0001193125-10-017228.txt : 20120621
0001193125-10-017228.hdr.sgml : 20120621
20100129172242
ACCESSION NUMBER: 0001193125-10-017228
CONFORMED SUBMISSION TYPE: 485APOS
PUBLIC DOCUMENT COUNT: 5
FILED AS OF DATE: 20100129
DATE AS OF CHANGE: 20100415
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: iSHARES INC
CENTRAL INDEX KEY: 0000930667
IRS NUMBER: 510396525
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0831
FILING VALUES:
FORM TYPE: 485APOS
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-97598
FILM NUMBER: 10561089
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 INC
DATE OF NAME CHANGE: 20000516
FORMER COMPANY:
FORMER CONFORMED NAME: WEBS INDEX FUND INC
DATE OF NAME CHANGE: 19970211
FORMER COMPANY:
FORMER CONFORMED NAME: FOREIGN FUND INC
DATE OF NAME CHANGE: 19950524
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: iSHARES INC
CENTRAL INDEX KEY: 0000930667
IRS NUMBER: 510396525
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0831
FILING VALUES:
FORM TYPE: 485APOS
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-09102
FILM NUMBER: 10561090
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 INC
DATE OF NAME CHANGE: 20000516
FORMER COMPANY:
FORMER CONFORMED NAME: WEBS INDEX FUND INC
DATE OF NAME CHANGE: 19970211
FORMER COMPANY:
FORMER CONFORMED NAME: FOREIGN FUND INC
DATE OF NAME CHANGE: 19950524
0000930667
S000028709
iShares MSCI USA Index Fund
C000087836
iShares MSCI USA Index Fund
485APOS
1
d485apos.txt
FORM 485APOS
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 2010
FILE NOS. 33-97598 AND 811-09102
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 107 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 109 [X]
(CHECK APPROPRIATE BOX OR BOXES)
ISHARES, INC.
(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
300 E. LOMBARD STREET
BALTIMORE, MD 21202
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH COPIES TO:
MARGERY K. NEALE, ESQ. BENJAMIN J. HASKIN, ESQ. JESSICA N. BENTLEY, ESQ.
WILLKIE FARR & GALLAGHER LLP WILLKIE FARR & GALLAGHER LLP BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A.
787 SEVENTH AVENUE 1875 K STREET, N.W. 400 HOWARD STREET
NEW YORK, N.Y. 10019-6099 WASHINGTON, D.C. 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)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[_] On (date) pursuant to paragraph (b)
[_] On (date) pursuant to paragraph (a)(1)
[_] On (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[_] The post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES DESCRIBED HEREIN MAY NOT BE
SOLD UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE IN WHICH THE OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL.
2010 PROSPECTUS TO SHAREHOLDERS
iSHARES(Reg. TM) MSCI USA 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................. 5
Management..................................... 5
Shareholder Information........................ 8
Distribution................................... 15
Financial Highlights........................... 15
Index Provider................................. 15
Disclaimers.................................... 15
"MSCI USA IndexSM" is a servicemark of MSCI Inc. and has been licensed for use
for certain purposes by BlackRock Institutional Trust Company, N.A. ("BTC").
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. Prior to
December 1, 2009, BlackRock Institutional Trust Company, N.A. was known as
Barclays Global Investors, N.A.
i
[THIS PAGE INTENTIONALLY LEFT BLANK]
iSHARES(Reg. TM) MSCI USA INDEX FUND
Ticker: ___ Stock Exchange: _______
INVESTMENT OBJECTIVE
The iShares MSCI USA Index Fund (the "Fund") seeks investment results that
correspond generally to the price and yield performance, before fees and
expenses, of the MSCI USA Index (the "Underlying Index"). The Fund's investment
objective and the Underlying Index may be changed without shareholder approval.
FEES AND EXPENSES
The following table describes the fees and expenses that you will incur if you
own shares of the Fund. The iShares, Inc. (the "Company") Investment Advisory
Agreement provides that BlackRock Fund Advisors ("BFA") 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. Portfolio turnover may vary from year to year, as well
as within a year.
S-1
PRINCIPAL INVESTMENT STRATEGIES
The Underlying Index is a market capitalization weighted index designed to
measure the performance of equity securities in the top 85% by market
capitalization of equity securities listed on stock exchanges in the United
States. As of October 30, 2009, the Underlying Index had 601 constituents and
its three largest industries by component weighting were energy, industrials
and materials.
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 90% of its assets in the securities of the
Underlying Index and in depositary receipts representing securities of the
Underlying Index. The Fund may invest the remainder of its assets in other
securities, including securities not in the Underlying Index, futures
contracts, options on futures contracts, other types of options and swaps
related to its Underlying Index, as well as cash and cash equivalents,
including shares of money market funds affiliated with BFA or its affiliates.
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
Prospectus. The Fund is a series of the Company.
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.
S-2
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 Statement of Additional Information
("SAI").
ASSET CLASS RISK. Securities in the Underlying Index or 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.
EQUITY SECURITIES RISK. Equity securities are subject to volatile changes in
value and their values may be more volatile than other asset classes.
ISSUER RISK. Fund performance depends on the performance of individual
companies in which the Fund invests. Changes to the financial condition of any
of those companies may cause the value of their securities to decline.
MANAGEMENT RISK. The Fund 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 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.
PASSIVE INVESTMENT RISK. The Fund is not actively managed and BFA does not
attempt to take defensive positions in declining markets.
TECHNOLOGY SECTOR RISK. Technology companies face intense competition and
potentially rapid product obsolescence. They are also heavily dependent on
intellectual property rights and may be adversely affected by loss or
impairment of those rights.
TRACKING ERROR RISK. The performance of the Fund may diverge from that of its
Underlying Index.
S-3
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.
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 inception.
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").
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.
S-4
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.
The Fund is an ETF. 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 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.
-----------
* Prior to December 1, 2009, BFA was known as Barclays Global Fund Advisors.
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.
ASSET CLASS RISK. The securities in the Underlying Index or the Fund's
portfolio may underperform the returns of other securities or indexes that
track other industries, groups of industries, markets, asset classes or
sectors. Various types of securities or indexes tend to experience cycles of
outperformance and underperformance in comparison to the general securities
markets.
CONCENTRATION RISK. 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.
EQUITY SECURITIES RISK. The Fund invests in equity securities, which are
subject to volatile changes in value that may be attributable to market
perception of a particular issuer or to general stock market fluctuations that
affect all issuers. Investments in equity securities may be more volatile than
investments in other asset classes.
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 economic downturn in the securities markets,
multiple asset classes may be negatively affected.
2
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 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
3
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 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.
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.
TECHNOLOGY SECTOR RISK. The Fund invests in technology companies, which face
intense competition, both domestically and internationally, which may have an
adverse affect on profit margins. Technology companies may have limited product
lines, markets, financial resources or personnel. The products of technology
companies may face product obsolescence due to rapid technological developments
and frequent new product introduction, unpredictable changes in growth rates
and competition for the services of qualified personnel. Companies in the
technology sector are heavily dependent on patent and intellectual property
rights. The loss or impairment of these rights may adversely affect the
profitability of these companies.
4
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.
Portfolio Holdings Information
A description of the Company'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 Company. 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 Company
(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. BTC is a national bank, which is, in turn an
indirect subsidiary of BlackRock, Inc. ("BlackRock"). As of _____, ____, 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 Company's Board of Directors' (the
"Board") approval of the Investment Advisory Agreement with BFA will be
available in the Fund's annual report for the period ending August 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
5
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 and BTC 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
2009. Prior to her employment with BFA and BTC, Ms. Hsiung was a senior
portfolio manager from 2007 to 2009 for Barclays Global Fund Advisors ("BGFA")
and Barclays Global Investors, N.A. ("BGI") and a portfolio manager from 2002
to 2006 for BGFA and BGI. Ms. Hsiung has been a Portfolio Manager of the Fund
since inception.
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
2009. Prior to his employment with BFA and BTC, Mr. Savage was a senior
portfolio manager from 2006 to 2009 for BGFA and BGI and a portfolio manager
from 2001 to 2006 for BGFA and BGI. Mr. Savage has been a Portfolio Manager of
the Fund since inception.
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.
CONFLICTS OF INTEREST. BFA wants you to know that there are certain entities
with which BFA has relationships that may give rise to conflicts of interest,
or the appearance of conflicts of interest. These entities include the
following: BFA's affiliates (including BlackRock and The PNC Financial Services
Group, Inc., and each of their affiliates, directors, partners, trustees,
managing members, officers and employees (collectively, the "Affiliates")) and
BlackRock's significant shareholders, Merrill Lynch & Co., Inc. and its
affiliates, including Bank of America Corporation (each a "BAC Entity"), and
Barclays Bank PLC and its affiliates, including Barclays Capital Corp. (each a
"Barclays Entity") (for convenience the Affiliates, BAC Entities and Barclays
Entities are collectively referred to in this section as the "Entities" and
each separately is referred to as an "Entity").
The activities of Entities in the management of, or their interest in, their
own accounts and other accounts they manage, may present conflicts of interest
that could disadvantage the Fund and its shareholders. The Entities provide
investment management services to other funds and discretionary managed
accounts that follow an investment program similar to that of the Fund. The
Entities are involved worldwide with a broad spectrum of financial services and
asset management activities and may engage in the ordinary course of business
in activities in which their interests or the interests of their clients may
conflict with those of the Fund. One or more of the Entities act or may act as
an investor, investment banker, research provider, investment manager,
financier, advisor, market maker, trader, prime broker,
6
lender, agent and principal, and have other direct and indirect interests, in
securities, currencies and other instruments in which the Fund directly and
indirectly invests. Thus, it is likely that the Fund will have multiple
business relationships with and will invest in, engage in transactions with,
make voting decisions with respect to, or obtain services from entities for
which an Entity performs or seeks to perform investment banking or other
services.
One or more Entities may engage in proprietary trading and advise accounts and
funds that have investment objectives similar to those of the Fund and/or that
engage in and compete for transactions in the same types of securities,
currencies and other instruments as the Fund, including in securities issued by
other open-end and closed-end investment management companies, including
investment companies that are affiliated with the Fund and BFA, to the extent
permitted under the Investment Company Act of 1940, as amended (the "1940
Act"). The trading activities of these Entities are carried out without
reference to positions held directly or indirectly by the Fund and may result
in an Entity having positions that are adverse to those of the Fund.
No Entity is under any obligation to share any investment opportunity, idea or
strategy with the Fund. As a result, an Entity may compete with the Fund for
appropriate investment opportunities. As a result of this and several other
factors, the results of the Fund's investment activities may differ from those
of an Entity and of other accounts managed by an Entity, and it is possible
that the Fund could sustain losses during periods in which one or more Entities
and other accounts achieve profits on their trading for proprietary or other
accounts. The opposite result is also possible.
The Fund may, from time to time, enter into transactions in which an Entity or
an Entity's other clients have an adverse interest. Furthermore, transactions
undertaken by Entity-advised clients may adversely impact the Fund.
Transactions by one or more Entity-advised clients or BFA may have the effect
of diluting or otherwise disadvantaging the values, prices or investment
strategies of the Fund.
An Entity 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 the
Entities, may be paid licensing fees for use of their indices or index names.
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 the Entities will be as favorable as those terms offered to other index
licensees.
The Fund's activities may be limited because of regulatory restrictions
applicable to one or more Entities, and/or their internal policies designed to
comply with such restrictions. In addition, the Fund may invest in securities
of companies with which an Entity has or is trying to develop investment
banking relationships or in which an Entity has significant debt or equity
investments. The Fund also may invest in securities of companies for which an
Entity provides or may some day provide research coverage. An Entity may have
business relationships with and purchase or distribute or sell services or
products from or to distributors, consultants or others who recommend the Fund
or who engage in transactions with or for the Fund, and
7
may receive compensation for such services. The Fund may also make brokerage
and other payments to Entities in connection with the Fund's portfolio
investment transactions.
Under a securities lending program approved by the Fund's Board, the Fund has
retained an Affiliate of BFA to serve as the securities lending agent for the
Fund to the extent that the Fund participates in the securities lending
program. For these services, the lending agent may receive a fee from the Fund,
including a fee based on the returns earned on the Fund's investment of the
cash received as collateral for the loaned securities. In addition, one or more
Affiliates may be among the entities to which the Fund may lend its portfolio
securities under the securities lending program.
The activities of Affiliates may give rise to other conflicts of interest that
could disadvantage the Fund and its shareholders. BFA has adopted policies and
procedures designed to address these potential conflicts of interest.
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 Company 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
8
("market timing"), because the Fund sells and redeems its shares directly
through transactions that are in-kind and/or for cash with a deadline for
placing cash-related transactions no later than the close of the primary
markets for the Fund's portfolio securities. The Board 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 Company, including that such
investment companies enter into an agreement with the Company.
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
9
the portfolio securities held by the Fund. The quotations of certain Fund
holdings may not be updated during U.S. trading hours if such holdings do not
trade in the U.S. The Fund is not involved in, or responsible for, the
calculation or dissemination of the IOPV and makes no representation or
warranty as to its accuracy.
DETERMINATION OF NET ASSET VALUE. The NAV 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
10
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.
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.
DIVIDENDS AND DISTRIBUTIONS
GENERAL POLICIES. Dividends from net investment income, if any, are generally
declared and paid quarterly by the Fund. Distributions of net realized
securities gains, if any, generally are declared and paid once a year, but the
Company may make distributions on a more frequent basis for the Fund. The
Company 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 Company. 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.
11
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.
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, 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.
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 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 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.
12
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.
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 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
13
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 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. BFA may, from time to time, at its
own expense, compensate purchasers of Creation Units who have purchased
substantial amounts of Creation Units and other financial institutions for
administrative or marketing services. Similarly, the standard redemption
transaction fee 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.
14
The following table also shows, as of _________, 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.
HOUSEHOLDING. Householding is an option available to certain Fund investors.
Householding is a method of delivery, based on the preference of the individual
investor, in which a single copy of certain shareholder documents can be
delivered to investors who share the same address, even if their accounts are
registered under different names. Please contact your broker-dealer if you are
interested in enrolling in householding and receiving a single copy of
prospectuses and other shareholder documents, or if you are currently enrolled
in householding and wish to change your householding status.
Distribution
The Distributor distributes Creation Units for the Fund on an agency basis. The
Distributor does not maintain a secondary market in shares of the Fund. The
Distributor has no role in determining the policies of the Fund or the
securities that are purchased or sold by the Fund. The Distributor's principal
address is One Freedom Valley Drive, Oaks, PA 19456.
Financial Highlights
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 Company, 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 Company
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
15
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 COMPANY, 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 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 COMPANY 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
16
DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES
(INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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.
17
[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 Company 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), INC.
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, Inc. (the "Company"), as such Prospectus may be
revised or supplemented from time to time:
FUND TICKER STOCK EXCHANGE
------------------------------------------ -------- ---------------
iShares MSCI USA 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 Company'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")*.
-------
* Prior to December 1, 2009, BlackRock Institutional Trust Company, N.A.
was known as Barclays Global Investors, N.A. ("BGI").
TABLE OF CONTENTS
PAGE
-----
General Description of the Company 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
Securities of Investment Companies 4
Illiquid Securities 4
Short-Term Instruments and Temporary Investments 4
Futures and Options 4
Options on Futures Contracts 5
Swap Agreements 5
Tracking Stocks 5
Future Developments 5
General Considerations and Risks 6
Risks of Derivatives 6
Risks of Equity Securities 6
Risks of Futures and Options Transactions 6
Risks of Swap Agreements 7
Dividend Risk 7
Proxy Voting Policy 7
Portfolio Holdings Information 8
Construction and Maintenance of the Underlying Index 9
MSCI Indexes 9
MSCI USA Index 11
Investment Limitations 11
Continuous Offering 12
Management 13
Directors and Officers 13
Committees of the Board of Directors 17
Remuneration of Directors 20
Control Persons and Principal Holders of Securities 21
Potential Conflicts of Interest 21
Investment Advisory, Administrative and Distribution Services 26
Investment Adviser 26
i
PAGE
-----
Portfolio Managers 27
Codes of Ethics 29
Anti-Money Laundering Requirements 29
Administrator, Custodian and Transfer Agent 29
Distributor 29
Brokerage Transactions 30
Additional Information Concerning the Company 30
Capital Stock 30
Termination of the Company or the Fund 32
DTC as Securities Depository for Shares of the Fund 32
Creation and Redemption of Creation Units 33
General 33
Fund Deposit 33
Role of the Authorized Participant 34
Purchase Order 34
Acceptance of Order for Creation Unit 34
Issuance of a Creation Unit 35
Cash Purchase Method 35
Creation Transaction Fee 35
Redemption of Creation Units 36
Redemption Transaction Fee 36
Taxation on Creation and Redemptions of Creation Units 37
Taxes 38
Regulated Investment Company Qualifications 38
Taxation of RICs 38
Excise Tax 38
Net Capital Loss Carryforwards 38
Taxation of U.S. Shareholders 39
Sales of Shares 40
Back-Up Withholding 40
Sections 351 and 362 40
Taxation of Certain Derivatives 40
Qualified Dividend Income 41
Corporate Dividends Received Deduction 41
Excess Inclusion Income 41
Reporting 42
Other Taxes 42
ii
PAGE
-----
Taxation of Non-U.S. Shareholders 42
Financial Statements 43
Miscellaneous Information 43
Counsel 43
Independent Registered Public Accounting Firm 43
Shareholder Communications to the Board 43
iii
General Description of the Company and the Fund
The Company currently consists of more than ___ investment series or
portfolios. The Company was organized as a Maryland corporation on August 31,
1994 and is authorized to have multiple series or portfolios. The Company 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 Company'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 country, region or
group of countries. Each Fund is managed by BlackRock Fund Advisors ("BFA" or
the "Investment Adviser")*, a subsidiary of BTC.
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 "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 Company 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 Company a cash deposit equal to at least 110%, 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
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 vendor.
-------
* Prior to December 1, 2009, BlackRock Fund Advisors was known as Barclays
Global Fund Advisors ("BGFA").
1
The Company 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 Company 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 "diversified." With respect
to 75% of the Fund's total assets, a "diversified" fund is limited by the 1940
Act such that it does not invest more than 5% of its total assets in securities
of any one issuer and does not acquire more than 10% of the outstanding voting
securities of any one issuer (excluding cash and cash items, government
securities, and securities of other investment companies). The remaining 25% of
the fund's total assets may be invested in any manner.
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 "IRC"), and to relieve the Fund of any liability for U.S. federal
income tax to the extent that its earnings are distributed to shareholders,
provided that the Fund satisfies a minimum distribution requirement. Compliance
with the diversification requirements of the IRC may limit the investment
flexibility of the Fund and may make it less likely that the Fund will meet its
investment objective.
LENDING PORTFOLIO SECURITIES. Subject to approval of a securities lending
agency agreement by the Company's Board of Directors (the "Board" or the
"Directors"), 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 advised by
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
Board. 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, collateral for a repurchase agreement may
include cash items, obligations issued by the U.S. government or its agencies
or instrumentalities, obligations rated in the highest category 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, a repurchase obligation with a particular counterparty
must satisfy the credit quality standards applicable to the acquisition of an
instrument issued by such counterparty in compliance with Rule 2a-7 under the
1940 Act.
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
repurchase agreements will be covered by assets having a value equal to or
greater than such commitments. The Fund
3
maintains liquid assets in connection with reverse repurchase agreements. Under
the 1940 Act, reverse repurchase agreements are considered borrowings.
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
BFA 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.
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 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) Rating Service, 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 will 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 Company, 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
4
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 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.
5
General Considerations and Risks
A discussion of some of the risks associated with an investment in the Fund is
contained in the Prospectus.
An investment in the Fund should be made with an understanding that the value
of the Fund's portfolio securities may fluctuate in accordance with changes in
the financial condition of the issuers of the portfolio securities, the value
of 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
6
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.
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.
RISKS OF SWAP AGREEMENTS. The risk of loss with respect to swaps generally is
limited to the net amount of payments that the Fund is contractually obligated
to make. Swap agreements are subject to the risk that the swap counterparty
will default on its obligations. If such a default occurs, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
However, such remedies may be subject to bankruptcy and insolvency laws which
could affect the Fund's rights as a creditor (E.G., the Fund may not receive
the net amount of payments that it contractually is entitled to receive).
DIVIDEND RISK. There is no guarantee that the 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.
Proxy Voting Policy
The Company has adopted, as its proxy voting policies for the Fund, the proxy
voting guidelines of BFA, the investment adviser to the Fund. The Company 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
7
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 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
8
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 will disclose 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 Company'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.
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.
9
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 23 as emerging markets. All listed equity securities and
listed securities that exhibit characteristics of equity securities, except
mutual funds, ETFs, 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.
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.
10
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.
MSCI USA INDEX
NUMBER OF COMPONENTS: APPROXIMATELY 601
---------------------------------------
INDEX DESCRIPTION. The Underlying Index is a market capitalization weighted
index designed to measure the performance of equity securities in the top 85%
by market capitalization of equity securities listed on stock exchanges in the
United States. As of October 30, 2009, the Underlying Index had 601
constituents and its three largest industries by component weighting were
energy, industrials and materials.
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 a 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
11
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 any
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).
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.
12
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.
Management
DIRECTORS AND OFFICERS. The Board has responsibility for the overall
management and operations of the Company, including general supervision of the
duties performed by BFA and other service providers. Each Director serves until
his or her successor is duly elected or appointed and qualified. Each Officer
serves until he or she resigns, is removed, dies, retires or becomes
disqualified.
The Company, iShares Trust, Master Investment Portfolio ("MIP") and BlackRock
Funds III*, 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 Director also serves as a Trustee for iShares
Trust and, as a result, oversees a total of ___ funds within the fund complex.
With the exception of Robert S. Kapito, the address of each Director 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
Lead Independent Director.
-------
* Prior to December 1, 2009, BlackRock Funds III was known as Barclays
Global Investors Funds.
INTERESTED DIRECTOR
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY DIRECTOR
-------------------- --------------------- -------------------------------------- ---------------------------------------
Robert S. Kapito/1/ Director President and Director, BlackRock, Trustee of iShares Trust (since 2009);
(52) (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).
13
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY DIRECTOR
-------------------- --------------------- -------------------------------------- ---------------------------------------
Lee T. Kranefuss/2/ Director and Global Chief Executive Officer, Trustee of iShares Trust (since 2003).
(47) Chairman iShares/Intermediary Groups of BTC
(since 2003). (since 2009); Director, President and
Chief Executive Officer of BlackRock
Asset Management International,
Inc.(since 2009); Global Chief
Executive Officer,
iShares/Intermediary Groups of BGI
(2008-2009); Director, President and
Chief Executive Officer of Barclays
Global Investors International, Inc.
(2005-2009); Director and Chairman
of Barclays Global Investors Services
(2005-2009); Chief Executive Officer,
iShares Intermediary Index and
Market Group of BGI (2005-2008);
Chief Executive Officer of the
Intermediary Investor and Exchange
Traded Products Business of BGI
(2003-2005).
-------
/1/ Robert S. Kapito is deemed to be an "interested person" (as defined in the
1940 Act) of the Company due to his affiliations with BlackRock, Inc.
/2/ Lee T. Kranefuss is deemed to be an "interested person" (as defined in the
1940 Act) of the Company due to his affiliations with BFA, BTC and
BlackRock Execution Services, an affiliate of BFA and BTC.
INDEPENDENT DIRECTORS
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY DIRECTOR
-------------------- --------------------- -------------------------------------- ---------------------------------------
George G.C. Parker Director (since Dean Witter Distinguished Professor Trustee of iShares Trust (since 2000);
(70) 2002); Lead of Finance, Emeritus, Stanford Lead Independent Trustee of iShares
Independent University: Graduate School of Trust (since 2006); Director of
Director Business (since 1994). Continental Airlines, Inc. (since
(since 2006). 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/1/ Director Director of Real Estate Equity Trustee of iShares Trust (since 2003);
(48) (since 2003). Exchange (since 2005). Chairman, Independent Review
Committee, Canadian iShares Funds
(since 2007).
14
PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
NAME (AGE) POSITION DURING THE PAST 5 YEARS HELD BY DIRECTOR
-------------------- --------------------- -------------------------------------- ---------------------------------------
Cecilia H. Herbert Director Director (since 1998) and President Trustee of iShares Trust (since 2005);
(60) (since 2005). (since 2007) of the Board of Advisory Board Member of Forward
Directors, Catholic Charities CYO; Funds (2009); Director, Forward
Trustee of Pacific Select Funds Funds (34 portfolios) (since 2009).
(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 Director Retired; Partner, KPMG LLP (1968- Trustee of iShares Trust (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 Director Chief Investment Officer, Santa Clara Trustee of iShares Trust (since 2005).
(54) (since 2005). University (since 2002).
Robert H. Silver Director President and Co-Founder of The Trustee of iShares Trust (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 Director Professor, Stanford University: Trustee of iShares Trust (since 2008);
(55) (since 2008). Graduate School of Business (since Director of Moody's Corporation
1984). (since 2008).
-------
/1/ Prior to August 13, 2009, John E. Martinez was deemed to be an "interested
person" (as defined by the 1940 Act) of the Company. As of August 13,
2009, Mr. Martinez has been determined not to be an interested person
notwithstanding his former affiliation with BGI prior to 2002.
15
OFFICERS
PRINCIPAL OCCUPATION(S)
NAME (AGE) POSITION DURING THE PAST 5 YEARS
-------------------- --------------------- --------------------------------------
Michael A. Latham President Managing Director, BTC (since 2009);
(44) (since 2007). Head of Americas iShares, BGI (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).
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).
16
PRINCIPAL OCCUPATION(S)
NAME (AGE) POSITION DURING THE PAST 5 YEARS
-------------------- --------------------- ---------------------------------------
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).
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).
COMMITTEES OF THE BOARD OF DIRECTORS. Each Director who is not an interested
person (as defined in the 1940 Act) of the Company ("Independent Director")
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 Company's accounting and financial reporting principles
and policies and related controls and procedures maintained by or on behalf of
the Company; (ii) in its oversight of the Company'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
Company'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
August 31, 2009.
The Nominating and Governance Committee nominates individuals for Independent
Director 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 Director; (ii) recommending to the Board and current Independent
Directors the nominee(s) for appointment as an Independent Director by the
Board and current Independent Directors and/or for election as Independent
Directors by shareholders to fill any vacancy for a position of Independent
Director(s) on the Board; (iii) recommending to the Board and current
Independent Directors the size and composition of the Board and Board
committees and whether they comply with applicable laws and regulations; (iv)
recommending a current Independent Director to the Board and current
Independent Directors to serve as Lead Independent Director; (v) periodic
review of the Board's retirement policy; and (vi) recommending an appropriate
level of compensation for the Independent Directors for their services as
Directors, members or chairpersons of committees of the Board, Lead Independent
Director, 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 Directors. The Nominating and Governance
Committee met three times during the fiscal year ended August 31, 2009.
The following table sets forth, as of December 31, 2009, the dollar range of
equity securities beneficially owned by each Director in the Fund and in other
registered investment companies overseen by the Director within the same family
of investment companies as the Company. If a fund is not listed below, the
Director 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 DIRECTOR IN FAMILY OF
NAME OF DIRECTOR FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
------------------ -------------------------------------------------- ------------------------ ----------------------------
Robert Kapito None None None
Lee T. Kranefuss iShares Barclays 1-3 Year Treasury Bond Fund $50,001-$100,000 Over $100,000
17
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
------------------ -------------------------------------------------- ------------------------ ----------------------------
iShares Russell 3000 Index Fund $50,001-$100,000
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
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
18
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
------------------ -------------------------------------------------- ------------------------ ----------------------------
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
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
19
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR FUND SECURITIES IN THE FUND INVESTMENT COMPANIES
------------------ -------------------------------------------------- ------------------------ ----------------------------
iShares S&P/Citigroup International Treasury $1-$10,000
Bond Fund
Darrell Duffie None None None
As of December 31, 2009, none of the Directors who were not interested persons
(as defined in the 1940 Act) of the Company 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 DIRECTORS. For the calendar year ended December 31, 2009, the
Company paid each Independent Director $127,500 for meetings of the Board
attended by the Director; also the Company 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 Director. 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 to $5,878 for his or her service as a
director of a subsidiary of iShares Trust. The Company also reimburses each
Director for travel and other out-of-pocket expenses incurred by him/her in
connection with attending such meetings.
The table below sets forth the total compensation paid to each Interested
Director for the calendar year ended December 31, 2009:
PENSION OR
AGGREGATE RETIREMENT TOTAL
COMPENSATION BENEFITS ACCRUED AS ESTIMATED ANNUAL COMPENSATION
FROM THE PART OF COMPANY BENEFITS UPON FROM THE FUND
NAME OF INTERESTED DIRECTOR/1/,/2/ COMPANY EXPENSES/3/ RETIREMENT/3/ AND FUND COMPLEX/4/
----------------------------------- -------------- --------------------- ------------------ --------------------
Robert S. Kapito $0 Not Applicable Not Applicable $0
Lee T. Kranefuss $0 Not Applicable Not Applicable $0
-------
/1/ Compensation is not shown for Robert S. Kapito because he was appointed to
serve as Director of the Company effective December 1, 2009.
/2/ Robert S. Kapito and Lee T. Kranefuss were not compensated by the Company
due to their employment with BTC during the time period reflected in the
table.
/3/ No Director or Officer is entitled to any pension or retirement benefits
from the Company.
/4/ Includes compensation for service on the Board of Trustees of
iShares Trust.
The table below sets forth the total compensation paid to each Independent
Director for the calendar year ended December 31, 2009:
AGGREGATE PENSION OR TOTAL
COMPENSATION RETIREMENT BENEFITS ACCRUED AS ESTIMATED ANNUAL COMPENSATION
FROM THE PART OF COMPANY BENEFITS UPON FROM THE FUND
NAME OF INDEPENDENT DIRECTOR COMPANY 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 Director or Officer is entitled to any pension or retirement benefits
from the Company.
20
/2/ Includes compensation for service on the Board of Trustees of
iShares Trust.
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 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.
21
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.
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.
22
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 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.
23
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 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
24
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 "Determination of Net Asset Value" section in
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 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 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
25
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.
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 Company, 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 Company 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.
Under the Investment Advisory Agreement, BFA, subject to the supervision of the
Company's Board and in conformity with the stated investment policies of the
Fund, manages and administers the Company 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.
26
Under the Investment Advisory Agreement, BFA is responsible for all expenses of
the Fund, including the cost of transfer agency, custody, fund administration,
legal, audit and other services, except interest expense taxes, brokerage
expenses, 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.
Prior to December 1, 2009, Barclays Global Fund Advisors, a majority-owned
subsidiary of Barclays Bank PLC, acted as the Fund's investment adviser and was
compensated according to the same management fee rates.
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 Company
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 Company. If this happens, the Board
would consider selecting other qualified firms. Any new investment advisory
agreement would be subject to shareholder approval.
If current restrictions on bank activities with mutual funds were relaxed, BFA,
or its affiliates, would consider performing additional services for the
Company. BFA cannot predict whether these changes will be enacted, or the terms
under which BFA, or its affiliates, might offer to provide additional services.
BFA and/or BTC may pay certain broker-dealers and intermediaries for
participating in activities that are designed to make registered
representatives and other professionals 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. BFA and/or BTC may also pay broker-dealers or intermediaries for
certain printing, publishing and mailing costs associated with the Fund or
materials relating to exchange traded products in general. Payments to a
broker-dealer or intermediary may create potential conflicts of interest
between the broker-dealer or intermediary and its clients. These amounts, which
may be significant, are paid by BFA and/or BTC from their own resources and not
from the assets of the Fund.
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 ______, 2009:
DIANE HSIUNG
TYPES OF ACCOUNTS NUMBER TOTAL ASSETS
------------------------------------------------ -------- -------------
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
Accounts with Incentive-Based Fee Arrangements
27
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 ______, 2009:
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
______, 2009.
PORTFOLIO MANAGER COMPENSATION OVERVIEW
28
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 ______, 2009, Diane Hsiung and Greg Savage did not beneficially own
shares of the Fund.
CODES OF ETHICS. The Company, 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. 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 Company, State
Street provides necessary administrative, legal, tax and accounting and
financial reporting services for the maintenance and operations of the Company
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 Company, State Street maintains in separate
accounts cash, securities and other assets of the Company and the Fund, keeps
all necessary accounts and records and provides other services. State Street is
required, upon the order of the Company, to deliver securities held by State
Street and to make payments for securities purchased by the Company for the
Fund. Also, pursuant to a Delegation Agreement with the Company, 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 Company, 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 Company. 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 Company 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
29
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 ("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 Directors, 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.
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 Company 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 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 Company
CAPITAL STOCK. The Company currently is comprised of __ series referred to as
funds. Each series issues shares of common stock, par value $0.001 per share.
The Company has authorized and issued the following funds as separate series of
capital
30
stock: the iShares MSCI Australia Index Fund, the iShares MSCI Austria Index
Fund, the iShares MSCI Belgium Index Fund, the iShares MSCI Brazil Index Fund,
the iShares MSCI BRIC Index Fund, the iShares MSCI Canada Index Fund, the
iShares MSCI Chile Index Fund, the iShares MSCI Emerging Markets Index Fund,
the iShares MSCI Emerging Markets Eastern Europe Index Fund, the iShares MSCI
EMU Index Fund, the iShares MSCI France Index Fund, the iShares MSCI Germany
Index Fund, the iShares MSCI Hong Kong Index Fund, the iShares MSCI Israel
Capped Investable Market Index, the iShares MSCI Italy Index Fund, the iShares
MSCI Japan Index Fund, the iShares MSCI Japan Small Cap Index Fund, the iShares
MSCI Malaysia Index Fund, the iShares MSCI Mexico Index Fund, the iShares MSCI
Netherlands Index Fund, the iShares MSCI Pacific ex-Japan Index Fund, the
iShares MSCI Singapore Index Fund, the iShares MSCI South Africa Index Fund,
the iShares MSCI South Korea Index Fund, the iShares MSCI Spain Index Fund, the
iShares MSCI Sweden Index Fund, the iShares MSCI Switzerland Index Fund, the
iShares MSCI Taiwan Index Fund, the iShares MSCI Thailand Investable Market
Index Fund, the iShares MSCI Turkey Investable Market Index Fund, the iShares
MSCI United Kingdom Index Fund and the iShares MSCI USA Index Fund. The Company
has authorized for issuance, but is not currently offering for sale to the
public, eight additional series of shares of common stock. The Board may
designate additional series of common stock and classify shares of a particular
series into one or more classes of that series. The Amended and Restated
Articles of Incorporation confers upon the Board the power to establish the
number of shares which constitute a Creation Unit or by resolution, restrict
the redemption right to Creation Units.
Each share issued by a Fund has a PRO RATA interest in the assets of that Fund.
The Company is currently authorized to issue 18.35 billion shares of common
stock. The following number of shares is currently authorized for each of the
Funds: the iShares MSCI Australia Index Fund, 627.8 million shares; the iShares
MSCI Austria Investable Market Index Fund, 100 million shares; the iShares MSCI
Belgium Investable Market Index Fund, 136.2 million shares; the iShares MSCI
Brazil Index Fund, 500 million shares; the iShares MSCI BRIC Index Fund, 500
million shares; the iShares MSCI Canada Index Fund, 340.2 million shares; the
iShares MSCI Chile Investable Market Index Fund, 200 million shares; the
iShares MSCI Emerging Markets Index Fund, 2 billion shares; the iShares MSCI
Emerging Markets Eastern Europe Index Fund, 200 million shares; the iShares
MSCI EMU Index Fund, 1 billion shares; the iShares MSCI France Index Fund,
340.2 million shares; the iShares MSCI Germany Index Fund, 382.2 million
shares; the iShares MSCI Hong Kong Index Fund, 250 million shares; the iShares
MSCI Israel Capped Investable Market Index Fund, 500 million; the iShares MSCI
Italy Index Fund, 63.6 million shares; the iShares MSCI Japan Index Fund,
2,124.6 million shares; the iShares MSCI Japan Small Cap Index Fund, 500
million shares; the iShares MSCI Malaysia Index Fund, 300 million shares; the
iShares MSCI Mexico Investable Market Index Fund, 255 million shares; the
iShares MSCI Netherlands Investable Market Index Fund, 255 million shares; the
iShares MSCI Pacific ex-Japan Index Fund, 1 billion shares; the iShares MSCI
Singapore Index Fund, 300 million shares; the iShares MSCI South Africa Index
Fund, 400 million shares; the iShares MSCI South Korea Index Fund, 200 million
shares; the iShares MSCI Spain Index Fund, 127.8 million shares; the iShares
MSCI Sweden Index Fund, 63.6 million shares; the iShares MSCI Switzerland Index
Fund, 318.625 million shares; the iShares MSCI Taiwan Index Fund, 900 million
shares; the iShares MSCI Thailand Investable Market Index Fund, 200 million;
the iShares MSCI Turkey Investable Market Index Fund, 200 million; the iShares
MSCI United Kingdom Index Fund, 934.2 million shares; and the iShares MSCI USA
Index Fund, 500 million shares. Fractional shares will not be issued. 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. Shareholders are
entitled to require the Company to redeem Creation Units of their shares. The
Articles of Incorporation confer upon the Board the power, by resolution, to
alter the number of shares constituting a Creation Unit or to specify that
shares of common stock of the Company may be individually redeemable.
Each share has one vote with respect to matters upon which a stockholder vote
is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder and the Maryland General Corporation Law. Stockholders
have no cumulative voting rights with respect to their shares. Shares of all
Funds vote together as a single class except that, if the matter being voted on
affects only a particular Fund or, if a matter affects a particular Fund
differently from other Funds, that Fund will vote separately on such matter.
Under Maryland law, the Company is not required to hold an annual meeting of
stockholders unless required to do so under the 1940 Act. The policy of the
Company is not to hold an annual meeting of stockholders unless required to do
so under the 1940 Act. Under Maryland law, Directors of the Company may be
removed by vote of the stockholders.
Following the creation of the initial Creation Unit(s) of shares of the fund
and immediately prior to the commencement of trading in the fund's shares, a
holder of shares may be a "control person" of the fund, as defined in the 1940
Act. The fund cannot predict the length of time for which one or more
stockholders may remain a control person of the fund.
31
Shareholders may make inquiries by writing to the Company, c/o the Distributor,
SEI Investments Distribution Co., at One Freedom Valley Drive, Oaks, PA 19456.
Absent an applicable exemption or other relief from the SEC or its staff,
beneficial owners of more than 5% of the shares of the 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 directors 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 COMPANY OR THE FUND. The Company or the Fund may be
terminated by a majority vote of the Board or the affirmative vote of a
supermajority of the holders of the Company or the Fund entitled to vote on
termination. Although the shares are not automatically redeemable upon the
occurrence of any specific event, the organizational documents provide 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 Company or the 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 Company 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 the 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
Company and DTC, DTC is required to make available to the Company upon request
and for a fee to be charged to the Company a listing of the shares of the Fund
held by each DTC Participant. The Company shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding shares, directly or
indirectly, through such DTC Participant. The Company 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 Company 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 Company. 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 Company 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
32
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 Company at any
time by giving reasonable notice to the Company and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Company 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 Company issues and sells shares of the Fund only in Creation Units
on a continuous basis through the Distributor, without a sales load, at the
Fund's NAV next determined after receipt, on any Business Day (as defined
herein), 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 _________,____:
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 the Fund of the Company, 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, Dr. 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 equity
securities (I.E., the "Deposit Securities"), which constitutes an optimized
representation of the securities of the relevant Fund's Underlying Index and
the Cash Component computed as described below. Together, the Deposit
Securities and the Cash Component constitute the "Fund Deposit," which
represents the minimum initial and subsequent investment amount for a Creation
Unit of the Fund. 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 and
serves to compensate for any differences between the NAV per Creation Unit and
the Deposit Amount. Payment of any stamp duty or other similar fees and
expenses payable upon transfer of beneficial ownership of the Deposit
Securities shall be the sole responsibility of the Authorized Participant that
purchased the Creation Unit.
BFA makes available through the NSCC on each Business Day, prior to the opening
of business on the Listing Exchange, the list of names and the required number
of shares of each Deposit Security to be included in the current Fund Deposit
(based on information at the end of the previous Business Day) for the Fund.
Such Fund Deposit is applicable, subject to any adjustments as described below,
in order to effect purchases of Creation Units of shares of the Fund until such
time as the next-announced Fund Deposit is made available.
The identity and number of shares of the Deposit Securities pursuant to changes
in composition of the Fund's portfolio and changes 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 constituting the Underlying Index.
The Company 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 of the Clearing
Process (discussed below). The Company also reserves the right to permit or
require a "cash in lieu" amount where the delivery of the Deposit Security by
the Authorized Participant (as described below) would be restricted under
applicable securities laws or where the delivery of the Deposit Security to the
Authorized Participant would result in the disposition of the Deposit Security
by the Authorized Participant becoming
33
restricted under applicable securities laws, or 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 subject index being tracked by the Fund, or resulting
from stock splits and other corporate actions.
ROLE OF THE AUTHORIZED PARTICIPANT. Creation Units may be purchased only by or
through a DTC Participant that has entered into an Authorized Participant
Agreement with the Distributor (an "Authorized Participant"). Such Authorized
Participant will agree, pursuant to the terms of such Authorized Participant
Agreement and on behalf of itself or any investor on whose behalf it will act,
to certain conditions, including that such Authorized Participant will make
available in advance of each purchase of shares an amount of cash sufficient to
pay the Cash Component, once the NAV of a Creation Unit is next determined
after receipt of the purchase order in proper form, together with the
transaction fee described below. The Authorized Participant may require the
investor to enter into an agreement with such Authorized Participant with
respect to certain matters, including payment of the Cash Component. Investors
who are not Authorized Participants must make appropriate arrangements with an
Authorized Participant. Investors should be aware that their particular broker
may not be a DTC Participant or may not have executed an Authorized Participant
Agreement and that orders to purchase Creation Units may have to be placed by
the investor's broker through an Authorized Participant. As a result, purchase
orders placed through an Authorized Participant may result in additional
charges to such investor. The Company does not expect to enter into an
Authorized Participant Agreement with more than a small number of DTC
Participants. A list of current Authorized Participants may be obtained from
the Distributor.
PURCHASE ORDER. To initiate an order for a Creation Unit, an Authorized
Participant must submit to the Distributor an irrevocable order to purchase
shares of the Fund. The Distributor will notify BFA and the Custodian of such
order. The Custodian will then provide such information to the appropriate
subcustodian. The Custodian shall cause the subcustodian 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 a 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 Company. Deposit Securities must
be delivered to an account maintained at the applicable local subcustodian.
Those placing orders to purchase Creation Units through an Authorized
Participant should allow sufficient time to permit proper submission of the
purchase order to the Distributor by the cut-off time on such Business Day.
The Authorized Participant must also make available on or before the
contractual settlement date, by means satisfactory to the Company, immediately
available or same day funds estimated by the Company 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. Those placing
orders should ascertain the deadline for cash transfers by contacting the
operations department of the broker or depositary institution effectuating the
transfer of the Cash Component. This deadline is likely to be significantly
earlier than the closing time of the regular trading session on the Listing
Exchange.
Investors should be aware that an Authorized Participant may require orders for
purchases of shares placed with it to be in the particular form required by the
individual Authorized Participant.
ACCEPTANCE OF ORDER FOR CREATION UNIT. Subject to the conditions that (i) an
irrevocable purchase order has been submitted by the Authorized Participant
(either on its own or another investor's behalf) and (ii) arrangements
satisfactory to the Company are in place for payment of the Cash Component and
any other cash amounts which may be due, the Company will accept the order,
subject to its right (and the right of the Distributor and BFA) to reject any
order until acceptance.
Once the Company has accepted an order, upon next determination of the NAV of
the shares, the Company will confirm the issuance of a Creation Unit, against
receipt of payment, at such NAV. The Distributor will then transmit a
confirmation of acceptance to the Authorized Participant that placed the order.
The Company reserves the absolute right to reject or revoke a creation order
transmitted to it by the Distributor in respect of the Fund if (i) the order is
not in proper form; (ii) the investor(s) upon obtaining the shares ordered,
would own 80% or more of the currently outstanding shares of the Fund; (iii)
the Deposit Securities delivered do not conform to the identity and number of
shares specified 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 Company or
BFA, have an adverse effect on the Company or the rights of beneficial owners;
or (vii) circumstances outside the control of the Company, the Distributor and
BFA make it impracticable to process purchase orders. The Company shall notify
a prospective purchaser of a Creation Unit and/or the
34
Authorized Participant acting on behalf of such purchaser of its rejection of
such order. The Company, State Street, the subcustodian and the Distributor are
under no duty, however, to give notification of any defects or irregularities
in the delivery of Portfolio Deposits nor shall any of them incur any liability
for failure to give such notification.
ISSUANCE OF A CREATION UNIT. Except as provided herein, a Creation Unit will
not be issued until the transfer of good title to the Company 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).
To the extent contemplated by an Authorized Participant's agreement with the
Distributor, the Company will issue Creation Units to such Authorized
Participant notwithstanding the fact that the corresponding Portfolio 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 having a value at least equal to 110%,
which BFA may change from time to time, of the value of the missing Deposit
Securities in accordance with the Company's then-effective procedures. The only
collateral that is acceptable to the Company is cash in U.S. dollars or an
irrevocable letter of credit in form, and drawn on a bank, that is satisfactory
to the Company. The cash collateral posted by the Authorized Participant may be
invested at the risk of the Authorized Participant, and income, if any, on
invested cash collateral will be paid to that Authorized Participant.
Information concerning the Company's current procedures for collateralization
of missing Deposit Securities is available from the Distributor. The Authorized
Participant Agreement will permit the Company 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 Company of purchasing such securities
and the cash collateral or the amount that may be drawn under any letter of
credit.
In certain cases, Authorized Participants may create and redeem Creation Units
on the same trade date and in these instances, the Company reserves the right
to settle these transactions on a net basis. 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 Company and the Company's determination shall be final and
binding.
CASH PURCHASE METHOD. Although the Company does not ordinarily permit cash
purchases of Creation Units of iShares funds, when Creation Units are available
or specified for the Fund they will be effected in essentially the same manner
as in-kind purchases thereof. In the case of a cash purchase, the investor must
pay the cash equivalent of the Deposit Securities it would otherwise be
required to provide through an in-kind purchase, plus the same Cash Component
required to be paid by an in-kind purchaser. In addition, to offset the
Company's brokerage and other transaction costs associated with using the cash
to purchase the requisite Deposit Securities, the investor will be required to
pay a fixed purchase transaction fee, plus an additional variable charge for
cash purchases, which is expressed as a percentage of the value of the Deposit
Securities.
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 the Fund for brokerage and market impact
expenses. When the Company 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 Company. 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 maximum 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.
35
REDEMPTION OF 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 Distributor and only on a Business Day. The
Company will not redeem shares in amounts less than Creation Units. Beneficial
owners also may sell shares in the secondary market but must accumulate enough
shares to constitute a Creation Unit in order to have such shares redeemed by
the Company. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly of a
Creation Unit. 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 makes available through the NSCC, prior to the opening of business on the
Listing Exchange 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 defined 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 a receipt of a request in proper form, and the value
of the Fund Securities, less the redemption transaction fee described below.
REDEMPTION TRANSACTION FEE. A 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 Company 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 invested.
Redemption requests for Creation Units of the Fund must be submitted to the
Distributor by or through an Authorized Participant no later than 4:00 p.m.,
Eastern time on any Business Day in order to receive that day's NAV. Investors
other than through Authorized Participants are responsible for making
arrangements for a redemption request to be made through an Authorized
Participant. The Distributor will provide a list of current Authorized
Participants upon request.
The Authorized Participant must transmit the request for redemption in the form
required by the Company to the Distributor in accordance with procedures set
forth in the Authorized Participant Agreement. Investors should be aware that
their particular broker may not have executed an Authorized Participant
Agreement and that, therefore, requests to redeem Creation Units may have to be
placed by the investor's broker through an Authorized Participant who has
executed an Authorized Participant Agreement in effect. At any time, only a
limited number of broker-dealers will have an Authorized Participant Agreement.
Investors making a redemption request should be aware that such request must be
in the form specified by such Authorized Participant. Investors making a
request to redeem Creation Units should allow sufficient time to permit proper
submission of the request by an Authorized Participant and transfer of the
shares to the Company's Transfer Agent; such investors should allow for the
additional time that may be required to effect redemptions through their banks,
brokers or other financial intermediaries if such intermediaries are not
Authorized Participants.
A redemption request is considered to be in "proper form" if (i) an Authorized
Participant has transferred or caused to be transferred to the Company's
Transfer Agent the Creation Unit being redeemed through the book-entry system
of DTC so as to be effective by the Listing Exchange closing time on any
Business Day, (ii) a request in form satisfactory to the Company is received by
the Distributor from the Authorized Participant on behalf of itself or another
redeeming investor within the time periods specified above and (iii) all other
procedures set forth in the Participant Agreement are properly followed. If the
Transfer Agent does not receive the investor's shares through DTC's facilities
by 10:00 a.m., Eastern time, on the Business Day
36
next following the day that the redemption request is received, the redemption
request shall be rejected. Investors should be aware that the deadline for such
transfers of shares through the DTC system may be significantly earlier than
the close of business on the Listing Exchange. Those making redemption requests
should ascertain the deadline applicable to transfers of shares through the DTC
system by contacting the operations department of the broker or depositary
institution effecting the transfer of the shares.
Upon receiving a redemption request, the Distributor shall notify the Company
and the Company's Transfer Agent of such redemption request. The tender of an
investor's shares for redemption and the distribution of the cash redemption
payment in respect of Creation Units redeemed will be made through DTC and the
relevant Authorized Participant to the beneficial owner thereof as recorded on
the book-entry system of DTC or the DTC Participant through which such investor
holds, as the case may be, or by such other means specified by the Authorized
Participant submitting the redemption request.
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 providers in each jurisdiction
in which any of the Portfolio Securities are customarily traded, to which
account such Portfolio Securities will be delivered.
Deliveries of redemption proceeds by the Fund generally will be made within
three Business Days (I.E., "T+3").
Although the Company does not ordinarily permit cash redemptions of Creation
Units, in the event that cash redemptions are permitted or required by the
Company, proceeds will be paid to the Authorized Participant redeeming shares
on behalf of the redeeming investor as soon as practicable after the date of
redemption (within seven calendar days thereafter).
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 Company, at or prior to 10:00 a.m., Eastern time, on
the Listing Exchange business day after the date of submission of such
redemption request, 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 at least
equal to 110%, which BFA may change from time to time, of the value of the
missing shares. Such cash collateral must be delivered no later than 10:00
a.m., Eastern time on the day after the date of submission of such redemption
request and shall be held by State Street and marked to market daily. The fees
of State Street and any subcustodians 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, on
invested cash collateral will be paid to that Authorized Participant. The
Authorized Participant Agreement permits the Company to acquire Fund 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
Company of purchasing such shares, Fund Securities or Cash Component and the
value of the cash collateral.
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's portfolio securities or determination of its net asset value is not
reasonably practicable or (iv) in such other circumstance as is permitted by
the SEC.
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 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.
37
Taxes
REGULATED INVESTMENT COMPANY QUALIFICATIONS. The Fund intends to qualify for
treatment as a separate RIC under Subchapter M of the IRC. To qualify for
treatment as a RIC, the Fund must annually distribute at least 90% of its
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 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 IRC 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.
38
TAXATION OF U.S. SHAREHOLDERS. Dividends and other distributions by the Fund
are generally treated under the IRC as received by the shareholders at the time
the dividend or distribution is made. However, any dividend or distribution
declared by the Fund in October, November or December of any calendar year and
payable to shareholders of record on a specified date in such a month shall be
deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by the Fund not later than such December
31, provided such dividend is actually paid by the Fund during January of the
following calendar year.
The Fund intends to distribute annually to its shareholders substantially all
of its investment company taxable income and any net realized long-term capital
gains in excess of net realized short-term capital losses (including any
capital loss carryovers). However, if the Fund retains for investment an amount
equal to all or a portion of its net long-term capital gains in excess of its
net short-term capital losses (including any capital loss carryovers), it will
be subject to a corporate tax (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. Dividends paid
by the Fund that are attributable to dividends received by the Fund from
domestic corporations may qualify for the federal dividends received deduction
for corporations, although such amounts are not expected to be significant for
this Fund.
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
39
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 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 a Fund share
held by the shareholder for six months or less will be treated for U.S. federal
income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received by
the shareholder with respect to such share.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a 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 Company, on behalf of the Fund, has the right to
reject an order for a purchase of shares of the Fund if the purchaser (or group
of purchasers) would, upon obtaining the shares so ordered, own 80% or more of
the outstanding shares of the Fund and if, pursuant to Sections 351 and 362 of
the IRC, the Fund would have a basis in the securities different from the
market value of such securities on the date of deposit. If the Fund's basis in
such securities on the date of deposit was less than market value on such date,
the Fund, upon disposition of the securities, would recognize more taxable gain
or less taxable loss than if its basis in the securities had been equal to
market value. It is not anticipated that the Company will exercise the right of
rejection except in a case where the Company determines that accepting the
order could result in material adverse tax consequences to the Fund or its
shareholders. The Company 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 IRC
(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
40
any unrealized gain or loss on those positions will be included in the Fund's
income as if each position had been sold for its fair market value at the end
of the taxable year. The resulting gain or loss will be combined with any gain
or loss realized by the Fund from positions in Section 1256 contracts closed
during the taxable year. Provided such positions were held as capital assets
and were not part of a "hedging transaction" nor part of a "straddle," 60% of
the resulting net gain or loss will be treated as long-term capital gain or
loss, and 40% of such net gain or loss will be treated as short-term capital
gain or loss, regardless of the period of time the positions were actually held
by the Fund.
As a result of entering into swap contracts, the Fund may make or receive
periodic net payments. The Fund may also make or receive a payment when a swap
is terminated prior to maturity through an assignment of the swap or other
closing transaction. Periodic net payments will generally constitute ordinary
income or deductions, while termination of a swap will generally result in
capital gain or loss (which will be a long-term capital gain or loss if the
Fund has been a party to the swap for more than one year). 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.).
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 IRC. 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.
CORPORATE DIVIDENDS RECEIVED DEDUCTION. Dividends paid by the Fund that are
attributable to dividends received by the Fund from U.S. corporations may
qualify for the federal dividends received deduction for corporations. A 46-day
minimum holding period during the 90-day period that begins 45 days prior to
ex-dividend date (or 91-day minimum holding period during the 180 period
beginning 90 days prior to ex-dividend date for certain preference dividends)
during which risk of loss may not be diminished is required for the applicable
shares, at both the Fund and shareholder level, for a dividend to be eligible
for the dividends received deduction. Restrictions may apply if indebtedness,
including a short sale, is attributable to the investment.
EXCESS INCLUSION INCOME. Under current law, the Funds serve to block unrelated
business taxable income from being realized by their 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
41
the tax-exempt shareholder within the meaning of IRC Section 514(b). 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 tax if
certain "disqualified organizations" as defined by the IRC are Fund
shareholders. If a charitable remainder annuity trust or a charitable remainder
unitrust (each as defined in IRC Section 664) has UBTI for a taxable year, a
100% excise tax on the UBTI is imposed on the trust.
REPORTING. If a shareholder recognizes a loss with respect to the Fund's
shares of $2 million or more for an individual shareholder or $10 million or
more for a corporate shareholder, the shareholder must file with the IRS a
disclosure statement on Form 8886. Direct shareholders of portfolio securities
are in many cases exempted from this reporting requirement, but under current
guidance, shareholders of a RIC are not exempted. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
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. 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
42
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 are 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
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.
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.
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, if
applicable.
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 IRC, regulations, judicial authority and administrative
interpretations in effect on the date of this SAI. Changes in applicable
authority could materially affect the conclusions discussed above, and such
changes often occur.
Financial Statements
Financial statements for the Fund are not available because, as of the date of
this SAI, the Fund has no financial information to report.
Miscellaneous Information
COUNSEL. Willkie Farr & Gallagher LLP, located at 787 Seventh Avenue, New York,
NY 10019, is counsel to the Company.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. ________________________, serves
as the Company'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
Directors, 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
43
(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 Company and reported to the
Board.
44
IS-SAI-___-_____
ISHARES, INC.
FILES NOS. FILE NOS. 33-97598 AND 811-09102
PART C
OTHER INFORMATION
ITEM 28. EXHIBITS PEA # 107
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------
(a.1) Articles of Restatement, filed September 15, 2006, are incorporated
herein by reference to Post-Effective Amendment No. 31 to the
Registration Statement, filed on December 26, 2006 ("PEA No. 31").
(a.2) Articles of Amendment, filed December 20, 2006, are incorporated herein
by reference to PEA No. 31.
(a.3) Articles Supplementary, filed December 20, 2006, are incorporated herein
by reference to PEA No. 31.
(a.4) Articles Supplementary, filed July 18, 2007, are incorporated herein by
reference to Post-Effective Amendment No. 35 to the Registration
Statement, filed on July 19, 2007.
(a.5) Articles of Amendment, filed March 5, 2008, are incorporated herein by
reference to Post-Effective Amendment No. 55 to the Registration
Statement, filed on March 26, 2008 ("PEA No. 55").
(a.6) Articles Supplementary, filed March 5, 2008, are incorporated herein by
reference to PEA No. 55.
(a.7) Articles Supplementary, dated June 19, 2008 are incorporated herein by
reference to Post Effective Amendment No. 79, filed on December 23, 2008
("PEA No. 79").
(a.8) Articles Supplementary, dated February 24, 2009 are incorporated herein
by reference to Post Effective Amendment No. 100, filed on September 28,
2009 ("PEA No. 100").
(a.9) Articles Supplementary, dated December 10, 2009, are incorporated herein
by reference to Post Effective Amendment No. 105, filed on December 23,
2009 ("PEA No. 105").
(b.1) Amended and Restated By-Laws, dated December 8, 2006, are incorporated
herein by reference to Post-Effective Amendment No. 32 to the
Registration Statement, filed on April 16, 2007 ("PEA No. 32").
(c.) Article II of the Amended and Restated By-Laws incorporated herein by
reference to PEA No. 32.
(d.1) Investment Advisory Agreement, dated December 1, 2009, between
Registrant and BlackRock Fund Advisors ("BFA") is incorporated herein by
reference to PEA No. 105.
(d.2) Schedule A to Investment Advisory Agreement between Registrant and BFA
is filed herein.
(d.3) Fee Waiver Agreement, dated June 17, 2009, between Registrant and
Barclays Global Fund Advisors/1/ for iShares MSCI Emerging Markets Index
Fund is incorporated herein by reference to PEA No. 100.
(d.4) Interim Investment Advisory Agreement, dated December 1, 2009, between
Registrant and BFA is incorporated herein by reference to PEA No. 105.
(d.5) Schedule A to Interim Investment Advisory Agreement with BFA is
incorporated herein by reference to PEA No. 105.
(e.1) Distribution Agreement between Registrant and SEI Investments
Distribution Co., ("SEI") dated March 27, 2000, is incorporated herein
by reference to Post-Effective Amendment No. 18 to the Registration
Statement, filed on December 29, 2000 ("PEA No. 18").
(e.2) Exhibit A to Distribution Agreement is incorporated herein by reference
to Post-Effective Amendment
No. 102 filed on October 30, 2009 ("PEA No. 102").
(e.3) Form of Authorized Participant Agreement is incorporated herein by
reference to Post-Effective Amendment No. 27 to the Registration
Statement, filed on December 30, 2003.
(e.4) Form of Sales and Investor Services Agreement incorporated herein by
reference to PEA No. 18.
(f.) None.
(g.1) Custodian Agreement between Registrant and Investors Bank & Trust
Company ("IBT/2/")/2/, dated May 21, 2002, is incorporated herein by
reference to exhibit (g.3) of Post-Effective Amendment No. 26 to the
Registration Statement, filed on December 30, 2002 ("PEA No. 26").
(g.2) Amendment, dated December 31, 2002, to the Custodian Agreement is
incorporated herein by reference to exhibit (g.3) to PEA No. 31.
(g.3) Amendment, dated January 1, 2006, to the Custodian Agreement is
incorporated herein by reference to exhibit (g.4) to PEA No. 31.
(g.4) Appendix A to Custodian Agreement is incorporated herein by reference to
PEA No. 102.
(h.1) Administration Agreement between Registrant and IBT/2/, dated May 21,
2002, is incorporated herein by reference to exhibit (h.3) of PEA No.
26.
(h.2) Amendment, dated January 1, 2006, to the Administration Agreement is
incorporated herein by reference to exhibit (h.3) to PEA No. 31.
(h.3) Amendment, dated January 1, 2007, to the Administration Agreement is
incorporated herein by reference to exhibit (h.4) to PEA No. 32.
(h.4) Appendix A to Administration Agreement is incorporated herein by
reference to PEA No. 102.
(h.5) Transfer Agency and Service Agreement between Registrant and IBT/2/,
dated May 21, 2002, is incorporated herein by reference to exhibit (h.7)
of PEA No. 26.
(h.6) Amendment, dated May 21, 2002, to the Transfer Agency and Service
Agreement is incorporated herein by reference to PEA No. 31.
(h.7) Amendment, dated September 1, 2004, to the Transfer Agency and Service
Agreement is incorporated herein by reference to PEA No. 31.
(h.8) Amendment, dated January 1, 2006, to the Transfer Agency and Service
Agreement is incorporated herein by reference to PEA No. 31.
(h.9) Appendix A to Transfer Agency and Service Agreement is incorporated
herein by reference to PEA No. 102.
(h.10) Sub-License Agreement between Registrant and BlackRock Institutional
Trust Company, N.A. ("BTC")/3/ with respect to the use of the MSCI
Indexes, dated May 8, 2000, is incorporated herein by reference to
exhibit (h.4) to PEA No. 18.
(h.11) Amendment to the Sub-License Agreement between Registrant and BTC/3/
with respect to the use of the MSCI Indexes is incorporated herein by
reference to PEA No. 79.
(h.12) Amended and Restated Securities Lending Agency Agreement, dated November
2, 2009, among the Registrant, iShares Trust and Barclays Global
Investors, N.A./3/ is incorporated herein by reference to PEA No. 105.
(h.13) Schedule A to Amended and Restated Securities Lending Agency Agreement
is filed herein.
(h.14) Form of Master Securities Loan Agreement (including forms of Annexes,
Schedule and Appendix thereto) is filed herein.
(i.) Legal Opinion and Consent of Venable LLP to be filed by amendment.
(j.) Consent of PricewaterhouseCoopers LLP to be filed by amendment.
(k.) None.
(l.1) Subscription Agreement between the Registrant and Funds Distributor,
Inc. is incorporated herein by reference to Pre-Effective Amendment No.
3 to the Registration Statement, filed on March 6, 1996.
(l.2) Letter of Representations among the Registrant, The Depository Trust
Company ("DTC") and Morgan Stanley Trust Company Exhibit is incorporated
herein by reference to Pre-Effective Amendment No. 2 to the Registration
Statement, filed on March 1, 1996, to the Company's initial registration
statement on Form N-1A filed on September 29, 1995.
(l.3) Letter of Representations between the Registrant and DTC, dated May 5,
2000, is incorporated herein by reference to PEA No. 18.
(l.4) Letter of Representations between the Registrant and DTC dated October
15, 2001 is incorporated herein by reference to Post-Effective Amendment
No. 21 to the Registration Statement, filed on October 22, 2001.
(m.) Not applicable.
(n.) None.
(o.) Not applicable.
(p.1) Code of Ethics of the Registrant is incorporated herein by reference to
Post-Effective Amendment No. 30 to the Registration Statement, filed on
December 22, 2005 ("PEA No. 30").
(p.2) Code of Ethics of BFA/1/ is incorporated herein by reference to PEA No.
30.
(q.1) Powers of Attorney, each dated February 23, 2009, for Michael A. Latham,
Lee T. Kranefuss, 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 PEA No. 100.
(q.2) Power of Attorney, dated December 8, 2009, for Robert S. Kapito is
incorporated herein by reference to PEA No. 105.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 30. INDEMNIFICATION.
It is the Fund's policy to indemnify officers, directors, employees and
other agents to the maximum extent permitted by Section 2-418 of the Maryland
General Corporation Law, Article EIGHTH of the Fund's Articles of Restatement,
and Article VI of the Fund's By-Laws (each set forth below).
SECTION 2-418 OF THE MARYLAND GENERAL CORPORATION LAW READS AS FOLLOWS:
(a) (1) In this section the following words have the meanings indicated.
(2) "Corporation" includes any domestic or foreign predecessor entity
of a corporation in a merger, consolidation, or other transaction
in which the predecessor's existence ceased upon consummation of
the transaction.
(3) "Director" means any person who is or was a director of a
corporation and any person who, while a director of a
corporation, is or was serving at the request of the corporation
as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint
venture, trust, limited liability company, other enterprise, or
employee benefit plan.
(4) "Expenses" include attorney's fees.
(5) "Official capacity" means the following:
(i) When used with respect to a director, the office of director
in the corporation; and
(ii) When used with respect to a person other than a director as
contemplated in subsection (j) of this section, the elective
or appointive office in the corporation held by
the officer, or the employment or agency relationship
undertaken by the employee or agent in behalf of the
corporation.
(iii) "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint
venture, trust, other enterprise, or employee benefit plan.
(6) "Party" includes a person who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, or
investigative.
(b) (1) A corporation may indemnify any director made a party to any
proceeding by reason of service in that capacity unless it is
established that:
(i) The act or omission of the director was material to the
matter giving rise to the proceeding; and 1. Was committed
in bad faith; or 2. Was the result of active and deliberate
dishonesty; or
(ii) The director actually received an improper personal benefit
in money, property, or services; or
(iii) In the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was
unlawful.
(2) (i) Indemnification may be against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by the
director in connection with the proceeding.
(ii) However, if the proceeding was one by or in the right of the
corporation, indemnification may not be made in respect of
any proceeding in which the director shall have been
adjudged to be liable to the corporation.
(3) (i) The termination of any proceeding by judgment, order, or
settlement does not create a presumption that the director did
not meet the requisite standard of conduct set forth in this
subsection.
(ii) The termination of any proceeding by conviction, or a plea
of nolo contendere or its equivalent, or an entry of an
order of probation prior to judgment, creates a rebuttable
presumption that the director did not meet that standard of
conduct.
(4) A corporation may not indemnify a director or advance expenses
under this section for a proceeding brought by that director
against the corporation, except:
(i) For a proceeding brought to enforce indemnification under
this section; or
(ii) If the charter or bylaws of the corporation, a resolution of
the board of directors of the corporation, or an agreement
approved by the board of directors of the corporation to
which the corporation is a party expressly provide
otherwise.
(c) A director may not be indemnified under subsection (b) of this section in
respect of any proceeding charging improper personal benefit to the
director, whether or not involving action in the director's official
capacity, in which the director was adjudged to be liable on the basis that
personal benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits or otherwise,
in the defense of any proceeding referred to in subsection (b) of
this section, or in the defense of any claim, issue, or matter in
the proceeding, shall be indemnified against reasonable expenses
incurred by the director in connection with the proceeding,
claim, issue, or matter in which the director has been
successful.
(2) A court of appropriate jurisdiction, upon application of a
director and such notice as the court shall require, may order
indemnification in the following circumstances:
(i) If it determines a director is entitled to reimbursement
under paragraph (1) of this subsection, the court shall
order indemnification, in which case the director shall be
entitled to recover the expenses of securing such
reimbursement; or
(ii) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant
circumstances, whether or not the director has met the
standards of conduct set forth in subsection (b) of this
section or has been adjudged liable under the circumstances
described in subsection (c) of this section, the court may
order such indemnification as the court shall deem proper.
However, indemnification with respect to any proceeding by
or in the right of the corporation or in
which liability shall have been adjudged in the
circumstances described in subsection (c) of this section
shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the same court in
which the proceeding involving the director's liability took
place.
(e) (1) Indemnification under subsection (b) of this
section may not be made by the corporation unless authorized for
a specific proceeding after a determination has been made that
indemnification of the director is permissible in the
circumstances because the director has met the standard of
conduct set forth in subsection (b) of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a quorum
consisting of directors not, at the time, parties to the
proceeding, or, if such a quorum cannot be obtained, then by
a majority vote of a committee of the board consisting
solely of one or more directors not, at the time, parties to
such proceeding and who were duly designated to act in the
matter by a majority vote of the full board in which the
designated directors who are parties may participate;
(ii) By special legal counsel selected by the board of directors
or a committee of the board by vote as set forth in
subparagraph (i) of this paragraph, or, if the requisite
quorum of the full board cannot be obtained herefore and the
committee cannot be established, by a majority vote of the
full board in which directors who are parties may
participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as
the determination that indemnification is permissible. However,
if the determination that indemnification is permissible is made
by special legal counsel, authorization of indemnification and
determination as to reasonableness of expenses shall be made in
the manner specified in paragraph (2)(ii) of this subsection for
selection of such counsel.
(4) Shares held by directors who are parties to the proceeding may
not be voted on the subject matter under this subsection.
(f) (1) Reasonable expenses incurred by a director who is a party to a
proceeding may be paid or reimbursed by the corporation in advance of the
final disposition of the proceeding upon receipt by the corporation of:
(i) A written affirmation by the director of the director's good
faith belief that the standard of conduct necessary for
indemnification by the corporation as authorized in this
section has been met; and
(ii) A written undertaking by or on behalf of the director to
repay the amount if it shall ultimately be determined that
the standard of conduct has not been met.
(2) The undertaking required by paragraph (1)(ii) of this subsection
shall be an unlimited general obligation of the director but need
not be secured and may be accepted without reference to financial
ability to make the repayment.
(3) Payments under this subsection shall be made as provided by the
charter, bylaws, or contract or as specified in subsection (e)(2)
of this section.
(g) The indemnification and advancement of expenses provided or authorized by
this section may not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director may be entitled under the
charter, the bylaws, a resolution of stockholders or directors, an
agreement or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
(h) This section does not limit the corporation's power to pay or reimburse
expenses incurred by a director in connection with an appearance as a
witness in a proceeding at a time when the director has not been made a
named defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have requested a director to serve
an employee benefit plan where the performance of the director's
duties to the corporation also imposes duties on, or otherwise
involves services by, the director to the plan or participants or
beneficiaries of the plan;
(2) Excise taxes assessed on a director with respect to an employee
benefit plan pursuant to applicable law shall be deemed fines; and
(3) Action taken or omitted by the director with respect to an employee
benefit plan in the performance of the director's duties for a purpose
reasonably believed by the director to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified as and to the
extent provided in subsection (d) of this section for a director
and shall be entitled, to the same extent as a director, to seek
indemnification pursuant to the provisions of subsection (d) of
this section;
(2) A corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent that it
may indemnify directors under this section; and
(3) A corporation, in addition, may indemnify and advance expenses to
an officer, employee, or agent who is not a director to such
further extent, consistent with law, as may be provided by its
charter, bylaws, general or specific action of its board of
directors, or contract.
(k) (1) A corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust, other
enterprise, or employee benefit plan against any liability asserted against
and incurred by such person in any such capacity or arising out of such
person's position, whether or not the corporation would have the power to
indemnify against liability under the provisions of this section.
(2) A corporation may provide similar protection, including a trust fund,
letter of credit, or surety bond, not inconsistent with this section.
(3) The insurance or similar protection may be provided by a subsidiary or
an affiliate of the corporation.
(l) Any indemnification of, or advance of expenses to, a director in accordance
with this section, if arising out of a proceeding by or in the right of the
corporation, shall be reported in writing to the stockholders with the
notice of the next stockholders' meeting or prior to the meeting.
ARTICLE EIGHTH OF THE FUND'S ARTICLES OF RESTATEMENT PROVIDES AS FOLLOWS:
The Corporation shall indemnify to the fullest extent permitted by law
(including the Investment Company Act of 1940) any person made or threatened to
be made a party to any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that such person or such
person's testator or intestate is or was a director, officer or employee of the
Corporation or serves or served at the request of the Corporation any other
enterprise as director, officer or employee. To the fullest extent permitted by
law (including the Investment Company Act of 1940), expenses incurred by any
such person in defending any such action, suit or proceeding shall be paid or
reimbursed by the Corporation promptly upon receipt by it of an undertaking of
such person to repay such expenses if it shall ultimately be determined that
such person is not entitled to be indemnified by the Corporation. The rights
provided to any person by this Article EIGHTH shall be enforceable against the
Corporation by such person who shall be presumed to have relied upon it in
serving or continuing to serve as a director, officer or employee as provided
above. No amendment of this Article EIGHTH shall impair the rights of any person
arising at any time with respect to events occurring prior to such amendment.
For purposes of this Article EIGHTH, the term "Corporation" shall include any
predecessor of the Corporation and any constituent corporation (including any
constituent of a constituent) absorbed by the Corporation in a consolidation or
merger; the term "other enterprise" shall include any corporation, partnership,
joint venture, trust or employee benefit plan; service "at the request of the
Corporation" shall include service as a director, officer or employee of the
corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiaries; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
by a person with respect to any employee benefit plan which such person
reasonably believes to be in the interest of the participants and beneficiaries
of such plan shall be deemed to be action not opposed to the best interests of
the Corporation.
Nothing in Article SEVENTH or in this Article EIGHTH protects or purports
to protect any director or officer against any liability to the Corporation or
its security holders to which he or she would otherwise be subject by reason of
willful malfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
ARTICLE VI OF THE FUND'S AMENDED AND RESTATED BY-LAWS PROVIDES AS FOLLOWS:
SECTION 1. Insurance. Subject to the provisions of the 1940 Act, the
Corporation, directly, through third parties or through affiliates of the
Corporation, may purchase, or provide through a trust fund, letter of credit or
surety bond insurance on behalf of any person who is or was a Director, officer,
employee or agent of the
Corporation, or who, while a Director, officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a Director,
officer, employee, partner, trustee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against and incurred by such person in any such capacity or
arising out of such person's position, whether or not the Corporation would have
the power to indemnify such person against such liability.
SECTION 2. Indemnification and Advance of Expenses. To the maximum extent
permitted by Maryland law, in effect from time to time, the Corporation shall
indemnify and, without requiring a preliminary determination of the ultimate
entitlement to indemnification, shall pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any individual who is a
present or former director or officer of the Corporation and who is made, or
threatened to be made, a party to the proceeding by reason of his or her service
in any such capacity or (b) any individual who, while a director or officer of
the Corporation and at the request of the Corporation, serves or has served as a
director or officer of any other enterprise and who is made, or threatened to be
made, a party to the proceeding by reason of his or her service in any such
capacity. The Corporation may, with the approval of its Board of Directors or
any duly authorized committee thereof, provide such indemnification and advance
for expenses to a person who served a predecessor of the Corporation in any of
the capacities described in (a) or (b) above and to any employee or agent of the
Corporation or a predecessor of the Corporation. Any indemnification or advance
of expenses made pursuant to this Article shall be subject to applicable
requirements of the 1940 Act. The indemnification and payment of expenses
provided in these Bylaws shall not be deemed exclusive of or limit in any way
other rights to which any person seeking indemnification or payment of expenses
may be or may become entitled under any bylaw, regulation, insurance, agreement
or otherwise.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
SECURITIES ACT OF 1933
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Fund pursuant to the foregoing provisions, or otherwise, the Fund has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Fund of 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 Fund 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 whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SECTION 1.9 OF THE DISTRIBUTION AGREEMENT BETWEEN REGISTRANT AND SEI INVESTMENTS
DISTRIBUTION CO. PROVIDES AS FOLLOWS:
The Fund authorizes you and any dealers with whom you have entered into
dealer agreements to use any prospectus in the form most recently furnished by
the Fund in connection with the sale of Shares in Creation Units. The Fund
agrees to indemnify, defend and hold you, your several officers and directors,
and any person who controls you 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 reasonable counsel fees incurred in connection
therewith) which you, your officers and directors, or any such controlling
persons, may incur under the 1933 Act, the 1940 Act or common law or otherwise,
(a) arising out of or on the basis of any untrue statement, or alleged untrue
statement, of a material fact required to be stated in either any registration
statement or any prospectus or any statement of additional information, or (b)
arising out of or based upon any omission, or alleged omission, to state a
material fact required to be stated in any registration statement, any
prospectus or any statement of additional information or necessary to make the
statements in any of them not misleading, (c) arising out of breach of any
obligation, representation or warranty pursuant to this Agreement by the Fund,
or (d) the Fund's failure to comply with applicable securities laws, except that
the Fund's agreement to indemnify you, your officers or directors, and any such
controlling person will not be deemed to cover any such claim, demand, liability
or expense to the extent that it arises out of or is based upon any
such untrue statement, alleged untrue statement, omission or alleged omission
made in any registration statement, any prospectus or any statement of
additional information in reliance upon information furnished by you, your
officers, directors or any such controlling person to the Fund or its
representatives for use in the preparation thereof, and except that the Fund's
agreement to indemnify you and the Fund's representations and warranties set out
in paragraph 1.8 of this Agreement will not be deemed to cover any liability to
the Funds or their shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties under this Agreement ("Disqualifying Conduct"). The Fund's agreement to
indemnity you, your officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Fund's being notified of any action
brought against you, your officers or directors, or any such controlling person,
such notification to be given by letter, by facsimile or by telegram addressed
to the Fund at its address set forth above within a reasonable period of time
after the summons or other first legal process shall have been served. The
failure so to notify the Fund of any such action shall not relieve the Fund from
any liability which the Fund may have to the person against whom such action is
brought by reason of any such untrue, or alleged untrue, statement or omission,
or alleged omission, otherwise than on account of the Fund's indemnity agreement
contained in this paragraph 1.9. The Fund will be entitled to assume the defense
of any suit brought to enforce any such claim, demand or liability, but, in such
case, such defense shall be conducted by counsel of good standing chosen by the
Fund and approved by you. In the event the Fund elects to assume the defense of
any such suit and retain counsel of good standing approved by you, the defendant
or defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Fund does not elect to assume
the defense of any such suit, the Fund will reimburse you, your officers and
directors, or the controlling person or persons named as defendant or defendants
in such suit, for the reasonable fees and expenses of any counsel retained by
you or them. The Fund's indemnification agreement contained in this paragraph
1.9 and the Fund's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of you, your officers and directors, or any controlling person, and
shall survive the delivery of any Shares. This agreement of indemnity will inure
exclusively to your benefit, to the benefit of your several officers and
directors, and their respective estates, and to the benefit of any controlling
persons or other affiliates, and their successors. The Fund agrees promptly to
notify you of the commencement of any litigation or proceedings against the Fund
or any of its officers or Board members in connection with the issue and sale of
Shares.
IN CERTAIN CIRCUMSTANCES, AN AUTHORIZED PARTICIPANT MAY BE DEEMED AN AFFILIATE
OF THE FUND. SECTION 10 OF THE AUTHORIZED PARTICIPANT AGREEMENT PROVIDES
INDEMNIFICATION OF AUTHORIZED PARTICIPANTS AS FOLLOWS:
(b) The Distributor hereby agrees to indemnify and hold harmless the
Participant, its respective subsidiaries, affiliated persons, 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 Distributor of any provision of this Agreement that relates to the
Distributor; (ii) any failure on the part of the Distributor to perform any of
its obligations set forth in this Agreement; (iii) any failure by the
Distributor to comply with applicable laws, including rules and regulations of
self-regulatory organizations; or (iv) actions of such Indemnified Party in
reliance upon any representations made in accordance with the iShares Procedures
Handbook reasonably believed by the Participant to be genuine and to have been
given by the Distributor.
(c)The Participant shall not be liable to the Distributor for any damages
arising out of (i) mistakes or errors in data provided in connection with
purchase or redemption transactions except for data provided by the Participant,
or (ii) mistakes or errors by or out of interruptions or delays of
communications with the Distributor or any Indemnified Party who is a service
provider to the Fund. The Participant shall not be liable for any action,
representation, or solicitation made by the wholesalers of the Fund.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Fund 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 Director and Chairman of the Board of Directors of BFA and
Chairman Chief Executive Officer and Director of BTC
400 Howard Street, San Francisco, CA 94105
Anthony Spinale Chief Financial Officer of BFA and
Officer Chief Financial 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 Trust April 25, 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 Company maintains accounts, books and other documents required by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
(collectively, the "Records") at the offices of State Street Bank and Trust
Company ("State Street"), 200 Clarendon Street, Boston, MA 02116.
(b) 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. 107 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 29th day of January 2010.
By:
-------------------------------------
Michael A. Latham*
President
Date: January 29, 2010
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 107 to the Registration Statement has been signed
below by the following persons in the capacity and on the dates indicated.
By:
-------------------------------------
Lee T. Kranefuss*
Director
Date: January 29, 2010
-------------------------------------
John E. Martinez*
Director
Date: January 29, 2010
-------------------------------------
George G. C. Parker*
Director
Date: January 29, 2010
-------------------------------------
Cecilia H. Herbert*
Director
Date: January 29, 2010
-------------------------------------
Charles A. Hurty*
Director
Date: January 29, 2010
-------------------------------------
John E. Kerrigan*
Director
Date: January 29, 2010
-------------------------------------
Robert H. Silver*
Director
Date: January 29, 2010
-------------------------------------
J. Darrell Duffie*
Director
Date: January 29, 2010
-------------------------------------
Robert S. Kapito**
Director
Date: January 29, 2010
-------------------------------------
Michael Latham*
President
Date: January 29, 2010
/s/ Jack Gee
-------------------------------------
Jack Gee
Treasurer
Date: January 29, 2010
*,**By: /s/ Jack Gee
-------------------------------------
Jack Gee
Attorney in fact
Date: January 29, 2010
* Powers of Attorney, each dated February 23, 2009, for Michael A. Latham,
Lee T. Kranefuss, 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. 100, filed September 28, 2009.
** Power of Attorney, dated December 8, 2009, for Robert S. Kapito is
incorporated herein by reference to PEA No. 105.
Exhibit Index
(d.2) Schedule A to Investment Advisory Agreement between Registrant and BFA
(h.13) Schedule A to Amended and Restated Securities Lending Agency Agreement
(h.14) Form of Master Securities Loan Agreement
EX-99.(D.2)
2
dex99d2.txt
SCHDULE A TO INVESTMENT ADVISORY AGREEMENT
Exhibit (d.2)
SCHEDULE A
TO THE
ADVISORY AGREEMENT DATED DECEMBER 1, 2009
BETWEEN
ISHARES, INC.
AND
BLACKROCK FUND ADVISORS
Advisory Fee for the Category I Funds:
0.59% per annum of the aggregate net assets of the Category I Funds less than or
equal to $7.0 billion
plus 0.54% per annum of the aggregate net assets of the Category I Funds between
$7.0 billion and $11.0 billion
plus 0.49% per annum of the aggregate net assets of the Category I Funds between
$11.0 billion and $24.0 billion
plus 0.44% per annum of the aggregate net assets of the Category I Funds between
$24.0 billion and $48.0 billion
plus 0.40% per annum of the aggregate net assets of the Category I Funds in
excess of $48.0 billion
Category I Funds:
iShares MSCI Australia Index Fund
iShares MSCI Austria Investable Market Index Fund
iShares MSCI Belgium Investable Market Index Fund
iShares MSCI Canada Index Fund
iShares MSCI EMU Index Fund
iShares MSCI France Index Fund
iShares MSCI Germany Index Fund
iShares MSCI Hong Kong Index Fund
iShares MSCI Italy Index Fund
iShares MSCI Japan Index Fund
iShares MSCI Japan Small Cap Index Fund
iShares MSCI Malaysia Index Fund
iShares MSCI Mexico Investable Market Index Fund
iShares MSCI Netherlands Investable Market Index Fund
iShares MSCI Singapore Index Fund
iShares MSCI Spain Index Fund
iShares MSCI Sweden Index Fund
iShares MSCI Switzerland Index Fund
iShares MSCI United Kingdom Index Fund
Advisory Fee for Category II Funds:
0.74% per annum of the aggregate net assets of the Category II Funds less than
or equal to $2.0 billion
plus 0.69% per annum of the aggregate net assets of the Category II Funds
between $2.0 billion and $4.0 billion
plus 0.64% per annum of the aggregate net assets of the Category II Funds
between $4.0 billion and $8.0 billion
plus 0.57% per annum of the aggregate net assets of the Category II Funds
between $8.0 billion and $16.0 billion
plus 0.51% per annum of the aggregate net assets of the Category II Funds in
excess of $16.0 billion
Category II Funds:
iShares MSCI All Peru Capped Index Fund*
iShares MSCI Brazil Index Fund
iShares MSCI Chile Investable Market Index Fund
iShares MSCI Israel Capped Investable Market Index Fund
iShares MSCI South Africa Index Fund
iShares MSCI South Korea Index Fund
iShares MSCI Taiwan Index Fund
iShares MSCI Thailand Investable Market Index Fund
iShares MSCI Turkey Investable Market Index Fund
Advisory Fee for Category III Funds:
0.50% per annum of the aggregate net assets of the Category III Funds
Category III Funds:
iShares MSCI Pacific ex-Japan Index Fund
Advisory Fee for Category IV Funds:
0.75% per annum of the aggregate net assets of the Category IV Funds less than
or equal to $14.0 billion
plus 0.68% per annum of the aggregate net assets of the Category IV Funds
between $14.0 billion and $28.0 billion
plus 0.61% per annum of the aggregate net assets of the Category IV Funds in
excess of $28.0 billion
Category IV Funds:
iShares MSCI All Country Asia ex Japan Index Fund*
iShares MSCI BRIC Index Fund
iShares MSCI Emerging Markets Eastern Europe Index Fund
iShares MSCI Emerging Markets Financials Sector Index Fund*
iShares MSCI Emerging Markets Index Fund
iShares MSCI Emerging Markets Materials Sector Index Fund*
* This Fund is a fund of iShares Trust.
AMENDED AND APPROVED BY THE BOARD OF DIRECTORS OF ISHARES, INC. ON DECEMBER 8-9,
2009.
EX-99.(H.13)
3
dex99h13.txt
SCHEDULE A TO AMENDED AND RESTATED SECURITIES LENDING AGENCY AGREEMENT
Securities Lending Agreement Exhibit (h.13)
SCHEDULE A
LENDERS
iSHARES, INC.
iShares MSCI Australia Index Fund
iShares MSCI Austria Investable Market Index Fund
iShares MSCI Belgium Investable Market Index Fund
iShares MSCI Brazil Index Fund
iShares MSCI BRIC Index Fund
iShares MSCI Canada Index Fund
iShares MSCI Chile Investable Market Index Fund
iShares MSCI Emerging Markets Index Fund
iShares MSCI Emerging Markets Eastern Europe Index Fund
iShares MSCI EMU Index Fund
iShares MSCI France Index Fund
iShares MSCI Germany Index Fund
iShares MSCI Hong Kong Index Fund
iShares MSCI Israel Capped Investable Market Index Fund
iShares MSCI Italy Index Fund
iShares MSCI Japan Index Fund
iShares MSCI Japan Small Cap Index Fund
iShares MSCI Malaysia Index Fund
iShares MSCI Mexico Investable Market Index Fund
iShares MSCI Netherlands Investable Market Index Fund
iShares MSCI Pacific ex-Japan Index Fund
iShares MSCI Singapore Index Fund
iShares MSCI South Africa Index Fund
iShares MSCI South Korea Index Fund
iShares MSCI Spain Index Fund
iShares MSCI Sweden Index Fund
iShares MSCI Switzerland Index Fund
iShares MSCI Taiwan Index Fund
iShares MSCI Thailand Investable Market Index Fund
iShares MSCI Turkey Investable Market Index Fund
iShares MSCI United Kingdom Index Fund
iSHARES TRUST
iShares 10+ Year Credit Bond Fund
iShares 10+ Year Government/Credit Bond Fund
iShares 2012 S&P AMT-Free Municipal Series
iShares 2013 S&P AMT-Free Municipal Series
iShares 2014 S&P AMT-Free Municipal Series
iShares 2015 S&P AMT-Free Municipal Series
iShares 2016 S&P AMT-Free Municipal Series
iShares 2017 S&P AMT-Free Municipal Series
iShares Barclays 1-3 Year Credit Bond Fund (formerly known as Lehman 1-3 Year
Credit Bond Fund)
iShares Barclays 1-3 Year Treasury Bond Fund (formerly known as Lehman 1-3 Year
Treasury Bond Fund)
iShares Barclays 3-7 Year Treasury Bond Fund (formerly known as Lehman 3-7 Year
Treasury Bond Fund)
iShares Barclays 7-10 Year Treasury Bond Fund (formerly known as Lehman 7-10
Year Treasury Bond Fund)
iShares Barclays 10-20 Year Treasury Bond Fund (formerly known as Lehman 10-20
Year Treasury Bond Fund)
Securities Lending Agreement
SCHEDULE A (CONTINUED)
LENDERS
iShares Barclays 20+ Year Treasury Bond Fund (formerly known as Lehman 20+ Year
Treasury Bond Fund)
iShares Barclays Agency Bond Fund
iShares Barclays Aggregate Bond Fund (formerly known as Lehman Aggregate Bond
Fund)
iShares Barclays Credit Bond Fund (formerly known as Lehman Credit Bond Fund)
iShares Barclays Government/Credit Bond Fund (formerly known as Lehman
Government/Credit Bond Fund)
iShares Barclays Intermediate Credit Bond Fund (formerly known as Lehman
Intermediate Credit Bond Fund)
iShares Barclays Intermediate Government/Credit Bond Fund (formerly known as
Lehman Intermediate Government/Credit Bond Fund)
iShares Barclays MBS Bond Fund (formerly known as iShares Lehman MBS Bond Fund)
iShares Barclays Short Treasury Bond Fund (formerly known as Lehman Short
Treasury Bond Fund)
iShares Barclays TIPS Bond Fund (formerly known as Lehman TIPS Bond Fund)
iShares Cohen & Steers Realty Majors Index Fund
iShares Dow Jones International Select Dividend Index Fund (formerly known as
iShares Dow Jones EPAC Select Dividend Index Fund)
iShares Dow Jones Select Dividend Index Fund
iShares Dow Jones Transportation Average Index Fund
iShares Dow Jones U.S. Aerospace & Defense Index Fund
iShares Dow Jones U.S. Basic Materials Sector Index Fund
iShares Dow Jones U.S. Broker-Dealers Index Fund
iShares Dow Jones U.S. Consumer Goods Sector Index Fund
iShares Dow Jones U.S. Consumer Services Sector Index Fund
iShares Dow Jones U.S. Energy Sector Index Fund
iShares Dow Jones U.S. Financial Sector Index Fund
iShares Dow Jones U.S. Financial Services Index Fund
iShares Dow Jones U.S. Healthcare Providers Index Fund
iShares Dow Jones U.S. Healthcare Sector Index Fund
iShares Dow Jones U.S. Home Construction Index Fund
iShares Dow Jones U.S. Industrial Sector Index Fund
iShares Dow Jones U.S. Insurance Index Fund
iShares Dow Jones U.S. Medical Devices Index Fund
iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund
iShares Dow Jones U.S. Oil Equipment & Services Index Fund
iShares Dow Jones U.S. Pharmaceuticals Index Fund
iShares Dow Jones U.S. Real Estate Index Fund
iShares Dow Jones U.S. Regional Banks Index Fund
iShares Dow Jones U.S. Technology Sector Index Fund
iShares Dow Jones U.S. Telecommunications Sector Index Fund
iShares Dow Jones U.S. Index Fund (formerly known as iShares Dow Jones U.S.
Total Markets Index Fund)
iShares Dow Jones U.S. Utilities Sector Index Fund
iShares FTSE China (HK Listed) Index Fund
iShares FTSE Developed Small Cap ex-North America Index Fund
iShares FTSE EPRA/NAREIT Developed Asia Index Fund (formerly known as iShares
FTSE EPRA/NAREIT Asia Index Fund)
iShares FTSE EPRA/NAREIT Developed Europe Index Fund (formerly known as iShares
FTSE EPRA/NAREIT Europe Index Fund)
Securities Lending Agreement
SCHEDULE A (CONTINUED)
LENDERS
iShares FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund (formerly
known as iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund )
iShares FTSE EPRA/NAREIT North America Index Fund
iShares FTSE KLD Social Index Fund (formerly known as iShares KLD 400 Social
Index Fund)
iShares FTSE KLD Select Social Index Fund (formerly known as iShares KLD Select
Social(SM) Index Fund)
iShares FTSE NAREIT Industrial/Office Capped Index Fund (formerly known as
iShares FTSE NAREIT Industrial/Office Index Fund)
iShares FTSE NAREIT Real Estate 50 Index Fund
iShares FTSE NAREIT Residential Plus Capped Index Fund (formerly known as
iShares FTSE NAREIT Residential Index Fund)
iShares FTSE NAREIT Retail Capped Index Fund (formerly known as iShares FTSE
NAREIT Retail Index Fund)
iShares FTSE NAREIT Mortgage Plus Capped Index Fund (formerly known as iShares
FTSE NAREIT Mortgage REITs Index Fund)
iShares FTSE/Xinhua China 25 Index Fund
iShares iBoxx $ High Yield Corporate Bond Fund
iShares iBoxx $ Investment Grade Corporate Bond Fund (formerly know as iShares
GS $ InvesTop(TM) Corporate Bond Fund)
iShares JPMorgan USD Emerging Markets Bond Fund
iShares Morningstar Large Core Index Fund
iShares Morningstar Large Growth Index Fund
iShares Morningstar Large Value Index Fund
iShares Morningstar Mid Core Index Fund
iShares Morningstar Mid Growth Index Fund
iShares Morningstar Mid Value Index Fund
iShares Morningstar Small Core Index Fund
iShares Morningstar Small Growth Index Fund
iShares Morningstar Small Value Index Fund
iShares MSCI ACWI Index Fund
iShares MSCI ACWI ex US Financials Sector Index Fund
iShares MSCI ACWI ex US Index Fund
iShares MSCI All Country Asia ex Japan Index Fund
iShares MSCI All Peru Capped Index Fund
iShares MSCI EAFE Growth Index Fund
iShares MSCI EAFE Index Fund
iShares MSCI EAFE Small Cap Index Fund
iShares MSCI EAFE Value Index Fund
iShares MSCI Emerging Markets Financials Sector Index
iShares MSCI Emerging Markets Materials Sector Index
iShares MSCI Europe Financials Sector Index Fund
iShares MSCI Far East Financials Sector Index Fund
iShares MSCI Kokusai Index Fund
iShares Nasdaq Biotechnology Index Fund
iShares NYSE 100 Index Fund
iShares NYSE Composite Index Fund
iShares Russell 1000 Growth Index Fund
iShares Russell 1000 Index Fund
Securities Lending Agreement
SCHEDULE A (CONTINUED)
LENDERS
iShares Russell 1000 Value Index Fund
iShares Russell 2000 Growth Index Fund
iShares Russell 2000 Index Fund
iShares Russell 2000 Value Index Fund
iShares Russell 3000 Growth Index Fund
iShares Russell 3000 Index Fund
iShares Russell 3000 Value Index Fund
iShares Russell Microcap Index Fund
iShares Russell Midcap Growth Index Fund
iShares Russell Midcap Index Fund
iShares Russell Midcap Value Index Fund
iShares Russell Top 200 Growth Index Fund
iShares Russell Top 200 Index Fund
iShares Russell Top 200 Value Index Fund
iShares S&P 100 Index Fund
iShares S&P 1500 Index Fund
iShares S&P 500 Growth Index Fund
iShares S&P 500 Index Fund
iShares S&P 500 Value Index
Fund
iShares S&P Aggressive Allocation Fund
iShares S&P Asia 50 Index Fund
iShares S&P/Citigroup International Treasury Bond Fund
iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund
iShares S&P California AMT-Free Municipal Bond Fund (formerly known as iShares
S&P California Municipal Bond Fund)
iShares S&P Conservative Allocation Fund
iShares S&P Developed ex-U.S. Property Index Fund (formerly known as iShares S&P
World ex-U.S. Property Index Fund)
iShares S&P Emerging Markets Infrastructure Index Fund
iShares S&P Europe 350 Index Fund
iShares S&P Global 100 Index Fund
iShares S&P Global Clean Energy Index Fund
iShares S&P Global Consumer Discretionary Sector Index Fund
iShares S&P Global Consumer Staples Sector Index Fund
iShares S&P Global Energy Sector Index Fund
iShares S&P Global Financials Sector Index Fund
iShares S&P Global Healthcare Sector Index Fund
iShares S&P Global Industrials Sector Index Fund
iShares S&P Global Infrastructure Index Fund
iShares S&P Global Materials Sector Index Fund
iShares S&P Global Nuclear Energy Index Fund
iShares S&P Global Technology Sector Index Fund
iShares S&P Global Telecommunications Sector Index Fund
iShares S&P Global Timber & Forestry Index Fund
iShares S&P Global Utilities Sector Index Fund
iShares S&P Growth Allocation Fund
iShares S&P India Nifty 50 Index Fund
iShares S&P Latin America 40 Index Fund
iShares S&P MidCap 400 Growth Index Fund
iShares S&P MidCap 400 Index Fund
iShares S&P MidCap 400 Value Index Fund
iShares S&P Moderate Allocation Fund
iShares S&P National AMT-Free Municipal Bond Fund (formerly known as iShares S&P
National Municipal Bond Fund)
Securities Lending Agreement
SCHEDULE A (CONTINUED)
LENDERS
iShares S&P New York AMT-Free Municipal Bond Fund (formerly known as iShares S&P
New York Municipal Bond Fund)
iShares S&P North American Natural Resources Sector Index Fund
iShares S&P North American Technology-Multimedia Networking Index Fund
iShares S&P North American Technology-Semiconductors Index Fund
iShares S&P North American Technology-Software Index Fund
iShares S&P North American Technology Sector Index Fund
iShares S&P Short Term National AMT-Free Municipal Bond Fund (formerly known as
iShares S&P Short Term National Municipal Bond Fund)
iShares S&P SmallCap 600 Growth Index Fund
iShares S&P SmallCap 600 Index Fund
iShares S&P SmallCap 600 Value Index Fund
iShares S&P Target Date Retirement Income Index Fund
iShares S&P Target Date 2010 Index Fund
iShares S&P Target Date 2015 Index Fund
iShares S&P Target Date 2020 Index Fund
iShares S&P Target Date 2025 Index Fund
iShares S&P Target Date 2030 Index Fund
iShares S&P Target Date 2035 Index Fund
iShares S&P Target Date 2040 Index Fund
iShares S&P/TOPIX 150 Index Fund
iShares S&P U.S. Preferred Stock Index Fund
AMENDED AND APPROVED BY THE BOARD OF TRUSTEES OF ISHARES TRUST AND BOARD OF
DIRECTORS OF ISHARES, INC. ON DECEMBER 8-9, 2009.
EX-99.(H.14)
4
dex99h14.txt
FORM OF MASTER SECURITIES LOAN AGREEMENT
Exhibit (h.14)
[THE BOND MARKET ASSOCIATION LOGO] [LOGO]
Master Securities
Loan Agreement
2000 Version
Dated as of:
Between:
and
(each individually and not collectively)
1. APPLICABILITY.
From time to time the parties hereto may enter into transactions in which
one party ("Lender") will lend to the other party ("Borrower") certain
Securities (as defined herein) against a transfer of Collateral (as defined
herein). Each such transaction shall be referred to herein as a "Loan" and,
unless otherwise agreed in writing, shall be governed by this Agreement,
including any supplemental terms or conditions contained in an Annex or
Schedule hereto and in any other annexes identified herein or therein as
applicable hereunder. Capitalized terms not otherwise defined herein shall
have the meanings provided in Section 25.
2. LOANS OF SECURITIES.
2.1 Subject to the terms and conditions of this Agreement, Borrower or
Lender may, from time to time, seek to initiate a transaction in which
Lender will lend Securities to Borrower. Borrower and Lender shall
agree on the terms of each Loan (which terms may be amended during the
Loan), including the issuer of the Securities, the amount of
Securities to be lent, the basis of compensation, the amount of
Collateral to be transferred by Borrower, and any additional terms.
Such agreement shall be confirmed (a) by a schedule and receipt
listing the Loaned Securities provided by Borrower to Lender in
accordance with Section 3.2, (b) through any system that compares
Loans and in which Borrower and Lender are participants, or (c) in
such other manner as may be agreed by Borrower and Lender in writing.
Such confirmation (the "Confirmation"), together with the Agreement,
shall constitute conclusive evidence of the terms agreed between
Borrower and Lender with respect to the Loan to which the Confirmation
relates, unless with respect to the Confirmation specific objection is
made promptly after receipt thereof. In the event of any inconsistency
between the terms of such Confirmation and Agreement, this Agreement
shall prevail unless each party has executed such Confirmation.
2.2 Notwithstanding any other provision in this Agreement regarding when a
Loan commences, unless otherwise agreed, a Loan hereunder shall not
occur until the Loaned Securities and the Collateral therefor have
been transferred in accordance with Section 15.
3. TRANSFER OF LOANED SECURITIES.
3.1 Unless otherwise agreed, Lender shall transfer Loaned Securities to
Borrower hereunder on or before the Cutoff Time on the date agreed to
by Borrower and Lender for the commencement of the Loan.
3.2 Unless otherwise agreed, Borrower shall provide Lender, for each Loan
in which Lender is a Customer, with a schedule and receipt listing the
Loaned Securities. Such schedule and receipt may consist of (a) a
schedule provided to Borrower by Lender and executed and returned by
Borrower when the Loaned Securities are received, (b) in the case of
Securities transferred through a Clearing Organization which provides
transferors with a notice evidencing such transfer, such notice, or
(c) a confirmation or other document provided to Lender by Borrower.
3.3 Notwithstanding any other provision in this Agreement, the parties
hereto agree that they intend the Loans hereunder to be loans of
Securities. If, however, any Loan is deemed to be a loan of money by
Borrower to Lender, then Borrower shall have, and Lender shall be
deemed to have granted, a security interest in the Loaned Securities
and the proceeds thereof.
4. COLLATERAL.
4.1 Unless otherwise agreed, Borrower shall, prior to or concurrently with
the transfer of the Loaned Securities to Borrower, but in no case
later than the Close of Business on the day of such transfer, transfer
to Lender Collateral with a Market Value at least equal to the Margin
Percentage of the Market Value of the Loaned Securities.
4.2 The Collateral transferred by Borrower to Lender, as adjusted pursuant
to Section 9, shall be security for Borrower's obligations in respect
of such Loan and for any other obligations of Borrower to Lender
hereunder. Borrower hereby pledges with, assigns to, and grants Lender
a continuing first priority security interest in, and a lien upon, the
Collateral, which shall attach upon the transfer of the Loaned
Securities by Lender to Borrower and which shall cease upon the
transfer of the Loaned Securities by Borrower to Lender. In addition
to the rights and remedies given to Lender hereunder, Lender shall
have all the rights and remedies of a secured party under the UCC. It
is understood that Lender may use or invest the Collateral, if such
consists of cash, at its own risk, but that (unless Lender is a
Broker-Dealer) Lender shall, during the term of any Loan hereunder,
segregate Collateral from all securities or other assets in its
possession. Lender may Retransfer Collateral only (a) if Lender is a
Broker-Dealer or (b) in the event of a Default by Borrower.
Segregation of Collateral may be accomplished by appropriate
identification on the books and records of Lender if it is a
"securities intermediary" within the meaning of the UCC.
4.3 Except as otherwise provided herein, upon transfer to Lender of the
Loaned Securities on the day a Loan is terminated pursuant to Section
6, Lender shall be obligated to transfer the Collateral (as adjusted
pursuant to Section 9) to Borrower no later than the Cutoff Time on
such day or, if such day is not a day on which a transfer of such
Collateral may be effected under Section 15, the next day on which
such a transfer may be effected.
4.4 If Borrower transfers Collateral to Lender, as provided in Section
4.1, and Lender does not transfer the Loaned Securities to Borrower,
Borrower shall have the absolute right to the return of the
Collateral; and if Lender transfers Loaned Securities to Borrower and
Borrower does not transfer Collateral to Lender as provided in Section
4.1, Lender shall have the absolute right to the return of the Loaned
Securities.
2
4.5 Borrower may, upon reasonable notice to Lender (taking into account
all relevant factors, including industry practice, the type of
Collateral to be substituted, and the applicable method of transfer),
substitute Collateral for Collateral securing any Loan or Loans;
provided, however, that such substituted Collateral shall (a) consist
only of cash, securities or other property that Borrower and Lender
agreed would be acceptable Collateral prior to the Loan or Loans and
(b) have a Market Value such that the aggregate Market Value of such
substituted Collateral, together with all other Collateral for Loans
in which the party substituting such Collateral is acting as Borrower,
shall equal or exceed the agreed upon Margin Percentage of the Market
Value of the Loaned Securities.
4.6 Prior to the expiration of any letter of credit supporting Borrower's
obligation hereunder, Borrower shall, no later than the Extension
Deadline, (a) obtain an extension of the expiration of such letter of
credit, (b) replace such letter of credit by providing Lender with a
substitute letter of credit in an amount at least equal to the amount
of the letter of credit for which it is substituted, or (c) transfer
such other Collateral to Lender as may be acceptable to Lender.
5. FEES FOR LOAN.
5.1 Unless otherwise agreed, (a) Borrower agrees to pay Lender a loan fee
(a "Loan Fee"), computed daily on each Loan to the extent such Loan is
secured by Collateral other than cash, based on the aggregate Market
Value of the Loaned Securities on the day for which such Loan Fee is
being computed, and (b) Lender agrees to pay Borrower a fee or rebate
(a "Cash Collateral Fee") on Collateral consisting of cash, computed
daily based on the amount of cash held by Lender as Collateral, in the
case of each of the Loan Fee and the Cash Collateral Fee at such rates
as Borrower and Lender may agree. Except as Borrower and Lender may
otherwise agree (in the event that cash Collateral is transferred by
clearing house funds or otherwise), Loan Fees shall accrue from and
including the date on which the Loaned Securities are transferred to
Borrower to, but excluding, the date on which such Loaned Securities
are returned to Lender, and Cash Collateral Fees shall accrue from and
including the date on which the cash Collateral is transferred to
Lender to, but excluding, the date on which such cash Collateral is
returned to Borrower.
5.2 Unless otherwise agreed, any Loan Fee or Cash Collateral Fee payable
hereunder shall be payable:
(a) in the case of any Loan of Securities other than Government
Securities, upon the earlier of (i) the fifteenth day of the
month following the calendar month in which such fee was incurred
and (ii) the termination of all Loans hereunder (or, if a
transfer of cash in accordance with Section 15 may not be
effected on such fifteenth day or the day of such termination, as
the case may be, the next day on which such a transfer may be
effected); and
(b) in the case of any Loan of Government Securities, upon the
termination of such Loan and at such other times, if any, as may
be customary in accordance with market practice.
Notwithstanding the foregoing, all Loan Fees shall be payable by Borrower
immediately in the event of a Default hereunder by Borrower and all Cash
Collateral Fees shall be payable immediately by Lender in the event of a
Default by Lender.
3
6. TERMINATION OF THE LOAN.
6.1 (a) Unless otherwise agreed, either party may terminate a Loan on a
termination date established by notice given to the other party prior
to the Close of Business on a Business Day. The termination date
established by a termination notice shall be a date no earlier than
the standard settlement date that would apply to a purchase or sale of
the Loaned Securities (in the case of a notice given by Lender) or the
non-cash Collateral securing the Loan (in the case of a notice given
by Borrower) entered into at the time of such notice, which date
shall, unless Borrower and Lender agree to the contrary, be (i) in the
case of Government Securities, the next Business Day following such
notice and (ii) in the case of all other Securities, the third
Business Day following such notice.
(b) Notwithstanding paragraph (a) and unless otherwise agreed,
Borrower may terminate a Loan on any Business Day by giving
notice to Lender and transferring the Loaned Securities to Lender
before the Cutoff Time on such Business Day if (i) the Collateral
for such Loan consists of cash or Government Securities or (ii)
Lender is not permitted, pursuant to Section 4.2, to Retransfer
Collateral.
6.2 Unless otherwise agreed, Borrower shall, on or before the Cutoff Time
on the termination date of a Loan, transfer the Loaned Securities to
Lender; provided, however, that upon such transfer by Borrower, Lender
shall transfer the Collateral (as adjusted pursuant to Section 9) to
Borrower in accordance with Section 4.3.
7. RIGHTS IN RESPECT OF LOANED SECURITIES AND COLLATERAL.
7.1 Except as set forth in Sections 8.1 and 8.2 and as otherwise agreed by
Borrower and Lender, until Loaned Securities are required to be
redelivered to Lender upon termination of a Loan hereunder, Borrower
shall have all of the incidents of ownership of the Loaned Securities,
including the right to transfer the Loaned Securities to others.
Lender hereby waives the right to vote, or to provide any consent or
to take any similar action with respect to, the Loaned Securities in
the event that the record date or deadline for such vote, consent or
other action falls during the term of the Loan.
7.2 Except as set forth in Sections 8.3 and 8.4 and as otherwise agreed by
Borrower and Lender, if Lender may, pursuant to Section 4.2,
Retransfer Collateral, Borrower hereby waives the right to vote, or to
provide any consent or take any similar action with respect to, any
such Collateral in the event that the record date or deadline for such
vote, consent or other action falls during the term of a Loan and such
Collateral is not required to be returned to Borrower pursuant to
Section 4.5 or Section 9.
8. DISTRIBUTIONS.
8.1 Lender shall be entitled to receive all Distributions made on or in
respect of the Loaned Securities which are not otherwise received by
Lender, to the full extent it would be so entitled if the Loaned
Securities had not been lent to Borrower.
8.2 Any cash Distributions made on or in respect of the Loaned Securities,
which Lender is entitled to receive pursuant to Section 8.1, shall be
paid by the transfer of cash to Lender by Borrower, on the date any
such Distribution is paid, in an amount equal to such cash
Distribution, so long as Lender is not in Default at the time of such
payment. Non-cash Distributions that Lender is
4
entitled to receive pursuant to Section 8.1 shall be added to the
Loaned Securities on the date of distribution and shall be considered
such for all purposes, except that if the Loan has terminated,
Borrower shall forthwith transfer the same to Lender.
8.3 Borrower shall be entitled to receive all Distributions made on or in
respect of non-cash Collateral which are not otherwise received by
Borrower, to the full extent it would be so entitled if the Collateral
had not been transferred to Lender.
8.4 Any cash Distributions made on or in respect of such Collateral, which
Borrower is entitled to receive pursuant to Section 8.3, shall be paid
by the transfer of cash to Borrower by Lender, on the date any such
Distribution is paid, in an amount equal to such cash Distribution, so
long as Borrower is not in Default at the time of such payment.
Non-cash Distributions that Borrower is entitled to receive pursuant
to Section 8.3 shall be added to the Collateral on the date of
distribution and shall be considered such for all purposes, except
that if each Loan secured by such Collateral has terminated, Lender
shall forthwith transfer the same to Borrower.
8.5 Unless otherwise agreed by the parties:
(a) If (i) Borrower is required to make a payment (a "Borrower
Payment") with respect to cash Distributions on Loaned Securities
under Sections 8.1 and 8.2 ("Securities Distributions"), or (ii)
Lender is required to make a payment (a "Lender Payment") with
respect to cash Distributions on Collateral under Sections 8.3
and 8.4 ("Collateral Distributions"), and (iii) Borrower or
Lender, as the case may be ("Payor"), shall be required by law to
collect any withholding or other tax, duty, fee, levy or charge
required to be deducted or withheld from such Borrower Payment or
Lender Payment ("Tax"), then Payor shall (subject to subsections
(b) and (c) below), pay such additional amounts as may be
necessary in order that the net amount of the Borrower Payment or
Lender Payment received by the Lender or Borrower, as the case
may be ("Payee"), after payment of such Tax equals the net amount
of the Securities Distribution or Collateral Distribution that
would have been received if such Securities Distribution or
Collateral Distribution had been paid directly to the Payee.
(b) No additional amounts shall be payable to a Payee under
subsection (a) above to the extent that Tax would have been
imposed on a Securities Distribution or Collateral Distribution
paid directly to the Payee.
(c) No additional amounts shall be payable to a Payee under
subsection (a) above to the extent that such Payee is entitled to
an exemption from, or reduction in the rate of, Tax on a Borrower
Payment or Lender Payment subject to the provision of a
certificate or other documentation, but has failed timely to
provide such certificate or other documentation.
(d) Each party hereto shall be deemed to represent that, as of the
commencement of any Loan hereunder, no Tax would be imposed on
any cash Distribution paid to it with respect to (i) Loaned
Securities subject to a Loan in which it is acting as Lender or
(ii) Collateral for any Loan in which it is acting as Borrower,
unless such party has given notice to the contrary to the other
party hereto (which notice shall specify the rate at which such
Tax would be imposed). Each party agrees to notify the other of
any change that occurs during the term of a Loan in the rate of
any Tax that would be imposed on any such cash Distributions
payable to it.
5
8.6 To the extent that, under the provisions of Sections 8.1 through 8.5,
(a) a transfer of cash or other property by Borrower would give rise
to a Margin Excess or (b) a transfer of cash or other property by
Lender would give rise to a Margin Deficit, Borrower or Lender (as the
case may be) shall not be obligated to make such transfer of cash or
other property in accordance with such Sections, but shall in lieu of
such transfer immediately credit the amounts that would have been
transferable under such Sections to the account of Lender or Borrower
(as the case may be).
9. MARK TO MARKET.
9.1 If Lender is a Customer, Borrower shall daily mark to market any Loan
hereunder and in the event that at the Close of Trading on any
Business Day the Market Value of the Collateral for any Loan to
Borrower shall be less than 100% of the Market Value of all the
outstanding Loaned Securities subject to such Loan, Borrower shall
transfer additional Collateral no later than the Close of Business on
the next Business Day so that the Market Value of such additional
Collateral, when added to the Market Value of the other Collateral for
such Loan, shall equal 100% of the Market Value of the Loaned
Securities.
9.2 In addition to any rights of Lender under Section 9.1, if at any time
the aggregate Market Value of all Collateral for Loans by Lender shall
be less than the Margin Percentage of the Market Value of all the
outstanding Loaned Securities subject to such Loans (a "Margin
Deficit"), Lender may, by notice to Borrower, demand that Borrower
transfer to Lender additional Collateral so that the Market Value of
such additional Collateral, when added to the Market Value of all
other Collateral for such Loans, shall equal or exceed the Margin
Percentage of the Market Value of the Loaned Securities.
9.3 Subject to Borrower's obligations under Section 9.1, if at any time
the Market Value of all Collateral for Loans to Borrower shall be
greater than the Margin Percentage of the Market Value of all the
outstanding Loaned Securities subject to such Loans (a "Margin
Excess"), Borrower may, by notice to Lender, demand that Lender
transfer to Borrower such amount of the Collateral selected by
Borrower so that the Market Value of the Collateral for such Loans,
after deduction of such amounts, shall thereupon not exceed the Margin
Percentage of the Market Value of the Loaned Securities.
9.4 Borrower and Lender may agree, with respect to one or more Loans
hereunder, to mark the values to market pursuant to Sections 9.2 and
9.3 by separately valuing the Loaned Securities lent and the
Collateral given in respect thereof on a Loan-by-Loan basis.
9.5 Borrower and Lender may agree, with respect to any or all Loans
hereunder, that the respective rights of Lender and Borrower under
Sections 9.2 and 9.3 may be exercised only where a Margin Excess or
Margin Deficit exceeds a specified dollar amount or a specified
percentage of the Market Value of the Loaned Securities under such
Loans (which amount or percentage shall be agreed to by Borrower and
Lender prior to entering into any such Loans).
9.6 If any notice is given by Borrower or Lender under Sections 9.2 or 9.3
at or before the Margin Notice Deadline on any day on which a transfer
of Collateral may be effected in accordance with Section 15, the party
receiving such notice shall transfer Collateral as provided in such
Section no later than the Close of Business on such day. If any such
notice is given after the Margin Notice Deadline, the party receiving
such notice shall transfer such Collateral no later than the Close of
Business on the next Business Day following the day of such notice.
6
10. REPRESENTATIONS.
The parties to this Agreement hereby make the following representations and
warranties, which shall continue during the term of any Loan hereunder:
10.1 Each party hereto represents and warrants that (a) it has the power to
execute and deliver this Agreement, to enter into the Loans
contemplated hereby and to perform its obligations hereunder, (b) it
has taken all necessary action to authorize such execution, delivery
and performance, and (c) this Agreement constitutes a legal, valid and
binding obligation enforceable against it in accordance with its
terms.
10.2 Each party hereto represents and warrants that it has not relied on
the other for any tax or accounting advice concerning this Agreement
and that it has made its own determination as to the tax and
accounting treatment of any Loan and any dividends, remuneration or
other funds received hereunder.
10.3 Each party hereto represents and warrants that it is acting for its
own account unless it expressly specifies otherwise in writing and
complies with Section 11.1(b).
10.4 Borrower represents and warrants that it has, or will have at the time
of transfer of any Collateral, the right to grant a first priority
security interest therein subject to the terms and conditions hereof.
10.5 (a) Borrower represents and warrants that it (or the person to whom it
relends the Loaned Securities) is borrowing or will borrow Loaned
Securities that are Equity Securities for the purpose of making
delivery of such Loaned Securities in the case of short sales, failure
to receive securities required to be delivered, or as otherwise
permitted pursuant to Regulation T as in effect from time to time.
(b) Borrower and Lender may agree, as provided in Section 24.2, that
Borrower shall not be deemed to have made the representation or
warranty in subsection (a) with respect to any Loan. By entering
into any such agreement, Lender shall be deemed to have
represented and warranted to Borrower (which representation and
warranty shall be deemed to be repeated on each day during the
term of the Loan) that Lender is either (i) an "exempted
borrower" within the meaning of Regulation T or (ii) a member of
a national securities exchange or a broker or dealer registered
with the U.S. Securities and Exchange Commission that is entering
into such Loan to finance its activities as a market maker or an
underwriter.
10.6 Lender represents and warrants that it has, or will have at the time
of transfer of any Loaned Securities, the right to transfer the Loaned
Securities subject to the terms and conditions hereof.
11. COVENANTS.
11.1 Each party agrees either (a) to be liable as principal with respect to
its obligations hereunder or (b) to execute and comply fully with the
provisions of Annex I (the terms and conditions of which Annex are
incorporated herein and made a part hereof).
11.2 Promptly upon (and in any event within seven (7) Business Days after)
demand by Lender, Borrower shall furnish Lender with Borrower's most
recent publicly-available financial statements and any other financial
statements mutually agreed upon by Borrower and Lender.
7
Unless otherwise agreed, if Borrower is subject to the requirements of
Rule 17a-5(c) under the Exchange Act, it may satisfy the requirements
of this Section by furnishing Lender with its most recent statement
required to be furnished to customers pursuant to such Rule.
12. EVENTS OF DEFAULT.
All Loans hereunder may, at the option of the non-defaulting party (which
option shall be deemed to have been exercised immediately upon the
occurrence of an Act of Insolvency), be terminated immediately upon the
occurrence of any one or more of the following events (individually, a
"Default"):
12.1 if any Loaned Securities shall not be transferred to Lender upon
termination of the Loan as required by Section 6;
12.2 if any Collateral shall not be transferred to Borrower upon
termination of the Loan as required by Sections 4.3 and 6;
12.3 if either party shall fail to transfer Collateral as required by
Section 9;
12.4 if either party (a) shall fail to transfer to the other party amounts
in respect of Distributions required to be transferred by Section 8,
(b) shall have been notified of such failure by the other party prior
to the Close of Business on any day, and (c) shall not have cured such
failure by the Cutoff Time on the next day after such Close of
Business on which a transfer of cash may be effected in accordance
with Section 15;
12.5 if an Act of Insolvency occurs with respect to either party;
12.6 if any representation made by either party in respect of this
Agreement or any Loan or Loans hereunder shall be incorrect or untrue
in any material respect during the term of any Loan hereunder;
12.7 if either party notifies the other of its inability to or its
intention not to perform its obligations hereunder or otherwise
disaffirms, rejects or repudiates any of its obligations hereunder; or
12.8 if either party (a) shall fail to perform any material obligation
under this Agreement not specifically set forth in clauses 12.1
through 12.7, above, including but not limited to the payment of fees
as required by Section 5, and the payment of transfer taxes as
required by Section 14, (b) shall have been notified of such failure
by the other party prior to the Close of Business on any day, and (c)
shall not have cured such failure by the Cutoff Time on the next day
after such Close of Business on which a transfer of cash may be
effected in accordance with Section 15.
The non-defaulting party shall (except upon the occurrence of an Act of
Insolvency) give notice as promptly as practicable to the defaulting party
of the exercise of its option to terminate all Loans hereunder pursuant to
this Section 12.
13. REMEDIES.
13.1 Upon the occurrence of a Default under Section 12 entitling Lender to
terminate all Loans hereunder, Lender shall have the right, in
addition to any other remedies provided herein, (a) to purchase a like
amount of Loaned Securities ("Replacement Securities") in the
principal
8
market for such Loaned Securities in a commercially reasonable manner,
(b) to sell any Collateral in the principal market for such Collateral
in a commercially reasonable manner and (c) to apply and set off the
Collateral and any proceeds thereof (including any amounts drawn under
a letter of credit supporting any Loan) against the payment of the
purchase price for such Replacement Securities and any amounts due to
Lender under Sections 5, 8, 14 and 16. In the event that Lender shall
exercise such rights, Borrower's obligation to return a like amount of
the Loaned Securities shall terminate. Lender may similarly apply the
Collateral and any proceeds thereof to any other obligation of
Borrower under this Agreement, including Borrower's obligations with
respect to Distributions paid to Borrower (and not forwarded to
Lender) in respect of Loaned Securities. In the event that (i) the
purchase price of Replacement Securities (plus all other amounts, if
any, due to Lender hereunder) exceeds (ii) the amount of the
Collateral, Borrower shall be liable to Lender for the amount of such
excess together with interest thereon at a rate equal to (A) in the
case of purchases of Foreign Securities, LIBOR, (B) in the case of
purchases of any other Securities (or other amounts, if any, due to
Lender hereunder), the Federal Funds Rate or (C) such other rate as
may be specified in Schedule B, in each case as such rate fluctuates
from day to day, from the date of such purchase until the date of
payment of such excess. As security for Borrower's obligation to pay
such excess, Lender shall have, and Borrower hereby grants, a security
interest in any property of Borrower then held by or for Lender and a
right of setoff with respect to such property and any other amount
payable by Lender to Borrower. The purchase price of Replacement
Securities purchased under this Section 13.1 shall include, and the
proceeds of any sale of Collateral shall be determined after deduction
of, broker's fees and commissions and all other reasonable costs, fees
and expenses related to such purchase or sale (as the case may be). In
the event Lender exercises its rights under this Section 13.1, Lender
may elect in its sole discretion, in lieu of purchasing all or a
portion of the Replacement Securities or selling all or a portion of
the Collateral, to be deemed to have made, respectively, such purchase
of Replacement Securities or sale of Collateral for an amount equal to
the price therefor on the date of such exercise obtained from a
generally recognized source or the last bid quotation from such a
source at the most recent Close of Trading. Subject to Section 18,
upon the satisfaction of all obligations hereunder, any remaining
Collateral shall be returned to Borrower.
13.2 Upon the occurrence of a Default under Section 12 entitling Borrower
to terminate all Loans hereunder, Borrower shall have the right, in
addition to any other remedies provided herein, (a) to purchase a like
amount of Collateral ("Replacement Collateral") in the principal
market for such Collateral in a commercially reasonable manner, (b) to
sell a like amount of the Loaned Securities in the principal market
for such Loaned Securities in a commercially reasonable manner and (c)
to apply and set off the Loaned Securities and any proceeds thereof
against (i) the payment of the purchase price for such Replacement
Collateral, (ii) Lender's obligation to return any cash or other
Collateral, and (iii) any amounts due to Borrower under Sections 5, 8
and 16. In such event, Borrower may treat the Loaned Securities as its
own and Lender's obligation to return a like amount of the Collateral
shall terminate; provided, however, that Lender shall immediately
return any letters of credit supporting any Loan upon the exercise or
deemed exercise by Borrower of its termination rights under Section
12. Borrower may similarly apply the Loaned Securities and any
proceeds thereof to any other obligation of Lender under this
Agreement, including Lender's obligations with respect to
Distributions paid to Lender (and not forwarded to Borrower) in
respect of Collateral. In the event that (i) the sales price received
from such Loaned Securities is less than (ii) the purchase price of
Replacement Collateral (plus the amount of any cash or other
Collateral not replaced by Borrower and all other amounts, if any, due
to Borrower hereunder), Lender shall be liable to Borrower for the
amount of any such deficiency, together with interest on such amounts
at a rate equal to (A) in the case of Collateral consisting of Foreign
Securities, LIBOR, (B) in the
9
case of Collateral consisting of any other Securities (or other
amounts due, if any, to Borrower hereunder), the Federal Funds Rate or
(C) such other rate as may be specified in Schedule B, in each case as
such rate fluctuates from day to day, from the date of such sale until
the date of payment of such deficiency. As security for Lender's
obligation to pay such deficiency, Borrower shall have, and Lender
hereby grants, a security interest in any property of Lender then held
by or for Borrower and a right of setoff with respect to such property
and any other amount payable by Borrower to Lender. The purchase price
of any Replacement Collateral purchased under this Section13.2 shall
include, and the proceeds of any sale of Loaned Securities shall be
determined after deduction of, broker's fees and commissions and all
other reasonable costs, fees and expenses related to such purchase or
sale (as the case may be). In the event Borrower exercises its rights
under this Section 13.2, Borrower may elect in its sole discretion, in
lieu of purchasing all or a portion of the Replacement Collateral or
selling all or a portion of the Loaned Securities, to be deemed to
have made, respectively, such purchase of Replacement Collateral or
sale of Loaned Securities for an amount equal to the price therefor on
the date of such exercise obtained from a generally recognized source
or the last bid quotation from such a source at the most recent Close
of Trading. Subject to Section 18, upon the satisfaction of all
Lender's obligations hereunder, any remaining Loaned Securities (or
remaining cash proceeds thereof) shall be returned to Lender.
13.3 Unless otherwise agreed, the parties acknowledge and agree that (a)
the Loaned Securities and any Collateral consisting of Securities are
of a type traded in a recognized market, (b) in the absence of a
generally recognized source for prices or bid or offer quotations for
any security, the non-defaulting party may establish the source
therefor in its sole discretion, and (c) all prices and bid and offer
quotations shall be increased to include accrued interest to the
extent not already included therein (except to the extent contrary to
market practice with respect to the relevant Securities).
13.4 In addition to its rights hereunder, the non-defaulting party shall
have any rights otherwise available to it under any other agreement or
applicable law.
14. TRANSFER TAXES.
All transfer taxes with respect to the transfer of the Loaned Securities by
Lender to Borrower and by Borrower to Lender upon termination of the Loan
and with respect to the transfer of Collateral by Borrower to Lender and by
Lender to Borrower upon termination of the Loan or pursuant to Section 4.5
or Section 9 shall be paid by Borrower.
15. TRANSFERS.
15.1 All transfers by either Borrower or Lender of Loaned Securities or
Collateral consisting of "financial assets" (within the meaning of the
UCC) hereunder shall be by (a) in the case of certificated securities,
physical delivery of certificates representing such securities
together with duly executed stock and bond transfer powers, as the
case may be, with signatures guaranteed by a bank or a member firm of
the New York Stock Exchange, Inc., (b) registration of an
uncertificated security in the transferee's name by the issuer of such
uncertificated security, (c) the crediting by a Clearing Organization
of such financial assets to the transferee's "securities account"
(within the meaning of the UCC) maintained with such Clearing
Organization, or (d) such other means as Borrower and Lender may
agree.
15.2 All transfers of cash hereunder shall be by (a) wire transfer in
immediately available, freely transferable funds or (b) such other
means as Borrower and Lender may agree.
10
15.3 All transfers of letters of credit from Borrower to Lender shall be
made by physical delivery to Lender of an irrevocable letter of credit
issued by a "bank" as defined in Section 3(a)(6)(A)-(C) of the
Exchange Act. Transfers of letters of credit from Lender to Borrower
shall be made by causing such letters of credit to be returned or by
causing the amount of such letters of credit to be reduced to the
amount required after such transfer.
15.4 A transfer of Securities, cash or letters of credit may be effected
under this Section 15 on any day except (a) a day on which the
transferee is closed for business at its address set forth in Schedule
A hereto or (b) a day on which a Clearing Organization or wire
transfer system is closed, if the facilities of such Clearing
Organization or wire transfer system are required to effect such
transfer.
15.5 For the avoidance of doubt, the parties agree and acknowledge that the
term "securities," as used herein (except in this Section 15), shall
include any "security entitlements" with respect to such securities
(within the meaning of the UCC). In every transfer of "financial
assets" (within the meaning of the UCC) hereunder, the transferor
shall take all steps necessary (a) to effect a delivery to the
transferee under Section 8-301 of the UCC, or to cause the creation of
a security entitlement in favor of the transferee under Section 8-501
of the UCC, (b) to enable the transferee to obtain "control" (within
the meaning of Section 8-106 of the UCC), and (c) to provide the
transferee with comparable rights under any applicable foreign law or
regulation.
16. CONTRACTUAL CURRENCY.
16.1 Borrower and Lender agree that (a) any payment in respect of a
Distribution under Section 8 shall be made in the currency in which
the underlying Distribution of cash was made, (b) any return of cash
shall be made in the currency in which the underlying transfer of cash
was made, and (c) any other payment of cash in connection with a Loan
under this Agreement shall be in the currency agreed upon by Borrower
and Lender in connection with such Loan (the currency established
under clause (a), (b) or (c) hereinafter referred to as the
"Contractual Currency"). Notwithstanding the foregoing, the payee of
any such payment may, at its option, accept tender thereof in any
other currency; provided, however, that, to the extent permitted by
applicable law, the obligation of the payor to make such payment will
be discharged only to the extent of the amount of Contractual Currency
that such payee may, consistent with normal banking procedures,
purchase with such other currency (after deduction of any premium and
costs of exchange) on the banking day next succeeding its receipt of
such currency.
16.2 If for any reason the amount in the Contractual Currency received
under Section 16.1, including amounts received after conversion of any
recovery under any judgment or order expressed in a currency other
than the Contractual Currency, falls short of the amount in the
Contractual Currency due in respect of this Agreement, the party
required to make the payment will (unless a Default has occurred and
such party is the non-defaulting party) as a separate and independent
obligation and to the extent permitted by applicable law, immediately
pay such additional amount in the Contractual Currency as may be
necessary to compensate for the shortfall.
16.3 If for any reason the amount in the Contractual Currency received
under Section 16.1 exceeds the amount in the Contractual Currency due
in respect of this Agreement, then the party receiving the payment
will (unless a Default has occurred and such party is the
non-defaulting party) refund promptly the amount of such excess.
11
17. ERISA.
Lender shall, if any of the Securities transferred to the Borrower
hereunder for any Loan have been or shall be obtained, directly or
indirectly, from or using the assets of any Plan, so notify Borrower in
writing upon the execution of this Agreement or upon initiation of such
Loan under Section 2.1. If Lender so notifies Borrower, then Borrower and
Lender shall conduct the Loan in accordance with the terms and conditions
of Department of Labor Prohibited Transaction Exemption 81-6 (46 Fed. Reg.
7527, Jan. 23, 1981; as amended, 52 Fed. Reg. 18754, May 19, 1987), or any
successor thereto (unless Borrower and Lender have agreed prior to entering
into a Loan that such Loan will be conducted in reliance on another
exemption, or without relying on any exemption, from the prohibited
transaction provisions of Section 406 of the Employee Retirement Income
Security Act of 1974, as amended, and Section 4975 of the Internal Revenue
Code of 1986, as amended). Without limiting the foregoing and
notwithstanding any other provision of this Agreement, if the Loan will be
conducted in accordance with Prohibited Transaction Exemption 81-6, then:
17.1 Borrower represents and warrants to Lender that it is either (a) a
bank subject to federal or state supervision, (b) a broker-dealer
registered under the Exchange Act or (c) exempt from registration
under Section 15(a)(1) of the Exchange Act as a dealer in Government
Securities.
17.2 Borrower represents and warrants that, during the term of any Loan
hereunder, neither Borrower nor any affiliate of Borrower has any
discretionary authority or control with respect to the investment of
the assets of the Plan involved in the Loan or renders investment
advice (within the meaning of 29 C.F.R. Section 2510.3-21(c)) with
respect to the assets of the Plan involved in the Loan. Lender agrees
that, prior to or at the commencement of any Loan hereunder, it will
communicate to Borrower information regarding the Plan sufficient to
identify to Borrower any person or persons that have discretionary
authority or control with respect to the investment of the assets of
the Plan involved in the Loan or that render investment advice (as
defined in the preceding sentence) with respect to the assets of the
Plan involved in the Loan. In the event Lender fails to communicate
and keep current during the term of any Loan such information, Lender
rather than Borrower shall be deemed to have made the representation
and warranty in the first sentence of this Section 17.2.
17.3 Borrower shall mark to market daily each Loan hereunder pursuant to
Section 9.1 as is required if Lender is a Customer.
17.4 Borrower and Lender agree that:
(a) the term "Collateral" shall mean cash, securities issued or
guaranteed by the United States government or its agencies or
instrumentalities, or irrevocable bank letters of credit issued
by a person other than Borrower or an affiliate thereof;
(b) prior to the making of any Loans hereunder, Borrower shall
provide Lender with (i) the most recent available audited
statement of Borrower's financial condition and (ii) the most
recent available unaudited statement of Borrower's financial
condition (if more recent than the most recent audited
statement), and each Loan made hereunder shall be deemed a
representation by Borrower that there has been no material
adverse change in Borrower's financial condition subsequent to
the date of the latest financial statements or information
furnished in accordance herewith;
(c) the Loan may be terminated by Lender at any time, whereupon
Borrower shall deliver the Loaned Securities to Lender within the
lesser of (i) the customary delivery period for such
12
Loaned Securities, (ii) five Business Days, and (iii) the time
negotiated for such delivery between Borrower and Lender;
provided, however, that Borrower and Lender may agree to a longer
period only if permitted by Prohibited Transaction Exemption
81-6; and
(d) the Collateral transferred shall be security only for obligations
of Borrower to the Plan with respect to Loans, and shall not be
security for any obligation of Borrower to any agent or affiliate
of the Plan.
18. SINGLE AGREEMENT.
Borrower and Lender acknowledge that, and have entered into this Agreement
in reliance on the fact that, all Loans hereunder constitute a single
business and contractual relationship and have been entered into in
consideration of each other. Accordingly, Borrower and Lender hereby agree
that payments, deliveries and other transfers made by either of them in
respect of any Loan shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Loan
hereunder, and the obligations to make any such payments, deliveries and
other transfers may be applied against each other and netted. In addition,
Borrower and Lender acknowledge that, and have entered into this Agreement
in reliance on the fact that, all Loans hereunder have been entered into in
consideration of each other. Accordingly, Borrower and Lender hereby agree
that (a) each shall perform all of its obligations in respect of each Loan
hereunder, and that a default in the performance of any such obligation by
Borrower or by Lender (the "Defaulting Party") in any Loan hereunder shall
constitute a default by the Defaulting Party under all such Loans
hereunder, and (b) the non-defaulting party shall be entitled to set off
claims and apply property held by it in respect of any Loan hereunder
against obligations owing to it in respect of any other Loan with the
Defaulting Party.
19. APPLICABLE LAW.
THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF.
20. WAIVER.
The failure of a party to this Agreement to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. All waivers in
respect of a Default must be in writing.
21. SURVIVAL OF REMEDIES
All remedies hereunder and all obligations with respect to any Loan shall
survive the termination of the relevant Loan, return of Loaned Securities
or Collateral and termination of this Agreement.
22. NOTICES AND OTHER COMMUNICATIONS.
Any and all notices, statements, demands or other communications hereunder
may be given by a party to the other by telephone, mail, facsimile, e-mail,
electronic message, telegraph, messenger or otherwise to the individuals
and at the facsimile numbers and addresses specified with respect to it in
Schedule A hereto, or sent to such party at any other place specified in a
notice of change of number or address hereafter received by the other
party. Any notice, statement, demand or other
13
communication hereunder will be deemed effective on the day and at the time
on which it is received or, if not received, on the day and at the time on
which its delivery was in good faith attempted; provided, however, that any
notice by a party to the other party by telephone shall be deemed effective
only if (a) such notice is followed by written confirmation thereof and (b)
at least one of the other means of providing notice that are specifically
listed above has previously been attempted in good faith by the notifying
party.
23. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.
23.1 EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK
STATE COURT SITTING IN NEW YORK CITY, AND ANY APPELLATE COURT FROM ANY
SUCH COURT, SOLELY FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING
BROUGHT TO ENFORCE ITS OBLIGATIONS HEREUNDER OR RELATING IN ANY WAY TO
THIS AGREEMENT OR ANY LOAN HEREUNDER AND (B) WAIVES, TO THE FULLEST
EXTENT IT MAY EFFECTIVELY DO SO, ANY DEFENSE OF AN INCONVENIENT FORUM
TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT AND
ANY RIGHT OF JURISDICTION ON ACCOUNT OF ITS PLACE OF RESIDENCE OR
DOMICILE.
23.2 EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE
TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
24. MISCELLANEOUS.
24.1 Except as otherwise agreed by the parties, this Agreement supersedes
any other agreement between the parties hereto concerning loans of
Securities between Borrower and Lender. This Agreement shall not be
assigned by either party without the prior written consent of the
other party and any attempted assignment without such consent shall be
null and void. Subject to the foregoing, this Agreement shall be
binding upon and shall inure to the benefit of Borrower and Lender and
their respective heirs, representatives, successors and assigns. This
Agreement may be terminated by either party upon notice to the other,
subject only to fulfillment of any obligations then outstanding. This
Agreement shall not be modified, except by an instrument in writing
signed by the party against whom enforcement is sought. The parties
hereto acknowledge and agree that, in connection with this Agreement
and each Loan hereunder, time is of the essence. Each provision and
agreement herein shall be treated as separate and independent from any
other provision herein and shall be enforceable notwithstanding the
unenforceability of any such other provision or agreement.
24.2 Any agreement between Borrower and Lender pursuant to Section 10.5(b)
or Section 25.37 shall be made (a) in writing, (b) orally, if
confirmed promptly in writing or through any system that compares
Loans and in which Borrower and Lender are participants, or (c) in
such other manner as may be agreed by Borrower and Lender in writing.
14
25. DEFINITIONS.
For the purposes hereof:
25.1 "Act of Insolvency" shall mean, with respect to any party, (a) the
commencement by such party as debtor of any case or proceeding under
any bankruptcy, insolvency, reorganization, liquidation, moratorium,
dissolution, delinquency or similar law, or such party's seeking the
appointment or election of a receiver, conservator, trustee,
custodian or similar official for such party or any substantial part
of its property, or the convening of any meeting of creditors for
purposes of commencing any such case or proceeding or seeking such an
appointment or election, (b) the commencement of any such case or
proceeding against such party, or another seeking such an appointment
or election, or the filing against a party of an application for a
protective decree under the provisions of the Securities Investor
Protection Act of 1970, which (i) is consented to or not timely
contested by such party, (ii) results in the entry of an order for
relief, such an appointment or election, the issuance of such a
protective decree or the entry of an order having a similar effect,
or (iii) is not dismissed within 15 days, (c) the making by such
party of a general assignment for the benefit of creditors, or (d)
the admission in writing by such party of such party's inability to
pay such party's debts as they become due.
25.2 "Bankruptcy Code" shall have the meaning assigned in Section 26.1.
25.3 "Borrower" shall have the meaning assigned in Section 1.
25.4 "Borrower Payment" shall have the meaning assigned in Section 8.5(a).
25.5 "Broker-Dealer" shall mean any person that is a broker (including a
municipal securities broker), dealer, municipal securities dealer,
government securities broker or government securities dealer as
defined in the Exchange Act, regardless of whether the activities of
such person are conducted in the United States or otherwise require
such person to register with the U.S. Securities and Exchange
Commission or other regulatory body.
25.6 "Business Day" shall mean, with respect to any Loan hereunder, a day
on which regular trading occurs in the principal market for the
Loaned Securities subject to such Loan, provided, however, that for
purposes of determining the Market Value of any Securities hereunder,
such term shall mean a day on which regular trading occurs in the
principal market for the Securities whose value is being determined.
Notwithstanding the foregoing, (a) for purposes of Section 9,
"Business Day" shall mean any day on which regular trading occurs in
the principal market for any Loaned Securities or for any Collateral
consisting of Securities under any outstanding Loan hereunder and
"next Business Day" shall mean the next day on which a transfer of
Collateral may be effected in accordance with Section 15, and (b) in
no event shall a Saturday or Sunday be considered a Business Day.
25.7 "Cash Collateral Fee" shall have the meaning assigned in Section 5.1.
25.8 "Clearing Organization" shall mean (a) The Depository Trust Company,
or, if agreed to by Borrower and Lender, such other "securities
intermediary" (within the meaning of the UCC) at which Borrower (or
Borrower's agent) and Lender (or Lender's agent) maintain accounts,
or (b) a Federal Reserve Bank, to the extent that it maintains a
book-entry system.
15
25.9 "Close of Business" shall mean the time established by the parties in
Schedule B or otherwise orally or in writing or, in the absence of
any such agreement, as shall be determined in accordance with market
practice.
25.10 "Close of Trading" shall mean, with respect to any Security, the end
of the primary trading session established by the principal market
for such Security on a Business Day, unless otherwise agreed by the
parties.
25.11 "Collateral" shall mean, whether now owned or hereafter acquired and
to the extent permitted by applicable law, (a) any property which
Borrower and Lender agree prior to the Loan shall be acceptable
collateral and which is transferred to Lender pursuant to Sections 4
or 9 (including as collateral, for definitional purposes, any letters
of credit mutually acceptable to Lender and Borrower), (b) any
property substituted therefor pursuant to Section 4.5, (c) all
accounts in which such property is deposited and all securities and
the like in which any cash collateral is invested or reinvested, and
(d) any proceeds of any of the foregoing; provided, however, that if
Lender is a Customer, "Collateral" shall (subject to Section 17.4(a),
if applicable) be limited to cash, U.S. Treasury bills and notes, an
irrevocable letter of credit issued by a "bank" (as defined in
Section 3(a)(6)(A)-(C) of the Exchange Act), and any other property
permitted to serve as collateral securing a loan of securities under
Rule 15c3-3 under the Exchange Act or any comparable regulation of
the Secretary of the Treasury under Section 15C of the Exchange Act
(to the extent that Borrower is subject to such Rule or comparable
regulation) pursuant to exemptive, interpretive or no-action relief
or otherwise. If any new or different Security shall be exchanged for
any Collateral by recapitalization, merger, consolidation or other
corporate action, such new or different Security shall, effective
upon such exchange, be deemed to become Collateral in substitution
for the former Collateral for which such exchange is made. For
purposes of return of Collateral by Lender or purchase or sale of
Securities pursuant to Section 13, such term shall include Securities
of the same issuer, class and quantity as the Collateral initially
transferred by Borrower to Lender, as adjusted pursuant to the
preceding sentence.
25.12 "Collateral Distributions" shall have the meaning assigned in Section
8.5(a).
25.13 "Confirmation" shall have the meaning assigned in Section 2.1.
25.14 "Contractual Currency" shall have the meaning assigned in Section
16.1.
25.15 "Customer" shall mean any person that is a customer of Borrower under
Rule 15c3-3 under the Exchange Act or any comparable regulation of
the Secretary of the Treasury under Section 15C of the Exchange Act
(to the extent that Borrower is subject to such Rule or comparable
regulation).
25.16 "Cutoff Time" shall mean a time on a Business Day by which a transfer
of cash, securities or other property must be made by Borrower or
Lender to the other, as shall be agreed by Borrower and Lender in
Schedule B or otherwise orally or in writing or, in the absence of
any such agreement, as shall be determined in accordance with market
practice.
25.17 "Default" shall have the meaning assigned in Section 12.
25.18 "Defaulting Party" shall have the meaning assigned in Section 18.
16
25.19 "Distribution" shall mean, with respect to any Security at any time,
any distribution made on or in respect of such Security, including,
but not limited to: (a) cash and all other property, (b) stock
dividends, (c) Securities received as a result of split ups of such
Security and distributions in respect thereof, (d) interest payments,
(e) all rights to purchase additional Securities, and (f) any cash or
other consideration paid or provided by the issuer of such Security
in exchange for any vote, consent or the taking of any similar action
in respect of such Security (regardless of whether the record date
for such vote, consent or other action falls during the term of the
Loan). In the event that the holder of a Security is entitled to
elect the type of distribution to be received from two or more
alternatives, such election shall be made by Lender, in the case of a
Distribution in respect of the Loaned Securities, and by Borrower, in
the case of a Distribution in respect of Collateral.
25.20 "Equity Security" shall mean any security (as defined in the Exchange
Act) other than a "nonequity security," as defined in Regulation T.
25.21 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
25.22 "Extension Deadline" shall mean, with respect to a letter of credit,
the Cutoff Time on the Business Day preceding the day on which the
letter of credit expires.
25.23 "FDIA" shall have the meaning assigned in Section 26.4.
25.24 "FDICIA" shall have the meaning assigned in Section 26.5.
25.25 "Federal Funds Rate" shall mean the rate of interest (expressed as an
annual rate), as published in Federal Reserve Statistical Release
H.15(519) or any publication substituted herefor, charged for federal
funds (dollars in immediately available funds borrowed by banks on an
overnight unsecured basis) on that day or, if that day is not a
banking day in New York City, on the next preceding banking day.
25.26 "Foreign Securities" shall mean, unless otherwise agreed, Securities
that are principally cleared and settled outside the United States.
25.27 "Government Securities" shall mean government securities as defined
in Section 3(a)(42)(A)-(C) of the Exchange Act.
25.28 "Lender" shall have the meaning assigned in Section 1.
25.29 "Lender Payment" shall have the meaning assigned in Section 8.5(a).
25.30 "LIBOR" shall mean for any date, the offered rate for deposits in
U.S. dollars for a period of three months which appears on the
Reuters Screen LIBOR page as of 11:00 a.m., London time, on such date
(or, if at least two such rates appear, the arithmetic mean of such
rates).
25.31 "Loan" shall have the meaning assigned in Section 1.
25.32 "Loan Fee" shall have the meaning assigned in Section 5.1.
25.33 "Loaned Security" shall mean any Security transferred in a Loan
hereunder until such Security (or an identical Security) is
transferred back to Lender hereunder, except that, if any new or
different Security shall be exchanged for any Loaned Security by
recapitalization, merger,
17
consolidation or other corporate action, such new or different
Security shall, effective upon such exchange, be deemed to become a
Loaned Security in substitution for the former Loaned Security for
which such exchange is made. For purposes of return of Loaned
Securities by Borrower or purchase or sale of Securities pursuant to
Section 13, such term shall include Securities of the same issuer,
class and quantity as the Loaned Securities, as adjusted pursuant to
the preceding sentence.
25.34 "Margin Deficit" shall have the meaning assigned in Section 9.2.
25.35 "Margin Excess" shall have the meaning assigned in Section 9.3.
25.36 "Margin Notice Deadline" shall mean the time agreed to by the parties
in the relevant Confirmation, Schedule B hereto or otherwise as the
deadline for giving notice requiring same-day satisfaction of
mark-to-market obligations as provided in Section 9 hereof (or, in
the absence of any such agreement, the deadline for such purposes
established in accordance with market practice).
25.37 "Margin Percentage" shall mean, with respect to any Loan as of any
date, a percentage agreed by Borrower and Lender, which shall be not
less than 100%, unless (a) Borrower and Lender agree otherwise, as
provided in Section 24.2, and (b) Lender is not a Customer.
Notwithstanding the previous sentence, in the event that the writing
or other confirmation evidencing the agreement described in clause
(a) does not set out such percentage with respect to any such Loan,
the Margin Percentage shall not be a percentage less than the
percentage obtained by dividing (i) the Market Value of the
Collateral required to be transferred by Borrower to Lender with
respect to such Loan at the commencement of the Loan by (ii) the
Market Value of the Loaned Securities required to be transferred by
Lender to Borrower at the commencement of the Loan.
25.38 "Market Value" shall have the meaning set forth in Annex II or
otherwise agreed to by Borrower and Lender in writing.
Notwithstanding the previous sentence, in the event that the meaning
of Market Value has not been set forth in Annex II or in any other
writing, as described in the previous sentence, Market Value shall be
determined in accordance with market practice for the Securities,
based on the price for such Securities as of the most recent Close of
Trading obtained from a generally recognized source agreed to by the
parties or the closing bid quotation at the most recent Close of
Trading obtained from such source, plus accrued interest to the
extent not included therein (other than any interest credited or
transferred to, or applied to the obligations of, the other party
pursuant to Section 8, unless market practice with respect to the
valuation of such Securities in connection with securities loans is
to the contrary). If the relevant quotation did not exist at such
Close of Trading, then the Market Value shall be the relevant
quotation on the next preceding Close of Trading at which there was
such a quotation. The determinations of Market Value provided for in
Annex II or in any other writing described in the first sentences of
this Section 25.38 or, if applicable, in the preceding sentence shall
apply for all purposes under this Agreement, except for purposes of
Section 13.
25.39 "Payee" shall have the meaning assigned in Section 8.5(a).
25.40 "Payor" shall have the meaning assigned in Section 8.5(a).
25.41 "Plan" shall mean: (a) any "employee benefit plan" as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974
which is subject to Part 4 of Subtitle B of Title I of
18
such Act; (b) any "plan" as defined in Section 4975(e)(1) of the
Internal Revenue Code of 1986; or (c) any entity the assets of which
are deemed to be assets of any such "employee benefit plan" or "plan"
by reason of the Department of Labor's plan asset regulation, 29
C.F.R. Section 2510.3-101.
25.42 "Regulation T" shall mean Regulation T of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
25.43 "Retransfer" shall mean, with respect to any Collateral, to pledge,
repledge, hypothecate, rehypothecate, lend, relend, sell or otherwise
transfer such Collateral, or to re-register any such Collateral
evidenced by physical certificates in any name other than Borrower's.
25.44 "Securities" shall mean securities or, if agreed by the parties in
writing, other assets.
25.45 "Securities Distributions" shall have the meaning assigned in Section
8.5(a).
25.46 "Tax" shall have the meaning assigned in Section 8.5(a).
25.47 "UCC" shall mean the New York Uniform Commercial Code.
26. INTENT.
26.1 The parties recognize that each Loan hereunder is a "securities
contract," as such term is defined in Section 741 of Title 11 of the
United States Code (the "Bankruptcy Code"), as amended (except
insofar as the type of assets subject to the Loan would render such
definition inapplicable).
26.2 It is understood that each and every transfer of funds, securities
and other property under this Agreement and each Loan hereunder is a
"settlement payment" or a "margin payment," as such terms are used in
Sections 362(b)(6) and 546(e) of the Bankruptcy Code.
26.3 It is understood that the rights given to Borrower and Lender
hereunder upon a Default by the other constitute the right to cause
the liquidation of a securities contract and the right to set off
mutual debts and claims in connection with a securities contract, as
such terms are used in Sections 555 and 362(b)(6) of the Bankruptcy
Code.
26.4 The parties agree and acknowledge that if a party hereto is an
"insured depository institution," as such term is defined in the
Federal Deposit Insurance Act, as amended ("FDIA"), then each Loan
hereunder is a "securities contract" and "qualified financial
contract," as such terms are defined in the FDIA and any rules,
orders or policy statements thereunder (except insofar as the type of
assets subject to the Loan would render such definitions
inapplicable).
26.5 It is understood that this Agreement constitutes a "netting contract"
as defined in and subject to Title IV of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") and each
payment obligation under any Loan hereunder shall constitute a
"covered contractual payment entitlement" or "covered contractual
payment obligation," respectively, as defined in and subject to
FDICIA (except insofar as one or both of the parties is not a
"financial institution" as that term is defined in FDICIA).
26.6 Except to the extent required by applicable law or regulation or as
otherwise agreed, Borrower and Lender agree that Loans hereunder
shall in no event be "exchange contracts" for purposes
19
of the rules of any securities exchange and that Loans hereunder
shall not be governed by the buy-in or similar rules of any such
exchange, registered national securities association or other
self-regulatory organization.
27. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS.
27.1 WITHOUT WAIVING ANY RIGHTS GIVEN TO LENDER HEREUNDER, IT IS
UNDERSTOOD AND AGREED THAT THE PROVISIONS OF THE SECURITIES INVESTOR
PROTECTION ACT OF 1970 MAY NOT PROTECT LENDER WITH RESPECT TO LOANED
SECURITIES HEREUNDER AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO
LENDER MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF BORROWER'S
OBLIGATIONS IN THE EVENT BORROWER FAILS TO RETURN THE LOANED
SECURITIES.
27.2 LENDER ACKNOWLEDGES THAT, IN CONNECTION WITH LOANS OF GOVERNMENT
SECURITIES AND AS OTHERWISE PERMITTED BY APPLICABLE LAW, SOME
SECURITIES PROVIDED BY BORROWER AS COLLATERAL UNDER THIS AGREEMENT
MAY NOT BE GUARANTEED BY THE UNITED STATES.
BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A.
By:
----------------------------------
Title:
By:
----------------------------------
Title:
[BORROWER]
By:
----------------------------------
Title:
20
ANNEX I-A
PARTY ACTING AS AGENT
This Annex sets forth the terms and conditions governing all transactions in
which a party lending or borrowing Securities, as the case may be ("Agent"), in
a Loan is acting as agent for one or more third parties (each, a "Principal").
Unless otherwise defined, capitalized terms used but not defined in this Annex
shall have the meanings assigned in the Securities Loan Agreement of which it
forms a part (such agreement, together with this Annex and any other annexes,
schedules or exhibits, referred to as the "Agreement") and, unless otherwise
specified, all section references herein are intended to refer to sections of
such Securities Loan Agreement.
1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. In addition to the
representations and warranties set forth in the Agreement, Agent
hereby makes the following representations and warranties, which shall
continue during the term of any Loan: Principal has duly authorized
Agent to execute and deliver the Agreement on its behalf, has the
power to so authorize Agent and to enter into the Loans contemplated
by the Agreement and to perform the obligations of Lender or Borrower,
as the case may be, under such Loans, and has taken all necessary
action to authorize such execution and delivery by Agent and such
performance by it.
2. IDENTIFICATION OF PRINCIPALS. Agent agrees (a) to provide the other
party, prior to any Loan under the Agreement, with a written list of
Principals for which it intends to act as Agent (which list may be
amended in writing from time to time with the consent of the other
party), and (b) to provide the other party, before the Close of
Business on the next Business Day after agreeing to enter into a Loan,
with notice of the specific Principal or Principals for whom it is
acting in connection with such Loan. If (i) Agent fails to identify
such Principal or Principals prior to the Close of Business on such
next Business Day or (ii) the other party shall determine in its sole
discretion that any Principal or Principals identified by Agent are
not acceptable to it, the other party may reject and rescind any Loan
with such Principal or Principals, return to Agent any Collateral or
Loaned Securities, as the case may be, previously transferred to the
other party and refuse any further performance under such Loan, and
Agent shall immediately return to the other party any portion of the
Loaned Securities or Collateral, as the case may be, previously
transferred to Agent in connection with such Loan; provided, however,
that (A) the other party shall promptly (and in any event within one
Business Day of notice of the specific Principal or Principals) notify
Agent of its determination to reject and rescind such Loan and (B) to
the extent that any performance was rendered by any party under any
Loan rejected by the other party, such party shall remain entitled to
any fees or other amounts that would have been payable to it with
respect to such performance if such Loan had not been rejected. The
other party acknowledges that Agent shall not have any obligation to
provide it with confidential information regarding the financial
status of its Principals; Agent agrees, however, that it will assist
the other party in obtaining from Agent's Principals such information
regarding the financial status of such Principals as the other party
may reasonably request.
3. LIMITATION OF AGENT'S LIABILITY. The parties expressly acknowledge
that if the representations and warranties of Agent under the
Agreement, including this Annex, are true and correct in all material
respects during the term of any Loan and Agent otherwise complies with
the provisions of this Annex, then (a) Agent's obligations under the
Agreement shall not include a guarantee of performance by its
Principal or Principals and (b) the other party's remedies shall not
include a right of setoff against obligations, if any, of Agent
arising in other transactions in which Agent is acting as principal.
4. MULTIPLE PRINCIPALS.
(a) In the event that Agent proposes to act for more than one Principal
hereunder, Agent and the other party shall elect whether (i) to treat
Loans under the Agreement as transactions entered into on behalf of
separate Principals or (ii) to aggregate such Loans as if they were
transactions by a single Principal. Failure to make such an election
in writing shall be deemed an election to treat Loans under the
Agreement as transactions on behalf of separate Principals.
(b) In the event that Agent and the other party elect (or are deemed to
elect) to treat Loans under the Agreement as transactions on behalf of
separate Principals, the parties agree that (i) Agent will provide the
other party, together with the notice described in Section 2(b) of
this Annex, notice specifying the portion of each Loan allocable to
the account of each of the Principals for which it is acting (to the
extent that any such Loan is allocable to the account of more than one
Principal), (ii) the portion of any individual Loan allocable to each
Principal shall be deemed a separate Loan under the Agreement, (iii)
the mark to market obligations of Borrower and Lender under the
Agreement shall be determined on a Loan-by-Loan basis (unless the
parties agree to determine such obligations on a
Principal-by-Principal basis), and (iv) Borrower's and Lender's
remedies under the Agreement upon the occurrence of a Default shall be
determined as if Agent had entered into a separate Agreement with the
other party on behalf of each of its Principals.
(c) In the event that Agent and the other party elect to treat Loans under
the Agreement as if they were transactions by a single Principal, the
parties agree that (i) Agent's notice under Section 2(b) of this Annex
need only identify the names of its Principals but not the portion of
each Loan allocable to each Principal's account, (ii) the mark to
market obligations of Borrower and Lender under the Agreement shall,
subject to any greater requirement imposed by applicable law, be
determined on an aggregate basis for all Loans entered into by Agent
on behalf of any Principal, and (iii) Borrower's and Lender's remedies
upon the occurrence of a Default shall be determined as if all
Principals were a single Lender or Borrower, as the case may be.
(d) Notwithstanding any other provision of the Agreement (including,
without limitation, this Annex), the parties agree that any
transactions by Agent on behalf of a Plan shall be treated as
transactions on behalf of separate Principals in accordance with
Section 4(b) of this Annex (and all mark to market obligations of the
parties shall be determined on a Loan-by-Loan basis).
5. INTERPRETATION OF TERMS. All references to "Lender" or "Borrower," as
the case may be, in the Agreement shall, subject to the provisions of
this Annex (including, among other provisions, the limitations on
Agent's liability in Section 3 of this Annex), be construed to reflect
that (i) each Principal shall have, in connection with any Loan or
Loans entered into by Agent on its behalf, the rights,
responsibilities, privileges and obligations of a "Lender" or
"Borrower," as the case may be, directly entering into such Loan or
Loans with the other party under the Agreement, and (ii) Agent's
Principal or Principals have designated Agent as their sole agent for
performance of Lender's obligations to Borrower or Borrower's
obligations to Lender, as the case may be, and for receipt of
performance by Borrower of its obligations to Lender or Lender of its
obligations to Borrower, as the case may be, in connection with any
Loan or Loans under the Agreement (including, among other things, as
Agent for each Principal in connection with transfers of securities,
cash or other property and as agent for giving and receiving all
notices under the Agreement). Both Agent and its Principal or
Principals shall be deemed "parties" to the Agreement and all
references to a "party" or "either party" in the
2
Agreement shall be deemed revised accordingly (and any Default by
Agent under the Agreement shall be deemed a Default by Lender or
Borrower, as the case may be).
BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A.
IN ITS INDIVIDUAL CAPACITY
By: ________________________________
Title:
By: ________________________________
Title:
[BORROWER]
By: ________________________________
Title:
Title:
3
ANNEX II
MARKET VALUE
Unless otherwise agreed by Borrower and Lender:
1. If the principal market for the Securities to be valued is a national
securities exchange in the United States, their Market Value shall be
determined by their last sale price on such exchange at the most
recent Close of Trading or, if there was no sale on the Business Day
of the most recent Close of Trading, by the last sale price at the
Close of Trading on the next preceding Business Day on which there was
a sale on such exchange, all as quoted on the Consolidated Tape or, if
not quoted on the Consolidated Tape, then as quoted by such exchange.
2. If the principal market for the Securities to be valued is the
over-the-counter market, and the Securities are quoted on The Nasdaq
Stock Market ("Nasdaq"), their Market Value shall be the last sale
price on Nasdaq at the most recent Close of Trading or, if the
Securities are issues for which last sale prices are not quoted on
Nasdaq, the last bid price at such Close of Trading. If the relevant
quotation did not exist at such Close of Trading, then the Market
Value shall be the relevant quotation on the next preceding Close of
Trading at which there was such a quotation.
3. Except as provided in Section 4 of this Annex, if the principal market
for the Securities to be valued is the over-the-counter market, and
the Securities are not quoted on Nasdaq, their Market Value shall be
determined in accordance with market practice for such Securities,
based on the price for such Securities as of the most recent Close of
Trading obtained from a generally recognized source agreed to by the
parties or the closing bid quotation at the most recent Close of
Trading obtained from such a source. If the relevant quotation did not
exist at such Close of Trading, then the Market Value shall be the
relevant quotation on the next preceding Close of Trading at which
there was such a quotation.
4. If the Securities to be valued are Foreign Securities, their Market
Value shall be determined as of the most recent Close of Trading in
accordance with market practice in the principal market for such
Securities.
5. The Market Value of a letter of credit shall be the undrawn amount
thereof.
6. All determinations of Market Value under Sections 1 through 4 of this
Annex shall include, where applicable, accrued interest to the extent
not already included therein (other than any interest credited or
transferred to, or applied to the obligations of, the other party
pursuant to Section 8 of the Agreement), unless market practice with
respect to the valuation of such Securities in connection with
securities loans is to the contrary.
7. The determinations of Market Value provided for in this Annex shall
apply for all purposes under the Agreement, except for purposes of
Section 13 of the Agreement.
[BORROWER] BLACKROCK INSTITUTIONAL TRUST COMPANY,
N.A.
By: By:
---------------------------------- -------------------------------------
Title: Title:
By:
-------------------------------------
Title:
SCHEDULE A
NAMES AND ADDRESSES FOR COMMUNICATIONS
For the purpose of Section 22 of this Agreement
COUNTERPARTY:
SCHEDULE B
SUPPLEMENTAL TERMS AND CONDITIONS
TO 2000 BMA
CORRESP
5
filename5.txt
[LOGO APPEARS HERE]
1875 K Street, NW
Washington, DC 20006-1238
Tel: 202 303 1000
Fax: 202 303 2000
VIA EDGAR
---------
January 29, 2010
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: iShares Inc.
(Securities Act File No. 033-97598;
Investment Company Act File No. 811-09102)
Post-Effective Amendment No. 107
-------------------------------
Ladies and Gentlemen:
On behalf of the iShares Inc. (the "Corporation"), we hereby transmit for
filing with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company
Act of 1940, Post-Effective Amendment No. 107 (the "Amendment") to the
Corporation's Registration Statement on Form N-1A (the "Registration
Statement"). The Amendment is being filed pursuant to Rule 485(a)(2) under the
1933 Act and for the sole purpose of adding a new fund to the Corporation:
iShares MSCI USA Index Fund (the "Fund"). The filing will become automatically
effective 75 days after the filing.
The following information is provided to assist the Staff of the Commission
(the "Staff") in its review of the Registration Statement.
(1) Investment Objectives and Policies
-----------------------------------
The Fund seeks investment results that correspond generally to the price and
yield performance, before fees and expenses, of the MSCI USA Index (the
"Underlying Index"). The Underlying Index is a market capitalization weighted
index designed to measure the performance of equity securities in the top 85%
by market capitalization of equity securities listed on stock exchanges in the
United States. As of October 30, 2009, the Underlying Index had 601
constituents and its three largest industries by component weighting were
energy, industrials and materials.
(2) Other Changes from Recent Filings
---------------------------------
The Fund's description of its investment strategy (i.e., the Fund tracks a
specific benchmark) and risk factors are specific to this Fund. The portfolio
managers are specific to this Fund. Disclosure related to portfolio manager
compensation in the Statement of Additional Information has also been updated.
The Amendment follows the general format used by previous Corporation and
iShares Trust (the "Trust") filings prepared in accordance with the revised
Form N-1A, for example, Post-Effective Amendment No. 322 to the Trust filed
pursuant to Rule 485(a)(2) on November 5, 2009, relating to the iShares MSCI
Emerging Markets Financial Sector Index. The disclosure related to potential
conflicts of interest and anti-money laundering requirements follows the
general format found in the iShares 2017 S&P AMT-Free Municipal Series of the
Trust, as filed pursuant to Rule 485(b) on December 4, 2009 (as discussed with
Mary Cole of the SEC Staff).
(3) Prior Filings with Similar Disclosure
-------------------------------------
Much of the disclosure in the Amendment is substantially similar to that in
previous filings submitted by the Corporation and the Trust and reviewed by the
Staff. In particular, we invite your attention to Post-Effective Amendment
No. 322 to the Trust, filed pursuant to Rule 485(a) on November 5, 2009,
relating to the iShares MSCI Emerging Markets Financial Sector Index.
The disclosures applicable to the Fund and the Corporation included in the
Amendment that are substantially similar to those in the referenced prior
filing relate to descriptions of shares, the investment manager and other
attributes under the headings "Introduction," "Portfolio Holdings Information,"
"Management--Investment Adviser," "Management--Administrator, Custodian and
Transfer Agent," "Shareholder Information--Buying and Selling Shares,"
"Shareholder Information--Book Entry," "Shareholder Information--Share Prices,"
"Shareholder Information--Dividends and Distributions," "Shareholder
Information--Taxes," "Shareholder Information--Taxes on Distribution,"
"Shareholder Information--Taxes When Shares Are Sold," Shareholder
Information--Creations and Redemptions," "Shareholder
Information--Householding," and "Distribution," included in the Prospectus, and
under the headings "Proxy Voting," "Portfolio Holdings Information,"
"Continuous Offering," "Investment Advisory, Administrative and Distribution
Services--Investment Adviser," "Investment Advisory, Administrative and
Distribution Services--Codes of Ethics," "Investment Advisory, Administrative
and Distribution Services--Administrator, Custodian and Transfer Agent,"
"Investment Advisory, Administrative and Distribution Services--Distributor"
"Brokerage Transactions," "Additional Information Concerning the
Corporation--Termination of the Corporation or the Fund," "Additional
Information Concerning the Corporation--DTC as Securities Depository for Shares
of the Fund," and "Miscellaneous Information" included in the Statement of
Additional Information.
* * * * *
The operations of the Fund, the description of the shares offered and the other
information that is typically common in a fund complex do not appear to raise
novel issues or problem areas that warrant particular attention of the Staff in
reviewing the Registration Statement. Consequently, on behalf of the
Corporation, we request that the Registration Statement be given selective
review by the Staff./1/
--------
/1 /See Inv. Co. Act. Rel. No. 13768 (Feb. 15, 1984).
- 2 -
Should members of the Staff have any questions or comments concerning the
Registration Statement, please do not hesitate to contact me at (202) 303-1273.
Sincerely,
/s/ Ryan P. Brizek
--------------------------
Ryan P. Brizek
cc: Jessica Bentley, Esq.
Benjamin J. Haskin
- 3 -