over $100,000
iShares S&P California AMT-Free Municipal Bond Over $100,000
Fund
22
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY TRUSTEE IN FAMILY OF
NAME OF TRUSTEE/1/ FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
-------------------- -------------------------------------------------- ------------------------ ----------------------------
iShares S&P Global 100 Index Fund $ 10,001-$50,000
Cecilia H. Herbert iShares Barclays 1-3 Year Treasury Bond fund $ 10,001-$50,000 Over $100,000
iShares Barclays Aggregate Bond Fund $ 10,001-$50,000
iShares Barclays TIPS Bond Fund $ 10,001-$50,000
iShares FTSE/Xinhua China 25 Index Fund Over $100,000
iShares iBoxx $ High Yield Corporate Bond Fund $ 10,001-$50,000
iShares MSCI EAFE Index Fund $ 10,001-$50,000
iShares MSCI Emerging Markets Index Fund $50,001-$100,000
iShares MSCI Pacific ex-Japan Index Fund $ 10,001-$50,000
iShares Russell 1000 Growth Index Fund $ 10,001-$50,000
iShares S&P 500 Index Fund $50,001-$100,000
iShares S&P MidCap 400 Index Fund $ 10,001-$50,000
Charles A. Hurty iShares Dow Jones Financial Sector Index Fund $ 1-$10,000 Over $100,000
iShares Dow Jones Select Dividend Index Fund $ 1-$10,000
iShares Dow Jones U.S. Energy Sector Index Fund $ 10,001-$50,000
iShares Dow Jones U.S. Technology Sector Index $ 10,001-$50,000
Fund
iShares FTSE/Xinhua China 25 Index Fund $ 10,001-$50,000
iShares MSCI EAFE Index Fund $ 10,001-$50,000
iShares MSCI Japan Index Fund $ 10,001-$50,000
iShares S&P 500 Index Fund $ 10,001-$50,000
iShares S&P Global Energy Sector Fund $ 1-$10,000
John E. Kerrigan iShares MSCI ACWI ex US Index Fund Over $100,000 Over $100,000
iShares S&P Short Term National AMT-Free Over $100,000
Municipal Bond Fund
Robert H. Silver iShares Barclays 1-3 Year Credit Bond Fund Over $100,000 Over $100,000
iShares Barclays 1-3 Year Treasury Bond Fund Over $100,000
iShares Barclays Aggregate Bond Fund $ 10,001-$50,000
iShares Dow Jones U.S. Broker-Dealers Index Fund Over $100,000
iShares Dow Jones U.S. Financial Services Index $50,001-$100,000
Fund
iShares Dow Jones U.S. Regional Banks Index $50,001-$100,000
Fund
23
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY TRUSTEE IN FAMILY OF
NAME OF TRUSTEE/1/ FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
-------------------- ------------------------------------------------- ------------------------ ----------------------------
iShares iBoxx $ Investment Grade Corporate Bond Over $100,000
Fund
iShares MSCI ACWI ex US Index Fund Over $100,000
iShares MSCI BRIC Index Fund $ 10,001-$50,000
iShares MSCI EAFE Index Fund Over $100,000
iShares Russell 1000 Growth Index Fund $50,001-$100,000
iShares Russell 1000 Value Index Fund $50,001-$100,000
iShares Russell 2000 Growth Index Fund $ 10,001-$50,000
iShares Russell 2000 Value Index Fund $ 10,001-$50,000
iShares Russell 3000 Index Fund $50,001-$100,000
iShares S&P 500 Index Fund Over $100,000
iShares S&P Europe 350 Index Fund $ 10,001-$50,000
iShares S&P U.S. Preferred Stock Index Fund Over $100,000
iShares S&P/Citigroup International Treasury $ 1-$10,000
Bond Fund
Darrell Duffie None None None
----------
/1/ Beneficial ownership is not shown for Michael Latham because he was
appointed to serve as Trustee of the Trust effective May 1, 2010.
As of December 31, 2009, none of the Trustees who were not interested persons
(as defined in the 1940 Act) of the Trust or their immediate family members
owned beneficially or of record any securities of BFA (the Fund's investment
adviser), the Distributor or any person controlling, controlled by or under
common control with BFA or the Distributor.
REMUNERATION OF TRUSTEES. For the calendar year ended December 31, 2009, the
Trust paid each Independent Trustee $127,500 for meetings of the Board attended
by the Trustee; also the Trust paid 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. For the calendar year ended December 31, 2009, John Martinez, John
Kerrigan and Cecilia Herbert were also each entitled to $17,500 for his or her
service on a committee of the Board that considered matters relating to
securities lending, and $5,878 for his or her service as a director of a
subsidiary of the Trust. Effective January 1, 2010, the Trust pays each
Independent Trustee $110,000 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 (now,
Independent Chairman). Effective January 1, 2010, John Martinez, John Kerrigan
and Cecilia Herbert are also each entitled to $10,000 for his or her service as
a director of a subsidiary of the Trust. Effective April 30, 2010, the Trust
pays John Kerrigan an annual fee of $7,500 for service as the Chairperson of
the Board's Nominating and Governance Committee. The Trust also reimburses each
Trustee for travel and other out-of-pocket expenses incurred by him/her in
connection with attending such meetings.
24
The table below sets forth the total compensation paid to each Interested
Trustee for the calendar year ended December 31, 2009:
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 TRUSTEE1,2 TRUST EXPENSES/3/ RETIREMENT/3/ AND FUND COMPLEX/4/
------------------------------- -------------- --------------------- ------------------ --------------------
Robert S. Kapito $0 Not Applicable Not Applicable $0
----------
/1/ Compensation is not shown for Michael Latham because he was appointed to
serve as Trustee of the Trust effective May 1, 2010.
/2/ Robert S. Kapito was not compensated by the Trust due to his employment
with BTC during the time period reflected in the table.
/3/ No Trustee or Officer is entitled to any pension or retirement benefits
from the Trust.
/4/ Includes compensation for service on the Board of Directors of iShares,
Inc.
The table below sets forth the total compensation paid to each Independent
Trustee for the calendar year ended December 31, 2009:
AGGREGATE PENSION OR TOTAL
COMPENSATION RETIREMENT BENEFITS ACCRUED AS ESTIMATED ANNUAL COMPENSATION
FROM THE PART OF TRUST BENEFITS UPON FROM THE FUND
NAME OF INDEPENDENT TRUSTEE TRUST EXPENSES/1/ RETIREMENT/1/ AND FUND COMPLEX/2/
----------------------------- -------------- -------------------------------- ------------------ --------------------
George G.C. Parker $152,500 Not Applicable Not Applicable $305,000
John E. Kerrigan 150,878 Not Applicable Not Applicable 295,878
Charles A. Hurty 147,500 Not Applicable Not Applicable 295,000
Cecilia H. Herbert 150,878 Not Applicable Not Applicable 295,878
Robert H. Silver 127,500 Not Applicable Not Applicable 255,000
Darrell Duffie 127,500 Not Applicable Not Applicable 255,000
John E. Martinez 150,878 Not Applicable Not Applicable 295,878
----------
/1/ No Trustee or Officer is entitled to any pension or retirement benefits
from the Trust.
/2/ Includes compensation for service on the Board of Directors of iShares,
Inc.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. Ownership information is
not provided for the Fund as it had not commenced operations as of the date of
this SAI.
POTENTIAL CONFLICTS OF INTEREST
Bank of America Corporation ("BAC"), through its subsidiary Merrill Lynch and
Co., Inc. ("Merrill Lynch"), Barclays PLC ("Barclays") and The PNC Financial
Services Group, Inc. ("PNC"), each has a significant economic interest in
BlackRock, Inc., the parent of BFA, the Fund's investment adviser. PNC is
considered to be an affiliate of BlackRock, Inc., under the Investment Company
Act. Certain activities of BlackRock Advisors, LLC, BlackRock, Inc. and their
affiliates (collectively, "BlackRock") and PNC and its affiliates
(collectively, "PNC" and together with BlackRock, "Affiliates"), and those of
BAC, Merrill Lynch and their affiliates (collectively, the "BAC Entities") and
Barclays and its affiliates (collectively, the "Barclays Entities")(BAC
Entities and Barclays Entities, collectively, the "BAC/Barclays Entities"),
with respect to the Fund and/or other accounts managed by BlackRock, PNC or
BAC/Barclays Entities, may give rise to actual or perceived conflicts of
interest such as those described below.
BlackRock is one of the world's largest asset management firms. BAC is a
national banking corporation, which, through its affiliates and subsidiaries,
including Merrill Lynch, provides a full range of financial services. Merrill
Lynch is a full service investment banking, broker-dealer, asset management and
financial services organization. PNC is a diversified financial services
organization spanning the retail, business and corporate markets. Barclays is a
major global financial services provider engaged in a range of activities,
including retail and commercial banking, credit cards, investment banking, and
wealth management. BlackRock and PNC are affiliates of one another under the
1940 Act. BlackRock, BAC, Merrill Lynch, PNC, Barclays and their respective
affiliates (including, for these purposes, their directors, partners, trustees,
managing members, officers and employees), including the entities and personnel
who may be involved in the investment activities and business operations of the
Fund, are engaged worldwide in businesses, including equity, fixed income, cash
management and alternative
25
investments, and have interests other than that of managing the Fund. These are
considerations of which investors in the Fund should be aware, and which may
cause conflicts of interest that could disadvantage the Fund and its
shareholders. These activities and interests include potential multiple
advisory, transactional, financial and other interests in securities and other
instruments, and companies that may be purchased or sold by the Fund.
BlackRock and its Affiliates, as well as the BAC/Barclays Entities, have
proprietary interests in, and may manage or advise with respect to, accounts or
funds (including separate accounts and other funds and collective investment
vehicles) that have investment objectives similar to those of the Fund and/or
that engage in transactions in the same types of securities, currencies and
instruments as the Fund. One or more Affiliates and BAC/Barclays Entities are
also major participants in the global currency, equities, swap and fixed income
markets, in each case both on a proprietary basis and for the accounts of
customers. As such, one or more Affiliates or BAC/Barclays Entities are or may
be actively engaged in transactions in the same securities, currencies, and
instruments in which the Fund invests. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Fund invests, which could have an adverse impact on the Fund's performance.
Such transactions, particularly in respect of most proprietary accounts or
customer accounts, will be executed independently of the Fund's transactions
and thus at prices or rates that may be more or less favorable than those
obtained by the Fund. When BlackRock and its Affiliates or the BAC/Barclays
Entities seek to purchase or sell the same assets for their managed accounts,
including the Fund, the assets actually purchased or sold may be allocated
among the accounts on a basis determined in their good faith discretion to be
equitable. In some cases, this system may adversely affect the size or price of
the assets purchased or sold for the Fund. In addition, transactions in
investments by one or more other accounts managed by BlackRock or its
Affiliates or a BAC/Barclays Entity may have the effect of diluting or
otherwise disadvantaging the values, prices or investment strategies of the
Fund, particularly, but not limited to, with respect to small capitalization,
emerging market or less liquid strategies. This may occur when investment
decisions regarding the Fund are based on research or other information that is
also used to support decisions for other accounts. When BlackRock or its
Affiliates or a BAC/Barclays Entity implements a portfolio decision or strategy
on behalf of another account ahead of, or contemporaneously with, similar
decisions or strategies for the Fund, market impact, liquidity constraints, or
other factors could result in the Fund receiving less favorable trading results
and the costs of implementing such decisions or strategies could be increased
or the Fund could otherwise be disadvantaged. BlackRock or it Affiliates or a
BAC/Barclays Entity may, in certain cases, elect to implement internal policies
and procedures designed to limit such consequences, which may cause the Fund to
be unable to engage in certain activities, including purchasing or disposing of
securities, when it might otherwise be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding the Fund may
benefit other accounts managed by BlackRock or its Affiliates or a BAC/Barclays
Entity. For example, the sale of a long position or establishment of a short
position by the Fund may impair the price of the same security sold short by
(and therefore benefit) one or more Affiliates or BAC/Barclays Entities or
their other accounts, and the purchase of a security or covering of a short
position in a security by the Fund may increase the price of the same security
held by (and therefore benefit) one or more Affiliates or BAC/Barclays Entities
or their other accounts.
BlackRock and its Affiliates or a BAC/Barclays Entity and their clients may
pursue or enforce rights with respect to an issuer in which the Fund has
invested, and those activities may have an adverse effect on the Fund. As a
result, prices, availability, liquidity and terms of the Fund's investments may
be negatively impacted by the activities of BlackRock or its Affiliates or a
BAC/Barclays Entity or their clients, and transactions for the Fund may be
impaired or effected at prices or terms that may be less favorable than would
otherwise have been the case.
The results of the Fund's investment activities may differ significantly from
the results achieved by BlackRock and its Affiliates or the BAC/Barclays
Entities for their proprietary accounts or other accounts (including investment
companies or collective investment vehicles) managed or advised by them. It is
possible that one or more Affiliate- or BAC/Barclays Entity-managed accounts
and such other accounts will achieve investment results that are substantially
more or less favorable than the results achieved by the Fund. Moreover, it is
possible that the Fund will sustain losses during periods in which one or more
Affiliates or BAC/Barclays Entity-managed accounts achieve significant profits
on their trading for proprietary or other accounts. The opposite result is also
possible. The investment activities of one or more Affiliates or BAC/Barclays
Entities for their proprietary accounts and accounts under their management may
also limit the investment opportunities for the Fund in certain emerging and
other markets in which limitations are imposed upon the amount of investment,
in the aggregate or in individual issuers, by affiliated foreign investors.
26
From time to time, the Fund's activities may also be restricted because of
regulatory restrictions applicable to one or more Affiliates or BAC/Barclays
Entities, and/or their internal policies designed to comply with such
restrictions. As a result, there may be periods, for example, when BlackRock,
and/or one or more Affiliates or BAC/Barclays Entities, will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which BlackRock and/or one or more Affiliates or BAC/Barclays
Entities are performing services or when position limits have been reached.
In connection with its management of the Fund, BlackRock may have access to
certain fundamental analysis and proprietary technical models developed by one
or more Affiliates or BAC/Barclays Entities. BlackRock will not be under any
obligation, however, to effect transactions on behalf of the Fund in accordance
with such analysis and models. In addition, neither BlackRock nor any of its
Affiliates, nor any BAC/Barclays Entity, will have any obligation to make
available any information regarding their proprietary activities or strategies,
or the activities or strategies used for other accounts managed by them, for
the benefit of the management of the Fund and it is not anticipated that
BlackRock will have access to such information for
the purpose of managing the Fund. The proprietary activities or portfolio
strategies of BlackRock and its Affiliates and the BAC/Barclays Entities, or
the activities or strategies used for accounts managed by them or other
customer accounts could conflict with the transactions and strategies employed
by BlackRock in managing the Fund.
In addition, certain principals and certain employees of BlackRock are also
principals or employees of BlackRock or another Affiliate. As a result, the
performance by these principals and employees of their obligations to such
other entities may be a consideration of which investors in the Fund should be
aware.
BlackRock may enter into transactions and invest in securities, instruments and
currencies on behalf of the Fund in which customers of BlackRock or its
Affiliates or a BAC/Barclays Entity, or, to the extent permitted by the SEC,
BlackRock or another Affiliate or a BAC/Barclays Entity, serves as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Fund, and such party may
have no incentive to assure that the Fund obtains the best possible prices or
terms in connection with the transactions. In addition, the purchase, holding
and sale of such investments by the Fund may enhance the profitability of
BlackRock or its Affiliates or a BAC/Barclays Entity. One or more Affiliates or
BAC/Barclays Entities may also create, write or issue derivatives for their
customers, the underlying securities, currencies or instruments of which may be
those in which the Fund invests or which may be based on the performance of the
Fund. The Fund may, subject to applicable law, purchase investments that are
the subject of an underwriting or other distribution by one or more Affiliates
or BAC/Barclays Entities and may also enter into transactions with other
clients of an Affiliate or BAC/Barclays Entity where such other clients have
interests adverse to those of the Fund.
At times, these activities may cause departments of BlackRock or its Affiliates
or a BAC/Barclays Entity to give advice to clients that may cause these clients
to take actions adverse to the interests of the Fund. To the extent affiliated
transactions are permitted, the Fund will deal with BlackRock and its
Affiliates or BAC/Barclays Entities on an arms-length basis. BlackRock or its
Affiliates or a BAC/Barclays Entity may also have an ownership interest in
certain trading or information systems used by the Fund. The Fund's use of such
trading or information systems may enhance the profitability of BlackRock and
its Affiliates or BAC/Barclays Entities.
One or more Affiliates or one of the BAC/Barclays Entities may act as broker,
dealer, agent, lender or adviser or in other commercial capacities for the
Fund. It is anticipated that the commissions, mark-ups, mark-downs, financial
advisory fees, underwriting and placement fees, sales fees, financing and
commitment fees, brokerage fees, other fees, compensation or profits, rates,
terms and conditions charged by an Affiliate or BAC/Barclays Entity will be in
its view commercially reasonable, although each Affiliate or BAC/Barclays
Entity, including its sales personnel, will have an interest in obtaining fees
and other amounts that are favorable to the Affiliate or BAC/Barclays Entity
and such sales personnel.
Subject to applicable law, the Affiliates and BAC/Barclays Entities (and their
personnel and other distributors) will be entitled to retain fees and other
amounts that they receive in connection with their service to the Fund as
broker, dealer, agent, lender, adviser or in other commercial capacities and no
accounting to the Fund or its shareholders will be required, and no fees or
other compensation payable by the Fund or its shareholders will be reduced by
reason of receipt by an Affiliate or BAC/Barclays Entity of any such fees or
other amounts.
When an Affiliate or BAC/Barclays Entity acts as broker, dealer, agent, adviser
or in other commercial capacities in relation to the Fund, the Affiliate or
BAC/Barclays Entity may take commercial steps in its own interests, which may
have an adverse effect on the Fund. The Fund will be required to establish
business relationships with its counterparties based on the Fund's own credit
standing. Neither BlackRock nor any of the Affiliates, nor any BAC/Barclays
Entity, will have any obligation to allow their credit to be used in connection
with the Fund's establishment of its business relationships, nor is it expected
that the
27
Fund's counterparties will rely on the credit of BlackRock or any of the
Affiliates or BAC/Barclays Entities in evaluating the Fund's creditworthiness.
Purchases and sales of securities for the Fund may be bunched or aggregated
with orders for other BlackRock client accounts. BlackRock and its Affiliates
and the BAC/Barclays Entities, however, are not required to bunch or aggregate
orders if portfolio management decisions for different accounts are made
separately, or if they determine that bunching or aggregating is not
practicable, required or with cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the
same price or execution on the entire volume of securities purchased or sold.
When this occurs, the various prices may be averaged, and the Fund will be
charged or credited with the average price. Thus, the effect of the aggregation
may operate on some occasions to the disadvantage of the Fund. In addition,
under certain circumstances, the Fund will not be charged the same commission
or commission equivalent rates in connection with a bunched or aggregated
order.
BlackRock may select brokers (including, without limitation, Affiliates or
BAC/Barclays Entities) that furnish BlackRock, the Fund, other BlackRock client
accounts or other Affiliates or BAC/Barclays Entities or personnel, directly or
through correspondent relationships, with research or other appropriate
services which provide, in BlackRock's view, appropriate assistance to
BlackRock in the investment decision-making process (including with respect to
futures, fixed-price offerings and over-the-counter transactions). Such
research or other services may include, to the extent permitted by law,
research reports on companies, industries and securities; economic and
financial data; financial publications; proxy analysis; trade industry
seminars; computer data bases; research-oriented software and other services
and products. Research or other services obtained in this manner may be used in
servicing any or all of the Fund and other BlackRock client accounts, including
in connection with BlackRock client accounts other than those that pay
commissions to the broker relating to the research or other service
arrangements. Such products and services may disproportionately benefit other
BlackRock client accounts relative to the Fund based on the amount of brokerage
commissions paid by the Fund and such other BlackRock client accounts. For
example, research or other services that are paid for through one client's
commissions may not be used in managing that client's account. In addition,
other BlackRock client accounts may receive the benefit, including
disproportionate benefits, of economies of scale or price discounts in
connection with products and services that may be provided to the Fund and to
such other BlackRock client accounts. To the extent that BlackRock uses soft
dollars, it will not have to pay for those products and services itself.
BlackRock may receive research that is bundled with the trade execution,
clearing, and/or settlement services provided by a particular broker-dealer. To
the extent that BlackRock receives research on this basis, many of the same
conflicts related to traditional soft dollars may exist. For example, the
research effectively will be paid by client commissions that also will be used
to pay for the execution, clearing, and settlement services provided by the
broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades through brokers who, pursuant to such
arrangements, provide research or other services in order to ensure the
continued receipt of research or other services BlackRock believes are useful
in its investment decision-making process. BlackRock may from time to time
choose not to engage in the above described arrangements to varying degrees.
BlackRock may also into commission sharing arrangements under which BlackRock
may execute transactions through a broker-dealer, including, where permitted,
an Affiliate or BAC/Barclays Entity, and request that the broker-dealer
allocate a portion of the commissions or commission credits to another firm
that provides research to BlackRock. To the extent that BlackRock engages in
commission sharing arrangements, many of the same conflicts related to
traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks ("ECNs") in
executing client securities transactions for certain types of securities. These
ECNs may charge fees for their services, including access fees and transaction
fees. The transaction fees, which are similar to commissions or
markups/markdowns, will generally be charged to clients and, like commissions
and markups/markdowns, would generally be included in the cost of the
securities purchased. Access fees may be paid by BlackRock even though incurred
in connection with executing transactions on behalf of clients, including the
Fund. In certain circumstances, ECNs may offer volume discounts that will
reduce the access fees typically paid by BlackRock. This would have the effect
of reducing the access fees paid by BlackRock. BlackRock will only utilize ECNs
consistent with its obligation to seek to obtain best execution in client
transactions.
BlackRock has adopted policies and procedures designed to prevent conflicts of
interest from influencing proxy voting decisions that it makes on behalf of
advisory clients, including the Fund, and to help ensure that such decisions
are made in
28
accordance with BlackRock's fiduciary obligations to its clients. Nevertheless,
notwithstanding such proxy voting policies and procedures, actual proxy voting
decisions of BlackRock may have the effect of favoring the interests of other
clients or businesses of other divisions or units of BlackRock and/or its
Affiliates or a BAC/Barclays Entity, provided that BlackRock believes such
voting decisions to be in accordance with its fiduciary obligations. For a more
detailed discussion of these policies and procedures, see "Proxy Voting
Policies and Procedures."
It is also possible that, from time to time, BlackRock or its Affiliates or a
BAC/Barclays Entity may, although they are not required to, purchase and hold
shares of the Fund. Increasing the Fund's assets may enhance investment
flexibility and diversification and may contribute to economies of scale that
tend to reduce the Fund's expense ratio. BlackRock and its Affiliates or
BAC/Barclays Entities reserve the right to redeem at any time some or all of
the shares of the Fund acquired for their own accounts. A large redemption of
shares of the Fund by BlackRock or its Affiliates or by a BAC/Barclays Entity
could significantly reduce the asset size of the Fund, which might have an
adverse effect on the Fund's investment flexibility, portfolio diversification
and expense ratio. BlackRock will consider the effect of redemptions on the
Fund and other shareholders in deciding whether to redeem its shares.
It is possible that the Fund may invest in securities of companies with which
an Affiliate or a BAC/Barclays Entity has or is trying to develop investment
banking relationships as well as securities of entities in which BlackRock or
its Affiliates or a BAC/Barclays Entity has significant debt or equity
investments or in which an Affiliate or BAC/Barclays Entity makes a market. The
Fund also may invest in securities of companies to which an Affiliate or a
BAC/Barclays Entity provides or may some day provide research coverage. Such
investments could cause conflicts between the interests of the Fund and the
interests of other clients of BlackRock or its Affiliates or a BAC/Barclays
Entity. In making investment decisions for the Fund, BlackRock is not permitted
to obtain or use material non-public information acquired by any division,
department or Affiliate of BlackRock or of a BAC/Barclays Entity in the course
of these activities. In addition, from time to time, the activities of an
Affiliate or a BAC/Barclays Entity may limit the Fund's flexibility in
purchases and sales of securities. When an Affiliate is engaged in an
underwriting or other distribution of securities of an entity, BlackRock may be
prohibited from purchasing or recommending the purchase of certain securities
of that entity for the Fund.
BlackRock and its Affiliates and the BAC/Barclays Entities, their personnel and
other financial service providers may have interests in promoting sales of the
Fund. With respect to BlackRock and its Affiliates and BAC/Barclays Entities
and their personnel, the remuneration and profitability relating to services to
and sales of the Fund or other products may be greater than remuneration and
profitability relating to services to and sales of certain funds or other
products that might be provided or offered. BlackRock and its Affiliates or
BAC/Barclays Entities and their sales personnel may directly or indirectly
receive a portion of the fees and commissions charged to the Fund or its
shareholders. BlackRock and its advisory or other personnel may also benefit
from increased amounts of assets under management. Fees and commissions may
also be higher than for other products or services, and the remuneration and
profitability to BlackRock or its Affiliates or a BAC/Barclays Entity and such
personnel resulting from transactions on behalf of or management of the Fund
may be greater than the remuneration and profitability resulting from other
funds or products.
BlackRock and its Affiliates or a BAC/Barclays Entity and their personnel may
receive greater compensation or greater profit in connection with an account
for which BlackRock serves as an adviser than with an account advised by an
unaffiliated investment adviser. Differentials in compensation may be related
to the fact that BlackRock may pay a portion of its advisory fee to its
Affiliate or to a BAC/Barclays Entity, or relate to compensation arrangements,
including for portfolio management, brokerage transactions or account
servicing. Any differential in compensation may create a financial incentive on
the part of BlackRock or its Affiliates or BAC/Barclays Entities and their
personnel to recommend BlackRock over unaffiliated investment advisers or to
effect transactions differently in one account over another.
BlackRock and its Affiliates or a BAC/Barclays Entity may provide valuation
assistance to certain clients with respect to certain securities or other
investments and the valuation recommendations made for their clients' accounts
may differ from the valuations for the same securities or investments assigned
by the Fund's pricing vendors, especially if such valuations are based on
broker-dealer quotes or other data sources unavailable to the Fund's pricing
vendors. While BlackRock will generally communicate its valuation information
or determinations to the Fund's pricing vendors and/or fund accountants, there
may be instances where the Fund's pricing vendors or fund accountants assign a
different valuation to a security or other investment than the valuation for
such security or investment determined or recommended by BlackRock.
As disclosed in more detail in the "Determination of Net Asset Value" section
of the Fund's Prospectus, when market valuations are not readily available or
such valuations do not reflect current market values, the affected investments
will be
29
valued using fair value pricing, pursuant to procedures adopted by the Fund's
Board. As a result, the Fund's sale or redemption of its shares at net asset
value, at a time when a holding or holdings are valued by BlackRock (pursuant
to Board-adopted procedures) at fair value, may have the effect of diluting or
increasing the economic interest of existing shareholders.
To the extent permitted by applicable law, the Fund may invest all or some of
its short term cash investments in any money market fund or similarly-managed
private fund advised or managed by BlackRock. In connection with any such
investments, the Fund, to the extent permitted by the 1940 Act, may pay its
share of expenses of a money market fund in which it invests, which may result
in the Fund bearing some additional expenses.
BlackRock and its Affiliates or a BAC/Barclays Entity and their directors,
officers and employees, may buy and sell securities or other investments for
their own accounts, and may have conflicts of interest with respect to
investments made on behalf of the Fund. As a result of differing trading and
investment strategies or constraints, positions may be taken by directors,
officers, employees and Affiliates of BlackRock or by BAC/Barclays Entities
that are the same, different from or made at different times than positions
taken for the Fund. To lessen the possibility that the Fund will be adversely
affected by this personal trading, the Fund, BFA, the Distributor and BlackRock
each has adopted a Code of Ethics in compliance with Section 17(j) of the 1940
Act that restricts securities trading in the personal accounts of investment
professionals and others who normally come into possession of information
regarding the Fund's portfolio transactions. Each Code of Ethics can be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at (202) 551-8090. Each Code of Ethics is also available on the
EDGAR Database on the SEC's Internet site at http://www.sec.gov, and copies may
be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov or
by writing the SEC's Public Reference Section, Washington, DC 20549-1520.
BlackRock and its Affiliates will not purchase securities or other property
from, or sell securities or other property to, the Fund, except that the Fund
may in accordance with rules adopted under the 1940 Act engage in transactions
with accounts that are affiliated with the Fund as a result of common officers,
directors, or investment advisers or pursuant to exemptive orders granted to
the Fund and/or BlackRock by the SEC. These transactions would be affected in
circumstances in which BlackRock determined that it would be appropriate for
the Fund to purchase and another client of BlackRock to sell, or the Fund to
sell and another client of BlackRock to purchase, the same security or
instrument on the same day. From time to time, the activities of the Fund may
be restricted because of regulatory requirements applicable to BlackRock or its
Affiliates or a BAC/Barclays Entity and/or BlackRock's internal policies
designed to comply with, limit the applicability of, or otherwise relate to
such requirements. A client not advised by BlackRock would not be subject to
some of those considerations. There may be periods when BlackRock may not
initiate or recommend certain types of transactions, or may otherwise restrict
or limit their advice in certain securities or instruments issued by or related
to companies for which an Affiliate or a BAC/Barclays Entity is performing
investment banking, market making or other services or has proprietary
positions. For example, when an Affiliate is engaged in an underwriting or
other distribution of securities of, or advisory services for, a company, the
Fund may be prohibited from or limited in purchasing or selling securities of
that company. Similar situations could arise if personnel of BlackRock or its
Affiliates or a BAC/Barclays Entity serve as directors of companies the
securities of which the Fund wish to purchase or sell. However, if permitted by
applicable law, the Fund may purchase securities or instruments that are issued
by such companies or are the subject of an underwriting, distribution, or
advisory assignment by an Affiliate or a BAC/Barclays Entity, or in cases in
which personnel of BlackRock or its Affiliates or of BAC/Barclays Entities are
directors or officers of the issuer.
The investment activities of one or more Affiliates or BAC/Barclays Entities
for their proprietary accounts and for client accounts may also limit the
investment strategies and rights of the Fund. For example, in regulated
industries, in certain emerging or international markets, in corporate and
regulatory ownership definitions, and in certain futures and derivative
transactions, there may be limits on the aggregate amount of investment by
affiliated investors that may not be exceeded without the grant of a license or
other regulatory or corporate consent or, if exceeded, may cause BlackRock, the
Fund or other client accounts to suffer disadvantages or business restrictions.
If certain aggregate ownership thresholds are reached or certain transactions
undertaken, the ability of BlackRock on behalf of clients (including the Fund)
to purchase or dispose of investments, or exercise rights or undertake business
transactions, may be restricted by regulation or otherwise impaired. As a
result, BlackRock, on behalf of clients (including the Fund), may limit
purchases, sell existing investments, or otherwise restrict or limit the
exercise of rights (including voting rights) when BlackRock, in its sole
discretion, deems it appropriate.
30
BlackRock and its Affiliates and BAC/Barclays Entities may maintain securities
indices as part of their product offerings. Index based funds seek to track
the performance of securities indices and may use the name of the index in the
fund name. Index providers, including BlackRock and its Affiliates and
BAC/Barclays Entities may be paid licensing fees for use of their index or
index name. BlackRock and its Affiliates and BAC/Barclays Entities will not be
obligated to license their indices to BlackRock, and BlackRock cannot be
assured that the terms of any index licensing agreement with BlackRock and its
Affiliates and BAC/Barclays Entities will be as favorable as those terms
offered to other index licensees.
BlackRock and its Affiliates and BAC/Barclays Entities may serve as Authorized
Participants in the creation and redemption of
exchange traded funds. As described in greater detail in the Creations and
Redemptions section of the prospectus, BlackRock and its Affiliates and
BAC/Barclays Entities may therefore be deemed to be participants in a
distribution of iShares funds that could render them statutory underwriters.
Present and future activities of BlackRock and its Affiliates and BAC/Barclays
Entities, including BlackRock Advisors, LLC, in addition to those described in
this section, may give rise to additional conflicts of interest.
Investment Advisory, Administrative and Distribution Services
INVESTMENT ADVISER. BFA serves as investment adviser to the Fund pursuant to
an Investment Advisory Agreement between the Trust, on behalf of the Fund, and
BFA. BFA is a California corporation indirectly owned by BlackRock, Inc. and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. Under the Investment Advisory Agreement, BFA, 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. BFA is responsible for placing purchase and sale orders and providing
continuous supervision of the investment portfolio of the Fund.
Pursuant to the Investment Advisory Agreement between BFA and the Trust
(entered into on behalf of the Fund), BFA is responsible for substantially all
expenses of the Fund, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, except interest expense,
taxes, brokerage expenses and other expenses connected with the execution of
portfolio securities transactions, distribution fees and extraordinary
expenses.
For its investment management services to the Fund, BFA is entitled to receive
management fees from the Fund, based on a percentage of the Fund's average
daily net assets, at the annual rate of 0.48%. Because the Fund has been in
operation for less than one full fiscal year, this percentage reflects the rate
at which BFA will be paid.
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 BFA and will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
Current interpretations of U.S. federal banking laws and regulations (i) may
prohibit BlackRock, Inc., BTC and BFA from controlling or underwriting the
shares of the Fund, but (ii) do not prohibit BlackRock, Inc. or BFA 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.
BFA 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 BFA 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.
31
If current restrictions on bank activities with mutual funds were relaxed, BFA,
or its affiliates, would consider performing additional services for the Trust.
BFA cannot predict whether these changes will be enacted, or the terms under
which BFA, or its affiliates, might offer to provide additional services.
PORTFOLIO MANAGERS. The individuals named as Portfolio Managers in the Fund's
Prospectus were also primarily responsible for the day-to-day management of
other iShares funds and certain other types of portfolios and/or accounts as
indicated in the tables below as of ______, 2010:
DIANE HSIUNG
TYPES OF ACCOUNTS NUMBER TOTAL ASSETS
------------------------------------------------ -------- -------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
Accounts with Incentive-Based Fee Arrangements
GREG SAVAGE
TYPES OF ACCOUNTS NUMBER TOTAL ASSETS
------------------------------------------------ -------- -------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
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. Pursuant to
BTC and BFA 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 it would have if the Portfolio Managers and BFA 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 BFA or BTC, as applicable, for its advisory
services. One or more of those other portfolios or accounts, however, may pay
BTC 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 BTC a portion of that portfolio's or account's gains, or would pay
BTC more for its services than would otherwise be the case if BTC meets or
exceeds specified performance targets. By their nature, incentive-based fee
arrangements could present an incentive for BTC 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 BTC 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
Managers' favoring those portfolios or accounts with incentive-based fee
arrangements.
The table below shows, for each Portfolio Manager, the number of portfolios or
accounts of the types set forth in the above table and the aggregate of total
assets in those portfolios or accounts with respect to which the investment
management fees are based on the performance of those portfolios or accounts as
of ______, 2010:
32
DIANE HSIUNG
NUMBER OF OTHER
ACCOUNTS WITH
PERFORMANCE-BASED FEES AGGREGATE
MANAGED BY PORTFOLIO MANAGER OF TOTAL ASSETS
------------------------------ ----------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
GREG SAVAGE
NUMBER OF OTHER
ACCOUNTS WITH
PERFORMANCE-BASED FEES AGGREGATE
MANAGED BY PORTFOLIO MANAGER OF TOTAL ASSETS
------------------------------ ----------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
The discussion below describes the Portfolio Managers' compensation as of
______, 2010.
PORTFOLIO MANAGER COMPENSATION OVERVIEW
BASE COMPENSATION. Generally, portfolio managers receive base compensation
based on their seniority and/or their position with the firm. Senior portfolio
managers who perform additional management functions within the portfolio
management group or within BlackRock may receive additional compensation for
serving in these other capacities.
DISCRETIONARY INCENTIVE COMPENSATION. Discretionary incentive compensation is a
function of several components: the performance of BlackRock, Inc., the
performance of the portfolio manager's group within BlackRock, the investment
performance, including risk-adjusted returns, of the firm's assets under
management or supervision by that portfolio manager relative to predetermined
benchmarks, and the individual's seniority, role within the portfolio
management team, teamwork and contribution to the overall performance of these
portfolios and BlackRock.
DISTRIBUTION OF DISCRETIONARY INCENTIVE COMPENSATION. Discretionary incentive
compensation is distributed to portfolio managers in a combination of cash and
BlackRock, Inc. restricted stock units which vest ratably over a number of
years. The BlackRock, Inc. restricted stock units, if properly vested, will be
settled in BlackRock, Inc. common stock. Typically, the cash bonus, when
combined with base salary, represents more than 60% of total compensation for
the portfolio managers. Paying a portion of annual bonuses in stock puts
compensation earned by a portfolio manager for a given year "at risk" based on
BlackRock's ability to sustain and improve its performance over future periods.
From time to time, long-term incentive equity awards are granted to certain key
employees to aid in retention, align their interests with long-term shareholder
interests and motivate performance. Equity awards are generally granted in the
form of BlackRock, Inc. restricted stock units that, once vested, settle in
BlackRock, Inc. common stock.
As of ______, 2010, Diane Hsiung and Greg Savage did not beneficially own
shares of the Fund.
CODES OF ETHICS. The Trust, BFA and the Distributor have adopted Codes of
Ethics pursuant to Rule 17j-1 of 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.
ANTI-MONEY LAUNDERING REQUIREMENTS. The Fund is subject to the USA PATRIOT Act
(the "Patriot Act"). The Patriot Act is intended to prevent the use of the U.S.
financial system in furtherance of money laundering, terrorism or other illicit
activities. Pursuant to requirements under the Patriot Act, the Fund may
request information from Authorized Participants to enable it to form a
reasonable belief that it knows the true identity of its Authorized
Participants. This information will be used to verify the identity of
Authorized Participants or, in some cases, the status of financial
professionals; it will be used only for compliance with the requirements of the
Patriot Act.
33
The Fund reserves the right to reject purchase orders from persons who have not
submitted information sufficient to allow the Fund to verify their identity.
The Fund also reserves the right to redeem any amounts in the Fund from persons
whose identity it is unable to verify on a timely basis. It is the Fund's
policy to cooperate fully with appropriate regulators in any investigations
conducted with respect to potential money laundering, terrorism or other
illicit activities.
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. Pursuant to an Administration Agreement with the Trust, State Street
provides necessary administrative, legal, tax and accounting and financial
reporting services 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. Pursuant to a
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, pursuant to a Delegation Agreement with the Trust, 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 these services, State Street
receives certain out-of-pocket costs, transaction fees and asset-based fees
which are accrued daily and paid monthly by BFA 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 Units, as described in the Prospectus and below in
the CREATION AND REDEMPTION OF CREATION UNITS section of this SAI. Shares in
less than Creation Units are not distributed by the Distributor. The
Distributor will deliver the Prospectus and, upon request, the SAI to persons
purchasing Creation Units 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, as amended
(the "1934 Act"), and a member of the Financial Industry Regulatory Authority,
Inc. ("FINRA").
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 following (i) the vote of a majority of the
Independent Trustees, or (ii) the 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 Units of Fund
shares. Such Soliciting Dealers may also be Authorized Participants (as defined
below), Depository Trust Company ("DTC") participants and/or investor services
organizations.
BFA or BTC 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.
FINANCIAL INTERMEDIARY COMPENSATION. BFA and/or BTC and/or their respective
subsidiaries ("BFA Entities") pay certain broker-dealers, banks and other
financial intermediaries ("Intermediaries") for certain activities related to
the Fund, other iShares funds or exchange traded products in general
("Payments"). BFA Entities make Payments from their own assets and not from the
assets of the Fund. Although a portion of BFA Entities' revenue comes directly
or indirectly in part from fees paid by the Fund and other iShares funds,
Payments do not increase the price paid by investors for the purchase of shares
of, or the cost of owning, the Fund or other iShares funds. BFA Entities make
Payments for Intermediaries' participating in activities that are designed to
make registered representatives, other professionals and individual investors
more knowledgeable about exchange traded products, including the Fund or for
other activities, such as participation in marketing activities and
presentations, educational training programs, conferences, the development of
technology platforms and reporting systems ("Education Costs"). BFA Entities
also make Payments to Intermediaries for certain printing, publishing and
mailing costs associated with the Fund or materials relating to exchange traded
products in general ("Publishing Costs"). In addition, BFA Entities make
Payments to Intermediaries that make shares of the Fund and certain other
iShares funds available to their clients or for otherwise promoting the Fund
and other iShares funds; Payments of this type are sometimes referred to as
revenue-sharing payments.
34
Payments to an Intermediary may be significant to the Intermediary, and amounts
that Intermediaries pay to your salesperson or other investment professional
may also be significant for your salesperson or other investment professional.
Because an Intermediary may make decisions about which investment options it
will recommend or make available to its clients or what services to provide for
various products based on payments it receives or is eligible to receive,
Payments create conflicts of interest between the Intermediary and its clients
and these financial incentives may cause the Intermediary to recommend the Fund
and other iShares funds over other investments. The same conflict of interest
exists with respect to your salesperson or other investment professional if he
or she receives similar payments from his or her Intermediary firm.
As of February 2, 2010, BFA Entities had arrangements to make Payments other
than Education Costs or Publishing Costs only to Fidelity Brokerage Services
LLC ("FBS") and Merrill Lynch, Pierce, Fenner & Smith, Inc. ("ML"). Pursuant to
BFA Entities' arrangement with FBS, FBS has agreed to promote iShares funds to
FBS's customers and not to charge certain of its customers any commissions when
those customers purchase or sell shares of certain iShares funds online (the
"Co-Branded Marketing Program"). BFA Entities have agreed to facilitate the
Co-Branded Marketing Program by making payments to FBS during the term of the
agreement in a fixed amount. Upon termination of the agreement the BFA Entities
will make additional payments to FBS based upon a number of criteria, including
the overall success of the Co-Branded Marketing program and the level of
services provided by FBS during the wind-down period. Pursuant to BFA Entities'
arrangement with ML, BFA Entities have agreed to reimburse ML for a portion of
certain fee waivers that ML may be required to implement with respect to
accounts that hold "plan assets" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), as a consequence of a
technical ERISA affiliate relationship between BFA and ML.
Any additions, modifications, or deletions to Intermediaries listed above that
have occurred since the date noted above are not included in the list. Further,
BFA Entities make Education Costs and Publishing Costs Payments to other
Intermediaries that are not listed above. BFA Entities may determine to make
Payments based on any number of metrics. For example, BFA Entities may make
Payments at year-end or other intervals in a fixed amount, an amount based upon
an Intermediary's services at defined levels or an amount based on the
Intermediary's net sales of one or more iShares funds in a year or other
period, any of which arrangements may include an agreed-upon minimum or maximum
payment, or any combination of the foregoing. As of the date of this SAI, BFA
anticipates that the Payments paid by BFA Entities in connection with the Fund,
iShares funds and exchange traded products in general will be immaterial to BFA
Entities in the aggregate for the next year. PLEASE CONTACT YOUR SALESPERSON OR
OTHER INVESTMENT PROFESSIONAL FOR MORE INFORMATION REGARDING ANY PAYMENTS HIS
OR HER INTERMEDIARY FIRM MAY RECEIVE. ANY PAYMENTS MADE BY THE BFA ENTITIES TO
AN INTERMEDIARY MAY CREATE THE INCENTIVE FOR AN INTERMEDIARY TO ENCOURAGE
CUSTOMERS TO BUY SHARES OF ISHARES FUNDS.
Brokerage Transactions
BFA 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, BFA'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 BFA 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.
BFA 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 BFA 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 BFA 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 BFA. 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. BFA may deal, trade and invest for its own
account in the types of securities in
35
which the Fund may invest. BFA 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 BFA, in conformity with the 1940 Act and SEC rules 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 consists of more than ___ separate investment
series or portfolios called funds. The Trust issues shares of beneficial
interests in each fund with no par value. The Board may designate additional
iShares funds.
Each share issued by a fund has a PRO RATA interest in the assets of that 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 relevant fund, and
in the net distributable assets of such fund on liquidation.
Each share has one vote with respect to matters upon which the shareholder is
entitled to vote. In any matter submitted to shareholders for a vote, each fund
shall hold a separate vote, provided that shareholders of all affected funds
will vote together when: (1) required by the 1940 Act or (2) the Trustees
determine that the matter affects the interests of more than one fund.
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 in the election of members of 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(s) of shares of a 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.
In accordance with the Trust's Amended and Restated Agreement and Declaration
of Trust dated September 17, 2009 (the "Declaration of Trust"), the Board may,
without shareholder approval (unless such shareholder approval is required by
applicable law, including the 1940 Act), cause one or more funds commencing
operations after September 24, 2008 (each, a "New Fund") to merge, reorganize,
consolidate, sell all or substantially all of their assets, or take other
similar actions with, to or into another New Fund.
Shareholders may make inquiries by writing to iShares Trust, c/o SEI
Investments Distribution Co., 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 the fund and beneficial
owners of 10% of the shares of the 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 subject to the affirmative vote of a majority
of the holders of the Trust or the Fund entitled to vote on termination;
however, in certain circumstances described in the Declaration of Trust, only a
majority vote of the Board is required. Although the shares are not
automatically redeemable upon the occurrence of any specific event, the
Declaration of Trust provides that the Board will have the unrestricted power
to alter the number of shares in a Creation Unit. In the event of a termination
of the Trust or the
36
Fund, the Board, in its sole discretion, could determine to permit the shares
to be redeemable in aggregations smaller than Creation Units 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 SHARES OF THE FUND. 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 ("NYSE"),
the NYSE Amex Equities and FINRA. 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 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 Units
GENERAL. The Trust issues and sells shares of the Fund only in Creation Units
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. The following table sets forth the number of shares of
the Fund that constitute a Creation Unit for the Fund and the value of such
Creation Unit as of ___________, 2010:
37
VALUE PER
SHARES PER CREATION
CREATION UNIT UNIT (US$)
--------------- -----------
__ _______
The Board reserves the right to declare a split or a consolidation in the
number of shares outstanding of any fund of the Trust, and to make a
corresponding change in the number of shares constituting a Creation Unit, in
the event that the per share price in the secondary market rises (or declines)
to an amount that falls outside the range deemed desirable by the Board.
A "Business Day" with respect to the Fund is any day on which 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, (as
observed): New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
FUND DEPOSIT. The consideration for purchase of Creation Units of the Fund
generally consists of the in-kind deposit of a designated portfolio of
securities (I.E., the Deposit Securities), which constitutes an optimized
representation of the securities of the 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 of the Fund.
The Cash Component is sometimes also referred to as the "Balancing Amount." The
function of the Cash Component is to compensate for any differences between the
NAV per Creation Unit 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) 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 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 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.
BFA, through the NSCC, makes available on each Business Day, prior to the
opening of business on the (subject to amendments) Listing Exchange (currently
9:30 a.m., Eastern time), the identity and the required number of shares of
each Deposit Security and the amount of the Cash Component to be included in
the current Fund Deposit (based on information at the end of the previous
Business Day). Such Deposit Securities are applicable, subject to any
adjustments as described below, in order to effect purchases of Creation Units
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 change pursuant to
the changes in the composition of the Fund's portfolio and as rebalancing
adjustments and corporate action events are reflected from time to time by BFA
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 Fund's Underlying Index.
The Trust reserves the right to permit or require the substitution of 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 (as discussed below), or the Federal Reserve System for U.S. Treasury
securities.
The Trust reserves the right to permit or require a "cash-in-lieu" amount where
the delivery of Deposit Securities by the Authorized Participant (as described
below) would be restricted under the securities laws or where the delivery of
Deposit Securities to the Authorized Participant would result in the
disposition of Deposit Securities by the Authorized Participant becoming
restricted under the securities laws, and in certain other situations. The
adjustments described above will reflect changes known to BFA 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.
38
PROCEDURES FOR CREATION OF CREATION UNITS. To be eligible to place orders with
the Distributor and to create a Creation Unit 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, and must have executed an agreement with the Distributor,
with respect to creations and redemptions of Creation Units ("Participant
Agreement") (discussed below). A Participating Party or DTC Participant who has
executed a Participant Agreement is referred to as an "Authorized Participant."
Investors should contact the Distributor for the names of Authorized
Participants. All shares of the 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 creation orders must be placed for one or more Creation Units and, whether
through a Participating Party or a DTC Participant, must be received by the
Distributor in proper form no later than the closing time of the regular
trading session of the Listing Exchange ("Closing Time") (normally 4:00 p.m.,
Eastern time) on any Business Day in order for creation of Creation Units to be
effected based on the NAV of shares of the Fund as next determined on such
date. The date on which an order to create Creation Units (or an order to
redeem Creation Units, as discussed below) is timely received in proper form 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 Units shall be placed with an Authorized
Participant in the form required by such Authorized Participant. In addition,
an Authorized Participant may request that an investor make certain
representations or enter into agreements with respect to an order (E.G., to
provide for payments of cash). Investors should be aware that their particular
broker may not have executed a Participant Agreement and, therefore, orders to
create Creation Units of the Fund will have to be placed by the investor's
broker through an Authorized Participant. In such cases, there may be
additional charges to such investor. A limited number of broker-dealers has
executed a Participant Agreement and only a small number of such Authorized
Participants have international capabilities.
Investors placing orders for Creation Units 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 if the regular trading session on the applicable 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. 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 Units must be
received by the Distributor from an Authorized Participant on its own or
another investor's behalf by the Closing Time on any 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.
ISSUANCE OF A CREATION UNIT. Except as provided herein, a Creation Unit will
not be issued until the transfer of cash or, if applicable, good title to the
Trust of the Deposit Securities and the payment of the Cash Component have been
completed. When the subcustodian has confirmed to the Custodian that the
securities included in the Fund Deposit (or the cash value thereof) have been
delivered to the account of the relevant subcustodian or subcustodians, the
Distributor and the Adviser shall be notified of such delivery and the Company
will issue and cause the delivery of the Creation Unit. Creation Units
typically are issued on a "T+3 basis" (I.E., three Business Days after trade
date). However, as discussed in the REGULAR HOLIDAYS section of this SAI, the
Fund reserves the right to settle Creation Unit transactions on a basis other
than T+3 in order to
39
accommodate non-U.S. market holiday schedules, to account for different
treatment among non-U.S. and U.S. markets of dividend record dates and
ex-dividend dates (I.E., the last day the holder of a security can sell the
security and still receive dividends payable on the security), and in certain
other circumstances.
To the extent contemplated by the applicable Participant Agreement, Creation
Units may 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 115%, which BFA 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 UNITS. The Trust reserves the absolute right
to reject any creation order for shares of the Fund 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 do not conform to the identity and number of shares disseminated
through the facilities of the NSCC for that date by BFA, 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, in
the discretion of the Trust or BFA, have an adverse effect on the Trust or the
rights of Beneficial Owners; or (vii) circumstances outside the control of the
Trust, State Street, the Distributor or BFA would make it impossible or
impracticable to process creation orders. Examples of such circumstances
include acts of God; public service or utility problems 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, BFA, the Distributor, DTC, NSCC, State Street, the
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 of its rejection of the order. The Trust, State Street, the
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 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 standard creation transaction fee is imposed to
offset the transfer and other transaction costs associated with the issuance of
Creation Units. The standard creation transaction fee will be the same
regardless of the number of Creation Units purchased by a purchaser on the same
day. Purchasers of Creation Units for cash are required to pay an additional
variable charge to compensate for brokerage and market impact expenses. When
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 up to a maximum additional variable charge as indicated in the
chart below. 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.
The following table sets forth the Fund's standard creation transaction fees
and maximum additional variable charges:
STANDARD CREATION MAXIMUM ADDITIONAL
TRANSACTION FEE VARIABLE CHARGE*
------------------ -------------------
$____ 3.0%
----------
* As a percentage of the amount invested.
REDEMPTION OF SHARES IN CREATION UNITS. Shares of the Fund may be redeemed
only in Creation Units 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
Units. Beneficial Owners must accumulate enough shares in the secondary market
to constitute a Creation Unit in order to have such shares redeemed by the
Trust. There can
40
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 by an investor
who wishes to redeem a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
shares to constitute a redeemable Creation Unit.
BFA and the Distributor make available through the NSCC, immediately prior to
the opening of business on the Listing Exchange (currently 9:30 a.m., Eastern
time) on each Business Day, the identity and number of shares 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 Units.
Unless cash redemptions are available or specified for the Fund, the redemption
proceeds for a Creation Unit generally consist of Fund Securities plus cash in
an amount equal to the difference between the NAV of the shares being redeemed,
as next determined after receipt of a request in proper form, and the value of
the Fund Securities (such difference, the "Cash Redemption Amount"), less the
redemption transaction fee set forth below. In the event that the Fund
Securities have a value greater than the NAV of the shares, a compensating cash
payment equal to such difference is required to be made by or through an
Authorized Participant by the redeeming shareholder.
Redemptions of shares will be subject to compliance with applicable U.S.
federal and state securities laws and the Fund (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation Units for cash
to the extent that the Trust cannot lawfully deliver specific Fund Securities
upon redemptions or cannot 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 security
included in the Fund Securities, 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 1933 Act to a redeeming Beneficial Owner
that is not a "qualified institutional buyer," as such term is defined under
Rule 144A of the 1933 Act. An Authorized Participant may request a 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 NYSE is closed (other
than customary weekend and holiday closings); (ii) for any period during which
trading on the NYSE 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.
REDEMPTION TRANSACTION FEE. A standard redemption transaction fee is imposed
to offset transfer and other transaction costs that may be incurred by the
Fund. The standard redemption transaction fee will be the same regardless of
the number of Creation Units redeemed by an investor on the same day. The
redeeming investor may be assessed an additional variable charge on the
cash-in-lieu portion of its redemption proceeds, up to a maximum additional
variable charge as indicated in the chart below. The standard redemption
transaction fee and the additional variable charge for cash-in-lieu redemptions
are set forth 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 Fund's standard redemption transaction fees
and maximum additional variable charges:
STANDARD REDEMPTION MAXIMUM ADDITIONAL
TRANSACTION FEE VARIABLE CHARGE*
-------------------- -------------------
$____ 2.0%
----------
* As a percentage of the amount redeemed.
PLACEMENT OF REDEMPTION ORDERS. Orders to redeem Creation Units must be
delivered through an Authorized Participant. An order in good form to redeem
Creation Units is deemed received by the Trust on the Transmittal Date if: (i)
a request in satisfactory form to the Trust 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
41
certain countries, however, the delivery of in-kind redemption proceeds for the
Fund may take longer than three Business Days after the Transmittal Date. In
such cases, the local market settlement procedures will not commence until the
end of local holiday periods. See below for a list of local holidays in the
non-U.S. countries relevant to the Fund.
In order to take 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 with the
Distributor, in the event an Authorized Participant has submitted a redemption
request in proper form but is unable to transfer all or part of the Creation
Unit to be redeemed to the Fund's Transfer Agent, the Distributor will 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, in U.S. dollars in immediately available funds
having a value (marked to market daily) at least equal to 115%, which BFA 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 and shall be held by State Street and marked to
market daily, and 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 cash collateral posted by the
Authorized Participant may be invested at the risk of the Authorized
Participant and income, if any, will be paid to the Authorized Participant. The
Participant Agreement permits the Trust, on behalf of the Fund, to acquire the
Deposit Securities and the Cash Component underlying such shares at any time
and subjects 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 according
to the procedures set forth under Determination of NAV computed on the Business
Day on which a redemption order is deemed received in good form 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 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 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 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 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 disposition of Fund Securities). The 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 Units
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
securities included in the Fund Securities applicable to the redemption of a
Creation Unit 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.
42
Because the portfolio securities of the Fund may trade on days that the Listing
Exchange for the Fund is closed or on days that are otherwise not Business Days
for the Fund, investors may not be able to redeem their shares of the Fund, or
to purchase and sell shares of the Fund on the Listing Exchange, on days when
the NAV of the Fund could be significantly affected by events in the relevant
non-U.S. markets.
TAXATION ON CREATION AND REDEMPTIONS OF CREATION UNITS. An Authorized
Participant generally will recognize either gain or loss upon the exchange of
Deposit Securities for Creation Units. This gain or loss is calculated by
taking the market value of the Creation Units purchased over the Authorized
Participant's aggregate basis in the Deposit Securities exchanged therefor.
However, the U.S. Internal Revenue Service (the "IRS") may apply the wash sales
rules to determine that any loss realized upon the exchange of Deposit
Securities for Creation Units as capital assets is not currently deductible.
Authorized Participants should consult their own tax advisors.
Current federal tax laws dictate that capital gain or loss realized from the
redemption of Creation Units will generally create long-term capital gain or
loss if the Authorized Participant holds the Creation Units as capital assets
for more than one year, or short-term capital gain or loss if the Creation
Units were held for one year or less, if the Creation Units are held as capital
assets.
REGULAR HOLIDAYS. For every occurrence of one or more intervening holidays in
the applicable non-U.S. market that are not holidays observed in the U.S.
equity market, the redemption settlement cycle will be extended by the number
of such intervening holidays. In addition to holidays, other unforeseeable
closings in a non-U.S. market due to emergencies may also prevent the Trust
from delivering securities within normal settlement period.
The securities delivery cycles currently practicable for transferring portfolio
securities to redeeming investors, coupled with non-U.S. market holiday
schedules, will require a delivery process longer than seven calendar days, in
certain circumstances. The holidays applicable to the Fund during such periods
are listed below, as are instances where more than seven days will be needed to
deliver redemption proceeds. Although certain holidays may occur on different
dates in subsequent years, the number of days required to deliver redemption
proceeds in any given year is not expected to exceed the maximum number of days
listed below for the Fund. The proclamation of new holidays, the treatment by
market participants of certain days as "informal holidays" (E.G., days on which
no or limited securities transactions occur, as a result of substantially
shortened trading hours), the elimination of existing holidays, or changes in
local securities delivery practices, could affect the information set forth
herein at some time in the future.
43
The dates in calendar years 2010 and 2011 in which the regular holidays
affecting the relevant securities markets of the following countries (please
note these holiday schedules are subject to potential changes in the relevant
securities markets):
2010
AUSTRALIA
-------------------------------------------------------
January 1 April 5 August 2 December 27
January 26 April 26 August 11 December 28
March 1 May 3 September 27
March 8 June 7 October 4
April 2 June 14 November 2
BELGIUM
-------------------------------------------------------
January 1 May 14 November 1
April 2 May 24 November 11
April 5 July 21
May 13 August 16
CANADA
-------------------------------------------------------
January 1 May 24 September 6 December 28
January 4 June 24 October 11
February 15 July 1 November 11
April 2 August 2 December 27
CHINA
-------------------------------------------------------
January 1 April 2 July 1 September 29
January 18 April 5 July 5 September 30
February 15 April 6 September 6 October 1
February 16 May 3 September 22 October 11
February 17 May 21 September 23 November 11
February 18 May 31 September 27 November 25
February 19 June 16 September 28 December 27
DENMARK
-------------------------------------------------------
January 1 April 30 December 24
April 1 May 13 December 31
April 2 May 14
April 5 May 24
FINLAND
-------------------------------------------------------
January 1 May 13 December 31
January 6 June 25
April 2 December 6
April 5 December 24
FRANCE
-------------------------------------------------------
January 1 July 14
April 2 November 1
April 5 November 11
May 13
GERMANY
-------------------------------------------------------
January 1 April 5 November 1
January 6 May 13 December 24
February 15 May 24 December 31
April 2 June 3
HUNGARY
-------------------------------------------------------
January 1 August 20
March 15 November 1
April 5 December 24
May 24
INDIA
-------------------------------------------------------
January 26 March 24 May 27 October 2
February 12 April 1 July 1 November 5
February 27 April 2 August 19 November 18
March 1 April 14 September 11 December 17
March 16 May 1 September 30 December 25
IRELAND
v
January 1 May 3 December 27
March 17 June 7 December 28
April 2 August 2 December 29
April 5 October 25
ISRAEL
-------------------------------------------------------
February 28 April 19 September 8 September 23
March 29 April 20 September 9 September 29
March 30 May 18 September 10 September 30
April 4 May 19 September 17
April 5 July 20 September 22
44
JAPAN
-------------------------------------------------------
January 1 April 29 July 19 November 3
January 11 May 3 September 20 November 23
February 11 May 4 September 23 December 23
March 22 May 5 October 11 December 31
RUSSIA
-------------------------------------------------------
January 1 January 7 March 8 November 4
January 4 January 8 May 3
January 5 February 22 May 10
January 6 February 23 June 14
SOUTH AFRICA
-------------------------------------------------------
January 1 April 27 December 16
March 22 June 16 December 27
April 2 August 9
April 5 September 24
SOUTH KOREA
-------------------------------------------------------
January 1 May 21 September 23
February 15 June 2 December 31
March 1 September 21
May 5 September 22
SPAIN
-------------------------------------------------------
January 1 April 2 November 1 December 24
January 6 April 5 November 9 December 31
March 19 August 16 December 6
April 1 October 12 December 8
SWEDEN
-------------------------------------------------------
January 1 May 13
January 6 June 25
April 2 December 24
April 5 December 31
SWITZERLAND
-------------------------------------------------------
January 1 April 5 June 29 December 24
January 6 May 13 September 9 December 31
March 19 May 24 November 1
April 2 June 3 December 8
THEUNITED KINGDOM
-------------------------------------------------------
January 1 May 31
April 2 August 30
April 5 December 27
May 3 December 28
2011
AUSTRALIA
-------------------------------------------------------
January 3 April 25 June 13 November 1
January 26 April 26 August 1 December 26
March 7 May 2 August 17 December 27
March 14 May 16 September 26
April 22 June 6 October 3
BELGIUM
-------------------------------------------------------
April 22 June 13 November 11
April 25 July 21 December 26
June 2 August 15
June 3 November 1
CANADA
-------------------------------------------------------
January 3 May 23 September 5 December 27
January 4 June 24 October 10
February 21 July 1 November 11
April 22 August 1 December 26
CHINA
-------------------------------------------------------
January 3 February 7 May 5 October 5
January 17 February 8 May 6 October 6
January 31 February 9 May 30 October 7
February 1 February 21 July 4 October 10
February 2 May 2 September 5 November 11
February 3 May 3 October 3 November 24
February 4 May 4 October 4 December 26
DENMARK
-------------------------------------------------------
April 21 June 2
April 22 June 13
April 25 December 26
May 20
45
FINLAND
-------------------------------------------------------
January 6 June 24
April 22 December 6
April 25 December 26
June 2
FRANCE
-------------------------------------------------------
April 22 August 15
April 25 November 1
June 2 November 11
July 14 December 26
GERMANY
-------------------------------------------------------
January 6 June 2 October 3
March 7 June 13 November 1
April 22 June 23 December 26
April 25 August 15
HUNGARY
-------------------------------------------------------
March 14 October 31
March 15 November 1
April 25 December 26
June 13
INDIA
-------------------------------------------------------
January 26 April 14 August 15 October 6
February 16 April 16 August 19 October 26
March 2 April 22 August 23 October 28
April 1 May 17 August 31 November 7
April 4 June 30 September 1 November 10
April 12 July 1 September 30 December 6
IRELAND
-------------------------------------------------------
January 3 May 2 December 26
March 17 June 6 December 27
April 22 August 1 December 28
April 25 October 31
ISRAEL
-------------------------------------------------------
March 20 May 8 September 28 October 13
April 18 May 9 September 29 October 19
April 19 June 7 September 30 October 20
April 24 June 8 October 7
April 25 August 9 October 12
JAPAN
-------------------------------------------------------
January 3 April 29 July 18 November 3
January 10 May 3 September 19 November 23
February 11 May 4 September 23 December 23
March 21 May 5 October 10
RUSSIA
-------------------------------------------------------
January 3 January 7 March 8 June 13
January 4 January 10 May 2 November 4
January 5 February 23 May 9
January 6 March 7 May 10
SOUTH AFRICA
-------------------------------------------------------
March 21 May 2 December 26
April 22 June 16
April 25 August 9
April 27 December 16
SOUTH KOREA
-------------------------------------------------------
February 2 April 5 August 15 December 30
February 3 May 5 September 12
February 4 May 10 September 13
March 1 June 6 October 3
SPAIN
-------------------------------------------------------
January 6 May 2 September 9 December 6
April 21 May 3 October 12 December 8
April 22 July 25 November 1 December 26
April 25 August 15 November 9
SWEDEN
-------------------------------------------------------
January 6 June 6
April 22 June 24
April 25 December 26
June 2
SWITZERLAND
-------------------------------------------------------
January 6 June 13 August 15 December 26
April 22 June 23 September 8
April 25 June 29 November 1
June 2 August 1 December 8
46
THEUNITED KINGDOM
-------------------------------------------------------
January 3 May 30
April 22 August 29
April 25 December 26
May 2 December 27
REDEMPTIONS. The longest redemption cycle for the Fund is a function of the
longest redemption cycle among the countries whose stocks comprise the Fund. In
the calendar year 2010 and 2011, the dates of regular holidays affecting the
following securities markets present the worst-case redemption cycle* for the
Fund as follows:
2010
China 02/10/10 02/22/10 12
02/11/10 02/23/10 12
02/12/10 02/24/10 12
03/29/10 04/07/08 9
03/30/10 04/08/08 9
04/01/10 04/09/08 8
09/20/10 10/04/10 14
09/21/10 10/05/10 14
09/24/10 10/06/10 12
Denmark 03/29/10 04/06/10 8
03/30/10 04/07/10 8
03/31/10 04/08/10 8
Japan 04/28/10 05/06/10 8
04/29/10 05/07/10 8
04/30/10 05/10/10 10
South Korea 09/16/10 09/24/10 8
09/17/10 09/27/10 10
09/20/10 09/28/10 8
Spain 03/29/10 04/06/10 8
03/30/10 04/07/10 8
03/31/10 04/08/10 8
2011
Australia 04/19/11 04/27/11 8
04/20/11 04/28/11 8
04/21/11 04/29/11 8
China 01/26/11 02/10/11 15
01/27/11 02/11/11 15
01/28/11 02/14/11 17
04/27/11 05/09/11 12
04/28/11 05/10/11 12
04/29/11 05/11/11 12
09/28/11 10/11/11 13
09/29/11 10/12/11 13
09/30/11 10/13/11 13
Denmark 04/18/11 04/26/11 8
04/19/11 04/27/11 8
04/20/11 04/28/11 8
Ireland 12/21/11 12/29/11 8
12/22/11 12/30/11 8
12/23/11 01/03/12 11
Japan 04/27/11 05/06/11 9
47
04/28/11 05/09/11 11
05/02/11 05/10/11 8
Russia 12/28/11 01/10/12 13
12/29/11 01/11/12 13
12/30/11 01/12/12 13
South Africa 03/14/11 03/22/11 8
03/15/11 03/23/11 8
03/16/11 03/24/11 8
03/17/11 03/25/11 8
03/18/11 03/28/11 10
04/15/11 04/26/11 11
04/18/11 04/28/11 10
04/19/11 04/29/11 10
04/20/11 05/03/11 13
04/21/11 05/04/11 13
04/26/11 05/05/11 9
04/28/11 05/06/11 8
04/29/11 05/09/11 10
06/09/11 06/17/11 8
06/10/11 06/20/11 10
06/13/11 06/21/11 8
06/14/11 06/22/11 8
06/15/11 06/23/11 8
08/02/11 08/10/11 8
08/03/11 08/11/11 8
08/04/11 08/12/11 8
08/05/11 08/15/11 10
08/08/11 08/16/11 8
12/09/11 12/19/11 10
12/12/11 12/20/11 8
12/13/11 12/21/11 8
12/14/11 12/22/11 8
12/15/11 12/23/11 8
12/19/11 12/27/11 8
12/20/11 12/28/11 8
12/21/11 12/29/11 8
12/22/11 12/30/11 8
12/23/11 01/03/12 11
Spain 04/18/11 04/26/11 8
04/19/11 04/27/11 8
04/20/11 04/28/11 8
----------
* These worst-case redemption cycles are based on information regarding
regular holidays, which may be out of date. Based on changes in holidays,
longer (worse) redemption cycles are possible.
Taxes
REGULATED INVESTMENT COMPANY QUALIFICATIONS. The Fund intends to qualify for
treatment as a separate RIC under Subchapter M of the Internal Revenue Code. To
qualify for treatment as a RIC, the Fund must annually distribute at least 90%
of its 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 non-U.S. currencies, other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies, and net
48
income derived from interests in qualified publicly-traded partnerships (I.E.,
partnerships that are traded on an established securities market or tradable on
a secondary market, other than partnerships that derive 90% of their income
from interest, dividends, capital gains and other traditionally permitted
mutual fund income); and (ii) at the close of each quarter of the Fund's
taxable year, (a) at least 50% of the market value of the Fund's total assets
must be represented by cash 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 the Fund's assets and not greater
than 10% of the outstanding voting securities of such issuer, and (b) not more
than 25% of the value of the Fund's total assets may be invested in the
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer, of two or more issuers of which 20% or more of the
voting stock is held by the Fund and that are engaged in the same or similar
trades or businesses or related trades or businesses or the securities of one
or more qualified publicly-traded partnerships.
Although in general the passive loss rules of the Internal Revenue Code do not
apply to RICs, such rules do apply to a RIC with respect to items attributable
to an interest in a qualified publicly-traded partnership. The Fund's
investments in partnerships, including in qualified publicly-traded
partnerships, may result in the Fund being subject to state, local, or non-U.S.
income, franchise or withholding tax liabilities.
TAXATION OF RICS. As a RIC, 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, provided that it satisfies a minimum
distribution requirement. To satisfy the minimum distribution requirement, the
Fund must distribute to its shareholders at least the sum of (i) 90% of its
"investment company taxable income" (I.E., income other than its net realized
long-term capital gain over its net realized short-term capital loss), plus or
minus certain adjustments, and (ii) 90% of its net tax-exempt income for the
taxable year. The Fund will be subject to income tax at regular corporation
rates on any taxable income or gains that it does not distribute to its
shareholders. If the Fund fails to qualify for any taxable year as a RIC or
fails to meet the distribution requirement, 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 and distributions
to corporate shareholders generally should be eligible for the dividends
received deduction. 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 U.S. federal income taxation to the extent any such
income or gains are not distributed. 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.
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 12 months ended October 31 of such
year. For this purpose, however, any ordinary income or capital gain net income
retained by the Fund that is subject to corporate income tax will be considered
to have been distributed by year-end. In addition, the minimum amounts that
must be distributed in any year to avoid the excise tax will be increased or
decreased to reflect any underdistribution or overdistribution, as the case may
be, from the previous 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.
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.
TAXATION OF U.S. SHAREHOLDERS. Dividends and other distributions by the Fund
are generally treated under the Internal Revenue Code 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.
49
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 (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 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 shares of the Fund, and as a
capital gain thereafter (if the shareholder holds 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.
Recent legislation will impose, beginning in 2013, a new 3.8% Medicare
contribution tax on net investment income, including interest, dividends, and
capital gain, of U.S. individuals with income exceeding $200,000 (or $250,000
if married and filing jointly), and of estates and trusts.
Investors considering buying shares just prior to a dividend or capital gain
distribution should be aware that, although the price of shares 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 security on the record date for any dividends payable with
respect to such security, 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
security became ex-dividend with respect to such dividends (I.E., the date on
which a buyer of the security would not be entitled to receive the declared,
but unpaid, dividends); or (b) the date the Fund acquired such security.
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.
In certain situations, the Fund may, for a taxable year, defer all or a portion
of its capital losses and currency losses realized after October until the next
taxable year in computing its investment company taxable income and net capital
gain, which will defer the recognition of such realized losses. Such deferrals
and other rules regarding gains and losses realized after October may affect
the tax character of shareholder distributions.
SALES OF SHARES. Upon the sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss equal to the difference between
the amount realized and the shareholder's basis in shares of the Fund. 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
50
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. The 3.8% Medicare
contribution tax (discussed above) will apply to gains from the sale or
exchange of Fund Shares.
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 mutual
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 shareholders from immediately deducting the sales
charge by shifting their investments within a family of mutual funds.
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: (i) has failed to provide a correct taxpayer identification number; (ii)
is subject to back-up withholding by the IRS; (iii) has failed to certify to
the Fund that such shareholder is not subject to back-up withholding; or (iv)
has not certified that such shareholder is a U.S. person (including a U.S.
resident alien). Back-up withholding is not an additional tax and any amount
withheld may be credited against a shareholder's U.S. federal income tax
liability.
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 Internal Revenue Code, 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.
TAXATION OF CERTAIN DERIVATIVES. The Fund's transactions in zero coupon
securities, non-U.S. currencies, forward contracts, options and futures
contracts (including options and futures contracts on non-U.S. currencies), to
the extent permitted, will be subject to special provisions of the Internal
Revenue 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 zero
coupon security, non-U.S. currency, forward contract, option, 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 non-U.S. currency forward contracts traded in the
interbank market and options on most security 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.
51
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). With respect to
certain types of swaps, the Fund may be required to currently recognize income
or loss with respect to future payments on such swaps or may elect under
certain circumstances to mark such swaps to market annually for tax purposes as
ordinary income or loss. The tax treatment of many types of credit default
swaps is uncertain.
QUALIFIED DIVIDEND INCOME. Distributions by the Fund of investment company
taxable income (including any short-term capital gains), 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%
(0% 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 U.S. corporations (but generally not from
U.S. REITs) and certain non-U.S. corporations (E.G., non-U.S. corporations that
are not "passive foreign investment companies" and which are incorporated in a
possession of the U.S. or in certain countries with a comprehensive tax treaty
with the U.S., or the stock of which is readily tradable on an established
securities market in the U.S.). Under current IRS guidance, the United States
has appropriate comprehensive income tax treaties with the following countries:
Australia, Austria, Bangladesh, Barbados, Belgium, Canada, China (but not with
Hong Kong which is treated as a separate jurisdiction for U.S. tax purposes),
Cyprus, the Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany,
Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica,
Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Mexico, Morocco, the
Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal,
Romania, Russia, the Slovak Republic, Slovenia, South Africa, South Korea,
Spain, Sri Lanka, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia,
Turkey, Ukraine, the United Kingdom and Venezuela.
A dividend from the Fund will not be treated as qualified dividend income to
the extent that (i) 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 or the Fund fails to satisfy those holding period
requirements with respect to the securities it holds that paid the dividends
distributed to the shareholder (or, in the case of certain preferred stocks,
the holding requirement of 91 days during the 181-day period beginning on the
date that is 90 days before the date on which the stock becomes ex-dividend
with respect to such dividend); (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 Internal Revenue Code. Dividends received by the
Fund from a REIT or another RIC may be treated as qualified dividend income
only to the extent the dividend distributions are attributable to qualified
dividend income received by such REIT or other RIC. It is expected that
dividends received by the Fund from a REIT and distributed to a shareholder
generally will be taxable to the shareholder as ordinary income. Absent 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 be taxable
as ordinary income. Capital gain distributions consisting of the Fund's net
capital gains will be taxable as long-term capital gains.
If you lend your Fund shares pursuant to securities lending arrangements you
may lose the ability to use non-U.S. tax credits passed through by the Fund or
to treat Fund dividends (paid while the shares are held by the borrower) as
qualified dividends. Consult your financial intermediary or tax advisor. If you
enter into a short sale with respect to shares of the Fund, substitute payments
made to the lender of such shares may not be deductible. Consult your financial
intermediary or tax advisor.
EXCESS INCLUSION INCOME. Under current law, the Fund will block unrelated
business taxable income from being realized by its tax-exempt shareholders.
Notwithstanding the foregoing, a tax-exempt shareholder could realize unrelated
business taxable income by virtue of its investment in the Fund if shares in
the Fund constitute debt-financed property in the hands of the tax-exempt
shareholder within the meaning of Section 514(b) of the Internal Revenue Code.
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 (i) 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;
(ii) not be offset by otherwise allowable deductions for tax purposes; (iii)
not be eligible for reduced U.S. withholding for non-U.S. shareholders even
from tax treaty countries; and (iv) cause the Fund to be subject to
52
tax if certain "disqualified organizations," as defined by the Internal Revenue
Code, are Fund shareholders. If a charitable remainder annuity trust or a
charitable remainder unitrust (each as defined in Section 664 of the Internal
Revenue Code) has UBTI for a taxable year, a 100% excise tax on the UBTI is
imposed on the trust.
NON-U.S. INVESTMENTS. Under Section 988 of the Internal Revenue Code, 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
non-U.S. currency and the time the Fund actually collects such income or pays
such liabilities are generally treated as ordinary income or ordinary loss. In
general, gains (and losses) realized on debt instruments will be treated as
Section 988 gain (or loss) to the extent attributable to changes in exchange
rates between the U.S. dollar and the currencies in which the instruments are
denominated. Similarly, gain or losses on non-U.S. currency, non-U.S. currency
forward contracts and certain non-U.S. currency options or futures contracts
denominated in non-U.S 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.
The Fund may be subject to non-U.S. income taxes withheld at the source. The
Fund, if permitted to do so, may elect to "pass through" to its investors the
amount of non-U.S. income taxes paid by the Fund provided that the Fund held
the security on the dividend settlement date and for at least 15 additional
days immediately before and/or thereafter, with the result that each investor
with respect to shares of the Fund held for a minimum 16-day holding period at
the time of deemed distribution will (i) include in gross income, even though
not actually received, the investor's PRO RATA share of the Fund's non-U.S.
income taxes, and (ii) either deduct (in calculating U.S. taxable income, but
only for investors who itemize their deductions on their personal tax returns)
or credit (in calculating U.S. federal income tax) the investor's PRO RATA
share of the Fund's non-U.S. income taxes. A non-U.S. person invested in the
Fund in a year that the Fund elects to "pass through" its non-U.S. taxes may be
treated as receiving additional dividend income subject to U.S. withholding
tax. A non-U.S. tax credit may not exceed the investor's U.S. federal income
tax otherwise payable with respect to the investor's non-U.S. source income.
For this purpose, shareholders must treat as non-U.S. source gross income (i)
their proportionate shares of non-U.S. taxes paid by the Fund and (ii) the
portion of any dividend paid by the Fund that represents income derived from
non-U.S. sources; the Fund's gain from the sale of securities will generally be
treated as U.S.-source income. Certain limitations will be imposed to the
extent to which the non-U.S. tax credit may be claimed.
PASSIVE FOREIGN INVESTMENT COMPANIES. If the Fund purchases shares in "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 Internal Revenue Code, 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% 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 would 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 effects of these rules.
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
53
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.
OTHER TAXES. Dividends, distributions and redemption proceeds may also be
subject to additional state, local and non-U.S. 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. Dividends paid by the Fund
from net-tax exempt income or long-term capital gains are generally not subject
to such withholding tax. 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, U.S. 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 non-U.S. shareholders of the Fund, a distribution attributable to the
Fund's sale or exchange of U.S. real property or of a REIT or other U.S. real
property holding corporation will be treated as real property gain subject to
35% withholding tax if 50% or more of the value of the Fund's assets is
invested in REITs and other U.S. real property holding corporations and if the
non-U.S. 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. In addition,
non-U.S. shareholders may be subject to certain tax filing requirements if 50%
or more of the Fund's assets are invested in REITs and other U.S. real property
holding corporations. After December 31, 2009, distributions by the Fund that
are attributable to gain received from the sale or exchange of U.S. real
property or an interest in a U.S. real property holding corporation will only
be subject to withholding and taxed to the shareholder as income effectively
connected to a U.S. trade or business if the distributions are attributable to
distributions from a REIT to the Fund.
Disposition of Fund shares by non-U.S. shareholders on or before December 31,
2009, will be subject to withholding tax and treated as income effectively
connected to a U.S. trade or business if 50% or more of the value of the Fund's
assets are invested in REITs and other U.S. real property holding corporations,
the Fund is not domestically controlled, and the non-U.S. shareholder owns more
than 5% of the outstanding shares of the Fund at any time during the five-year
period ending on the date of disposition. After December 31, 2009, such
dispositions will be subject to withholding and treated as income effectively
connected to a U.S. trade or business even if the Fund is domestically
controlled.
The rules laid out in the previous two paragraphs, other than the withholding
rules, will apply notwithstanding the Fund's participation in a wash sale
transaction or its payment of a substitute dividend.
Provided that 50% or more of the value of the Fund's stock is held by U.S.
shareholders, distributions of U.S. real property interests (including
securities in a U.S. real property holding corporation, unless such corporation
is regularly traded on an established securities market and the Fund has held
5% or less of the outstanding shares of the corporation during the five-year
period ending on the date of distribution) occurring on or before December 31,
2009, in redemption of a non-U.S. shareholder's shares of the Fund will cause
the Fund to recognize gain. If the Fund is required to recognize gain, the
amount of gain recognized will equal to the fair market value of such interests
over the Fund's adjusted bases to the extent of the greatest non-U.S. ownership
percentage of the Fund during the five-year period ending on the date of
redemption for redemptions.
For taxable years beginning before January 1, 2010, properly-designated
dividends were generally exempt from U.S. 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
54
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. Although this provision has expired, legislation has been proposed
under which this provision would be extended to taxable years beginning before
January 1, 2011; this extension, if enacted, would be applied retroactively.
For taxable years beginning before January 1, 2010, distributions that the Fund
designates as "short-term capital gains dividends" or "long-term capital gains
dividends" may not be treated as such to a recipient non-U.S. shareholder if
the distribution is attributable to gain received from the sale or exchange of
U.S. real property or an interest in a U.S. real property holding corporation
and the non-U.S. shareholder has not owned more than 5% of the outstanding
shares of the Fund at any time during the one-year period ending on the date of
distribution. Such distributions will be subject to 30% withholding by the Fund
and will be treated as ordinary dividends to the non-U.S. shareholder.
The Internal Revenue Code will impose a U.S. federal withholding tax of 30% on
payments (including gross proceeds) that are attributable to certain U.S.
investments and made to non-U.S. entities. The Fund will be required to
withhold with respect to non-U.S. entities unless such entity complies with
certain reporting requirements to the IRS in respect of such shareholder's own
direct and indirect U.S. investors, effective beginning with payments made
after December 31, 2012. Affected shareholders consult their own tax advisors
regarding the possible implications of these requirements on their own
investment in the Fund.
Shares of the Fund held by a non-U.S. shareholder at death will be considered
situated within the United States and subject to the U.S. estate tax for
decedents dying after December 31, 2010. It is unclear at the current time
whether these provisions will be extended into the future.
The foregoing discussion is a summary of certain material U.S. federal income
tax considerations 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
non-U.S tax laws. Finally, the foregoing discussion is based on applicable
provisions of the Internal Revenue Code, 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.
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. ________________________, serves
as the Trust's independent registered public accounting firm, audits the Fund's
financial statements, and may perform other services.
SHAREHOLDER COMMUNICATIONS 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 BlackRock Institutional Trust Company, N.A. - Mutual Fund Administration,
400 Howard Street, San Francisco, CA 94105. Shareholder communications to the
Board should include the following information: (i) the name and address of the
shareholder; (ii) the number of shares owned by the shareholder; (iii) the
Fund(s) of which the shareholder owns share; and
55
(iv) 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.
56
IS-SAI-___-_____
iShares Trust
File Nos. 333-92935 and 811-09729
Part C
Other Information
Item 28. Exhibits:
PEA # 423
Exhibit
Number Description
------- -----------
(a) Amended and Restated Agreement and Declaration of Trust, dated
September 17, 2009, is incorporated herein by reference to
Post-Effective Amendment No. 303, filed October 16, 2009 ("PEA No.
303").
(a.1) Restated Certificate of Trust, dated September 13, 2006, is
incorporated herein by reference to Post-Effective Amendment No. 53,
filed September 19, 2006.
(b) Amended and Restated By-Laws, dated April 20, 2010, is incorporated
herein by reference to Post-Effective Amendment No. 418, filed May 4,
2010 ("PEA No. 418").
(c) Article II of the Amended and Restated Agreement and Declaration of
Trust is incorporated herein by reference to Exhibit (a) to PEA No.
303.
(d.1) Investment Agreement, dated December 1, 2009, between the Trust and
BlackRock Fund Advisors ("BFA") is incorporated herein by reference to
Post-Effective Amendment No. 354, filed December 28, 2009 ("PEA No.
354").
(d.2) Schedule A to the Investment Advisory Agreement between the Trust and
BFA is incorporated herein by reference to PEA No. 418.
(d.3) Schedule A to the Investment Advisory Agreement between iShares, Inc.
and BFA incorporated herein by reference to PEA No. 418.
(d.4) Master Advisory Fee Waiver Agreement, dated June 17, 2009, between the
Trust and Barclays Global Fund Advisors/1/ is incorporated herein by
reference to Post-Effective Amendment No. 261, filed July 24, 2009
("PEA No. 261").
(d.5) Schedule A, dated June 17, 2009, to the Master Advisory Fee Waiver
Agreement is incorporated herein by reference to Exhibit (d.5) of PEA
No. 261.
(e.1) Distribution Agreement between the Trust and SEI Investments
Distribution Company ("SEI") is incorporated herein by reference to
Post-Effective Amendment No. 2, filed May 12, 2000 ("PEA No. 2").
(e.2) Exhibit A to the Distribution Agreement between the Trust and SEI is
incorporated herein by reference to PEA No. 418.
(f) Not applicable.
(g.1) Custodian Agreement between the Trust and Investors Bank & Trust
Company ("IBT")/2/ 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 is incorporated herein by
reference to PEA No. 418.
(h.1) Amended and Restated Securities Lending Agency Agreement, dated
November 2, 2009, among the Trust, iShares, Inc. and Barclays Global
Investors, N.A./3/ is incorporated herein by reference to PEA No. 354.
(h.2) Schedule A to Amended and Restated Securities Lending Agency Agreement
is incorporated herein by reference to PEA No. 418.
(h.3) Form of Master Securities Loan Agreement (including forms of Annexes,
Schedule and Appendix thereto) is incorporated herein by reference to
Post-Effective Amendment No. 369, filed January 22, 2010.
(h.4) Delegation Agreement between the Trust and IBT/2/ is incorporated
herein by reference to Exhibit (g.3) to PEA No. 2.
(h.5) Administration Agreement between the Trust and IBT/2/ is incorporated
herein by reference to Exhibit (h.1) to PEA No. 2.
(h.6) Amendment, dated May 21, 2002, to the Administration Agreement is
incorporated herein by reference to Exhibit (h.6) to PEA No. 45.
(h.7) Amendment, dated January 1, 2006, to the Administration Agreement is
incorporated herein by reference to Exhibit (h.7) to PEA No. 45.
(h.8) Amendment, dated January 1, 2007, to the Administration Agreement is
incorporated herein by reference to Exhibit (h.8) to Post-Effective
Amendment No. 75, filed March 26, 2007.
(h.9) Appendix A to the Administration Agreement is incorporated herein by
reference to PEA No. 418.
(h.10) Transfer Agency and Service Agreement between the Trust and IBT/2/ is
incorporated herein by reference to Exhibit (h.2) to PEA No. 2.
(h.11) Amendment, dated May 21, 2002, to the Transfer Agency and Service
Agreement is incorporated herein by reference to PEA No. 45.
(h.12) Amendment, dated August 18, 2004, to the Transfer Agency and Service
Agreement is incorporated herein by reference to PEA No. 45.
(h.13) Amendment, dated January 1, 2006, to the Transfer Agency and Service
Agreement is incorporated herein by reference to PEA No. 45.
(h.14) Appendix A to the Transfer Agency and Service Agreement is
incorporated herein by reference to PEA No. 418.
(h.15) Sublicense Agreement, dated April 25, 2000, between BlackRock
Institutional Trust Company, N.A. ("BTC")/3/ and the Trust for iShares
S&P Funds is incorporated herein by reference to Exhibit (h.3.i) to
PEA No. 2.
(h.16) Amendment to Sublicense Agreement between BTC/3/ and the Trust for the
iShares S&P Funds is incorporated herein by reference to
Post-Effective Amendment No. 188, filed November 20, 2008.
(h.17) Sublicense Agreement, dated April 25, 2000, between BTC/3/ and the
Trust for iShares Dow Jones Funds is incorporated herein by reference
to Exhibit (h.7) to Post-Effective Amendment No. 37, filed June 6,
2005 ("PEA No. 37").
(h.18) Exhibit A to the Sublicense Agreement, dated April 1, 2006, between
BTC/3/ 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.
(h.19) Sublicense Agreement between BTC/3/ and the Trust for iShares Dow
Jones Funds to be filed by amendment.
(h.20) Sublicense Agreement, dated April 25, 2000, between BTC/3/ and the
Trust for iShares Russell Funds is incorporated herein by reference to
Exhibit (h.8) to PEA No. 37.
(h.21) Exhibit A to the Sublicense Agreement between BTC/3/ and the Trust for
iShares Russell Funds is incorporated herein by reference to
Post-Effective Amendment No. 114, filed November 9, 2007 ("PEA No.
114").
(h.22) Sublicense Agreement between BTC/3/ and the Trust for the iShares MSCI
Funds is incorporated herein by reference to Exhibit (h.9) to
Post-Effective Amendment No. 10, filed June 1, 2001.
(h.23) Amendment to Sublicense Agreement between BTC/3/ and the Trust for the
iShares MSCI Funds is incorporated herein by reference to PEA No. 418.
(h.24) Sublicense Agreement between BTC/3/ 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.25) Sublicense Agreement between BTC/3/ 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
Post-Effective Amendment No. 16, filed July 31, 2002.
(h.26) Sublicense Agreement between BTC/3/ and the Trust for iShares iBoxx $
High Yield Corporate Bond Fund and iShares iBoxx $ Investment Grade
Corporate Bond Fund is incorporated herein by reference to Exhibit
(h.24) to PEA No. 114.
(h.27) Sublicense Agreement between BTC/3/ 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.28) Sublicense Agreement between BTC/3/ 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.29) Sublicense Agreement between BTC/3/ 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.
(h.30) Sublicense Agreement between BTC/3/ 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.31) Sublicense Agreement between BTC/3/ and the Trust for iShares
Morningstar Funds is incorporated herein by reference to Exhibit
(h.21) to PEA No. 37.
(h.32) Sublicense Agreement between BTC/3/ and the Trust for iShares KLD
Select Social(SM) Index Fund is incorporated herein by reference to
Exhibit (h.22) to PEA No. 37.
(h.33) Exhibit A to the Sublicense Agreement between BTC/3/ and the Trust for
iShares KLD 400 Social Index Fund is incorporated herein by reference
to Exhibit (h.31) to PEA No. 114.
(h.34) Exhibit A to the Sublicense Agreement between BTC/3/ 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.35) Exhibit A to the Sublicense Agreement between BTC/3/ 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 BTC/3/ and the Trust for FTSE/NAREIT
Funds is incorporated herein by reference to PEA No. 114.
(h.37) Amendment to Sublicense Agreement between BTC/3/ and the Trust for
FTSE/NAREIT Funds to be filed by amendment.
(h.38) Sublicense Agreement between BTC/3/ and the Trust for iShares JPMorgan
USD Emerging Markets Bond Fund is incorporated herein by reference to
Exhibit (h.38) to Post-Effective Amendment No. 101, filed September
27, 2007.
(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 Nasdaq Biotechnology 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
PEA No. 418.
(p.2) BTC/3/ Code of Ethics is incorporated herein by reference to
Post-Effective Amendment No. 39, filed July 28, 2005.
(p.3) Code of Ethics for SEI is incorporated herein by reference to PEA No.
45.
(q.1) Powers of Attorney, each dated February 23, 2009, for John E.
Martinez, George G.C. Parker, Cecilia H. Herbert, John E. Kerrigan,
Charles A. Hurty, Robert H. Silver and Darrell Duffie are incorporated
herein by reference to Post-Effective Amendment No. 226, filed April
22, 2009 ("PEA No. 226").
(q.2) Power of Attorney, dated December 8, 2009, for Robert S. Kapito is
incorporated herein by reference to PEA No. 354.
(q.3) Power of Attorney, dated May 1, 2010, for Michael Latham is
incorporated herein by reference to PEA No. 417.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT:
None.
ITEM 30. 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 Amended and Restated By-Laws provides that the Trust may purchase and
maintain insurance on behalf of any Covered Person or employee of the Trust,
including any Covered Person or employee of the Trust who is or was serving at
the request of the Trust as a Trustee, officer, or employee of a corporation,
partnership, association, joint venture, trust, or other enterprise, against any
liability asserted against and incurred by such Covered Person or employee in
any such capacity or arising out of his or her status as such, whether or not
the Trustees would have the power to indemnify him or her against such
liability. The Trust may not acquire or obtain a contract for insurance that
protects or purports to protect any Trustee or officer of the Trust against any
liability to the Trust or its Shareholders to which such Trustee or officer
otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
The Administration Agreement provides that IBT/2/ 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/2/, 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/2/ indemnification
obligation with respect to the acts or omissions of its subcustodians shall not
exceed the indemnification provided by the applicable subcustodian to IBT/2/.
The Custodian Agreement provides that IBT/2/ 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/2/, 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/2/ indemnification
obligation with respect to the acts or omissions of its subcustodians shall not
exceed the indemnification provided by the applicable subcustodian to IBT/2/.
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 BTC shall indemnify and
hold harmless each client, Lender, its Board of Trustees and its agents and BFA
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 BTC, 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 BTC's indemnification obligation with respect to the
acts or omissions of its subcustodians shall not exceed the indemnification
provided by the applicable subcustodian to BTC.
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 31. (A) BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER:
The Trust is advised by BFA, a wholly-owned subsidiary of BTC, 400 Howard
Street, San Francisco, CA 94105. BFA'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 BFA 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 BFA will also have substantial
responsibilities as directors and/or officers of BTC. To the knowledge of the
Registrant, except as set forth below, none of the directors or executive
officers of BFA 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 Chairman Director and Chairman of the Board of Directors of BFA
and Chief Executive Officer and Director of BTC, 400
Howard Street, San Francisco, CA 94105
Anthony Spinale Chief Financial Officer of BFA and Chief Financial
Officer Officer and Cashier of BTC, 400 Howard Street, San
Francisco, CA 94105
Rohit Bhagat Director and Chief Operating Officer of BFA and BTC,
Director 400 Howard Street, San Francisco, CA 94105
ITEM 32. PRINCIPAL UNDERWRITERS:
(a) 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 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
Oak Associates Funds February 27, 1998
CNI Charter Funds April 1, 1999
iShares, Inc. January 28, 2000
Optique Funds, Inc. November 1, 2000
Causeway Capital Management Trust September 20, 2001
BlackRock Funds III March 31, 2003
SEI Opportunity Fund, LP October 1, 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 Alpha Strategy Portfolios, LP June 29, 2007
TD Asset Management USA Funds July 25, 2007
SEI Structured Credit Fund, LP July 31, 2007
Wilshire Mutual Funds, Inc. July 12, 2008
Wilshire Variable Insurance Trust July 12, 2008
Forward Funds August 14, 2008
Global X Funds October 24, 2008
Faith Shares Trust August 7, 2009
Schwab Strategic Trust October 12, 2009
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 25 of Part B. Unless otherwise noted, the business
address of each director or officer is One Freedom Valley Drive, Oaks, PA
19456.
Position and Office Positions and Offices
Name 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, Chief Operations Officer & Treasurer --
John Munch General Counsel & Secretary --
Karen LaTourette Chief Compliance Officer & Asst. Secretary, Anti-Money Laundering
Officer --
Mark J. Held Senior Vice President --
Lori L. White Vice President & Assistant Secretary --
Robert Silvestri Vice President --
John Coary Vice President & Assistant Secretary --
John Cronin Vice President --
(c) Not applicable.
ITEM 33. 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 there under (collectively, the "Records") at
the offices of State Street Bank and Trust Company ("State Street"), 200
Clarendon Street, Boston, MA 02116.
(b) BFA maintains all Records relating to its services as investment adviser at
400 Howard Street, San Francisco, CA, 94105.
(c) SEI 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 34. MANAGEMENT SERVICES:
Not applicable.
ITEM 35. UNDERTAKINGS:
Not applicable.
----------
/1/ Prior to December 1, 2009, BFA was known as Barclays Global Fund Advisors.
/2/ 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 Trust.
/3/ Prior to December 1, 2009, BTC was known as Barclays Global Investors, N.A.
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. 423 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 10th day of May 2010.
By:
----------------------------------
Michael Latham*
President and Trustee
Date: May 10, 2010
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 423 to the Registration Statement has been signed
below by the following persons in the capacity and on the date indicated.
By:
----------------------------------
Michael Latham*
President and Trustee
Date: May 10, 2010
----------------------------------
John E. Martinez**
Trustee
Date: May 10, 2010
----------------------------------
George G. C. Parker**
Trustee
Date: May 10, 2010
----------------------------------
Cecilia H. Herbert**
Trustee
Date: May 10, 2010
----------------------------------
Charles A. Hurty**
Trustee
Date: May 10, 2010
----------------------------------
John E. Kerrigan**
Trustee
Date: May 10, 2010
----------------------------------
Robert H. Silver**
Trustee
Date: May 10, 2010
----------------------------------
Darrell Duffie**
Trustee
Date: May 10, 2010
----------------------------------
Robert S. Kapito***
Trustee
Date: May 10, 2010
/s/ Jack Gee
----------------------------------
Jack Gee
Treasurer
Date: May 10, 2010
/s/ Jack Gee
----------------------------------
*,**,*** By: Jack Gee
Attorney-in-fact
Date: May 10, 2010
----------
* Power of Attorney, dated May 1, 2010, for Michael Latham is incorporated
herein by reference to PEA No. 417.
** Powers of Attorney, each dated February 23, 2009, for John E. Martinez,
George G.C.Parker, Cecilia H. Herbert, Charles A. Hurty, John E. Kerrigan,
Robert H. Silver and Darrell Duffie are incorporated herein by reference to
PEA No. 226.
*** Power of Attorney, dated December 8, 2009, for Robert S. Kapito is
incorporated herein by reference to PEA No. 354.
Exhibit Index
(i) Legal Opinion and Consent of Richards, Layton & Finger P.A.
EX-99.(I)
2
dex99i.txt
LEGAL OPINION AND CONSENT OF RICHARDS, LAYTON & FINGER P.A.
Exhibit (i)
RICHARDS
LAYTON &
FINGER
May 10, 2010
iShares Trust
c/o Barclays Global Fund Advisors
400 Howard Avenue
San Francisco, CA 94105
RE: iShares MSCI ACWI ex US Health Care 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 (as
amended and restated, 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, dated September 13, 2006,
made by the trustees named therein, as further amended and
restated by the Amended and Restated Agreement and Declaration of
Trust, dated September 24, 2008, made by the trustees named
therein, as further amended and restated by the Amended and
Restated Agreement and Declaration of Trust, dated September 17,
2009 (as amended and restated on such date, the "Trust
Instrument"), made by the trustees named therein;
[_] [_] [_]
One Rodney Square [_] 920 North King Street [_] Wilmington, DE 19801 [_]
Phone: 302-651-7700 [_] Fax: 302-651-7701
www.rlf.com
iShares Trust
May 10, 2010
Page 2
(c) Post-Effective Amendment No. 423 (the "Amendment"), to be filed with
the Securities and Exchange Commission (the "SEC"), to the Trust's
Registration Statement on Form N-1A (File Nos. 333-92935 and
811-09729), filed with the SEC on December 16, 1999 (as amended by the
Amendment, the "Registration Statement");
(d) The Amended and Restated By-Laws of the Trust in effect on the date
the Resolutions (as defined below) were adopted by the Board of
Trustees of the Trust (the "Board"), as approved by the Board on
December 8, 2006, as further amended and restated by the Amended and
Restated By-Laws of the Trust, as approved by the Board on August 13,
2009, as further amended and restated by the Amended and Restated
By-Laws of the Trust in effect on the date hereof as approved by the
Board on April 20, 2010 (as amended and restated on such date, the
"By-laws");
(e) Copies of certain resolutions adopted by the Board at a meeting with
respect to delegation of naming determinations for series of the Trust
to Barclays Global Fund Advisors or any Fund officer;
(f) Copies of certain resolutions (the "Resolutions") adopted by the Board
at a meeting on February 23-24, 2009, with respect to the creation of
that certain series of the Trust to be known as iShares MSCI ACWI ex
US Health Care Index Fund (the "Fund") and the issuance of certain
shares of beneficial interest in such Fund (each, a "Share," and
collectively, the "Shares");
(g) A certificate of an officer of the Trust with respect to certain
matters, dated May 10, 2010; and
(h) A Certificate of Good Standing for the Trust, dated May 10, 2010,
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 (h) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (h) 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.
iShares Trust
May 10, 2010
Page 3
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 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.
iShares Trust
May 10, 2010
Page 4
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/AXR
CORRESP
3
filename3.txt
WILLKIE FARR & GALLAGHER LLP
1875 K Street, NW
Washington, DC 20006-1238
Tel: 202 303 1000
Fax: 202 303 2000
VIA EDGAR
---------
May 10, 2010
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: iShares Trust
File Nos. 333-92935, 811-09729
Post-Effective Amendment No. 423
--------------------------------
Ladies and Gentlemen:
On behalf of iShares Trust (the "Trust"), we hereby transmit for filing with
the Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940, Post-Effective Amendment No. 423 to the Trust's
Registration Statement on Form N-1A. This Amendment relates to the following
series of the Trust:
iShares MSCI ACWI ex US Health Care Index Fund
Series Identifier: S0000 26116
This Amendment is being filed pursuant to Rule 485(a)(1) under the Securities
Act for the purpose of implementing the new summary prospectus format, and it
will become effective automatically 60 days after filing. The Trust expects to
request acceleration of the effective date to June 9, 2010.
The Trust's registration statement was first amended to include this Fund as a
new series of the Trust on April 22, 2009. The Trust received and responded to
comments from the Staff of the Commission relating to the initial amendment. To
date, the Fund has not begun operations or offered its securities for sale to
the public.
If you have any questions or comments, please call me at (202) 303-1203.
Sincerely,
/s/ Anthony A. Vertuno
Anthony A. Vertuno
cc: Jessica N. Bentley, Esq.
Benjamin J. Haskin, Esq.