As filed with the U.S. Securities and Exchange Commission on August 26, 2009
Securities Act File No. 33-43446
Investment Company Act File No. 811-06444
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 |
x |
Pre-Effective Amendment No. |
¨ |
Post-Effective Amendment No. 148 |
x |
and/or
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 |
x |
Amendment No. 148
(Check appropriate box or boxes)
Legg Mason Partners Equity Trust
(Exact Name of Registrant as Specified in Charter)
55 Water Street, New York, New York | 10041 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants Telephone Number, including Area Code (800) 451-2010
Robert I. Frenkel
Legg Mason Partners Equity Trust
100 First Stamford Place
Stamford, Connecticut 06902
(Name and Address of Agent for Service)
COPY TO:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
Continuous
(Approximate Date of Proposed Offering)
It is proposed that this filing will become effective:
¨ | immediately upon filing pursuant to paragraph (b) | |
x | on August 28, 2009 pursuant to paragraph (b) | |
¨ | 60 days after filing pursuant to paragraph (a)(1) | |
¨ | on pursuant to paragraph (a)(1) | |
¨ | 75 days after filing pursuant to paragraph (a)(2) | |
¨ | on pursuant to paragraph (a)(2) of Rule 485. |
If appropriate, check the following box:
¨ | This post-effective amendment designates a new effective date for a previously filed post-effective amendment. |
This filing relates solely to Legg Mason Partners All Cap Fund.
PROSPECTUS / AUGUST 28, 2009
Legg Mason Capital Management
All Cap Fund
Class |
Ticker Symbols | |
A |
SPAAX | |
B |
SPBBX | |
C |
SPBLX | |
FI |
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R |
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R1 |
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I |
LACIX | |
1 |
The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
LEGG MASON PARTNERS ALL CAP FUND
SUPPLEMENT DATED AUGUST 28, 2009
TO THE PROSPECTUS DATED AUGUST 28, 2009
The following supplements, and replaces any contrary information in, the Prospectus
Until October 4, 2009, the funds name will remain Legg Mason Partners All Cap Fund. Effective October 5, 2009, the funds name will change to Legg Mason Capital Management All Cap Fund.
There will be no change in the funds investment objective or investment policies as a result of the name change.
Legg Mason Capital Management
All Cap Fund
The fund seeks long-term capital growth.
The table below describes the fees and expenses that you may pay if you buy and hold shares of the fund.
You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $25,000 in funds sold by Legg Mason Investor Services, LLC (LMIS), the funds distributor. More information about these and other discounts is available from your financial intermediary, in this Prospectus on page 25 under the heading Sales charges and in the funds statement of additional information (SAI) on page 47 under the heading Sales Charge Waivers and Reductions.
Class 1 shares of the fund are not available for purchase or incoming exchanges.
SHAREHOLDER FEES | |||||||||||||||||||
(PAID
DIRECTLY FROM YOUR INVESTMENT) |
CLASS A | CLASS B | CLASS C | CLASS FI | CLASS R | CLASS R1 | CLASS I | CLASS 1 | |||||||||||
Maximum sales charge (load) imposed on purchases (as a % of offering price) | 5.75 | % | None | None | None | None | None | None | n/a | ||||||||||
Maximum deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption) |
Generally,
None |
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5.00 | % | 1.00 | % | None | None | None | None | None |
2 | Legg Mason Funds |
ANNUAL FUND OPERATING EXPENSES | ||||||||||||||||||||||||
(EXPENSES
THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT) |
CLASS A | CLASS B | CLASS C | CLASS FI | CLASS R | CLASS R1 | CLASS I | CLASS 1 | ||||||||||||||||
Management fees | 0.70 | % | 0.70 | % | 0.70 | % | 0.70 | % | 0.70 | % | 0.70 | % | 0.70 | % | 0.70 | % | ||||||||
Distribution and service (12b-1) fees | 0.25 | % | 1.00 | % | 1.00 | % | 0.25 | % | 0.50 | % | 1.00 | % | None | None | ||||||||||
Other expenses | 0.59 | % | 0.55 | % | 0.16 | % | 0.53 | % 1 | 0.53 | % 1 | 0.58 | % 1 | 0.33 | % 1 | 0.46 | % | ||||||||
Total annual fund operating expenses | 1.54 | % | 2.25 | % | 1.86 | % | 1.48 | % | 1.73 | % | 2.28 | % | 1.03 | % | 1.16 | % 2 |
1 |
Other expenses for Class I have been estimated. Other expenses for Class FI, Class R and Class R1 shares have been estimated because no Class FI, Class R or Class R1 shares were outstanding during the funds last fiscal year. |
2 |
The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes and extraordinary expenses), subject to recapture as described below. As a result, total annual operating expenses for Class 1 shares are expected to be 0.25% lower than total annual operating expenses for Class A shares. This arrangement is expected to continue at least until August 31, 2010, may be changed or terminated prior to that date only by agreement of the manager and the Board of Trustees (the Board) and may be changed or terminated at any time after that date by the manager. The manager is permitted to recapture amounts waived or reimbursed to the fund during the same fiscal year if the funds total annual operating expenses have fallen to a level below the limit described above. In no case will the manager recapture any amount that would result, on any particular business day of the fund, in the funds total annual operating expenses exceeding this limit. |
Example
This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:
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You invest $10,000 in the fund for the time periods indicated |
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Your investment has a 5% return each year and the funds operating expenses remain the same |
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You reinvest all distributions and dividends without a sales charge |
Legg Mason Capital Management All Cap Fund | 3 |
Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR | 3 YEARS | 5 YEARS | 10 YEARS | ||||||||||
Class A (with or without redemption) | $ | 723 | $ | 1,034 | $ | 1,367 | $ | 2,305 | |||||
Class B (redemption at end of period) | $ | 728 | $ | 1,003 | $ | 1,304 | $ | 2,405 | |||||
Class B (no redemption) | $ | 228 | $ | 703 | $ | 1,204 | $ | 2,405 | |||||
Class C (redemption at end of period) | $ | 289 | $ | 585 | $ | 1,006 | $ | 2,181 | |||||
Class C (no redemption) | $ | 189 | $ | 585 | $ | 1,006 | $ | 2,181 | |||||
Class FI (with or without redemption) | $ | 151 | $ | 468 | $ | 808 | $ | 1,769 | |||||
Class R (with or without redemption) | $ | 176 | $ | 546 | $ | 940 | $ | 2,042 | |||||
Class R1 (with or without redemption) | $ | 231 | $ | 712 | $ | 1,219 | $ | 2,613 | |||||
Class I (with or without redemption) | $ | 105 | $ | 328 | $ | 569 | $ | 1,260 | |||||
Class 1 (with or without redemption) | $ | 118 | $ | 368 | $ | 637 | $ | 1,408 |
The fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the funds performance. During the most recent fiscal year, the funds portfolio turnover rate was 59% of the average value of its portfolio.
Principal investment strategies
The fund invests primarily in equity securities that, in the portfolio managers opinion, offer the potential for capital growth. The fund may invest in issuers of any size, allowing the portfolio managers flexibility to identify investment opportunities that are expected to help the fund achieve its investment objective.
The portfolio managers follow an intrinsic value discipline in selecting securities, which means that the portfolio managers seek to purchase securities trading at large discounts to their assessment of the companies estimated value. The portfolio managers determine intrinsic value by measuring the companys value on such factors as the discounted value of its projected
4 | Legg Mason Funds |
future free cash flows, the capability to earn returns on capital in excess of its cost of capital, private market values of similar companies and the costs to replicate the business. These and other factors may be more or less significant depending on the type of company. The portfolio managers may also consider qualitative factors in selecting stocks, including an assessment of the companys products, competitive positioning, strategy, industry economics and dynamics, and regulatory frameworks, among others. Securities may be undervalued due to, among other things, uncertainty arising from the limited availability of accurate information, economic growth and changes, changes in competitive conditions, technological change, investor overreaction to negative news or events, and changes in governmental policy or geopolitical dynamics.
The fund may invest up to 25% of its net assets in foreign securities.
The portfolio managers may decide to sell securities given a variety of circumstances, such as, for example, when a security no longer appears to offer a long-term above-average risk-adjusted rate of return, when an investment opportunity arises that the portfolio managers believe is more compelling, when the original reason for investing no longer applies, to realize gains or limit potential losses.
Risk is inherent in all investing. The value of your investment in the fund, as well as the amount of return you receive on your investment, may fluctuate significantly. You may lose part or all of your investment in the fund or your investment may not perform as well as other similar investments. The following is a summary description of certain risks of investing in the fund.
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Stock market and equity securities risk: Stock markets are volatile and stock prices may decline generally. Stocks fluctuate in price based on changes in a companys financial condition and overall market and economic conditions. If the market prices of the securities owned by the fund fall, the value of your investment in the fund will decline. The recent financial crisis has caused a significant decline in the value and liquidity of many securities. |
Legg Mason Capital Management All Cap Fund | 5 |
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Issuer risk: The value of a stock can go up or down more than the market as a whole and can perform differently from the value of the market as a whole, often due to disappointing earnings reports by the issuer, unsuccessful products or services, loss of major customers, major litigation against the issuer or changes in government regulations affecting the issuer or the competitive environment. The fund may experience a substantial or complete loss on an individual stock. Historically, the prices of securities of small and medium capitalization companies have generally gone up or down more than those of large capitalization companies, although even large capitalization companies may fall out of favor with investors. |
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Liquidity risk: Some securities held by the fund may be difficult to sell, or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the fund is forced to sell an illiquid asset to meet redemption requests or other cash needs, the fund may be forced to sell at a loss. |
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Foreign investments risk: The funds investments in securities of foreign issuers involve greater risk than investments in securities of U.S. issuers. Foreign countries in which the fund may invest may have markets that are less liquid and more volatile than U.S. markets and may suffer from political or economic instability. In some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. Currency fluctuations could erase investment gains or add to investment losses. |
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Portfolio selection risk: The value of your investment may decrease if the portfolio managers judgment about the attractiveness, value or market trends affecting a particular security, industry or sector or about market movements is incorrect. |
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Value investing risk: The value approach to investing including the intrinsic value discipline used here involves the risk that stocks may remain undervalued. Value stocks may underperform the overall equity market while the market concentrates on growth stocks. Although the fund will not concentrate its investments in any one industry or industry group, it may, like many value funds, weight its investments toward certain |
6 | Legg Mason Funds |
industries, thus increasing its exposure to factors adversely affecting issuers within those industries. |
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Non-diversification risk: The fund is classified as non-diversified, which means it may invest a larger percentage of its assets in a small number of issuers than a diversified fund. To the extent the fund invests its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers. |
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Risk of increase in expenses: Your actual costs of investing in the fund may be higher than the expenses shown in Annual fund operating expenses for a variety of reasons. For example, expense ratios may be higher than those shown if a voluntary fee waiver is changed or terminated or if average net assets decrease. Net assets are more likely to decrease and fund expense ratios are more likely to increase when markets are volatile. |
These and other risks are discussed in more detail later in this Prospectus or in the SAI.
Please note there are many other factors that could adversely affect your investment and that could prevent the fund from achieving its objective.
The following bar chart and table provide some indication of the risks of investing in the fund. The bar chart shows changes in the funds performance from year to year for Class A shares. The table shows the average annual total returns of each class of the fund that has been in operation for at least one full calendar year and also compares the funds performance with the average annual total returns of an index or other benchmark. The fund makes updated performance information available at the funds website, http://www.leggmason.com/individualinvestors (select Equity and click on the name of the fund in the dropdown menu), or by calling Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432.
The funds past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
Legg Mason Capital Management All Cap Fund | 7 |
Sales charges are not reflected in the bar chart below, and if those charges were included, returns would be less than those shown.
Best quarter (ended 12/31/2001): 19.01%. Worst quarter (ended 12/31/2008): (26.35)%. The year-to-date return as of the most recent calendar quarter, which ended 06/30/2009, was 16.06%.
Prior to February 2, 2007, the fund had a different manager and followed different investment strategies under the name Legg Mason Partners Multiple Discipline Funds All Cap Growth and Value. Prior to January 21, 2004, the fund followed different investment strategies under the name Premier Selections All Cap Growth Fund.
AVERAGE ANNUAL TOTAL RETURNS (for periods ended December 31, 2008) | |||||||||||
1 YEAR | 5 YEARS |
SINCE INCEPTION |
INCEPTION DATE |
||||||||
Class A | |||||||||||
Return before taxes | (54.06 | )% | (12.64 | )% | (11.31 | )% | 06/30/2000 | ||||
Return after taxes on distributions | (54.06 | )% | (12.64 | )% | (11.31 | )% | |||||
Return after taxes on distributions and sale of fund shares | (35.14 | )% | (10.25 | )% | (8.81 | )% | |||||
Other Classes (Return before taxes only) | |||||||||||
Class B | (53.96 | )% | (12.45 | )% | (11.31 | )% | 06/30/2000 | ||||
Class C | (51.96 | )% | (12.21 | )% | (11.30 | )% | 06/30/2000 | ||||
Class I | (50.95 | )% | n/a | (49.39 | )% | 10/02/2007 | |||||
Class 1 | (51.06 | )% | n/a | (39.35 | )% | 02/02/2007 | |||||
Russell 3000 Index | (37.31 | )% | (1.95 | )% | (3.23 | )% |
8 | Legg Mason Funds |
The after-tax returns are shown only for Class A shares, are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investors tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns for classes other than Class A will vary from returns shown for Class A.
Legg Mason Capital Management, Inc.
Jay Leopold, CFA, Bill Miller, CFA, and David Nelson, CFA. Mr. Leopold has been a portfolio manager for the fund since February 2007 and Mr. Miller and Mr. Nelson have been portfolio managers for the fund since January 2009.
Purchase and sale of fund shares
You may purchase shares of the fund each day the New York Stock Exchange is open, at the funds net asset value determined after receipt of your request in good order, plus any applicable sales charge.
The funds initial and subsequent investment minimums generally are as follows:
INVESTMENT MINIMUM INITIAL/ADDITIONAL INVESTMENT | ||||||||||||||||
CLASS A | CLASS B | CLASS C | CLASS FI | CLASS R | CLASS R1 | CLASS I | CLASS 1 1 | |||||||||
General | $1,000/$50 | $1,000/$50 | $1,000/$50 | n/a | n/a | n/a | n/a | n/a | ||||||||
Uniform Gifts or Transfers to Minor Accounts | $1,000/$50 | $1,000/$50 | $1,000/$50 | n/a | n/a | n/a | n/a | n/a | ||||||||
IRAs | $250/$50 | $250/$50 | n/a | n/a | n/a | n/a | n/a | n/a | ||||||||
SIMPLE IRAs | None/None | None/None | n/a | n/a | n/a | n/a | n/a | n/a | ||||||||
Systematic Investment Plans | $50/$50 | $50/$50 | $50/$50 | n/a | n/a | n/a | n/a | n/a |
Legg Mason Capital Management All Cap Fund | 9 |
INVESTMENT MINIMUM INITIAL/ADDITIONAL INVESTMENT | ||||||||||||||||
CLASS A | CLASS B | CLASS C | CLASS FI | CLASS R | CLASS R1 | CLASS I | CLASS 1 1 | |||||||||
Clients of Eligible Financial Intermediaries | None/None | n/a | n/a | None/None | n/a | n/a | None/None | n/a | ||||||||
Retirement plans with omnibus accounts held on the books of the fund | None/None | None/None | None/None | None/None | None/None | None/None | None/None | None/None | ||||||||
Other retirement plans | None/None | None/None | n/a | n/a | n/a | n/a | n/a | n/a | ||||||||
Institutional Investors | $1,000/$50 | $1,000/$50 | $1,000/$50 | n/a | n/a | n/a | $1 million/None | n/a |
1 |
Class 1 shares are not available for purchase and incoming exchanges. |
Your financial intermediary may impose higher investment minimums.
You may redeem shares of the fund each day the New York Stock Exchange is open. You should contact your financial intermediary, or, if you hold your shares through the fund, you should contact the fund by phone (Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432) or by mail (Legg Mason Funds, P.O. Box 55214, Boston, MA 02205-8504). You may also be eligible to schedule automatic redemptions of a portion of your shares.
The funds distributions are taxable as ordinary income or capital gain, except when your investment is in an IRA, 401(k) or other tax-advantaged account.
Payments to broker/dealers and other financial intermediaries
The fund and its related companies may pay broker/dealers or other financial intermediaries (such as a bank) for the sale of fund shares and related services. These payments may create a conflict of interest by influencing your broker/dealer or other intermediary or its employees or associated persons to recommend the fund over another investment. Ask your financial adviser or visit your financial intermediarys website for more information.
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More on the funds investment strategies, investments and risks
The fund seeks long-term capital growth.
The funds investment objective and strategies may be changed by the Board without shareholder approval.
Cash management
The fund may hold cash pending investment, and may invest in money market instruments for cash management purposes. The amount of assets the fund may hold for cash management purposes will depend on market conditions and the need to meet expected redemption requests.
Derivatives and hedging techniques
The fund may, but need not, use derivative contracts. Derivatives are financial instruments whose value depends upon, or is derived from, the value of an asset, such as one or more underlying investments, indexes or currencies. The fund may engage in a variety of transactions using derivatives, such as futures and options on securities, securities indexes or currencies; options on these futures; forward currency contracts; and interest rate or currency swaps. Derivatives may be used by the fund for any of the following purposes:
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As a hedging technique in an attempt to manage risk in the funds portfolio |
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As a substitute for buying or selling securities |
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As a cash flow management technique |
A derivative contract will obligate or entitle the fund to deliver or receive an asset or cash payment based on the change in value of one or more investments, currencies or indexes. When the fund enters into derivatives transactions, it may be required to segregate assets or enter into offsetting positions, in accordance with applicable regulations. Such segregation is not a hedging technique and will not limit the funds exposure to loss. The fund will, therefore, have investment risk with respect to both the
Legg Mason Capital Management All Cap Fund | 11 |
derivative itself and the assets that have been segregated to offset the funds derivative exposure. If such segregated assets represent a large portion of the funds portfolio, portfolio management may be affected as covered positions may have to be reduced if it becomes necessary for the fund to reduce the amount of segregated assets in order to meet redemptions or other obligations.
Should the manager choose to use derivatives, the fund will, in determining compliance with any percentage limitation or requirement regarding the use or investment of fund assets, take into account the market value of the funds derivative positions that are intended to reduce or create exposure to the applicable category of investments.
Foreign investments
The fund may invest up to 25% of its net assets (at the time of investment) in foreign securities. The fund may invest directly in foreign issuers or invest in depositary receipts.
Defensive investing
The fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions in any type of money market instruments, short-term debt securities or cash without regard to any percentage limitations.
Other investments
The fund may also use other strategies and invest in other securities that are described, along with their risks, in the SAI. However, the fund might not use all of the strategies and techniques or invest in all of the types of securities described in this Prospectus or in the SAI.
More on risks of investing in the fund
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Equity securities risk: Stocks fluctuate in price based on changes in a companys financial condition and overall market and economic conditions. The value of a particular stock may decline due to factors that affect a particular industry or industries, such |
12 | Legg Mason Funds |
as an increase in production costs, competitive conditions or labor shortages; or due to general market conditions, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or generally adverse investor sentiment. |
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Issuer risk: The value of a security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of a companys stock may deteriorate because of a variety of factors, including disappointing earnings reports by the issuer, unsuccessful products or services, loss of major customers, major litigation against the issuer or changes in government regulations affecting the issuer or the competitive environment. |
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Large capitalization company risk: Large capitalization companies may fall out of favor with investors. |
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Small and medium capitalization company risk: The fund will be exposed to additional risks as a result of its investments in the securities of small and medium capitalization companies. Small and medium capitalization companies may fall out of favor with investors; may have limited product lines, operating histories, markets or financial resources; or may be dependent upon a limited management group. The prices of securities of small and medium capitalization companies generally are more volatile than those of large capitalization companies and are more likely to be adversely affected than large capitalization companies by changes in earnings results and investor expectations or poor economic or market conditions, including those experienced during a recession. Securities of small and medium capitalization companies may underperform large capitalization companies, may be harder to sell at times and at prices the portfolio managers believe appropriate and may offer greater potential for losses. |
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Liquidity risk: Liquidity risk exists when particular investments are difficult to sell. Although most of the funds investments must be liquid at the time of investment, investments may become illiquid after purchase by the fund, particularly during periods of market turmoil. When the fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if the fund is forced to sell these investments to meet |
Legg Mason Capital Management All Cap Fund | 13 |
redemption requests or for other cash needs, the fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the fund, due to limitations on illiquid investments, may be unable to achieve its desired level of exposure to a certain sector. |
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Foreign securities risk: The funds investments in securities of foreign issuers involve greater risk than investments in securities of U.S. issuers. Foreign countries in which the fund may invest may have markets that are less liquid and more volatile than markets in the United States, may suffer from political or economic instability and may experience negative government actions, such as currency controls or seizures of private businesses or property. In some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. Currency fluctuations could erase investment gains or add to investment losses. Because the value of a depositary receipt is dependent upon the market price of an underlying foreign security, depositary receipts are subject to most of the risks associated with investing in foreign securities directly. |
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Portfolio selection risk: The portfolio managers judgment about the attractiveness, value or market trends affecting a particular security, industry or sector or about market movements may prove to be incorrect. |
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Value investing risk: The value approach to investing involves the risk that value stocks may remain undervalued. Value stocks as a group may be out of favor and underperform the overall equity market for a long period of time, while the market concentrates on growth stocks. Although the fund will not concentrate its investments in any one industry or industry group, it may, like many value funds, weight its investments toward certain industries, thus increasing its exposure to factors adversely affecting issuers within those industries. |
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Non-diversification risk: The fund is classified as non-diversified, which means it may invest a larger percentage of its assets in a small number of issuers than a diversified fund. To the extent the fund concentrates its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers. |
14 | Legg Mason Funds |
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Cash management and defensive investing risk: The value of the investments held by the fund for cash management or defensive investing purposes may be affected by changing interest rates and by changes in credit ratings of the investments. If the fund makes substantial investments in such instruments or takes a temporary defensive position, it may be unable to achieve its investment objective. |
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Derivatives risk: Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated by the manager. Certain derivatives transactions may have a leveraging effect on the fund. Even a small investment in derivative contracts can have a significant impact on the funds stock market, interest rate or currency exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when stock prices, currency rates or interest rates are changing. The fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond as anticipated to changes in the value of the funds holdings. Using derivatives may increase volatility, which is the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. Holdings of derivatives also can make the fund less liquid and harder to value, especially in declining markets. |
Derivatives are subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation.
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Recent market events risk: The equity and debt capital markets in the United States and internationally have experienced unprecedented volatility. This financial crisis has caused a significant decline in the value and liquidity of many securities. This environment could make identifying investment risks and opportunities especially difficult for the manager. These market conditions may continue or get worse. |
Please note that there are other factors that could adversely affect your investment and that could prevent the fund from achieving its
Legg Mason Capital Management All Cap Fund | 15 |
objective. More information about risks appears in the SAI. Before investing, you should carefully consider the risks that you will assume.
The funds policies and procedures with respect to the disclosure of the funds portfolio securities are described in the SAI.
For more information about the fund, please visit the funds website, http://www.leggmason.com/individualinvestors, select Equity and click on the name of the fund in the dropdown menu.
16 | Legg Mason Funds |
Manager and sub-administrator
Legg Mason Capital Management, Inc. (LMCM or the manager) is the funds investment manager. LMCM, with offices at 100 International Drive, Baltimore, Maryland 21202, manages assets for clients around the globe, including corporations, public funds, government entities, endowments, foundations and individual investors. Clients invest with LMCM through separately managed accounts, sub-advised funds and Legg Mason-sponsored mutual funds. Since 1982, with the introduction of Legg Mason Value Trust, LMCM has distinguished itself by applying its distinct value investment process. As of June 30, 2009, LMCMs investment personnel managed approximately $13.7 billion in separate accounts and pooled assets. LMCM selects the funds investments, oversees its operations and provides administrative services.
Legg Mason Partners Fund Advisor, LLC (LMPFA or the sub-administrator) serves as the sub-administrator to the fund. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, provides certain administrative services for the fund pursuant to a sub-administration agreement between LMCM and LMPFA. LMCM, not the fund, pays LMPFA for its services as sub-administrator.
LMCM and LMPFA are wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason). Legg Mason, whose principal executive offices are at 100 International Drive, Baltimore, Maryland 21202, is a global asset management company. As of June 30, 2009, Legg Masons asset management operations had aggregate assets under management of approximately $657 billion.
Portfolio managers
Jay Leopold, CFA, Bill Miller, CFA and David Nelson, CFA serve as co-portfolio managers of the fund. Mr. Miller and Mr. Nelson have served as portfolio managers since January 2009. Mr. Leopold has served as portfolio manager since February 2007.
Mr. Leopold joined Legg Mason in 1986 and LMCM in 1995. After covering stocks in a variety of industries including health care, he was named Assistant Portfolio Manager of the Legg Mason American Leading Companies Trust mutual fund in 2000 and later
Legg Mason Capital Management All Cap Fund | 17 |
assumed responsibility for LMCMs All Cap product. He is a former President and Director of the Baltimore Security Analysts Society.
Mr. Miller has been employed by one or more subsidiaries of Legg Mason since 1981. Mr. Miller has served as a portfolio manager of Legg Mason Value Trust since 1982 and as portfolio manager for Legg Mason Opportunity Trust since 1999. He is currently Chairman and Chief Investment Officer for LMCM and Managing Member of LMM, LLC.
Mr. Nelson has more than 30 years of investment experience, including more than 15 years with Legg Mason. Mr. Nelson is a Senior Vice President of LMCM and serves as Chairman of the firms Investment Policy Committee. He has been the portfolio manager of Legg Mason American Leading Companies Trust since 1998.
The SAI provides information about the compensation of the portfolio managers, other accounts managed by the portfolio managers and any fund shares held by the portfolio managers.
Management fee
The fund pays a management fee at an annual rate that decreases as assets increase, as follows: 0.700% of assets up to and including $2 billion and 0.650% of assets over $2 billion.
For the fiscal year ended April 30, 2009, the fund paid a management fee of 0.49% of the funds average daily net assets for investment management services, after waivers and reimbursements.
A discussion regarding the basis for the Boards approval of the funds management agreement is available in the funds Annual Report for the fiscal year ended April 30, 2009.
Distribution
LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, serves as the funds sole and exclusive distributor.
The fund has adopted a shareholder services and distribution plan. Under the plan, the fund pays distribution and/or service fees, based on annualized percentages of average daily net assets, of up
18 | Legg Mason Funds |
to 0.25% for Class A shares, up to 1.00% for Class B shares, up to 1.00% for Class C shares, up to 0.25% for Class FI shares, up to 0.50% for Class R shares and up to 1.00% for Class R1 shares. These fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I shares and Class 1 shares are not subject to distribution and/or service fees under the plan.
In addition, the distributor, the manager and/or their affiliates may make payments for distribution, shareholder servicing, marketing and promotional activities and related expenses out of their past profits and other available sources, including profits from their relationships with the fund. These payments are not reflected as additional expenses in the fee table contained in this Prospectus. The recipients of these payments may include the funds distributor and affiliates of the manager, as well as non-affiliated broker/dealers, insurance companies, financial institutions and other financial intermediaries through which investors may purchase shares of the fund, including your financial intermediary. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for any fund-related marketing or shareholder servicing activities. The payments described in this paragraph are often referred to as revenue sharing payments. Revenue sharing arrangements are separately negotiated.
Revenue sharing payments may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the fund to you. Contact your financial intermediary for details about revenue sharing payments it receives or may receive. Revenue sharing payments, as well as payments under the shareholder services and distribution plan (where applicable), also benefit the manager, the distributor and their affiliates to the extent the payments result in more assets being invested in the fund on which fees are being charged.
Legg Mason Capital Management All Cap Fund | 19 |
Choosing a class of shares to buy
Individual investors can generally invest in Class A, Class B and Class C shares. Effective July 27, 2007, the funds Class 1 shares were closed to all purchases and incoming exchanges. Investors owning Class 1 shares on that date may continue to maintain their then-current Class 1 shares, but are no longer permitted to add to their Class 1 share positions (excluding reinvestment of dividends and distributions). Institutional and retirement plan investors and clients of eligible financial intermediaries should refer to Retirement and institutional investors eligible investors below for a description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose a class that may be appropriate for you.
When choosing which class of shares to buy, you should consider:
|
How much you plan to invest |
|
How long you expect to own the shares |
|
The expenses paid by each class detailed in the fee table and example at the front of this Prospectus |
|
Whether you qualify for any reduction or waiver of sales charges |
|
Availability of share classes |
If you are choosing between Class A and Class B shares, it will in almost all cases be the more economical choice for you to purchase Class A shares if you plan to purchase shares in an amount of $100,000 or more (whether in a single purchase or through aggregation of eligible holdings). This is because of the reduced sales charge available on larger investments of Class A shares and the lower ongoing expenses of Class A shares compared to Class B shares.
If you intend to invest for only a few years, the effect of Class B contingent deferred sales charges on redemptions made within five years of purchase, as well as the effect of higher expenses of that class, might make an investment in Class C shares more appropriate. There is no initial sales charge on Class C shares, and the contingent deferred sales charge does not apply to shares redeemed one year or more after purchase.
20 | Legg Mason Funds |
However, if you plan to invest a large amount and/or your investment horizon is five years or more, Class C shares might not be as advantageous as Class A shares. The annual distribution and/or service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger purchases of Class A shares.
Each class of shares except Class 1 shares is authorized to pay fees for recordkeeping services to Service Agents. As a result, operating expenses of classes that incur new or additional recordkeeping fees may increase over time.
You may buy shares:
|
Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a Service Agent) |
|
Directly from the fund |
Your Service Agent may provide shareholder services that differ from the services provided by other Service Agents. Services provided by your Service Agent may vary by class. You should ask your Service Agent to explain the shareholder services it provides for each class and the compensation it receives in connection with each class. Remember that your Service Agent may receive different compensation depending on the share class in which you invest.
Your Service Agent may not offer all classes of shares. You should contact your Service Agent for further information.
More information about the funds classes of shares is available through the Legg Mason funds website. Youll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:
|
The front-end sales charges that apply to the purchase of Class A shares |
|
The contingent deferred sales charges that apply to the redemption of Class B shares, Class C shares and certain Class A shares (redeemed within one year) |
Legg Mason Capital Management All Cap Fund | 21 |
|
Who qualifies for lower sales charges on Class A shares |
|
Who qualifies for a sales load waiver |
To visit the website, go to http://www.leggmason.com/individualinvestors, select Equity and click on the name of the fund in the dropdown menu.
22 | Legg Mason Funds |
The following table compares key features of the funds classes. You should review the fee table and example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you choose a class that may be appropriate for you. Please contact your Service Agent regarding the availability of Class FI, Class R or Class R1 shares. You may be required to provide appropriate documentation confirming your eligibility to invest in these share classes. Your Service Agent may receive different compensation depending upon which class you choose.
KEY FEATURES |
INITIAL SALES
CHARGE |
CONTINGENT
DEFERRED SALES CHARGE |
ANNUAL
DISTRIBUTION AND/OR SERVICE FEES |
EXCHANGE PRIVILEGE 1 |
||||||
Class A |
Initial sales charge You may qualify for reduction or waiver of initial sales charge Generally lower annual expenses than Class B and Class C |
Up to 5.75%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or more | 1.00% on purchases of $1 million or more if you redeem within 1 year of purchase; waived for certain investors | 0.25% of average daily net assets | Class A shares of funds sold by the distributor | |||||
Class B |
No initial sales charge Contingent deferred sales charge declines over time Converts to Class A after approximately 8 years Generally higher annual expenses than Class A |
None | Up to 5.00% charged when you redeem shares. This charge is reduced over time and there is no contingent deferred sales charge after 5 years; waived for certain investors | 1.00% of average daily net assets | Class B shares of funds sold by the distributor | |||||
Class C |
No initial sales charge Contingent deferred sales charge for only 1 year Does not convert to Class A Generally higher annual expenses than Class A |
None | 1.00% if you redeem within 1 year of purchase; waived for certain investors | 1.00% of average daily net assets | Class C shares of funds sold by the distributor |
Legg Mason Capital Management All Cap Fund | 23 |
KEY FEATURES |
INITIAL SALES
CHARGE |
CONTINGENT
DEFERRED SALES CHARGE |
ANNUAL
DISTRIBUTION AND/OR SERVICE FEES |
EXCHANGE PRIVILEGE 1 |
||||||
Class FI |
No initial or contingent deferred sales charge Only offered to Clients of Eligible Financial Intermediaries and eligible retirement plans |
None | None | 0.25% of average daily net assets | Class FI shares of funds sold by the distributor | |||||
Class R |
No initial or contingent deferred sales charge Only offered to eligible retirement plans with omnibus accounts held on the books of the fund |
None | None | 0.50% of average daily net assets | Class R shares of funds sold by the distributor | |||||
Class R1 |
No initial or contingent deferred sales charge Only offered to eligible retirement plans with omnibus accounts held on the books of the fund Generally higher annual expenses than Class R |
None | None | 1.00% of average daily net assets | Class R1 shares of funds sold by the distributor 2 | |||||
Class I |
No initial or contingent deferred sales charge Only offered to institutional and other eligible investors Generally lower annual expenses than the other classes |
None | None | None | Class I shares of funds sold by the distributor | |||||
Class 1 |
Closed to all purchases and incoming exchanges |
n/a | None | None | Class A shares of funds available for exchange |
1 |
Ask your Service Agent about the funds available for exchange. |
2 |
In this class, your options for exchange may be limited as the class is newly introduced. |
24 | Legg Mason Funds |
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called breakpoints. You do not pay a sales charge on the funds distributions or dividends that you reinvest in additional Class A shares.
The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you buy shares from a Service Agent. For Class A shares sold by the distributor, the distributor will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain the full amount of such sales charge. Service Agents will receive a distribution and/or service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by them.
AMOUNT OF INVESTMENT |
SALES CHARGE
AS % OF OFFERING PRICE |
SALES CHARGE
AS % OF NET AMOUNT INVESTED |
BROKER/DEALER
COMMISSION AS % OF OFFERING PRICE |
|||
Less than $25,000 | 5.75 | 6.10 | 5.00 | |||
$25,000 but less than $50,000 | 5.00 | 5.26 | 4.25 | |||
$50,000 but less than $100,000 | 4.50 | 4.71 | 3.75 | |||
$100,000 but less than $250,000 | 3.50 | 3.63 | 2.75 | |||
$250,000 but less than $500,000 | 2.50 | 2.56 | 2.00 | |||
$500,000 but less than $750,000 | 2.00 | 2.04 | 1.60 | |||
$750,000 but less than $1 million | 1.50 | 1.52 | 1.20 | |||
$1 million or more 1 | -0- | -0- | up to 1.00 |
1 |
The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the thirteenth month after purchase, the Service Agent will also receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution and/or service fee starting immediately after purchase. Please contact your Service Agent for more information. |
Investments of $1,000,000 or more
You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.
Legg Mason Capital Management All Cap Fund | 25 |
Qualifying for a reduced Class A sales charge
There are several ways you can combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent, Funds Investor Services or Institutional Shareholder Services if you are eligible for a letter of intent or a right of accumulation and if you own shares of other funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for a reduced sales charge.
|
Accumulation Privilege allows you to combine the current value of Class A shares of the fund with other shares of funds sold by the distributor that are owned by: |
|
you or |
|
your spouse, and children under the age of 21 |
with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charges.
Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be combined. Please contact your Service Agent for additional information.
If you hold fund shares in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.
Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.
|
Letter of Intent allows you to purchase Class A shares of funds sold by the distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of shares of funds sold by the distributor that are purchased during the 13-month period by: |
|
you or |
|
your spouse, and children under the age of 21 |
26 | Legg Mason Funds |
are eligible for inclusion under the letter of intent, based on the public offering price at the time of the purchase and any capital appreciation on those shares. In addition, you can include towards your asset goal amount the current value of any eligible holdings.
If you hold shares of funds sold by the distributor in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your letter of intent asset goal.
Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your letter of intent asset goal. Please contact your Service Agent for additional information.
If you do not meet your asset goal amount, shares in the amount of any sales charges due, based on the amount of your actual purchases, will be redeemed from your account.
Waivers for certain Class A investors
Class A initial sales charges are waived for certain types of investors, including:
|
Employees of Service Agents |
|
Investors who redeemed Class A shares of a fund sold by the distributor in the past 60 days, if the investors Service Agent is notified |
|
Directors and officers of any Legg Mason-sponsored fund |
|
Employees of Legg Mason and its subsidiaries |
|
Investors investing through certain retirement plans |
If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent, Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.
If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent, consult the SAI or visit the Legg
Legg Mason Capital Management All Cap Fund | 27 |
Mason funds website, http://www.leggmason.com/individualinvestors, select Equity and click on the name of the fund in the dropdown menu.
Class B shares
You buy Class B shares at net asset value without paying an initial sales charge. However, if you redeem your Class B shares within five years of your purchase payment, you will pay a contingent deferred sales charge. The contingent deferred sales charge decreases as the number of years since your purchase payment increases.
YEAR AFTER PURCHASE | 1ST | 2ND | 3RD | 4TH | 5TH | 6TH THROUGH 8TH | ||||||||||||
Contingent deferred sales charge | 5 | % | 4 | % | 3 | % | 2 | % | 1 | % | 0 | % |
LMIS generally will pay Service Agents selling Class B shares a commission of up to 4.00% of the purchase price of the Class B shares they sell. LMIS will retain the contingent deferred sales charges. The fund pays annual distribution and/or service fees of up to 1.00% of the average daily net assets of Class B shares. Service Agents receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.
Class B conversion
After approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:
SHARES ISSUED: AT INITIAL
PURCHASE |
SHARES ISSUED: ON
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS |
SHARES ISSUED: UPON
EXCHANGE FROM ANOTHER FUND SOLD BY LMIS |
||
Approximately 8 years after the date of purchase | In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as dividends) | On the date the shares originally acquired would have converted into Class A shares |
Class C shares
You buy Class C shares at net asset value with no initial sales charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.
28 | Legg Mason Funds |
LMIS generally will pay Service Agents selling Class C shares a commission of up to 1.00% of the purchase price of the Class C shares they sell. LMIS will retain the contingent deferred sales charges and an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.
Class FI, Class R, Class R1 and Class I shares
You buy Class FI, Class R, Class R1 and Class I shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.
Service Agents receive a distribution and/or service fee of up to 0.25% of the average daily net assets represented by Class FI shares serviced by them, up to 0.50% of the average daily net assets represented by Class R shares serviced by them and up to 1.00% of the average daily net assets represented by Class R1 shares serviced by them. Class I shares are not subject to any distribution and/or service fees.
Class 1 shares
Effective July 27, 2007, the funds Class 1 shares were closed to all purchases and incoming exchanges. Investors owning Class 1 shares on that date may continue to maintain their then-current Class 1 shares, but are no longer permitted to add to their Class 1 share positions (excluding reinvestment of dividends and distributions).
Legg Mason Capital Management All Cap Fund | 29 |
More about contingent deferred sales charges
The contingent deferred sales charge is based on the net asset value at the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.
In addition, you do not pay a contingent deferred sales charge:
|
When you exchange shares for shares of another fund sold by the distributor |
|
On shares representing reinvested distributions and dividends |
|
On shares no longer subject to the contingent deferred sales charge |
Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then redeem the shares in your account that have been held the longest.
If you redeem shares of a fund sold by the distributor and pay a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption. Please contact your Service Agent for additional information.
The distributor receives contingent deferred sales charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.
Contingent deferred sales charge waivers
The contingent deferred sales charge for each share class will generally be waived:
|
On payments made through certain systematic withdrawal plans |
|
On certain distributions from a retirement plan |
|
For retirement plans with omnibus accounts held on the books of the fund |
|
For involuntary redemptions of small account balances |
|
For 12 months following the death or disability of a shareholder |
30 | Legg Mason Funds |
If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent, consult the SAI or visit the Legg Mason funds website, http://www.leggmason.com/individualinvestors, select Equity and click on the name of the fund in the dropdown menu.
Legg Mason Capital Management All Cap Fund | 31 |
Retirement and institutional investors eligible investors
Retirement Plans
Retirement Plans include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs or similar accounts.
Retirement Plans with omnibus accounts held on the books of the fund can generally choose among five classes of shares: Class C, Class R, Class R1, Class FI and Class I shares.
Although Retirement Plans with omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary. The distributor may impose certain additional requirements. Please contact your Service Agent for more information.
Class A and Class B shares are no longer offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund, with limited exceptions. Class A shares will cease to be available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class FI shares available. Class C shares will cease to be available to new Retirement Plan investors through a Service Agent if the Service Agent makes Class R1 shares available. Please see below for additional information.
Other Retirement Plans
Other Retirement Plan investors can generally choose among three classes of shares: Class A, Class B and Class C shares. Other Retirement Plans include Retirement Plans investing through brokerage accounts and also include certain Retirement Plans with direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Individual retirement vehicles, such as IRAs, may also choose
32 | Legg Mason Funds |
among these share classes. Other Retirement Plans and individual retirement vehicles are treated like individual investors for purposes of determining sales charges and any applicable sales charge reductions or waivers.
Clients of Eligible Financial Intermediaries
Clients of Eligible Financial Intermediaries may invest in three classes of shares: Class A, Class FI or Class I shares. Clients of Eligible Financial Intermediaries are investors who invest in the fund through financial intermediaries that offer their clients fund shares through investment programs authorized by LMIS. Such investment programs may include fee-based advisory account programs and college savings vehicles such as Section 529 plans. The financial intermediary may impose separate investment minimums.
Institutional Investors
Institutional Investors may invest in Class I shares if they meet the $1,000,000 minimum initial investment requirement. Institutional Investors may also invest in Class A, Class B and Class C shares, which have different investment minimums, fees and expenses. Institutional Investors generally include corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, defined benefit plans and other similar entities with direct relationships to the fund.
Class A and Class B Retirement Plans
Class A and Class B shares are no longer offered through Service Agents to Retirement Plans with omnibus accounts held on the books of the fund. However, certain Retirement Plans that held Class B shares prior to December 1, 2006 are permitted to make additional investments in that class. Certain existing programs for current and prospective Retirement Plan investors sponsored by financial intermediaries also remain eligible to purchase Class A shares. Under these programs, the initial sales charge and contingent deferred sales charge for Class A shares are waived where:
|
Such Retirement Plans record keeper offers only load-waived shares |
|
Fund shares are held on the books of the fund through an omnibus account |
Legg Mason Capital Management All Cap Fund | 33 |
|
The Retirement Plan has more than 100 participants or has total assets exceeding $1 million |
LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on the purchase price of Class A shares sold by them. However, for certain Retirement Plans that are permitted to purchase shares at net asset value, LMIS may pay Service Agents commissions of up to 1.00% of the purchase price of the Class A shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.
Class C Retirement Plans
Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares at net asset value without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to Retirement Plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.
Certain Retirement Plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. Please see the SAI for more details.
Class FI shares
Class FI shares are offered only to investors who invest in the fund through certain financial intermediaries and Retirement Plan programs.
Class R shares
Class R shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary).
Class R1 shares
Class R1 shares are offered only to Retirement Plans with accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary).
34 | Legg Mason Funds |
Class I shares
Class I shares are offered only to Institutional Investors who meet the $1,000,000 minimum initial investment requirement, Clients of Eligible Financial Intermediaries and other investors authorized by LMIS. However, any investor that held Class I shares prior to November 20, 2006 is permitted to make additional investments in Class I shares.
Certain waivers of these requirements for individuals associated with the fund, Legg Mason or its affiliates are discussed in the SAI.
Other considerations
Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements for plans that differ from the funds share class eligibility standards. In certain cases this could result in the selection of a share class with higher distribution and/or service-related fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any plan sponsor, plan fiduciary or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.
Your Service Agent may not offer all share classes. Please contact your Service Agent for additional details.
Legg Mason Capital Management All Cap Fund | 35 |
Generally |
You may buy shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge.
You must provide the following information for your order to be processed:
Name of fund being bought
Class of shares being bought
Dollar amount or number of shares being bought
Account number (if existing account) |
|
Through a
Service Agent |
You should contact your Service Agent to open a brokerage account and make arrangements to buy shares.
Your Service Agent may charge an annual account maintenance fee. |
|
Through the fund |
Investors should contact Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to open an account and make arrangements to buy shares.
For initial purchases, complete and send your account application to the fund at the following address:
Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504
Subsequent purchases should be sent to the same address. Enclose a check to pay for the shares.
For more information, please call Funds Investor Services or Institutional Shareholder Services between 8:00 a.m. and 5:30 p.m. (Eastern time). |
36 | Legg Mason Funds |
Through a systematic investment plan |
You may authorize your Service Agent or the transfer agent, to transfer funds automatically from (i) a regular bank account, (ii) cash held in a brokerage account with a Service Agent or (iii) certain money market funds, in order to buy shares on a regular basis.
Amounts transferred must meet the applicable minimums (see Purchase and sale of fund shares)
Amounts may be transferred monthly, every alternate month, quarterly, semi-annually or annually
If you do not have sufficient funds in your account on a transfer date, your Service Agent, Funds Investor Services or Institutional Shareholder Services may charge you a fee
For more information, please contact your Service Agent, Funds Investor Services or Institutional Shareholder Services or consult the SAI. |
Legg Mason Capital Management All Cap Fund | 37 |
Generally | You may exchange shares of the fund for the same class of shares of other funds sold by the distributor on any day that both the fund and the fund into which you are exchanging are open for business. | |
Legg Mason offers a distinctive family of funds tailored to help meet the varying needs of large and small investors |
You may exchange shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your exchange request in good order.
If you bought shares through a Service Agent, contact your Service Agent to learn which funds your Service Agent makes available to you for exchanges
If you bought shares directly from the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to learn which funds are available to you for exchanges
Not all funds offer all classes
Some funds are offered only in a limited number of states. Your Service Agent, Funds Investor Services or Institutional Shareholder Services will provide information about the funds offered in your state
Remember that an exchange is a taxable transaction unless you are investing through a tax-qualified savings plan or account
Always be sure to read the prospectus of the fund into which you are exchanging shares |
|
Investment minimums, sales charges and other requirements |
In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange
Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge, and you will |
38 | Legg Mason Funds |
be subject to the contingent deferred sales charge of the fund that you originally purchased
For Class A, Class B and Class C exchanges, you will generally be required to meet the minimum investment requirement for the class of shares of the fund into which your exchange is made (except in the case of systematic exchange plans)
Your exchange will also be subject to any other requirements of the fund into which you are exchanging shares
If you hold share certificates, you must deliver the certificates, endorsed for transfer or with signed stock powers, to the transfer agent or your Service Agent before the exchange is effective
The fund may suspend or terminate your exchange privilege if you engage in a pattern of excessive exchanges |
||
By telephone |
Contact your Service Agent or, if you hold shares directly with the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:00 a.m. and 5:30 p.m. (Eastern time) for information. Exchanges are priced at the net asset value next determined.
Telephone exchanges may be made only between accounts that have identical registrations and may be made on any day the New York Stock Exchange (NYSE) is open. |
|
By mail |
Contact your Service Agent or, if you hold shares directly with the fund, write to the fund at the following address:
Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504 |
Legg Mason Capital Management All Cap Fund | 39 |
Through a systematic exchange plan |
You may be permitted to schedule automatic exchanges of shares of the fund for shares of other funds available for exchange. All requirements for exchanging shares described above apply to these exchanges. In addition:
Exchanges may be made monthly, every alternate month, quarterly, semi-annually or annually
Each exchange must meet the applicable investment minimums for systematic investment plans (see Purchase and sale of fund shares)
For more information, please contact your Service Agent, Funds Investor Services or Institutional Shareholder Services or consult the SAI. |
40 | Legg Mason Funds |
Generally |
Contact your Service Agent or, if you hold shares directly with the fund, Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 to redeem shares of the fund.
You may redeem shares at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge.
If you hold share certificates, you must deliver the certificates endorsed for transfer or with signed stock powers with a signature guarantee to the transfer agent or your Service Agent before you may redeem.
If the shares are held by a fiduciary or corporation, partnership or similar entity, other documents may be required. |
|
Redemption proceeds |
Your redemption proceeds normally will be sent within 3 business days after your request is received in good order, but in any event within 7 days, except that your proceeds may be delayed for up to 10 days if your share purchase was made by check.
Your redemption proceeds may be delayed, or your right to receive redemption proceeds suspended, if the NYSE is closed (other than on weekends or holidays), trading is restricted, an emergency exists or otherwise as permitted by order of the SEC.
If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. Your redemption proceeds can be sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated by you. To change the bank account designated to receive wire or electronic |
Legg Mason Capital Management All Cap Fund | 41 |
transfers, you will be required to deliver a new written authorization and may be asked to provide other documents. You may be charged a fee on a wire or an electronic transfer (ACH).
In other cases, unless you direct otherwise, your proceeds will be paid by check mailed to your address of record.
The fund reserves the right to pay redemption proceeds by giving you securities. You may pay transaction costs to dispose of the securities. |
||
By mail |
Contact your Service Agent or, if you hold your shares directly with the fund, write to the fund at the following address:
Legg Mason Funds P.O. Box 55214 Boston, Massachusetts 02205-8504
Your written request must provide the following:
The fund name, the class of shares being redeemed and your account number
The dollar amount or number of shares being redeemed
Signature of each owner exactly as the account is registered
Signature guarantees, as applicable (see Other things to know about transactions) |
|
By telephone |
If your account application permits, you may be eligible to redeem shares by telephone. Contact your Service Agent or, if you hold shares directly with the fund, call Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432 between 8:00 a.m. and 5:30 p.m. (Eastern time) for more information. Please have the following information ready when you call:
Name of fund being redeemed
Class of shares being redeemed
Account number |
42 | Legg Mason Funds |
Automatic cash withdrawal plans |
You may be permitted to schedule automatic redemptions of a portion of your shares. To qualify, you must own shares of the fund with a value of at least $10,000 ($5,000 for Retirement Plan accounts) and each automatic redemption must be at least $50.
The following conditions apply:
Your shares must not be represented by certificates
Redemptions may be made monthly, every alternate month, quarterly, semi-annually or annually
If your shares are subject to a contingent deferred sales charge, the charge will be required to be paid upon redemption. However, the charge will be waived if your automatic redemptions are equal to or less than 2% per month of your account balance on the date the redemptions commence, up to a maximum of 12% in one year
You must elect to have all dividends and distributions reinvested
For more information, please contact your Service Agent, Funds Investor Services or Institutional Shareholder Services or consult the SAI. |
Legg Mason Capital Management All Cap Fund | 43 |
Other things to know about transactions
When you buy, exchange or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:
|
Name of the fund |
|
Your account number |
|
In the case of a purchase (including a purchase as part of an exchange transaction), the class of shares being bought |
|
In the case of an exchange or redemption, the class of shares being exchanged or redeemed (if you own more than one class) |
|
Dollar amount or number of shares being bought, exchanged or redeemed |
|
In certain circumstances, the signature of each owner exactly as the account is registered (see Redeeming shares) |
The fund generally will not permit non-resident aliens with a non-U.S. address to establish an account. U.S. citizens with an APO/FPO address or an address in the United States (including its territories) and resident aliens with a U.S. address are permitted to establish an account with the fund. Subject to the requirements of local law, U.S. citizens residing in foreign countries are permitted to establish accounts with the fund.
In certain circumstances, such as during periods of market volatility, severe weather and emergencies, shareholders may experience difficulties placing exchange or redemption orders by telephone. In that case, shareholders should consider using the funds other exchange and redemption procedures described above under Exchanging shares and Redeeming shares.
The transfer agent, Funds Investor Services or Institutional Shareholder Services will employ reasonable procedures to confirm that any telephone exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for these transactions.
The fund has the right to:
|
Suspend the offering of shares |
44 | Legg Mason Funds |
|
Waive or change minimum initial and additional investment amounts |
|
Reject any purchase or exchange order |
|
Change, revoke or suspend the exchange privilege |
|
Suspend telephone transactions |
|
Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted or as otherwise permitted by the SEC |
Signature guarantees
To be in good order, your redemption request must include a signature guarantee if you:
|
Are redeeming shares with a value over $50,000 |
|
Are sending signed share certificates or stock powers to the transfer agent |
|
Instruct the transfer agent to mail the check to an address different from the one on your account registration |
|
Changed your account registration or your address within 30 days |
|
Want the check paid to someone other than the account owner(s) |
|
Are transferring the redemption proceeds to an account with a different registration |
You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a notary public.
Anti-money laundering
Federal anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide additional information in order for the fund to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and other federal regulations.
Legg Mason Capital Management All Cap Fund | 45 |
Small account balances/mandatory redemptions
The fund reserves the right to ask you to bring your account up to a minimum investment amount as determined by your Service Agent if the aggregate value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period). You will be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. If your account is closed, you will not be eligible to have your account reinstated without imposition of any sales charges that may apply to your new purchase. The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.
Subject to applicable law, the fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.
For more information, please contact your Service Agent, Funds Investor Services or Institutional Shareholder Services or consult the SAI.
Frequent trading of fund shares
Frequent trading in the funds shares increases the funds administrative costs associated with processing shareholder transactions. In addition, frequent trading may potentially interfere with the efficient management of the funds portfolio and increase the funds costs associated with trading the funds portfolio securities. Under certain circumstances, frequent trading may also dilute the returns earned on shares held by the funds other shareholders. The fund therefore discourages frequent purchases and redemptions by shareholders.
The fund reserves the right to refuse any client or reject any purchase order for shares (including exchanges) for any reason. In particular, the Board has determined that the fund is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the securities markets.
46 | Legg Mason Funds |
Under the funds frequent trading policy, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever the fund detects a pattern of excessive trading. The policy currently provides that the fund will use its best efforts to restrict a shareholders trading privileges in the fund if that shareholder has engaged in three or more Round Trips (defined below) during any rolling 12-month period. The restriction on the number of Round Trips may change from time to time by amendment of the frequent trading policy. The fund may determine to restrict a shareholder from making additional purchases prior to engaging in three Round Trips. However, the fund has the discretion to determine that restricting a shareholders trading privileges is not necessary (or that a new limit on Round Trips should be established for the shareholder) if it is determined that the pattern of trading is not abusive or harmful to the fund. In making such a determination, the fund will consider, among other things, the nature of the shareholders account, the reason for the frequent trading and the amount of trading. Additionally, the fund has the discretion to make inquiries or to take action against any shareholder whose trading appears inconsistent with the frequent trading policy. Examples of the types of actions the fund may take to deter excessive trading in a shareholder account include restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund.
A Round Trip is defined as a purchase (including subscriptions and exchanges) into the fund followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of the fund within 30 days of such purchase. Purchases and sales of fund shares pursuant to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips.
With respect to accounts where shareholder transactions are processed or records are kept by third-party intermediaries, the fund uses reasonable efforts to monitor such accounts to detect suspicious trading patterns. For any such account that is so
Legg Mason Capital Management All Cap Fund | 47 |
identified, the fund will make such further inquiries and take such other actions as shall be considered necessary or appropriate to enforce the funds frequent trading policy against the shareholder(s) trading through such account and, if necessary, the third-party intermediary (retirement plan administrators, securities broker/dealers and mutual fund marketplaces) maintaining such account. The fund may accept undertakings from intermediaries to enforce frequent trading policies on behalf of the fund that provide a substantially similar level of protection against excessive trading. Shareholders who own shares of the fund through financial intermediaries should examine any disclosures provided by the intermediaries to determine what restrictions apply to the shareholders.
Although the fund will monitor shareholder transactions for certain patterns of frequent trading activity, there can be no assurance that all such trading activity can be identified, prevented or terminated.
Share certificates
The fund does not issue share certificates. If you currently hold share certificates of the fund, the certificates will continue to be honored. If you would like to return your share certificates to the fund and hold your shares in uncertificated form, please contact your Service Agent, Funds Investor Services or Institutional Shareholder Services.
Record ownership
If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service Agent, as record holder, will vote your shares in accordance with your instructions. If you do not give your Service Agent voting instructions, your Service Agent, under certain circumstances, may nonetheless be entitled to vote your shares.
48 | Legg Mason Funds |
Dividends, distributions and taxes
Dividends and distributions
The fund generally pays dividends and makes capital gain distributions, if any, once or twice a year. The fund may pay additional distributions and dividends at
other times if necessary for the fund to avoid a federal tax. The fund expects distributions to be primarily from capital gains. Capital gain distributions and dividends are reinvested in additional fund shares of the same class you hold. You do not
pay a sales charge on reinvested distributions or dividends. Alternatively, you can instruct your Service Agent, Funds Investor Services or Institutional Shareholder Services to have your distributions and/or dividends paid in cash. You can change
Taxes
In general, redeeming shares, exchanging shares and receiving dividends and distributions (whether in cash or additional shares) are all taxable events. The following table summarizes the tax status to you of certain transactions related to the fund.
TRANSACTION | FEDERAL TAX STATUS | |
Redemption or exchange of shares | Usually capital gain or loss; long-term only if shares owned more than one year | |
Long-term capital gain distributions | Long-term capital gain | |
Dividends | Ordinary income, potentially taxable at long-term capital gain rates |
Distributions attributable to short-term capital gains are treated as dividends, taxable as ordinary income. Taxable dividends and long-term capital gain distributions are taxable whether received in cash or reinvested in fund shares. Although dividends (including dividends from short-term capital gains) are generally taxable as ordinary income, individual shareholders who satisfy certain holding period and other requirements are taxed on such dividends at long-term capital gain rates to the extent the dividends are attributable to qualified dividend income received by the fund. Qualified dividend income generally consists of dividends received from U.S. corporations (other than dividends from tax-exempt organizations and certain dividends from real estate investment trusts and regulated investment companies) and
Legg Mason Capital Management All Cap Fund | 49 |
certain foreign corporations ( e.g. , foreign corporations incorporated in certain countries with a comprehensive tax treaty with the United States or whose stock is traded on an established securities market in the United States and which are not passive foreign investment companies). In order for such dividends to be considered qualified dividend income, both the shareholder and the fund must meet certain holding period requirements. Long-term capital gain distributions are taxable to you as long-term capital gain regardless of how long you have owned your shares. You may want to avoid buying shares when the fund is about to declare a long-term capital gain distribution or a dividend because it will be taxable to you even though it may actually be a return of a portion of your investment.
A dividend declared by the fund in October, November and December and paid during January of the following year may in certain circumstances be treated as paid in December for tax purposes. Corporations may be able to take a dividends-received deduction for a portion of the distributions they receive.
After the end of each year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. If you do not provide the fund with your correct taxpayer identification number and any required certifications, you may be subject to back-up withholding on your distributions, dividends and redemption proceeds. Because each shareholders circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.
If the fund is held through a qualified retirement plan entitled to tax-exempt treatment for federal income tax purposes, distributions will generally not be taxable currently. Special tax rules apply to such retirement plans. You should consult your tax adviser regarding the tax treatment of distributions (which may include amounts attributable to fund distributions) which may be taxable when distributed from the retirement plan.
The above discussion is applicable to shareholders who are U.S. persons. If you are a non-U.S. person, please consult your own tax adviser with respect to the U.S. tax consequences to you of an investment in the fund.
50 | Legg Mason Funds |
You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good order, adjusted for any applicable sales charge. The funds net asset value per share is the value of its assets minus its liabilities divided by the number of shares outstanding. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the NYSE is open. The fund generally values its securities and other assets and calculates its net asset value as of the close of regular trading on the NYSE, normally at 4:00 p.m. Eastern time. If the NYSE closes at another time, the fund will calculate its net asset value as of the actual closing time. The NYSE is closed on certain holidays listed in the SAI.
In order to buy, redeem or exchange shares at a days price, you must place your order with your Service Agent or the transfer agent before the NYSE closes on that day. If the NYSE closes early on that day, you must place your order prior to the actual closing time. It is the responsibility of the Service Agents to transmit all orders to buy, exchange or redeem shares to the transfer agent on a timely basis.
Valuation of the funds securities and other assets is performed in accordance with procedures approved by the Board. These procedures delegate most valuation functions to LMPFA, which, in turn, uses independent third party pricing services approved by the funds Board. Under the procedures, assets are valued as follow:
|
Equity securities and certain derivative instruments that are traded on an exchange are valued at the closing price or, if that price is unavailable or deemed not representative of market value, the last sale price. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued at the price on the exchange considered by LMPFA to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the prices are typically determined by independent third party pricing services that use a variety of techniques and methodologies. |
Legg Mason Capital Management All Cap Fund | 51 |
|
The valuations for fixed income securities and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or quotations or a variety of fair value techniques and methodologies. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investments fair value. |
|
The valuations of securities traded on foreign markets and certain fixed income securities will generally be determined as of the earlier closing time of the markets on which they primarily trade. When the fund holds securities or other assets that are denominated in a foreign currency, the fund will normally use the currency exchange rates as of 2:00 p.m. Eastern time. The fund uses a fair value model developed by an independent third party pricing service to value foreign equity securities on days when a certain percentage change in the value of a domestic equity security index suggests that the closing prices on foreign exchanges may no longer represent the value of those securities at the time of closing of the NYSE. Foreign markets are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the funds shares may change on days when you will not be able to purchase or redeem the funds shares. |
|
If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by LMPFA to be unreliable, the market price may be determined by LMPFA using quotations from one or more broker/dealers. When such prices or quotations are not available, or when LMPFA believes that they are unreliable, LMPFA may price securities using fair value procedures approved by the Board. These procedures permit, among other things, the use of a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments to determine fair value. The fund may also use fair value procedures if LMPFA determines that a significant event has occurred between the time at which a market price is determined and the time at which the funds net asset value is calculated. |
52 | Legg Mason Funds |
Many factors may influence the price at which the fund could sell any particular portfolio investment. The sales price may well differ higher or lower from the funds last valuation, and such differences could be significant, particularly for securities that trade in relatively thin markets and/or markets that experience extreme volatility. Moreover, valuing securities using fair value methodologies involves greater reliance on judgment than valuing securities based on market quotations. A fund that uses fair value methodologies may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that the fund could obtain the value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.
Legg Mason Capital Management All Cap Fund | 53 |
The financial highlights tables are intended to help you understand the performance of each class for the past five years, unless otherwise noted. No financial highlights are presented for Class FI, Class R or Class R1 shares because no Class FI, Class R or Class R1 shares were outstanding for the periods shown. The returns for Class FI, Class R and Class R1 shares will differ from those of the other classes to the extent that their expenses differ. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the funds and the predecessor funds financial statements, which have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the funds financial statements, is included in the Annual Report (available upon request). The financial information shown below for periods prior to April 16, 2007 is that of the funds predecessor.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED APRIL 30: |
||||||||||||||||||||
CLASS A SHARES 1 | 2009 | 2008 | 2007 | 2006 2 | 2005 2 | |||||||||||||||
NET ASSET VALUE, BEGINNING OF YEAR | $ | 7.49 | $ | 10.36 | $ | 9.42 | $ | 8.02 | $ | 7.96 | ||||||||||
Income (loss) from operations: | ||||||||||||||||||||
Net investment income (loss) | 0.01 | (0.01 | ) | 0.01 | 0.01 | 0.01 | ||||||||||||||
Net realized and unrealized gain (loss) | (2.85 | ) | (2,86 | ) | 0.93 | 1.39 | 0.05 | |||||||||||||
Total income (loss) from operations |
(2.84 | ) | (2.87 | ) | 0.94 | 1.40 | 0.06 | |||||||||||||
NET ASSET VALUE, END OF YEAR | $ | 4.65 | $ | 7.49 | $ | 10.36 | $ | 9.42 | $ | 8.02 | ||||||||||
Total return 3 |
(37.92 | )% | (27.70 | )% | 9.98 | % | 17.46 | % | 0.75 | % | ||||||||||
NET ASSETS, END OF YEAR (000s) | $ | 144,443 | $ | 273,593 | $ | 443,226 | $ | 91,562 | $ | 84,629 | ||||||||||
Ratios to average net assets: | ||||||||||||||||||||
Gross expenses |
1.54 | % | 1.26 | % | 1.20 | % 4 | 1.21 | % 5 | 1.20 | % | ||||||||||
Net expenses 6 |
1.28 | 7 | 1.15 | 7 | 1.18 | 4,7,8 | 1.19 | 5,8 | 1.18 | 8 | ||||||||||
Net investment income (loss) |
0.18 | (0.11 | ) | 0.14 | 0.06 | 0.14 | ||||||||||||||
Portfolio turnover rate | 59 | % | 25 | % | 81 | % | 24 | % | 15 | % |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
Represents a share of capital stock outstanding prior to April 16, 2007. |
3 |
Performance figures, exclusive of sales charges, may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
4 |
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the year. Without these fees, the gross and net expense ratios would have been 1.18% and 1.16%, respectively. |
5 |
The gross and net expense ratios include interest expense. Excluding interest expense, the gross and net expense ratios would have been 1.20% and 1.19%, respectively. |
6 |
Reflects fee waivers and/or expense reimbursements. |
7 |
As a result of a contractual expense limitation, effective February 5, 2007 until September 1, 2008, the ratio of expenses, other than brokerage, taxes and extraordinary expenses to average net assets of Class A shares did not exceed 1.16% |
8 |
As a result of a voluntary expense limitation, prior to February 5, 2007, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses, to average net assets of Class A shares did not exceed 1.40%. |
54 | Legg Mason Funds |
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED APRIL 30: |
||||||||||||||||||||
CLASS B SHARES 1 | 2009 | 2008 | 2007 | 2006 2 | 2005 2 | |||||||||||||||
NET ASSET VALUE,
BEGINNING OF YEAR |
$ | 7.06 | $ | 9.84 | $ | 9.02 | $ | 7.74 | $ | 7.73 | ||||||||||
Income (loss) from operations: | ||||||||||||||||||||
Net investment loss | (0.03 | ) | (0.08 | ) | (0.05 | ) | (0.06 | ) | (0.05 | ) | ||||||||||
Net realized and unrealized
gain (loss) |
(2.67 | ) | (2.70 | ) | 0.87 | 1.34 | 0.06 | |||||||||||||
Total income (loss) from operations |
(2.70 | ) | (2.78 | ) | 0.82 | 1.28 | 0.01 | |||||||||||||
NET ASSET VALUE,
END OF YEAR |
$ | 4.36 | $ | 7.06 | $ | 9.84 | $ | 9.02 | $ | 7.74 | ||||||||||
Total return 3 |
(38.24 | )% | (28.25 | )% | 9.09 | % | 16.54 | % | 0.13 | % | ||||||||||
NET ASSETS,
END OF YEAR (000s) |
$ | 36,847 | $ | 89,574 | $ | 218,812 | $ | 71,865 | $ | 73,331 | ||||||||||
Ratios to average net assets: | ||||||||||||||||||||
Gross expenses |
2.25 | % | 2.10 | % | 1.93 | % 4 | 1.97 | % 5 | 1.97 | % | ||||||||||
Net expenses 6 |
2.00 | 7 | 1.92 | 7 | 1.90 | 4,7,8 | 1.95 | 5,8 | 1.94 | 8 | ||||||||||
Net investment loss |
(0.55 | ) | (0.90 | ) | (0.53 | ) | (0.70 | ) | (0.62 | ) | ||||||||||
Portfolio turnover rate | 59 | % | 25 | % | 81 | % | 24 | % | 15 | % |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
Represents a share of capital stock outstanding prior to April 16, 2007. |
3 |
Performance figures, exclusive of CDSC, may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
4 |
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense rations would have been 1.91% and 1.88%, respectively. |
5 |
The gross and net expense ratios include interest expense. Excluding interest expense, the gross and net expense ratios would have been 1.96% and 1.95%, respectively. |
6 |
Reflects fee waivers and/or expense reimbursements. |
7 |
As a result of a contractual expense limitation, effective February 5, 2007 until September 1, 2008, the ratio of expenses, other than brokerage, taxes and extraordinary expenses, to average net assets of Class B shares did not exceed 1.93%. |
8 |
As a result of a voluntary expense limitation, prior to February 5, 2007, the ratio of expenses, other than interest brokerage, taxes and extraordinary expenses, to average net assets of Class B shares did not exceed 2.15%. |
Legg Mason Capital Management All Cap Fund | 55 |
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED APRIL 30: |
||||||||||||||||||||
CLASS C SHARES 1 | 2009 | 2008 | 2007 | 2006 2 | 2005 2 | |||||||||||||||
NET ASSET VALUE, BEGINNING OF YEAR | $ | 7.09 | $ | 9.86 | $ | 9.03 | $ | 7.74 | $ | 7.74 | ||||||||||
Income (loss) from operations: | ||||||||||||||||||||
Net investment loss | (0.01 | ) | (0.07 | ) | (0.04 | ) | (0.06 | ) | (0.05 | ) | ||||||||||
Net realized and unrealized gain (loss) | (2.70 | ) | (2.70 | ) | 0.87 | 1.35 | 0.05 | |||||||||||||
Total income (loss) from operations |
(2.71 | ) | (2.77 | ) | 0.83 | 1.29 | 0.00 | 3 | ||||||||||||
NET ASSET VALUE,
END OF YEAR |
$ | 4.38 | $ | 7.09 | $ | 9.86 | $ | 9.03 | $ | 7.74 | ||||||||||
Total return 4 |
(38.22 | )% | (28.09 | )% | 9.19 | % | 16.67 | % | 0.00 | % | ||||||||||
NET ASSETS, END OF YEAR (000s) | $ | 55,813 | $ | 125,841 | $ | 266,870 | $ | 190,538 | $ | 215,024 | ||||||||||
Ratios to average net assets: | ||||||||||||||||||||
Gross expenses |
1.86 | % | 1.79 | % | 1.85 | % 5 | 1.93 | % 6 | 1.95 | % | ||||||||||
Net expenses |
1.71 | 7 | 1.79 | 1.85 | 5,7,8 | 1.91 | 6,7,8 | 1.92 | 7,8 | |||||||||||
Net investment loss |
(0.26 | ) | (0.77 | ) | (0.40 | ) | (0.65 | ) | (0.60 | ) | ||||||||||
Portfolio turnover rate | 59 | % | 25 | % | 81 | % | 24 | % | 15 | % |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
Represents a share of capital stock outstanding prior to August 16, 2007. |
3 |
Amount represents less than $0.01 per share. |
4 |
Performance figures, exclusive of CDSC, may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
5 |
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense ratios would have both been 1.83%. |
6 |
The gross and net expense ratios include interest expense. Excluding interest expense, the gross and net expense ratios would have been 1.93% and 1.90%, respectively. |
7 |
Reflects fee waivers and/or expense reimbursements. |
8 |
As a result of a voluntary expense limitation, prior to February 5, 2007, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses to average net assets of Class C shares did not exceed 2.15%. |
56 | Legg Mason Funds |
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED APRIL 30, UNLESS OTHERWISE NOTED: |
||||||||
CLASS I SHARES 1 | 2009 | 2008 2 | ||||||
NET ASSET VALUE, BEGINNING OF YEAR | $ | 7.51 | $ | 10.26 | ||||
Income (loss) from operations: | ||||||||
Net investment income | 0.04 | 0.02 | ||||||
Net realized and unrealized loss | (2.86 | ) | (2.77 | ) | ||||
Total loss from operations |
(2.82 | ) | (2.75 | ) | ||||
NET ASSET VALUE, END OF YEAR | $ | 4.69 | $ | 7.51 | ||||
Total return 3 |
(37.55 | )% | (26.80 | )% | ||||
NET ASSETS, END OF YEAR (000s) | $ | 210 | $ | 99 | ||||
Ratios to average net assets: | ||||||||
Gross expenses |
0.99 | % | 0.90 | % 4 | ||||
Net expenses |
0.61 | 5 | 0.90 | 4 | ||||
Net investment income |
0.79 | 0.49 | 4 | |||||
Portfolio turnover rate | 59 | % | 25 | % |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
For the period October 2, 2007 (inception date) to April 30, 2008. |
3 |
Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
4 |
Annualized. |
5 |
Reflects fee waivers and/or expense reimbursements. |
Legg Mason Capital Management All Cap Fund | 57 |
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED APRIL 30, UNLESS OTHERWISE NOTED: |
||||||||||||
CLASS 1 SHARES 1 | 2009 | 2008 | 2007 2 | |||||||||
NET ASSET VALUE, BEGINNING OF YEAR | $ | 7.51 | $ | 10.36 | $ | 10.41 | ||||||
Income (loss) from operations: | ||||||||||||
Net investment income | 0.02 | 0.01 | 0.00 | 3 | ||||||||
Net realized and unrealized loss | (2.85 | ) | (2.86 | ) | (0.05 | ) | ||||||
Total loss from operations |
(2.83 | ) | (2.85 | ) | (0.05 | ) | ||||||
NET ASSET VALUE, END OF YEAR | $ | 4.68 | $ | 7.51 | $ | 10.36 | ||||||
Total return 4 |
(37.68 | )% | (27.51 | )% | (0.48 | )% | ||||||
NET ASSETS, END OF YEAR (000s) | $ | 138,231 | $ | 267,372 | $ | 450,886 | ||||||
Ratios to average net assets: | ||||||||||||
Gross expenses |
1.16 | % | 0.93 | % | 1.06 | % 5,6 | ||||||
Net expenses |
1.00 | 7,8 | 0.90 | 7,8 | 1.06 | 5,6 | ||||||
Net investment income |
0.45 | 0.14 | 0.08 | 5 | ||||||||
Portfolio turnover rate | 59 | % | 25 | % | 81 | % |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
For the period February 2, 2007 (inception date) to April 30, 2007. |
3 |
Amount represents less than $0.01 per share. |
4 |
Performance figures, exclusive of sales charges prior to 2007, may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
5 |
Annualized. |
6 |
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund during the period. Without these fees, the gross and net expense ratios would both have been 1.06%. |
7 |
As a result of voluntary expense limitation, effective July 30, 2007, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses, to average net assets of Class 1 shares will not exceed Class A shares total net annual operating expenses less the 12b-1 fee differential of 0.25%. |
8 |
Reflects fee waivers and/or expense reimbursements. |
58 | Legg Mason Funds |
Legg Mason Funds Privacy Policy
We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:
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Information we receive from you on applications and forms, via the telephone and through our websites; |
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Information about your transactions with us, our affiliates or others (such as your purchases, sales or account balances); and |
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Information we receive from consumer reporting agencies. |
We do not disclose your nonpublic personal information, except as permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions. We may also provide this information to companies that perform services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. We will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.
With respect to our internal security procedures, we maintain physical, electronic and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.
If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.
[This page is not part of the Prospectus.]
Legg Mason Capital Management All Cap Fund
You may visit the funds website at http://www.leggmason.com/individualinvestors for a free copy of a Prospectus, Statement of Additional Information (SAI) or an Annual or Semi-Annual Report.
Shareholder reports Additional information about the funds investments is available in the funds Annual and Semi-Annual Reports to shareholders. In the funds Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the funds performance during its last fiscal year.
The fund sends only one report to a household if more than one account has the same last name and same address. Contact your Service Agent, Funds Investor Services or Institutional Shareholder Services if you do not want this policy to apply to you.
Statement of additional information The SAI provides more detailed information about the fund and is incorporated by reference into (is legally part of) this Prospectus.
You can make inquiries about the fund or obtain shareholder reports or the SAI (without charge) by contacting your Service Agent, by calling Funds Investor Services at 1-800-822-5544 or Institutional Shareholder Services at 1-888-425-6432, or by writing to the fund at 55 Water Street, New York, New York 10041.
Information about the fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commissions (the SEC) Public Reference Room in Washington, D.C. 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 SECs Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo @ sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549.
If someone makes a statement about the fund that is not in this Prospectus, you should not rely upon that information. Neither the fund nor the distributor is offering to sell shares of the fund to any person to whom the fund may not lawfully sell its shares.
(Investment Company Act
file no. 811-06444)
FD01889 08/09
AUGUST 28, 2009
LEGG MASON PARTNERS EQUITY TRUST
LEGG MASON PARTNERS ALL CAP FUND
(name of fund until October 4, 2009)
LEGG MASON CAPITAL MANAGEMENT ALL CAP FUND
(name of fund effective October 5, 2009)
Class A (SPAAX), Class B (SPBBX), Class C (SPBLX),
Class FI, Class R, Class R1, Class I (LACIX) and Class 1
55 Water Street
New York, New York 10041
Funds Investor Services 1-800-822-5544
Institutional Shareholder Services 1-888-425-6432
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the SAI) is not a prospectus and is meant to be read in conjunction with the current Prospectus of Legg Mason Partners All Cap Fund (the fund) dated August 28, 2009, as amended or supplemented from time to time, and is incorporated by reference in its entirety into the Prospectus. As part of a number of initiatives launched in 2006 to restructure and streamline the Legg Mason Partners fund complex, the fund assumed the assets and liabilities of a predecessor fund with the same name. The fund is now grouped for organizational and governance purposes with other Legg Mason Partners funds that are predominantly equity-type funds, and is a series of Legg Mason Partners Equity Trust (the Trust), a Maryland business trust. Certain historical information for periods prior to April 16, 2007 contained in the SAI is that of the funds predecessor (the LMP Fund). Effective October 5, 2009, the funds name will change to Legg Mason Capital Management All Cap Fund.
Additional information about the funds investments is available in the funds annual and semi-annual reports to shareholders. The annual report contains financial statements that are incorporated herein by reference. The funds Prospectus and copies of the annual and semi-annual reports may be obtained free of charge by contacting banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a Service Agent), or by writing or calling the Trust at the address or telephone number set forth above. Legg Mason Investor Services, LLC (LMIS), a wholly-owned broker/dealer subsidiary of Legg Mason, Inc. (Legg Mason), serves as the funds sole and exclusive distributor.
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THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
No person has been authorized to give any information or to make any representations not contained in the Prospectus or this SAI in connection with the offerings made by the Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the fund or its distributor. The Prospectus and this SAI do not constitute offerings by the fund or by the distributor in any jurisdiction in which such offerings may not lawfully be made.
2
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end, non-diversified management investment company.
The funds Prospectus discusses the funds investment objective and policies. The following discussion
Investment Objective and Principal Investment Strategies
The fund seeks long-term capital growth.
The fund invests primarily in equity securities of any size that, in the portfolio managers opinion, offer the potential for capital growth. The fund does not have specific market capitalization parameters, allowing the portfolio managers greater flexibility to identify investment opportunities that are expected to help the fund achieve its investment objective.
The portfolio managers follow an intrinsic value discipline in selecting securities, which means that the portfolio managers seek to purchase securities trading at large discounts to their assessment of the companies estimated value. The portfolio managers determine intrinsic value by measuring the companys value on such factors as the discounted value of its projected future free cash flows, the capability to earn returns on capital in excess of its cost of capital, private market values of similar companies and the costs to replicate the business. These and other factors may be more or less significant depending on the type of company. The portfolio managers may also consider qualitative factors in selecting stocks, including an assessment of the companys products, competitive positioning, strategy, industry economics and dynamics, and regulatory frameworks, among others. Securities may be undervalued due to, among other things, uncertainty arising from the limited availability of accurate information, economic growth and changes, changes in competitive conditions, technological change, investor overreaction to negative news or events, and changes in governmental policy or geopolitical dynamics.
The fund may invest up to 25% of its net assets in foreign securities.
The portfolio managers may decide to sell securities given a variety of circumstances, such as, for example, when a security no longer appears to offer a long-term above-average risk-adjusted rate of return, when an investment opportunity arises that the portfolio managers believe is more compelling, when the original reason for investing no longer applies, to realize gains or limit potential losses.
There is no guarantee that the fund will achieve its investment objective.
INVESTMENT PRACTICES AND RISK FACTORS
The funds principal investment strategies are described above. The following provides additional information about these principal strategies and describes other investment strategies and practices that may be used by the fund, which all involve risks of varying degrees.
Non-diversification.
The fund is non-diversified, which means that the fund may invest a greater proportion of its assets in the securities of a smaller number of issuers. To the extent the fund concentrates its assets in fewer issuers, the fund will be more susceptible to negative events affecting those issuers.
3
Equity Securities .
General . Investors should realize that risk of loss is inherent in the ownership of any securities and that the net asset value (NAV) of the fund will fluctuate, reflecting fluctuations in the market value of its portfolio positions.
Common Stocks. The fund may purchase common stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of the entitys preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to do so.
Convertible Securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion or exchange, convertible securities ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower than the yield of nonconvertible debt. Convertible securities are usually subordinated to comparable-tier nonconvertible securities, but rank senior to common stock in a corporations capital structure.
The value of a convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege and (2) its worth, at market value, if converted or exchanged into the underlying common stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible securitys governing instrument, which may be less than the ultimate conversion or exchange value.
Convertible securities are subject both to the stock market risk associated with equity securities and to the credit and interest rate risks associated with fixed income securities. As the market price of the equity security underlying a convertible security falls, the convertible security tends to trade on the basis of its yield and other fixed income characteristics. As the market price of such equity security rises, the convertible security tends to trade on the basis of its equity conversion features.
Warrants . The fund may invest in warrants. The funds investment in warrants will not entitle it to receive dividends or exercise voting rights, and will become worthless if the warrants cannot be profitably exercised before the expiration dates.
Preferred Stock. The fund may purchase preferred stock. Preferred stock pays dividends at a specified rate and generally has preference over common stock in the payment of dividends and the liquidation of the issuers assets, but is junior to the debt securities of the issuer in those same respects. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuers board of directors. Holders of preferred stock may suffer a loss of value if dividends are not paid. The market prices of preferred stocks are subject to changes in interest rates and are more sensitive to changes in the issuers creditworthiness than are the prices of debt securities. Generally, under normal circumstances, preferred stock does not carry voting rights.
Real Estate Investment Trusts. The fund may invest in shares of real estate investment trusts (REITs), which are pooled investment vehicles that invest in real estate or real estate loans or interests. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage (hybrid) REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. A mortgage REIT can make construction, development or long-term mortgage
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loans, which are sensitive to the credit quality of the borrower. Hybrid REITs combine the characteristics of both equity and mortgage trusts, generally by holding both ownership interests and mortgage interests in real estate. REITs are not taxed on income distributed to shareholders provided they comply with the applicable requirements of the Internal Revenue Code of 1986, as amended (the Code). Debt securities issued by REITs, for the most part, are general and unsecured obligations and are subject to risks associated with REITs. Like mutual funds, REITs have expenses, including advisory and administration fees paid by REIT shareholders, and, as a result, an investor is subject to a duplicate level of fees if the fund invests in REITs.
Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. An equity REIT may be affected by changes in the value of the underlying properties owned by the REIT. A mortgage REIT may be affected by changes in interest rates and the ability of the issuers of its portfolio mortgages to repay their obligations. REITs are dependent upon the skills of their managers and are not diversified. REITs are generally dependent upon maintaining cash flows to repay borrowings and to make distributions to shareholders and are subject to the risk of default by lessees and borrowers. REITs whose underlying assets are concentrated in properties used by a particular industry, such as health care, are also subject to industry related risks.
REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REITs investment in fixed income obligations can be expected to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed rate obligations can be expected to decline. If the REIT invests in adjustable rate mortgage loans, the interest rates on which are reset periodically, yields on a REITs investments in such loans will gradually align themselves to reflect changes in market interest rates. This causes the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Historically, REITs have been more volatile in price than the larger capitalization stocks included in the S&P 500 Index.
Foreign Securities . The fund may invest up to 25% of its net assets (at the time of investment) in foreign securities. The fund may invest directly in foreign issuers or invest in depositary receipts. The returns of the fund may be adversely affected by fluctuations in value of one or more currencies relative to the U.S. dollar. Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These include risks resulting from revaluation of currencies; future adverse political and economic developments; possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; differences in accounting, auditing and financial reporting standards; generally higher commission rates on foreign portfolio transactions; possible expropriation, nationalization or confiscatory taxation; withholding taxes and limitations on the use or removal of funds or other assets, including the withholding of dividends; adverse changes in investment or exchange control regulations; political instability, which could affect U.S. investments in foreign countries; and potential restrictions on the flow of international capital. Additionally, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility and be less liquid. Many of the foreign securities held by the fund will not be registered with, nor will the issuers thereof be subject to the reporting requirements of, the U.S. Securities and Exchange Commission (SEC). Accordingly, there may be less publicly available information about the securities and about the foreign company issuing them than is available about a U.S. company and its securities. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment positions. The fund may invest in securities of foreign governments (or agencies or subdivisions thereof), and many, if not all, of the foregoing considerations apply to such investments as well.
The costs associated with investment in the securities of foreign issuers, including withholding taxes, brokerage commissions and custodial fees, may be higher than those associated with investment in domestic
5
issuers. In addition, foreign investment transactions may be subject to difficulties associated with the settlement of such transactions. Transactions in securities of foreign issuers may be subject to less efficient settlement practices, including extended clearance and settlement periods. Delays in settlement could result in temporary periods when assets of the fund are uninvested and no return can be earned on them. The inability of the fund to make intended investments due to settlement problems could cause the fund to miss attractive investment opportunities. The inability to dispose of a portfolio security due to settlement problems could result in losses to the fund due to subsequent declines in value of the portfolio security or, if the fund has entered into a contract to sell the security, could result in liability to the purchaser.
Since the fund may invest in securities denominated in currencies other than the U.S. dollar, it may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rates between such currencies and the U.S. dollar. Changes in the currency exchange rates may influence the value of the funds shares and may also affect the value of dividends and interest earned by the fund and gains and losses realized by the fund. Exchange rates are determined by the forces of supply and demand in the foreign exchange markets. These forces are affected by the international balance of payments, other economic and financial conditions, government intervention, speculation and other factors.
Generally, American Depositary Receipts (ADRs), in registered form, are denominated in U.S. dollars and are designed for use in the domestic market. Usually issued by a U.S. bank or trust company, ADRs are receipts that demonstrate ownership of underlying foreign securities. For purposes of the funds investment policies and limitations, ADRs are considered to have the same characteristics as the securities underlying them. ADRs may be sponsored or unsponsored; issuers of securities underlying unsponsored ADRs are not contractually obligated to disclose material information in the United States. Accordingly, there may be less information available about such issuers than there is with respect to domestic companies and issuers of securities underlying sponsored ADRs. The fund may also invest in Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and other similar instruments, which are receipts that are often denominated in U.S. dollars and are issued by either a U.S. or non-U.S. bank evidencing ownership of underlying foreign securities. Even where they are denominated in U.S. dollars, depositary receipts are subject to currency risk if the underlying security is denominated in a foreign currency. EDRs are issued in bearer form and are designed for use in European securities markets. GDRs are tradable both in the U.S. and Europe and are designed for use throughout the world.
Investment in Other Investment Companies. The fund may invest in the securities of other investment companies, which can include open-end funds, closed-end funds and unregistered investment companies, subject to the limits set forth in the 1940 Act that apply to these types of investments. Investments in other investment companies are subject to the risks of the securities in which those investment companies invest. In addition, to the extent the fund invests in securities of other investment companies, fund shareholders would indirectly pay a portion of the operating costs of such companies in addition to the expenses of the funds own operation. These costs include management, brokerage, shareholder servicing and other operational expenses.
The fund may invest in shares of mutual funds or unit investment trusts that are traded on a stock exchange, called exchange-traded funds or ETFs. Typically an ETF seeks to track the performance of an index, such as the S&P 500, the NASDAQ 100, the Barclays Capital Treasury Bond Index or more narrow sector or foreign indexes, by holding in its portfolio either the same securities that comprise the index or a representative sample of the index. Investing in an ETF will give the fund exposure to the securities comprising the index on which the ETF is based.
Unlike shares of typical mutual funds or unit investment trusts, shares of ETFs are designed to be traded throughout the trading day, bought and sold based on market prices rather than NAV. Shares can trade at either a premium or discount to NAV. However, the portfolios held by index-based ETFs are publicly disclosed on each trading day and an approximation of actual NAV is disseminated throughout the trading day. Because of this transparency, the trading prices of index-based ETFs tend to closely track the actual NAV of the underlying
6
portfolios and the fund will generally gain or lose value depending on the performance of the index. However, gains or losses on the funds investment in ETFs will ultimately depend on the purchase and sale price of the ETF. In the future, as new products become available, the fund may invest in ETFs that are actively managed. Actively managed ETFs will likely not have the transparency of index-based ETFs and, therefore, may be more likely to trade at a larger discount or premium to actual NAVs.
The fund may invest in closed-end funds, which hold securities of U.S. and/or non-U.S. issuers. Because shares of closed-end funds trade on an exchange, investments in closed-end funds may entail the additional risk that the discount from NAV could increase while the fund holds the shares.
Short Sales. The fund may sell securities short against the box. While a short sale is the sale of a security the fund does not own, it is against the box if at all times when the short position is open, the fund owns an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities sold short.
Securities Lending. Consistent with applicable regulatory requirements, the fund may lend portfolio securities to brokers, dealers and other financial organizations meeting capital and other credit requirements or other criteria established by the Board of Trustees (the Board). The fund will not lend portfolio securities to affiliates of the manager unless it has applied for and received specific authority to do so from the SEC. From time to time, the fund may pay to the borrower and/or a third party which is unaffiliated with the fund or Legg Mason and is acting as a finder a part of the interest earned from the investment of collateral received for securities loaned. Although the borrower will generally be required to make payments to the fund in lieu of any dividends the fund would have otherwise received had it not loaned the shares to the borrower, such payments will not be treated as qualified dividend income for purposes of determining what portion of the funds regular dividends (as defined below) received by individuals may be taxed at the rates generally applicable to long-term capital gains (see Taxes below).
Requirements of the SEC, which may be subject to future modification, currently provide that the following conditions must be met. The fund will comply with the following conditions whenever its portfolio securities are loaned: (a) the fund must receive at least 100% cash collateral or equivalent securities from the borrower; (b) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (c) the fund must be able to terminate the loan at any time; (d) the fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (e) the fund may pay only reasonable custodian fees in connection with the loan; and (f) voting rights on the loaned securities may pass to the borrower. However, if a material event adversely affecting the investment in the loaned securities occurs, the fund must terminate the loan and regain the right to vote the securities.
Repurchase Agreements. The fund may agree to purchase securities from a bank or recognized securities dealer and simultaneously commit to resell the securities to the bank or dealer at an agreed-upon date and price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities (repurchase agreements). Under the terms of a typical repurchase agreement, the fund would acquire an underlying debt obligation for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase, and the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during the funds holding period. If the value of such securities were less than the repurchase price, plus interest, the other party to the agreement would be required to provide additional collateral so that at all times the collateral is at least 102% of the repurchase price plus accrued interest. The financial institutions with which the fund may enter into repurchase agreements will be banks and non-bank dealers of U.S. government securities that are on the Federal Reserve Bank of New Yorks list of reporting dealers, if such banks and non-bank dealers are deemed creditworthy by the funds manager. Repurchase agreements could involve certain risks in the event of default or insolvency of the other party, including possible delays or restrictions upon the funds ability to dispose of the underlying securities, the risk of a possible decline in the
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value of the underlying securities during the period in which the fund seeks to assert its right to them, the risk of incurring expenses associated with asserting those rights and the risk of losing all or part of the income from the agreement. The manager, acting under the supervision of the Board, reviews on an ongoing basis the value of the collateral and creditworthiness of those banks and dealers with which the fund enters into repurchase agreements to evaluate potential risks.
Pursuant to an exemptive order issued by the SEC, the fund, along with other affiliated entities managed by the manager or its affiliates, may transfer uninvested cash balances into one or more joint repurchase accounts. These balances are invested in one or more repurchase agreements, secured by U.S. government securities. Each joint repurchase arrangement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention or sale of the collateral may be subject to legal proceedings.
Reverse Repurchase Agreements. The fund may enter into reverse repurchase agreements, which involve the sale of fund securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowings. Since the proceeds of borrowings under reverse repurchase agreements are invested, this would introduce the speculative factor known as leverage. The securities purchased with the funds obtained from the agreement and securities collateralizing the agreement will have maturity dates no later than the repayment date. Generally the effect of such a transaction 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 it will be 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 greater rate of interest on the cash derived from the transaction than the interest cost of obtaining that 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 the manager 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 funds assets. The funds custodian bank will maintain a separate account for the fund with securities having a value equal to or greater than such commitment of the fund.
When-Issued and Delayed Delivery Transactions. The fund may purchase or sell securities on a when-issued or delayed delivery basis. Delivery of the securities in such cases occurs beyond the normal settlement periods but no payment or delivery is made by the fund prior to the reciprocal delivery or payment by the other party to the transaction. In entering into a when-issued or delayed delivery transaction, the fund relies on the other party to consummate the transaction and may be disadvantaged if the other party fails to do so.
The fund will maintain in a segregated account cash or liquid securities equal to the amount of the funds when-issued or delayed delivery commitments. For the purpose of determining the adequacy of the securities in the account, the deposited securities will be valued at market or fair value. If the market or fair value of such securities declines, additional cash or securities will be placed in the account on a daily basis so the value of the account will equal the amount of such commitments by the fund. Placing securities rather than cash in the account may have a leveraging effect on the funds assets. That is, to the extent the fund remains substantially fully invested in securities at the time that it has committed to purchase securities on a when-issued basis, there will be greater fluctuation in its NAV than if it had set aside cash to satisfy its purchase commitments. On the settlement date, the fund will meet its obligations from then-available cash flow, the sale of securities held in the separate account, the sale of other securities or, although it normally would not expect to do so, from the sale of the when-issued or delayed delivery securities themselves (which may have a greater or lesser value than the funds payment obligations).
Money Market Instruments. The fund may invest in any type of money market instruments, short-term debt securities or cash for temporary defensive purposes, to pay expenses and/or meet redemption request. Money market instruments in which the fund may invest include: U.S. government securities; certificates of deposit (CDs), time deposits (TDs) and bankers acceptances issued by domestic banks (including their branches
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located outside the United States and subsidiaries located in Canada), domestic branches of foreign banks, savings and loan associations and similar institutions; high grade commercial paper; and repurchase agreements with respect to the foregoing types of instruments. The following is a more detailed description of such money market instruments.
CDs are short-term negotiable obligations of commercial banks. TDs 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.
Domestic commercial banks organized under federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to be insured by the Federal Deposit Insurance Corporation (the FDIC). Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. Most state banks are insured by the FDIC (although such insurance may not be of material benefit to the fund, depending upon the principal amount of CDs of each bank held by the fund) and are subject to federal examination and to a substantial body of federal law and regulation. As a result of governmental regulations, domestic branches of domestic banks are, among other things, generally required to maintain specified levels of reserves and are subject to other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs, may be general obligations of the parent bank in addition to the issuing branch or may be limited by the terms of a specific obligation and government regulation. Such obligations are subject to different risks than are those of domestic banks or domestic branches of foreign banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. Foreign branches of domestic banks are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial recordkeeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank than about a domestic bank. CDs issued by wholly owned Canadian subsidiaries of domestic banks are guaranteed as to repayment of principal and interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch or may be limited by the terms of a specific obligation and by governmental regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may or may not be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, branches licensed by the Comptroller of the Currency and branches licensed by certain states (State Branches) may or may not be required to: (a) pledge to the regulator by depositing assets with a designated bank within the state, an amount of its assets equal to 5% of its total liabilities; and (b) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of State Branches may not necessarily be insured by the FDIC. In addition, there may be less publicly available information about a domestic branch of a foreign bank than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks or by domestic branches of foreign banks, the manager will carefully evaluate such investments on a case-by-case basis.
Savings and loan associations whose CDs may be purchased by the fund are supervised by the Office of Thrift Supervision and are insured by the Savings Association Insurance Fund, which is administered by the FDIC and is backed by the full faith and credit of the U.S. government. As a result, such savings and loan associations are subject to regulation and examination.
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Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender, such as the fund, pursuant to which the lender may determine to invest varying amounts. Transfer of such notes is usually restricted by the issuer, and there is no secondary trading market for such notes.
Fixed Income Securities. The prices of debt securities fluctuate in response to perceptions of the issuers creditworthiness and also tend to vary inversely with market interest rates. The value of such securities is likely to decline in times of rising interest rates. Conversely, when rates fall, the value of these investments is likely to rise. The longer the time to maturity the greater are variations in value.
U.S. Government Securities. U.S. government securities include debt obligations of varying maturities issued or guaranteed by the U.S. government or its agencies or instrumentalities. U.S. government securities include not only direct obligations of the U.S. Treasury, but also securities issued or guaranteed by the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association (Ginnie Mae), General Services Administration, Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage Association (Fannie Mae), Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board, Student Loan Marketing Association and Resolution Trust Corporation. Certain U.S. government securities, such as those issued or guaranteed by Ginnie Mae, Fannie Mae and Federal Home Loan Mortgage Corporation (Freddie Mac), are mortgage-related securities. Because the U.S. government is not obligated by law to provide support to an instrumentality that it sponsors, the fund will invest in obligations issued by such an instrumentality only if the manager determines that the credit risk with respect to the instrumentality does not make its securities unsuitable for investment by the fund.
Mortgage-backed securities may be issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac but may also be issued or guaranteed by other issuers, including private companies. Ginnie Mae is a government-owned corporation that is an agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. Until recently, Fannie Mae and Freddie Mac were government-sponsored corporations owned entirely by private stockholders. Both issue mortgage-related securities that contain guarantees as to timely payment of interest and principal but that are not backed by the full faith and credit of the U.S. government. The value of the companies securities fell sharply in 2008 due to concerns that the firms did not have sufficient capital to offset losses. In mid-2008, the U.S. Treasury was authorized to increase the size of home loans that Fannie Mae and Freddie Mac could purchase in certain residential areas and, until 2009, to lend Fannie Mae and Freddie Mac emergency funds and to purchase the companies stock. In September 2008, the U.S. Treasury announced that Fannie Mae and Freddie Mac had been placed in conservatorship by the Federal Housing Finance Agency (FHFA), a newly created independent regulator. In addition to placing the companies in conservatorship, the U.S. Treasury announced three additional steps that it intended to take with respect to Fannie Mae and Freddie Mac. First, the U.S. Treasury has entered into preferred stock purchase agreements (PSPAs) under which, if the FHFA determines that Fannie Maes or Freddie Macs liabilities have exceeded its assets under generally accepted accounting principles, the U.S. Treasury will contribute cash capital to the company in an amount equal to the difference between liabilities and assets. The PSPAs are designed to provide protection to the senior and subordinated debt and the mortgage-backed securities issued by Fannie Mae and Freddie Mac. Second, the U.S. Treasury established a new secured lending credit facility that is available to Fannie Mae and Freddie Mac until December 2009. Third, the U.S. Treasury initiated a temporary program to purchase Fannie Mae and Freddie Mac mortgage-backed securities, which is expected to continue until December 2009. No assurance can be given that the U.S. Treasury initiatives discussed above with respect to the debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac will be successful.
Restricted and Illiquid Securities. Up to 15% of the net assets of the fund may be invested in illiquid securities. An illiquid security is any security which may not be sold or disposed of in the ordinary course of
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business within seven days at approximately the value at which the fund has valued the security. Illiquid securities may include (a) repurchase agreements with maturities greater than seven days; (b) futures contracts and options thereon for which a liquid secondary market does not exist; (c) TDs maturing in more than seven calendar days; (d) securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets; and (e) securities of new and early stage companies whose securities are not publicly traded.
Under SEC regulations, certain securities acquired through private placements can be traded freely among qualified purchasers. The SEC has stated that an investment companys board of directors, or its investment adviser acting under authority delegated by the board, may determine that a security eligible for trading under these regulations is liquid. The fund intends to rely on these regulations, to the extent appropriate, to deem specific securities acquired through private placement as liquid. The Board has delegated to the manager the responsibility for determining whether a particular security eligible for trading under these regulations is liquid. Investing in these restricted securities could have the effect of increasing the funds illiquidity if qualified purchasers become, for a time, uninterested in buying these securities.
Restricted securities are securities subject to legal or contractual restrictions on their resale, such as private placements. Such restrictions might prevent the sale of restricted securities at a time when the sale would otherwise be desirable. Restricted securities may be sold only (1) pursuant to Rule 144A under the Securities Act of 1933, as amended (the 1933 Act), or another exemption; (2) in privately negotiated transactions; or (3) in public offerings with respect to which a registration statement is in effect under the 1933 Act. Rule 144A securities, although not registered in the United States, may be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act. As noted above, the manager, acting pursuant to guidelines established by the Board, may determine that some Rule 144A securities are liquid for purposes of limitations on the amount of illiquid investments the fund may own. Where registration is required, the fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the fund is able to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the fund might obtain a less favorable price than expected when it decided to sell.
Illiquid securities may be difficult to value and the fund may have difficulty disposing of such securities promptly. Judgment plays a greater role in valuing illiquid investments than those securities for which a more active market exists. The fund does not consider non-U.S. securities to be restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered for sale in the United States.
To the extent required by applicable law and SEC guidance, no securities for which there is not a readily available market will be acquired by the fund if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the funds net assets.
Borrowing. The fund may from time to time leverage its investments by purchasing securities with borrowed money. The fund may borrow money only from banks and in an amount not to exceed 33 1 / 3 % of the total value of its assets less liabilities. The amount of borrowings by the fund may also be limited by availability, cost of credit and restrictions imposed by the Federal Reserve Board. The fund is required under the 1940 Act to maintain at all times an asset coverage of 300% of the amount of its borrowings. If, as a result of market fluctuations or for any other reason, asset coverage of the fund drops below 300%, the fund must reduce its outstanding bank debt within three business days so as to restore its asset coverage to the 300% level.
Any gain in the value of securities purchased with borrowed money that exceeds the interest paid on the amount borrowed would cause the NAV of the shares of the fund to increase more rapidly than otherwise would be the case. Conversely, any decline in the value of securities purchased would cause the NAV of the shares of the fund to decrease more rapidly than otherwise would be the case. Borrowed money thus creates an opportunity for greater capital gain but at the same time increases exposure to capital risk. The net cost of any borrowed
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money would be an expense that otherwise would not be incurred and this expense could restrict or eliminate the net investment income of the fund in any given period.
Derivatives.
General. The fund may invest in certain derivative instruments (also called Financial Instruments), discussed below, to attempt to hedge its investments, among other things, as described in the Prospectus. The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the CFTC). In addition, the funds ability to use Financial Instruments may be limited by tax considerations. In addition to the instruments, strategies and risks described below, the manager expects that additional opportunities in connection with Financial Instruments and other similar or related techniques may become available. These new opportunities may become available as the manager develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. The manager may utilize these opportunities to the extent that they are consistent with the funds investment objective and are permitted by its investment limitations and applicable regulatory authorities. The fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.
Each derivative instrument purchased for the fund is reviewed and analyzed by the portfolio managers to assess the risk and reward of each such instrument in relation to the funds investment strategy. The decision to invest in derivative instruments or conventional securities is made by measuring the respective instruments ability to provide value to the fund.
Hedging strategies can be broadly categorized as short hedges and long hedges. A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential declines in the value of one or more investments held in the funds portfolio. In a short hedge, the fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that the fund intends to acquire. In a long hedge, the fund takes a position in a Financial Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, the fund does not own a corresponding security and, therefore, the transaction does not relate to a security the fund owns. Rather, it relates to a security that the fund intends to acquire. If the fund does not complete the hedge by purchasing the security as anticipated, the effect on the funds portfolio is the same as if the transaction were entered into for speculative purposes.
Financial Instruments on securities may be used to attempt to hedge against price movements in one or more particular securities positions that the fund owns or intends to acquire. Financial Instruments on indexes, in contrast, may be used to attempt to hedge against price movements in market sectors in which the fund has invested or expects to invest. Financial Instruments on debt securities may be used to hedge either individual securities or broad debt market sectors.
Special Risks. The use of Financial Instruments involves special considerations and risks, certain of which are described below. In general, these techniques may increase the volatility of the fund and may involve a small investment of cash relative to the magnitude of the risk assumed.
(1) | Successful use of most Financial Instruments depends upon the managers ability to predict movements of the overall securities, currency and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Use of Financial Instruments could result in a loss, regardless of whether the intent was to enhance returns or manage risk. |
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(2) | When Financial Instruments are used for hedging purposes, the historical correlation between price movements of a Financial Instrument and price movements of the investments being hedged might change so as to make the hedge less effective or unsuccessful. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a change in correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The effectiveness of hedges using Financial Instruments on indexes will depend on the degree to which correlation between price movements in the index and price movements in the securities being hedged can be accurately predicted. |
Because there are a limited number of types of exchange-traded options and futures contracts, it is likely that the standardized contracts available will not match the funds current or anticipated investments exactly. The fund may invest in options and futures contracts based on securities with different issuers, maturities or other characteristics from the securities in which it typically invests, which involves the risk that the options or futures position will not track the performance of the funds other investments.
Options and futures prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match the funds investments well. Options and futures prices are affected by factors which may not affect security prices the same way, such as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time remaining until expiration of the contract. Imperfect correlation may also result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures are traded as compared to securities or from the imposition of daily price fluctuation limits or trading halts. The fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in the funds options or futures positions have a low correlation with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.
(3) | If successful, the hedging strategies discussed above can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if the fund entered into a short hedge because its manager projected a decline in the price of a security in the funds portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument declined by more than the increase in the price of the security, the fund could suffer a loss. In either such case, the fund would have been in a better position had it not attempted to hedge at all. |
(4) | The fund might be required to maintain segregated assets as cover or make margin payments when it takes positions in Financial Instruments involving obligations to third parties ( i.e. , Financial Instruments other than purchased options). If the fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the funds ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so or require that the fund sell a portfolio security at a disadvantageous time. |
(5) | The fund may be subject to the risk that the other party to a Financial Instrument (the counterparty) will not be able to honor its financial obligation to the fund. |
(6) |
Many derivative instruments are traded in institutional markets rather than on an exchange. Nevertheless, many derivative instruments are actively traded and can be priced with as much accuracy as conventional securities. Derivative instruments that are custom designed to meet the specialized |
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investment needs of a relatively narrow group of institutional investors such as the fund are not readily marketable and are subject to the funds restrictions on illiquid investments. |
The funds ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the counterparty to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the fund.
Writing Covered Call Options. The fund may write (sell) covered call options. Covered call options will generally be written on securities and currencies which, in the opinion of the manager, are not expected to make any major price moves in the near future but which, over the long term, are deemed to be attractive investments for the fund.
The manager and the fund believe that writing of covered call options is less risky than writing uncovered or naked options, which the fund will not do. A call option written by the fund is covered if the fund owns the securities or currency underlying the option or has an absolute and immediate right to acquire that security or currency without additional cash consideration (or for additional cash consideration held in a segregated account by the funds custodian) upon conversion or exchange of other securities or currencies held in its portfolio. A written call option is also covered if the fund holds on a share-for-share basis a purchased call on the same security, or holds a call on the same currency as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the fund in cash or other liquid assets. Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the funds investment objective. When writing a covered call option, the fund, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price and retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the fund has no control over when it may be required to sell the underlying securities or currencies, since the option may be exercised at any time prior to the options expiration. If a call option which the fund has written expires, the fund will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the fund will realize a gain or loss from the sale of the underlying security or currency. The security or currency covering the call option will be maintained in a segregated account with the funds custodian.
The premium the fund receives for writing a call option is deemed to constitute the market value of an option. The premium the fund will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the implied price volatility of the underlying security or currency, and the length of the option period. In determining whether a particular call option should be written on a particular security or currency, the manager will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the fund for writing covered call options will be recorded as a liability in the funds statement of assets and liabilities. This liability will be adjusted daily to the options current market value. The liability will be extinguished upon expiration of the option or delivery of the underlying security or currency upon the exercise of the option. The liability with respect to a listed option will also be extinguished upon the purchase of an identical option in a closing transaction.
Closing transactions will be effected in order to realize a profit or to limit losses on an outstanding call option, to prevent an underlying security or currency from being called, or to permit the sale of the underlying security or currency. Furthermore, effecting a closing transaction will permit the fund to write another call option on the underlying security or currency with either a different exercise price, expiration date or both. If the fund desires to sell a particular security or currency from its portfolio on which it has written a call option or purchases a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security or
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currency. There is no assurance that the fund will be able to effect such closing transactions at a favorable price. If the fund cannot enter into such a transaction, it may be required to hold a security or currency that it might otherwise have sold, in which case it would continue to be at market risk with respect to the security or currency.
The fund will pay transaction costs in connection with the writing of options and in entering into closing purchase contracts. Transaction costs relating to options activity are normally higher than those applicable to purchases and sales of portfolio securities.
Options written by the fund will normally have expiration dates between one and six months from the date written. The exercise price of the options may be below, equal to or above the current market values of the underlying securities at the times the options are written. In the case of call options, these exercise prices are referred to as in-the-money, at-the-money and out-of-the-money, respectively.
The fund may write (a) in-the-money call options when the manager expects the price of the underlying security to remain flat or decline moderately during the option period, (b) at-the-money call options when the manager expects the price of the underlying security to remain flat or advance moderately during the option period and (c) out-of-the-money call options when the manager expects that the price of the security may increase but not above a price equal to the sum of the exercise price plus the premiums received from writing the call option. In any of the preceding situations, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Writing out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be utilized in the same market environments as such call options are used in equivalent transactions.
So long as the obligation of the fund as the writer of an option continues, the fund may be assigned an exercise notice by the broker/dealer through which the option was sold, requiring it to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or the fund effects a closing purchase transaction. The fund can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. To secure its obligation to deliver the underlying security when it writes a call option, or to pay for the underlying security when it writes a put option, the fund will be required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (OCC) or similar clearing corporation and the securities exchange on which the option is written.
An option position may be closed out only where there exists a secondary market for an option of the same series on a recognized securities exchange or in the over-the-counter market. From time to time, the fund may purchase an underlying security or currency for delivery in accordance with the exercise of an option, rather than delivering such security or currency from its portfolio. In such cases, additional costs will be incurred.
The fund may realize a profit or loss upon entering into a closing transaction. In cases in which the fund has written an option, it will realize a profit if the cost of the closing purchase transaction is less than the premium received upon writing the original option and will incur a loss if the cost of the closing purchase transaction exceeds the premium received upon writing the original option. Similarly, when the fund has purchased an option and engages in a closing sale transaction, whether it recognizes a profit or loss will depend upon whether the amount received in the closing sale transaction is more or less than the premium the fund initially paid for the original option plus the related transaction costs.
Although the fund generally will purchase or write only those options for which the manager believes there is an active secondary market so as to facilitate closing transactions, there is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist or may cease to exist. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, have at times
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rendered certain of the facilities of the OCC and national securities exchanges inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer, the fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing the maximum number of calls and puts of each class which may be held or written, or exercised within certain periods, by an investor or group of investors acting in concert (regardless of whether the options are written on the same or different securities exchanges or are held, written or exercised in one or more accounts or through one or more brokers). It is possible that the fund and other clients of the manager and certain of their affiliates may be considered to be such a group. A securities exchange may order the liquidation of positions found to be in violation of these limits, and it may impose certain other sanctions.
In the case of options written by the fund that are deemed covered by virtue of the funds holding convertible or exchangeable preferred stock or debt securities, the time required to convert or exchange and obtain physical delivery of the underlying common stock with respect to which the fund has written options may exceed the time within which the fund must make delivery in accordance with an exercise notice. In these instances, the fund may purchase or temporarily borrow the underlying securities for purposes of physical delivery. By so doing, the fund will not bear any market risk because the fund will have the absolute right to receive from the issuer of the underlying security an equal number of shares to replace the borrowed stock, but the fund may incur additional transaction costs or interest expenses in connection with any such purchase or borrowing.
Purchasing Put Options. The fund may purchase put options. As the holder of a put option, the fund has the right to sell the underlying security or currency at the exercise price at any time during the option period. The fund may enter into closing sale transactions with respect to such options, exercise them or permit them to expire.
The fund may purchase a put option on an underlying security or currency (a protective put) owned by the fund as a hedging technique in order to protect against an anticipated decline in the value of the security or currency. Such hedge protection is provided only during the life of the put option when the fund, as the holder of the put option, is able to sell the underlying security or currency at the put exercise price regardless of any decline in the underlying securitys market price or currencys exchange value. The premium paid for the put option and any transaction costs may reduce any capital gain or, in the case of currency, ordinary income otherwise available for distribution when the security is eventually sold.
The fund may also purchase put options at a time when the fund does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, the fund seeks to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, the fund will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently below the exercise price to cover the premium and transaction costs, unless the put option is sold in a closing sale transaction.
The premium paid by the fund when purchasing a put option will be recorded as an asset in the funds statement of assets and liabilities. This asset will be adjusted daily to the options current market value, as calculated by the fund. The asset will be extinguished upon expiration of the option or the delivery of the underlying security or currency upon the exercise of the option. The asset with respect to a listed option will also be extinguished upon the writing of an identical option in a closing transaction.
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Purchasing Call Options. The fund may purchase call options. As the holder of a call option, the fund has the right to purchase the underlying security or currency at the exercise price at any time during the option period. The fund may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. Call options may be purchased by the fund for the purpose of acquiring the underlying security or currency for its portfolio. Utilized in this fashion, the purchase of call options enables the fund to acquire the security or currency at the exercise price of the call option plus the premium paid. At times the net cost of acquiring the security in this manner may be less than the cost of acquiring the security or currency directly. This technique may also be useful to the fund in purchasing a large block of securities that would be more difficult to acquire by direct market purchases. So long as it holds such a call option rather than the underlying security or currency itself, the fund is partially protected from any unexpected decline in the market price of the underlying security or currency and in such event could allow the call option to expire, incurring a loss only to the extent of the premium paid for the option.
The fund may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. Call options may also be purchased at times to avoid realizing losses that would result in a reduction of the funds current return.
Stock Index Options. The fund may purchase and write put and call options on U.S. stock indexes listed on U.S. exchanges for the purpose of hedging its portfolio holdings. A stock index fluctuates with changes in the market values of the stocks included in the index. Some stock index options are based on a broad market index such as the New York Stock Exchange Composite Index or the Canadian Market Portfolio Index, or a narrower market or industry index such as the Standard & Poors 100 Index, the Amex Oil Index or the Amex Computer Technology Index.
Options on stock indexes are generally similar to options on stock except for the delivery requirements. Instead of giving the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive a cash exercise settlement amount equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed index multiplier. Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars or a foreign currency, as the case may be, times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedging technique will depend upon the extent to which price movements in the portion of the securities portfolio of the fund being hedged correlate with price movements of the stock index selected. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Accordingly, successful use by the fund of options on stock indexes will be subject to the managers ability to predict correctly movements in the direction of the stock market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual stocks.
The fund will engage in stock index options transactions only when determined by the manager to be consistent with the funds efforts to control risk. There can be no assurance that such judgment will be accurate or that the use of these portfolio strategies will be successful. When the fund writes an option on a stock index, the fund will establish a segregated account with its custodian in an amount equal to the market value of the option and will maintain the account while the option is open.
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Stock Index, Interest Rate and Currency Futures Contracts. The fund may enter into stock index, interest rate or currency futures contracts as a hedge against changes in prevailing levels of market values, interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or committed to be acquired by the fund. The funds hedging may include holding futures as an offset against anticipated changes in market values, interest or currency exchange rates. The fund may also enter into futures contracts based on financial indices including any index of U.S. government securities, foreign government securities or corporate debt securities.
A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument or currency for a specified price at a designated date, time and place. The purchaser of a futures contract on an index agrees to take or make delivery of an amount of cash equal to the difference between a specified dollar multiple of the value of the index on the expiration date of the contract (current contract value) and the price at which the contract was originally struck. No physical delivery of the securities underlying the index is made. Brokerage fees are incurred when a futures contract is bought or sold, and margin deposits must be maintained at all times that the futures contract is outstanding.
The purpose of entering into a futures contract is to protect the fund from fluctuations in the value of securities without actually buying or selling the securities. For example, in the case of stock index futures contracts, if the fund anticipates an increase in the price of stocks that it intends to purchase at a later time, the fund could enter into contracts to purchase the stock index (known as taking a long position) as a temporary substitute for the purchase of stocks. If an increase in the market occurs that influences the stock index as anticipated, the value of the futures contracts increases and thereby serves as a hedge against the funds not participating in a market advance. The fund then may close out the futures contracts by entering into offsetting futures contracts to sell the stock index (known as taking a short position) as it purchases individual stocks.
Although techniques other than sales and purchases of futures contracts could be used to reduce the funds exposure to market value, interest rate and currency exchange rate fluctuations, the fund may be able to hedge its exposure more effectively and at a lower cost through using futures contracts.
Although futures contracts typically require future delivery of and payment for financial instruments or currencies, futures contracts are usually closed out before the delivery date. Closing out an open futures contract sale or purchase is effected by entering into an offsetting futures contract purchase or sale, respectively, for the same aggregate amount of the identical financial instrument or currency and the same delivery date. If the offsetting purchase price is less than the original sale price, the fund realizes a gain; if it is more, the fund realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, the fund realizes a gain; if it is less, the fund realizes a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that the fund will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the fund is not able to enter into an offsetting transaction, the fund will continue to be required to maintain the margin deposits of the underlying financial instrument or currency on the relevant delivery date. The fund intends to enter into futures transactions only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time.
As an example of an offsetting transaction, the contractual obligations arising from the sale of one futures contract of September Treasury Bills on an exchange may be fulfilled at any time before delivery under the futures contract is required ( i.e ., on a specific date in September, the delivery month) by the purchase of another futures contract of September Treasury Bills on the same exchange. In such instance the difference between the price at which the futures contract was sold and the price paid for the offsetting purchase, after allowance for transaction costs, represents the profit or loss to the fund.
Persons who trade in futures contracts may be broadly classified as hedgers and speculators. Hedgers, whose business activity involves investment or other commitment in securities or other obligations, use the futures markets to offset unfavorable changes in value that may occur because of fluctuations in the value of the
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securities and obligations held or committed to be acquired by them or fluctuations in the value of the currency in which the securities or obligations are denominated. Debtors and other obligors may also hedge the interest cost of their obligations. The speculator, like the hedger, generally expects neither to deliver nor to receive the financial instrument underlying the futures contract, but, unlike the hedger, hopes to profit from fluctuations in prevailing interest rates or currency exchange rates.
The fund may enter into futures transactions for traditional hedging purposes; that is, futures contracts will be sold to protect against a decline in the price of securities or currencies that the fund owns, or futures contracts will be purchased to protect the fund against an increase in the price of securities or currencies it has committed to purchase or expects to purchase. The fund may also enter into futures transactions as a substitute for buying or selling securities or as a cash flow management technique.
No consideration will be paid or received by the fund upon the purchase or sale of a futures contract. Initially, the fund will be required to deposit with the broker an amount of cash or cash equivalents equal to approximately 1% to 10% of the contract amount (this amount is subject to change by the exchange or board of trade on which the contract is traded and brokers or members of such board of trade may charge a higher amount). This amount is known as initial margin and is in the nature of a performance bond or good faith deposit on the contract, which 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 or securities 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. In addition, when the fund enters into a long position in a futures contract or an option on a futures contract, it must maintain an amount of cash or cash equivalents equal to the total market value of the underlying futures contract, less amounts held in the funds commodity brokerage account at its broker. 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 funds existing position in the contract.
Positions in futures contracts may be closed out only on the exchange on which they were entered into (or through a linked exchange) and no secondary market exists for those contracts. In addition, although the fund intends to enter into futures contracts only if there is an active market for the contracts, there is no assurance that an active market will exist for the contracts at any particular time. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made 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 some futures traders to substantial losses. In such event, and in the event of adverse price movements, the fund would be required to make daily cash payments of variation margin; in such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may partially or completely offset losses on the futures contract. As described above, however, no assurance can be given that the price of the securities being hedged will correlate with the price movements in a futures contract and thus provide an offset to losses on the futures contract.
The CFTC has eliminated limitations on futures transactions and options thereon by registered investment companies, provided that the manager to the registered investment company claims an exclusion from regulation as a commodity pool operator. The fund is managed by an entity that has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act and therefore is not subject to registration or regulation as a pool operator under the Commodity Exchange Act. As a result of these CFTC rule changes, the fund is no longer restricted in its ability to enter into futures transactions and options thereon under CFTC regulations. The fund, however, continues to have policies with respect to futures and options thereon as set forth above. The current view of the staff of the SEC is that the funds long and short positions in futures contracts as well as put and call options on futures written by it must be collateralized with cash or other liquid securities and segregated with the funds custodian or a designated sub-custodian or covered in a manner similar to that for covered options on securities and designed to eliminate any potential leveraging.
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Options on Futures Contracts. Options on futures contracts are similar to options on securities or currencies except that options on futures contracts give the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell the futures contract, at a specified exercise price at any time during the period of the option. Upon exercise of the 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 writers futures margin account, which represents the amount by which the market price of the futures contract, at exercise, 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. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the securities or currencies upon which the futures contracts are based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing call and put options on futures, the fund may purchase call and put options on the underlying securities or currencies themselves (see Purchasing Put Options and Purchasing Call Options above). Such options would be used in a manner identical to the use of options on futures contracts.
To reduce or eliminate the leverage then employed by the fund or to reduce or eliminate the hedge position then currently held by the fund, the fund may seek to close out an option position by selling an option covering the same securities or currency and having the same exercise price and expiration date. The ability to establish and close out positions on options on futures contracts is subject to the existence of a liquid market. It is not certain that this market will exist at any specific time.
Special Risks of Using Futures Contracts. The prices of futures contracts are volatile and are influenced by, among other things, actual and anticipated changes in stock market prices or interest rates, which in turn are affected by fiscal and monetary policies and national and international political and economic events. At best, the correlation between changes in prices of futures contracts and of the securities or currencies being hedged can be only approximate. The degree of imperfection of correlation depends upon circumstances such as: variations in speculative market demand for futures and for equity securities, debt securities or currencies, including technical influences in futures trading; and differences between the financial instruments being hedged and the instruments underlying the standard futures contracts available for trading, with respect to market values, interest rate levels, maturities and creditworthiness of issuers. A decision of whether, when, and how to hedge involves skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or interest rate trends.
Because of the low margin deposits required, futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor.
Furthermore, in the case of a futures contract purchase, in order to be certain that the fund has sufficient assets to satisfy its obligations under a futures contract, the fund segregates and commits to back the futures contract with an amount of cash and liquid securities from the fund equal in value to the current value of the underlying instrument less the margin deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous days settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
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Forward Currency Contracts, Options on Currency and Currency Swaps. A forward currency contract is an obligation to purchase or sell a currency against another currency at a future date and price as agreed upon by the parties. The fund may either accept or make delivery of the currency at the maturity of the forward contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. The fund may engage in forward currency transactions in anticipation of, or to protect itself against, fluctuations in exchange rates. To attempt to hedge against adverse movements in exchange rates between currencies, the fund may enter into forward currency contracts for the purchase or sale of a specified currency at a specified future date. Such contracts may involve the purchase or sale of a foreign currency against the U.S. dollar or may involve two foreign currencies. The fund may enter into forward currency contracts either with respect to specific transactions or with respect to its portfolio positions. For example, when the manager anticipates making a purchase or sale of a security, it may enter into a forward currency contract in order to set the rate (either relative to the U.S. dollar or another currency) at which the currency exchange transaction related to the purchase or sale will be made (transaction hedging). Further, when the manager believes that a particular currency may decline compared to the U.S. dollar or another currency, the fund may enter into a forward currency contract to sell the currency the manager expects to decline in an amount approximating the value of some or all of the funds securities denominated in that currency. When the manager believes that one currency may decline against a currency in which some or all of the portfolio securities held by the fund are denominated, it may enter into a forward contract to buy the currency expected to appreciate for a fixed amount (position hedging). In this situation, the fund may, in the alternative, enter into a forward currency contract to sell a different currency for a fixed amount of the currency expected to decline where the manager believes that the value of the currency to be sold pursuant to the forward currency contract will fall whenever there is a decline in the value of the currency in which portfolio securities of the fund are denominated (cross hedging). The funds custodian places (i) cash, (ii) U.S. government securities or (iii) other liquid assets in a separate account of the fund having a value equal to the aggregate amount of the funds commitments under forward currency contracts entered into with respect to position hedges and cross hedges. If the value of the securities placed in a separate account declines, additional cash or securities are placed in the account on a daily basis so that the value of the account will equal the amount of the funds commitments with respect to such contracts.
The matching of the increase in value of a forward contract and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise. In addition, the fund may not always be able to enter into foreign currency forward contracts at attractive prices and this will limit the funds ability to use such contract to hedge or cross-hedge its assets. Also, with regard to the use of cross-hedges by the fund, there can be no assurance that historical correlations between the movement of certain foreign currencies relative to the U.S. dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying the cross-hedges of the fund and the movements in the exchange rates of the foreign currencies in which the assets of the fund that are the subject of such cross-hedges are denominated.
Forward contracts are traded in an interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement and is consummated without payment of any commission. The fund, however, may enter into forward contracts with deposit requirements or commissions.
A put option gives the fund, as purchaser, the right (but not the obligation) to sell a specified amount of currency at the exercise price until the expiration of the option. A call option gives the fund, as purchaser, the right (but not the obligation) to purchase a specified amount of currency at the exercise price until its expiration. The fund might purchase a currency put option, for example, to protect itself during the contract period against a decline in the value of a currency in which it holds or anticipates holding securities. If the currencys value should decline, the loss in currency value should be offset, in whole or in part, by an increase in the value of the put. If the value of the currency instead should rise, any gain to the fund would be reduced by the premium it had paid for the put option. A currency call option might be purchased, for example, in anticipation of, or to protect against, a rise in the value of a currency in which the fund anticipates purchasing securities.
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The ability of the fund to establish and close out positions in foreign currency options is subject to the existence of a liquid market. There can be no assurance that a liquid market will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by all of those factors that influence foreign exchange rates and investments generally.
A position in an exchange-listed option may be closed out only on an exchange that provides a secondary market for identical options. Exchange markets for options on foreign currencies exist but are relatively new, and the ability to establish and close out positions on the exchanges is subject to maintenance of a liquid secondary market. Closing transactions may be effected with respect to options traded in the over-the-counter (OTC) markets (currently the primary markets for options on foreign currencies) only by negotiating directly with the other party to the option contract or in a secondary market for the option if such market exists. Although the fund intends to purchase only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular option at any specific time. In such event, it may not be possible to effect closing transactions with respect to certain options, with the result that the fund would have to exercise those options which it has purchased in order to realize any profit. The staff of the SEC has taken the position that, in general, purchased OTC options and the underlying securities used to cover written OTC options are illiquid securities. However, the fund may treat as liquid the underlying securities used to cover written OTC options, provided it has arrangements with certain qualified dealers who agree that the fund may repurchase any option it writes for a maximum price to be calculated by a predetermined formula. In these cases, the OTC option itself would only be considered illiquid to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option.
The fund may also enter into currency swaps. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of the reference indexes. If a swap agreement provides for payment in different currencies, the parties might agree to exchange the notional principal amount as well. Forward foreign currency contracts and currency swaps are established in the interbank market conducted directly between currency traders (usually large commercial banks or other financial institutions) on behalf of their customers.
Interest Rate Swaps, Caps and Floors. Among the hedging transactions into which the fund may enter are interest rate swaps and the purchase or sale of interest rate caps and floors. The fund expects to enter into these transactions primarily to preserve a return or spread on a particular investment or segment of its portfolio or to protect against any increase in the price of securities the fund anticipates purchasing at a later date. The fund intends to use these transactions as a hedge and not as a speculative investment. The fund will not sell interest rate caps or floors that it does not own. In a typical interest rate swap, the fund and a counterparty exchange their right to receive or their obligation to pay interest on a security. For example, one party may agree to make regular payments equal to a floating interest rate times a notional principal amount, in return for payments equal to a fixed rate times the same notional amount, for a specified period of time. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
The fund may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities, and will usually enter into interest rate swaps on a net basis, i.e. , the two payment streams are netted, with the fund receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as these hedging transactions are entered into for good faith hedging purposes, the manager and the fund believe such obligations do not constitute senior securities and, accordingly will not treat them as being subject to the funds borrowing restrictions. The net amount of the excess, if any, of the obligations of the fund over its entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or liquid securities having an aggregate NAV at least equal to the accrued excess
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will be maintained in a segregated account by a custodian that satisfies the requirements of the 1940 Act. The fund will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized rating organization at the time of entering into such transaction. If there is a default by the other party to such a transaction, the fund will have contractual remedies pursuant to the agreements related to the transaction. Swap agreements will tend to shift the funds investment exposure from one type of investment to another. For example, if the fund agreed to exchange payments in U.S. dollars for payments in a foreign currency, the swap agreement would tend to decrease the funds exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Depending on how they are used, swap agreements may increase or decrease the overall volatility of the funds investments and its share price and yield. Caps and floors have an effect similar to buying or writing options.
Swap agreements are sophisticated risk management instruments that typically require a small cash investment relative to the magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on the funds performance. Swap agreements entail both interest rate risk and credit risk. There is a risk that, based on movements of interest rates in the future, the payments made by the fund under a swap agreement will be greater than the payments it received. Swap agreements are subject to credit risks related to the counterpartys ability to perform, and may decline in value if the counterpartys creditworthiness deteriorates.
New options and futures contracts and various combinations thereof continue to be developed and the fund may invest in any such options and contracts as may be developed to the extent consistent with its investment objective and regulatory requirements applicable to investment companies.
Recent Market Events. The fixed income markets have experienced a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market. However, these concerns have since expanded to include a broad range of mortgage-backed securities, asset-backed securities and other fixed income securities, including those rated investment grade, the U.S. and international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, fixed income instruments have been experiencing liquidity issues, increased price volatility, credit downgrades and increased likelihood of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. During times of market turmoil, investors tend to look to the safety of securities issued or backed by the U.S. Treasury, causing the prices of these securities to rise, and the yield to decline. These events and the continuing market upheavals may have an adverse effect
The fund has adopted the fundamental investment policies below for the protection of shareholders. Fundamental investment policies may not be changed without the vote of a majority of the outstanding shares of the fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting power of the fund present at a shareholder meeting, if the holders of more than 50% of the voting power of the fund are present in person or represented by proxy, or (b) more than 50% of the voting power of the fund.
If any percentage restriction described below is complied with at the time of an investment, a later increase or decrease in percentage resulting from a change in values or assets will not constitute a violation of the restriction.
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Fundamental Investment Policies
The funds fundamental investment policies are as follows:
(1) | The fund may not borrow money except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. |
(2) | The fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. |
(3) | The fund may lend money or other assets to the extent permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. |
(4) | The fund may not issue senior securities except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. |
(5) | The fund may not purchase or sell real estate except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. |
(6) | The fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority. |
(7) | Except as permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction, the fund may not make any investment if, as a result, the funds investments will be concentrated in any one industry. |
With respect to the fundamental policy relating to borrowing money set forth in (1) above, the 1940 Act permits a fund to borrow money in amounts of up to one-third of the funds total assets from banks for any purpose, and to borrow up to 5% of the funds total assets from banks or other lenders for temporary purposes. To limit the risks attendant to borrowing, the 1940 Act requires the fund to maintain at all times an asset coverage of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of the funds total assets, minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Certain trading practices and investments, such as reverse repurchase agreements, may be considered to be borrowings and thus subject to the 1940 Act restrictions. Borrowing money to increase portfolio holdings is known as leveraging. Borrowing, especially when used for leverage, may cause the value of the funds shares to be more volatile than if the fund did not borrow. This is because borrowing tends to magnify the effect of any increase or decrease in the value of the funds portfolio holdings. Borrowed money thus creates an opportunity for greater gains, but also greater losses. To repay borrowings, the fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with borrowing money, and these costs would offset and could eliminate the funds net investment income in any given period. Currently, the fund has no intention of borrowing money for leverage. The policy in (1) above will be interpreted to permit the fund to engage in trading practices and investments that may be considered to be borrowing to the extent permitted by the 1940 Act. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered to be borrowings under the policy. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the policy.
With respect to the fundamental policy relating to underwriting set forth in (2) above, the 1940 Act does not prohibit a fund from engaging in the underwriting business or from underwriting the securities of other issuers; in
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fact, the 1940 Act permits a fund to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently are that the amount of the funds underwriting commitments, when added to the value of the funds investments in issuers where the fund owns more than 10% of the outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the 1933 Act. Under the 1933 Act, an underwriter may be liable for material omissions or misstatements in an issuers registration statement or prospectus. Securities purchased from an issuer and not registered for sale under the 1933 Act are considered restricted securities. There may be a limited market for these securities. If these securities are registered under the 1933 Act, they may then be eligible for sale but participating in the sale may subject the seller to underwriter liability. These risks could apply to a fund investing in restricted securities. Although it is not believed that the application of the 1933 Act provisions described above would cause the fund to be engaged in the business of underwriting, the policy in (2) above will be interpreted not to prevent the fund from engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether the fund may be considered to be an underwriter under the 1933 Act.
With respect to the fundamental policy relating to lending set forth in (3) above, the 1940 Act does not prohibit a fund from making loans; however, SEC staff interpretations currently prohibit funds from lending more than one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that reflects current interest rates. The SEC frequently treats repurchase agreements as loans.) While lending securities may be a source of income to the fund, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in the underlying securities should the borrower fail financially. However, loans would be made only when the funds manager believes the income justifies the attendant risks. The fund also will be permitted by this policy to make loans of money, including to other funds. The fund would have to obtain exemptive relief from the SEC to make loans to other funds. The policy in (3) above will be interpreted not to prevent the fund from purchasing or investing in debt obligations and loans. In addition, collateral arrangements with respect to options, forward currency and futures transactions and other derivative instruments, as well as delays in the settlement of securities transactions, will not be considered loans.
With respect to the fundamental policy relating to issuing senior securities set forth in (4) above, senior securities are defined as fund obligations that have a priority over the funds shares with respect to the payment of dividends or the distribution of fund assets. The 1940 Act prohibits the fund from issuing senior securities except that the fund may borrow money in amounts of up to one-third of the funds total assets from banks for any purpose. The fund may also borrow up to 5% of the funds total assets from banks or other lenders for temporary purposes, and these borrowings are not considered senior securities. The issuance of senior securities by a fund can increase the speculative character of the funds outstanding shares through leveraging. Leveraging of the funds portfolio through the issuance of senior securities magnifies the potential for gain or loss on monies, because even though the funds net assets remain the same, the total risk to investors is increased to the extent of the funds gross assets. The policy in (4) above will be interpreted not to prevent collateral arrangements with respect to swaps, options, forward or futures contracts or other derivatives, or the posting of initial or variation margin.
With respect to the fundamental policy relating to real estate set forth in (5) above, the 1940 Act does not prohibit the fund from owning real estate; however, the fund is limited in the amount of illiquid assets it may purchase. Investing in real estate may involve risks, including that real estate is generally considered illiquid and may be difficult to value and sell. Owners of real estate may be subject to various liabilities, including environmental liabilities. To the extent that investments in real estate are considered illiquid, the current SEC staff position generally limits the funds purchases of illiquid securities to 15% of net assets. The policy in (5) above will be interpreted not to prevent the fund from investing in real estate-related companies, companies whose businesses consist in whole or in part of investing in real estate, instruments (like mortgages) that are secured by real estate or interests therein, or real estate investment trust securities.
25
With respect to the fundamental policy relating to commodities set forth in (6) above, the 1940 Act does not prohibit the fund from owning commodities, whether physical commodities and contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, the fund is limited in the amount of illiquid assets it may purchase. To the extent that investments in commodities are considered illiquid, the current SEC staff position generally limits the funds purchases of illiquid securities to 15% of net assets. If the fund were to invest in a physical commodity or a physical commodity-related instrument, the fund would be subject to the additional risks of the particular physical commodity and its related market. The value of commodities and commodity-related instruments may be extremely volatile and may be affected either directly or indirectly by a variety of factors. There may also be storage charges and risks of loss associated with physical commodities. The policy in (6) above will be interpreted to permit investments in exchange traded funds that invest in physical and/or financial commodities.
With respect to the fundamental policy relating to concentration set forth in (7) above, the 1940 Act does not define what constitutes concentration in an industry. The SEC staff has taken the position that investment of 25% or more of a funds total assets in one or more issuers conducting their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations of concentration could change in the future. A fund that invests a significant percentage of its total assets in a single industry may be particularly susceptible to adverse events affecting that industry and may be more risky than a fund that does not concentrate in an industry. The policy in (7) above will be interpreted to refer to concentration as that term may be interpreted from time to time. The policy also will be interpreted to permit investment without limit in the following: securities of the U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; securities of foreign governments; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry. There also will be no limit on investment in issuers domiciled in a single jurisdiction or country. The policy also will be interpreted to give broad authority to the fund as to how to classify issuers within or among industries.
The funds fundamental policies will be interpreted broadly. For example, the policies will be interpreted to refer to the 1940 Act and the related rules as they are in effect from time to time, and to interpretations and modifications of or relating to the 1940 Act by the SEC and others as they are given from time to time. When a policy provides that an investment practice may be conducted as permitted by the 1940 Act, the policy will be interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.
Diversification
The fund is currently classified as a non-diversified fund under the 1940 Act, which means the fund is not limited by the 1940 Act in the proportion of its assets it may invest in the securities of a single issuer. A diversified fund may not purchase securities of an issuer (other than obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, with respect to 75% of its total assets, (a) more than 5% of the funds total assets would be invested in securities of that issuer, or (b) the fund would hold more than 10% of the outstanding voting securities of that issuer. A non-diversified fund is not subject to these limitations. Therefore, a non-diversified fund can invest a greater portion of its assets in a single issuer or a limited number of issuers than may a diversified fund. In this regard, the fund is subject to greater risk than a diversified fund because the fund may be subject to greater volatility with respect to its portfolio securities than funds that are more broadly diversified. The fund intends to conduct its operations, however, so as to qualify as a regulated investment company (RIC) for purposes of the Code, which will relieve the fund of any liability for federal income tax to the extent its earnings are distributed to shareholders. To qualify as a RIC, the fund will, among other things, limit its investments so that, at the close of each quarter of the taxable year (a) not more than 25% of the market value of the funds total assets will be invested in the securities of a single issuer and (b) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the fund will not own more than 10% of the outstanding voting securities of a single issuer.
26
Portfolio Turnover
For reporting purposes, the funds portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the fund during the fiscal year. In determining such portfolio turnover, all securities whose maturities at the time of acquisition were one year or less are excluded. A 100% portfolio turnover rate would occur, for example, if all of the securities in the funds investment portfolio (other than short-term money market securities) were replaced once during the fiscal year. Portfolio turnover will not be a limiting factor should the manager deem it advisable to purchase or sell securities.
For the fiscal years ended April 30, 2008 and 2009, the funds portfolio turnover rates were 25% and 59%, respectively.
In the event that portfolio turnover increases, this increase necessarily results in correspondingly greater transaction costs which must be paid by the fund. To the extent the portfolio trading results in realization of net short-term capital gains, shareholders will be taxed on such gains at ordinary tax rates (except shareholders who invest through individual retirement accounts (IRAs) and other retirement plans which are not taxed currently on accumulations in their accounts).
27
The business affairs of the fund are managed by or under the direction of the Board of the Trust. The Board elects officers who are responsible for the day-to-day operations of the fund and who execute policies authorized by the Board.
The current Trustees, including the Trustees who are not interested persons of the fund (as defined in the 1940 Act) (the Independent Trustees), and executive officers of the Trust, their years of birth, their principal occupations during at least the past five years (their titles may have varied during that period), the number of funds associated with Legg Mason the Trustees oversee, and other board memberships they hold are set forth below. The address of each Trustee is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018.
Name and Year of Birth |
Position(s)
with Trust |
Term of
Office* and Length of Time Served** |
Principal Occupation(s) During Past 5 Years |
Number of
Funds in Fund Complex Overseen by Trustee |
Other Board
Past 5 Years |
|||||
INDEPENDENT TRUSTEES: |
||||||||||
Paul R. Ades Born 1940 |
Trustee | Since 1983 | Law firm of Paul R. Ades, PLLC (since 2000) | 56 | None | |||||
Andrew L. Breech Born 1952 |
Trustee | Since 1991 | President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985) | 56 | None | |||||
Dwight B. Crane Born 1937 |
Trustee | Since 1981 | Independent Consultant (since 1969); formerly, Professor, Harvard Business School (1969 to 2007) | 56 | None | |||||
Robert M. Frayn, Jr. Born 1934 |
Trustee | Since 1981 | Retired; formerly, President and Director, Book Publishing Co. (1970 to 2002) | 56 | None | |||||
Frank G. Hubbard Born 1937 |
Trustee | Since 1993 | President, Avatar International Inc. (business development) (since 1998) | 56 | None | |||||
Howard J. Johnson Born 1938 |
Trustee |
From 1981
to 1998 and 2000 to present |
Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003) | 56 | None | |||||
David E. Maryatt Born 1936 |
Trustee | Since 1983 | Private Investor; President and Director, ALS Co. (real estate management and development firm) (since 1993) | 56 | None | |||||
Jerome H. Miller Born 1938 |
Trustee | Since 1995 | Retired | 56 | None | |||||
Ken Miller Born 1942 |
Trustee | Since 1983 | Chairman, Young Stuff Apparel Group, Inc. (apparel manufacturer) (since 1963) | 56 | None |
28
Name and Year of Birth |
Position(s)
with Trust |
Term of
Office* and Length of Time Served** |
Principal Occupation(s) During Past 5 Years |
Number of
Funds in Fund Complex Overseen by Trustee |
Other Board
Past 5 Years |
|||||
John J. Murphy Born 1944 |
Trustee |
Since
2002 |
President, Murphy Capital Management (investment advice) (since 1983) | 56 | Trustee, funds in the UBS family of funds (55 funds); Director, Nicholas Applegate funds (13 funds); Trustee, Consulting Group Capital Markets Funds (11 funds); formerly, Director, Atlantic Stewardship Bank (2004 to 2005); Director, Barclays International Funds Group Ltd. and affiliated companies (1983 to 2003) | |||||
Thomas F. Schlafly Born 1948 |
Trustee |
Since
1983 |
Partner, Thompson Coburn LLP (law firm) (since 2009); formerly, Of Counsel, Husch Blackwell Sanders LLP (law firm) (1984 to 2009); President, The Saint Louis Brewery, Inc. (since 1989) | 56 | Director, Citizens National Bank of Greater St. Louis, Maplewood, MO (since 2006) | |||||
Jerry A. Viscione Born 1944 |
Trustee |
Since
1993 |
Retired; formerly, Executive Vice President, Marquette University (1997 to 2002) | 56 | None | |||||
INTERESTED TRUSTEE: |
||||||||||
R. Jay Gerken, CFA Born 1951 |
Trustee,
President,
|
Since
2002 |
Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.); Chairman of the Board and Trustee/Director of 151 funds associated with Legg Mason Partners Fund Advisor, LLC (LMPFA) and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Chairman, Smith Barney Fund Management LLC (SBFM) and Citi Fund Management, Inc. (CFM) (2002 to 2005); formerly, Chairman, President and Chief Executive Officer, Travelers Investment Adviser Inc. (2002 to 2005) | 138 | Former Trustee, Consulting Group Capital Markets Funds (11 funds) (2002 to 2006) |
* | Each Trustee serves until his respective successor has been duly elected and qualified or until his earlier death, resignation, retirement or removal. |
** | Indicates the earliest year in which the Trustee became a board member for a fund in the Legg Mason Partners fund complex. |
| Mr. Gerken is an interested person, as defined in the 1940 Act, because of his position with LMPFA and/or certain of its affiliates. |
29
Name, Year of Birth and Address |
Position(s)
with Trust |
Term of Office*
and Length of Time Served** |
Principal Occupation(s) During Past 5 Years |
|||
OFFICERS: |
||||||
R. Jay Gerken, CFA Born 1951 620 Eighth Avenue New York, NY 10018 |
Chairman,
President and Chief Executive Officer |
Since
2002 |
Managing Director of Legg Mason & Co.; Chairman of the Board and Trustee/Director of 151 funds associated with LMPFA and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Chairman of SBFM and CFM (2002 to 2005); formerly, Chairman, President and Chief Executive Officer of Travelers Investment Adviser Inc. (2002 to 2005) | |||
Ted P. Becker Born 1951 620 Eighth Avenue New York, NY 10018 |
Chief
Compliance Officer |
Since
2006 |
Director of Global Compliance at Legg Mason (since 2006); Managing Director of Compliance at Legg Mason & Co (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason & Co. (since 2006); Chief Compliance Officer of LMPFA and certain affiliates (since 2006); formerly, Managing Director of Compliance at Citigroup Asset Management (CAM) (a group of affiliated investment advisers, which included SBFM, Smith Barney Asset Management, CFM and other affiliated investment advisory entities) (2002 to 2005) | |||
John Chiota Born 1968 100 First Stamford Place Stamford, CT 06902 |
Chief Anti-
Money Laundering Compliance Officer and Identity Theft Prevention Officer |
Since
2006 and 2008 |
Vice President of Legg Mason & Co. (since 2005); Vice President at CAM (since 2004); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. (since 2006); Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. (since 2008); formerly, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse (prior to 2004) | |||
Robert I. Frenkel Born 1954 100 First Stamford Place Stamford, CT 06902 |
Secretary
and Chief Legal Officer |
Since
2003 |
Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2005); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. (since 2003); formerly, Managing Director and General Counsel of Global Mutual Funds for CAM (2000 to 2005); formerly, Secretary of CFM (2001 to 2004) | |||
Thomas C. Mandia Born 1962 100 First Stamford Place Stamford, CT 06902 |
Assistant
Secretary |
Since
2000 |
Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. (since 2006); formerly, Managing Director and Deputy General Counsel for CAM (1992 to 2005) | |||
Kaprel Ozsolak Born 1965 55 Water Street New York, NY 10041 |
Chief
Financial Officer and Treasurer |
Since
2004 |
Director of Legg Mason & Co. (since 2005); Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. (since 2005); formerly, Vice President at CAM (1996 to 2005); formerly, Chief Financial Officer and Treasurer of certain mutual funds associated with CAM (2004 to 2005); formerly, Controller of certain mutual funds associated with CAM (2002 to 2004) | |||
Steven Frank Born 1967 55 Water Street New York, NY 10041 |
Controller |
Since
2005 |
Vice President of Legg Mason & Co. or its predecessors (since 2002); Controller of certain funds associated with Legg Mason & Co. (since 2005); formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. (2001 to 2005) |
30
Name, Year of Birth and Address |
Position(s)
with Trust |
Term of Office*
and Length of Time Served** |
Principal Occupation(s) During Past 5 Years |
|||
Albert Laskaj Born 1977 55 Water Street New York, NY 10041 |
Controller |
Since
2007 |
Vice President of Legg Mason & Co. (since 2008); Controller of certain funds associated with Legg Mason & Co. (since 2007); formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. (2005 to 2007); formerly, Accounting Manager of certain mutual funds associated with certain predecessor firms of Legg Mason & Co. (2003 to 2005) | |||
Jeanne M. Kelly Born 1951 620 Eighth Avenue New York, NY 10018 |
Senior
Vice President |
Since
2005 |
Managing Director of Legg Mason & Co. (since 2005); Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); formerly, Director of Global Fund Administration, CAM (1996 to 2005) |
* | Each officer serves until his or her respective successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal. |
** | Indicates the earliest year in which the officer took office for any funds in the Legg Mason Partners fund complex. |
Officers of the Trust receive no compensation from the fund, although they may be reimbursed by the fund for reasonable out-of-pocket travel expenses for attending Board meetings. The Board has four standing Committees: the Audit Committee, the Governance Committee, the Performance Committee and the Pricing Committee. The Audit Committee and the Governance Committee are composed of all of the Independent Trustees, namely, Messrs. Ades, Breech, Crane, Frayn, Hubbard, Johnson, Maryatt, J. Miller, K. Miller, Murphy, Schlafly and Viscione. The Performance Committee is composed of four Independent Trustees, namely, Messrs. Ades, Crane, Murphy and Viscione, and the Chairman of the Board. The Pricing Committee is composed of the Chairman of the Board and one Independent Trustee.
The Audit Committee oversees the scope of the funds audit, the funds accounting and financial reporting policies and practices and its internal controls. The Audit Committee assists the Board in fulfilling its responsibility for oversight of the integrity of the accounting, auditing and financial reporting practices of the fund, the qualifications and independence of the funds independent registered public accounting firm and the funds compliance with legal and regulatory requirements. The Audit Committee approves, and recommends to the Independent Trustees for their ratification, the selection, appointment, retention or termination of the funds independent registered public accounting firm and approves the compensation of the independent registered public accounting firm. The Audit Committee also approves all audit and permissible non-audit services provided to the fund by the independent registered public accounting firm and all permissible non-audit services provided by the funds independent registered public accounting firm to its manager and any affiliated service providers if the engagement relates directly to the funds operations and financial reporting. The Audit Committee also assists the Board in fulfilling its responsibility for the review and negotiation of the funds investment management arrangement.
The Governance Committee is responsible for, among other things, recommending candidates to fill vacancies on the Board. The Governance Committee may consider nominees recommended by a shareholder. Shareholders who wish to recommend a nominee should send recommendations to the Trusts Secretary that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of Trustees. A recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders.
The Governance Committee also identifies potential nominees through its network of contacts and may also engage, if it deems it appropriate, a professional search firm. The Governance Committee meets to discuss and consider such candidates qualifications and then chooses a candidate by majority vote. The Governance Committee does not have specific, minimum qualifications for nominees, nor has it established specific qualities or skills that it regards as necessary for one or more of the Trustees to possess (other than any qualities or skills
31
that may be required by applicable law, regulation or listing standard). However, in evaluating a person as a potential nominee to serve as a Trustee, the Governance Committee may consider the following factors, among any others it may deem relevant:
|
whether or not the person is an interested person, as defined in the 1940 Act, and whether the person is otherwise qualified under applicable laws and regulations to serve as a Trustee; |
|
whether or not the person has any relationships that might impair his or her independence, such as any business, financial or family relationships with fund management, the manager, service providers or their affiliates; |
|
whether or not the person serves on boards of, or is otherwise affiliated with, competing financial service organizations or their related mutual fund complexes; |
|
whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of a Trustee; |
|
the contribution which the person can make to the Board (or, if the person has previously served as a Trustee, the contribution which the person made to the Board during his or her previous term of service), with consideration being given to the persons business and professional experience, education and such other factors as the Governance Committee may consider relevant; |
|
the character and integrity of the person; and |
|
whether or not the selection and nomination of the person would be consistent with the requirements of the retirement policies of the Trust, as applicable. |
The Pricing Committee is charged with determining the fair value prices for securities when required.
The Performance Committee is charged with assisting the Board in carrying out its oversight responsibilities over the fund and fund management with respect to investment management, objectives, strategies, policies and procedures, performance and performance benchmarks.
The Trusts Board oversees all of the equity-type funds in the fund complex. All members of the Board previously have served on boards of predecessors to the Legg Mason Partners funds. The Board met nine times during the funds last fiscal year. The Audit, Governance, Performance and Pricing Committees met four, four, four and four times, respectively, during the funds last fiscal year.
The following table shows the amount of equity securities owned by the Trustees in the fund and other investment companies in the fund complex supervised by the Trustees as of December 31, 2008.
Name of Trustee |
Dollar Range of
Equity Securities in the Fund |
Aggregate Dollar Range
of Equity Securities In Registered Investment Companies Overseen by Trustee |
||
Independent Trustees |
||||
Paul R. Ades |
None | Over $100,000 1 | ||
Andrew L. Breech |
None | Over $100,000 | ||
Dwight B. Crane |
None | Over $100,000 | ||
Robert M. Frayn, Jr. |
None | Over $100,000 | ||
Frank G. Hubbard |
None | Over $100,000 | ||
Howard J. Johnson |
None | $50,001-$100,000 | ||
David E. Maryatt |
None | $10,001-$50,000 | ||
Jerome H. Miller |
None | Over $100,000 | ||
Ken Miller |
None | Over $100,000 | ||
John J. Murphy |
None | Over $100,000 |
32
Name of Trustee |
Dollar Range of
Equity Securities in the Fund |
Aggregate Dollar Range
of Equity Securities In Registered Investment Companies Overseen by Trustee |
||
Thomas F. Schlafly |
None | Over $100,000 | ||
Jerry A. Viscione |
None | Over $100,000 | ||
Interested Trustee |
||||
R. Jay Gerken |
Over $100,000 | Over $100,000 |
1 |
As of December 31, 2008, Mr. Ades had over $100,000 invested in the Legg Mason Partners family of funds, including funds not overseen by him as Trustee. As of January 16, 2009, Mr. Ades had over $100,000 invested in funds overseen by him as Trustee. |
As of August 10, 2009, none of the Independent Trustees or their immediate family members owned beneficially or of record any securities of the manager or distributor of the fund, or of a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the manager or distributor of the fund.
Information regarding compensation paid by the fund to its Board is set forth below. The Independent Trustees receive a fee for each meeting of the Board and committee meetings attended and are reimbursed for all out-of-pocket expenses relating to attendance at such meetings. Mr. Gerken, an interested person as defined in the 1940 Act, does not receive compensation from the fund for his service as Trustee, but may be reimbursed for all out-of-pocket expenses relating to attendance at such meetings.
The fund pays a pro rata share of the Trustees fees based upon asset size. The fund currently pays each of the Independent Trustees his pro rata share of: an annual fee of $100,000 plus $20,000 for each regularly scheduled Board meeting attended in person, and $1,000 for each telephonic Board meeting in which that Trustee participates. The lead Independent Trustee receives an additional $25,000 per year, the Chair of the Audit Committee receives an additional $15,000 per year and the Chairs of the Compensation, Contract and Performance Committees each receive an additional $12,500 per year, respectively. Other members of the Compensation, Contract and Performance Committees each receive an additional $10,000 annually.
Information regarding compensation paid to the Trustees is shown below.
Name of Trustee |
Aggregate Compensation
from the Fund (2) |
Total Pension
or Retirement Benefits Paid as Part of Fund Expenses (4) |
Total
Compensation from Fund Complex Paid to Trustee (3) |
Number of
Portfolios in Fund complex Overseen by Trustee |
||||||
Independent Trustees |
||||||||||
Paul R. Ades |
$ | 3,128 | None | $ | 198,000 | 56 | ||||
Andrew L. Breech |
$ | 3,342 | None | $ | 198,500 | 56 | ||||
Dwight B. Crane |
$ | 3,596 | None | $ | 254,837 | 56 | ||||
Robert M. Frayn, Jr. |
$ | 3,197 | None | $ | 196,000 | 56 | ||||
Frank G. Hubbard |
$ | 3,197 | None | $ | 196,000 | 56 | ||||
Howard J. Johnson |
$ | 3,493 | None | $ | 213,500 | 56 | ||||
David E. Maryatt |
$ | 3,197 | None | $ | 196,000 | 56 | ||||
Jerome H. Miller |
$ | 3,222 | None | $ | 196,500 | 56 | ||||
Ken Miller |
$ | 3,197 | None | $ | 195,000 | 56 | ||||
John J. Murphy |
$ | 3,379 | None | $ | 207,500 | 56 |
33
(1) |
Mr. Gerken was not compensated for his services as a Trustee because of his affiliation with the manager. |
(2) |
Information is for the fiscal year ended April 30, 2009. |
(3) |
Information is for the calendar year ended December 31, 2008. |
(4) |
Pursuant to prior retirement plans, the fund made payments to former Trustees for the fiscal year ended April 30, 2009 of $1,036. |
As of August 10, 2009, the Trustees and officers of the Trust as a group owned less than 1% of the outstanding shares of the fund.
As of August 10, 2009, to the knowledge of the fund, the following shareholders or groups (as the term is used in Section 13(d) of the Securities Exchange Act of 1934 (the 1934 Act)) owned beneficially or of record 5% or more of the outstanding shares of the following classes of the fund:
Class |
Shareholder |
Percent of Ownership% | |||
CLASS 1 |
PFPC BROKERAGE SERVICES MAIN OFFICE BO PRIMERICA FINANCIAL SERVICES 760 MOORE ROAD KING OF PRUSSIA PA 19406-1212 |
100.00 | % | ||
CLASS A |
CITIGROUP GLOBAL MARKETS HOUSE ACCOUNT 700 RED BROOK BLVD OWINGS MILLS MD 21117-5184 |
37.26 | % | ||
CLASS A |
PFPC BROKERAGE SERVICES MAIN OFFICE FBO PRIMERICA FINANCIAL SERVICES 760 MOORE ROAD KING OF PRUSSIA PA 19406-1212 |
52.31 | % | ||
CLASS B |
CITIGROUP GLOBAL MARKETS HOUSE ACCOUNT 700 RED BROOK BLVD OWINGS MILLS MD 21117-5184 |
33.63 | % | ||
CLASS B |
PFPC BROKERAGE SERVICES MAIN OFFICE FBO PRIMERICA FINANCIAL SERVICES 760 MOORE ROAD KING OF PRUSSIA PA 19406-1212 |
57.79 | % |
34
Class |
Shareholder |
Percent of Ownership% | |||
CLASS C |
CITIGROUP GLOBAL MARKETS HOUSE ACCOUNT 700 RED BROOK BLVD OWINGS MILLS MD 21117-5184 |
82.67 | % | ||
CLASS I |
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 |
21.69 | % | ||
CLASS I |
DAVID E NELSON & BETSY S NELSON BALTIMORE MD 21218-1022 |
27.20 | % | ||
CLASS I |
WILLIAM H MILLER III BALTIMORE MD 21202-1153 |
26.67 | % | ||
CLASS I |
VISCIONE LIVING TRUST JERRY VISCIONE & GAIL VISCIONE SEATTLE WA 98133-8333 |
19.32 | % |
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager and Sub-administrator
Legg Mason Capital Management, Inc. (LMCM or the manager) serves as the funds investment manager pursuant to an investment management agreement (the Management Agreement) with the Trust on behalf of the fund. LMCM, with offices at 100 International Drive, Baltimore, Maryland 21202, manages assets for clients around the globe including corporations, public funds, government entities, endowments, foundations and individual investors. Clients invest with LMCM through separately managed accounts, sub-advised funds and Legg Mason-sponsored mutual funds. Since 1982, with the introduction of Legg Mason Value Trust, LMCM has distinguished itself by applying its distinct value investment process. As of June 30, 2009, LMCMs investment personnel managed approximately $13.7 billion in separate accounts and pooled assets. LMCM selects the funds investments, oversees its operations and provides administrative services.
LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, serves as the sub-administrator for the fund, providing certain administrative services for the fund pursuant to a sub-administration agreement between LMCM and LMPFA. LMCM, not the fund, pays LMPFA for its services as sub-administrator.
LMCM and LMPFA are wholly-owned subsidiaries of Legg Mason. Legg Mason, whose principal executive offices are at 100 International Drive, Baltimore, Maryland 21202, is a global asset management company. As of June 30, 2009, Legg Masons asset management operation had aggregate assets under management of approximately $657 billion.
Prior to February 2, 2007, LMPFA was the funds investment manager and ClearBridge Advisors, LLC (ClearBridge) was the funds subadviser. Prior to August 1, 2006, Smith Barney Fund Management LLC (SBFM) was the funds investment manager. ClearBridge and SBFM are also wholly-owned subsidiaries of Legg Mason.
Under the Management Agreement, LMCM, subject to the supervision of the Board, regularly provides the fund with investment research, advice, management and supervision, furnishes a continuous investment program for the funds portfolio of securities and other investments consistent with the funds investment objective, policies and restrictions, determines from time to time what securities and other investments will be purchased,
35
retained or sold by the fund and implements those decisions subject to the provisions of the funds governing documents, the 1940 Act, the applicable rules and regulations of the SEC and other applicable federal and state law, as well as any specific policies adopted by the Board and disclosed to the manager. The Management Agreement further provides that the manager provides advice and recommendations with respect to any other aspects of the business and affairs of the fund, and exercises voting rights, rights to consent to corporate action and any other rights pertaining to the funds portfolio securities subject to such direction as the Board may provide, and performs such other functions of investment management and supervision as may be directed by the Board.
The Management Agreement will continue in effect for its initial term and thereafter from year to year, provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose.
The Management Agreement provides that the manager may render services to others. The Management Agreement is terminable without penalty on not more than 60 days nor less than 30 days written notice by the fund when authorized either by a vote of holders of shares representing a majority of the voting power of the outstanding voting securities of the fund (as defined in the 1940 Act) or by a vote of a majority of the Trustees, or by the manager on not less than 90 days written notice, and will automatically terminate in the event of its assignment (as defined in the 1940 Act). The Management Agreement is not assignable by the Trust except with the consent of the manager. The Management Agreement provides that neither the manager nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties.
The Management Agreement provides for the payment of a fee computed daily at an annual rate based on the funds average daily net assets in accordance with the following schedule:
Average Daily Net Assets |
Investment
Management Fee Rate |
||
First $2 billion |
0.700 | % | |
Over $2 billion |
0.650 | % |
Prior to February 2, 2007, the fund paid LMPFA, and prior to August 1, 2006, the fund paid SBFM a management fee at the following rates:
0.750% on average daily net assets up to and including $1 billion;
0.725% on average daily net assets up to and including $2 billion;
0.700% on average daily net assets up to and including $5 billion;
0.675% on average daily net assets up to and including $10 billion; and
0.650% on average daily net assets in excess of $10 billion.
For the period from May 1, 2006 through July 31, 2006, the fund paid SBFM a management fee equal to 0.75% of the funds average daily net assets. For the period from August 1, 2006 through February 1, 2007, the fund paid LMPFA a management fee equal to 0.75% of the funds average daily net assets.
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For the fiscal years ended April 30, 2007, 2008 and 2009 the fund paid SBFM, LMPFA and LMCM management fees as follows:
Gross
Management Fee |
Waiver
Amount |
Expense
Reimbursement Amount |
Net
Management Fee |
|||||||||
Fiscal Year 2007: |
||||||||||||
5/1/06-7/31/06 (SBFM) |
$ | 652,525 | $ | 0 | $ | 0 | $ | 652,525 | ||||
8/1/06-2/1/07 (LMPFA) |
$ | 1,273,004 | $ | 0 | $ | 3,119 | $ | 1,269,885 | ||||
2/2/07-4/30/07 (LMCM) |
$ | 2,291,312 | $ | 0 | $ | 73,188 | $ | 2,218,124 | ||||
Total |
$ | 4,216,841 | $ | 0 | $ | 76,307 | $ | 4,140,534 | ||||
Fiscal Year 2008 (LMCM) |
$ | 7,652,166 | $ | 0 | $ | 783,204 | $ | 6,868,962 | ||||
Fiscal Year 2009 (LMCM) |
$ | 3,416,770 |
$
|
1,022,025
|
$ | 0 | $ | 2,394,745 |
Sub-administrator
The Management Agreement provides that LMCM will perform such administrative and management services as may from time to time reasonably be requested by the fund as necessary for the operation of the fund, subject to the direction and control of the Board. Such administrative services include (a) supervising the overall administration of the fund, including negotiation of contracts and fees with, and the monitoring of performance and billings of, the funds transfer agent, shareholder servicing agents, custodians and other independent contractors or agents; (b) providing certain compliance, fund accounting, regulatory reporting and tax reporting services; (c) preparing or participating in the preparation of Board materials, registration statements, proxy statements and reports and other communications to shareholders; (d) maintaining the funds existence; and (e) during such times as shares are publicly offered, maintaining the registration and qualification of the funds shares under federal and state laws. LMCM has entered into a sub-administration agreement pursuant to which LMPFA provides such administrative services to the fund. LMCM, not the fund, pays LMPFA for its services as sub-administrator. For the fiscal period from February 2, 2007 through April 30, 2007, for the fiscal year ended April 30, 2008, and for the fiscal year ended April 30, 2009, LMPFA received $163,908, $547,793 and $547,793 respectively, for its services as sub-administrator.
Portfolio Managers
The following tables set forth certain additional information with respect to the portfolio managers for the fund. Unless noted otherwise, all information is provided as of April 30, 2009.
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Other Accounts Managed by the Portfolio Managers
The table below identifies the portfolio managers, the number of accounts (other than the fund) for which each portfolio manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, other accounts and, if applicable, the number of accounts and total assets in the accounts where fees are based on performance.
Portfolio Manager |
Registered Investment
|
Other Pooled Investment
|
Other Accounts |
|||
Jay Leopold |
None | None | None | |||
Bill Miller |
2 other registered investment companies with $5.03 billion under management. No fees based on performance | None | 1 other account with $25.1 million in total assets under management. The account has a performance based fee. | |||
David Nelson |
1 other registered investment company with $200.7 million under management. No fees based on performance | None | 1 other account with $25.1 million in total assets under management. The account has a performance based fee. |
Investment Professional Compensation
Portfolio Manager Compensation
Mr. Nelson and Mr. Leopold are each paid a fixed base salary and a bonus. Bonus compensation is reviewed annually and is determined by a number of factors, including the annual performance of the portfolio managers accounts relative to the benchmark, the consistency of the portfolio managers performance, the total value of the assets managed by the portfolio manager, the portfolio managers contribution to the managers research process, the profitability of the manager, the portfolio managers contribution to profitability and trends in industry compensation levels and practices.
Mr. Miller serves as Chairman and Chief Investment Officer for LMCM and as Managing Member for LMM, LLC. Mr. Miller has an ownership interest in LMM, LLC and, therefore, receives a portion of its profits. He also has an employment contract with Legg Mason that is designed to compensate him in a similar manner based on the financial results of LMCM.
Each of the portfolio managers is also eligible to receive stock options from Legg Mason based upon an assessment of the portfolio managers contribution to the success of the company, as well as employee benefits, including, but not limited to, health care and other insurance benefits, participation in the Legg Mason 401(k) program, and participation in other Legg Mason deferred compensation plans.
Potential Conflicts of Interest
LMCM realizes the fact that a portfolio manager having day-to-day management responsibility for more than one account may create the potential for conflicts to arise.
The manager and the fund have adopted compliance policies and procedures that are designed to address various conflicts of interest that may arise for the manager and the individuals that it employs. The manager has
38
also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by the manager and the fund will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities. A portfolio manager may have an opportunity to purchase investments of limited availability. In this circumstance, the portfolio manager will review each accounts investment guidelines, restrictions, tax considerations, cash balances, liquidity needs and other factors to determine the suitability of the investment for each account and LMCMs Compliance Department will review all allocations to ensure that accounts are treated equitably. The portfolio manager may also decide to purchase or sell the same security for multiple accounts at approximately the same time. To address any conflicts that this situation might create, LMCM will generally combine client orders ( i.e., enter a bunched order) in an effort to obtain best execution or to negotiate a more favorable commission rate. In addition, if orders to buy or sell a security for multiple accounts at approximately the same time are executed at different prices or commissions, the transactions will generally be allocated to each account at the average execution price and commission. In circumstances where a bunched order is not completely filled, each account will normally receive a pro-rated portion of the securities based upon the accounts level of participation in the order. LMCM may under certain circumstances allocate securities in a manner other than pro-rata if it determines that the allocation is fair and equitable under the circumstances and does not discriminate against any account.
Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
Selection of Broker/Dealers. Portfolio managers may be able to select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others. Although the payment of brokerage commissions is subject to the requirement that the manager determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the fund, a decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the funds and/or accounts managed.
Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the managers management fee and/or the portfolio managers compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to
39
enhance the portfolio managers performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.
Some of the accounts managed by LMCMs portfolio managers pay performance fees, and thus may pay higher fees to LMCM than other accounts if certain performance objectives and other requirements are met. Since the compensation of each of LMCMs portfolio managers is impacted by firm profitability, it is possible under certain circumstances that a portfolio managers compensation could be more positively impacted if an account that pays a performance fee performs better than accounts that do not. LMCM realizes that this could create a possible conflict of interest. However, in accordance with LMCMs written policies and procedures, investment ideas are generally implemented in all similarly managed accounts at the same time, subject to considerations of each accounts investment guidelines, restrictions, tax considerations, cash balances, liquidity needs, trading costs, and other factors. These policies and procedures are designed to ensure that all accounts are treated equitably, regardless of the fees, including any performance fees, that these accounts generate for LMCM.
Related Business Opportunities . The manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the manager and its affiliates.
In the opinion of LMCM, a portfolio managers simultaneous management of the fund and the accounts included in the tables above, all of which are subject to LMCMs procedures, does not create any material
Portfolio Manager Securities Ownership.
The table below identifies ownership of the funds securities by the portfolio managers as of April 30, 2009.
Portfolio Manager |
Dollar Range of
Ownership of Securities |
|
Jay Leopold |
$100,001-$500,000 | |
Bill Miller |
$50,001-$100,000 | |
David Nelson |
$50,001-$100,000 |
Expenses
In addition to amounts payable under the Management Agreement and the 12b-1 Plan (as discussed below), the fund is responsible for its own expenses, including, among other things: interest; taxes; governmental fees; voluntary assessments and other expenses incurred in connection with membership in investment company organizations; organization costs of the fund; the cost (including brokerage commissions, transaction fees or charges, if any) in connection with the purchase or sale of the funds securities and other investments and any losses in connection therewith; fees and expenses of custodians, transfer agents, registrars, independent pricing vendors or other agents; legal expenses; loan commitment fees; expenses relating to share certificates; expenses relating to the issuance and redemption or repurchase of the funds shares and servicing shareholder accounts; expenses of registering and qualifying the funds shares for sale under applicable federal and state law; expenses of preparing, setting in print, printing and distributing prospectuses and statements of additional information and any supplements thereto, reports, proxy statements, notices and dividends to the funds shareholders; costs of stationery; website costs; costs of meetings of the Board or any committee thereof, meetings of shareholders and other meetings of the fund; Board fees; audit fees; travel expenses of officers, Trustees and employees of the fund, if any; the funds pro rata portion of premiums on any fidelity bond and other insurance covering the fund and its officers, Trustees and employees; and litigation expenses and any non-recurring or extraordinary expenses as may arise, including, without limitation, those relating to actions, suits or proceedings to which the fund is a party and any legal obligation which the fund may have to indemnify the funds Trustees and officers with respect thereto.
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Management may agree to implement an expense cap, waive fees and/or reimburse operating expenses for one or more classes of shares, either through contractual or voluntary arrangements. Any such waivers and/or reimbursements are described in the funds Prospectus. The contractual and voluntary expense caps, waivers and/or reimbursements do not cover extraordinary expenses, such as (a) any expenses or charges related to litigation, derivative actions, demand related to litigation, regulatory or other government investigations and proceedings, for cause regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and taxes; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the fund or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of the fund or class (except to the extent relating to routine items such as the election of Trustees or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time.
A voluntary fee waiver/reimbursement (voluntary limit) may be reduced or terminated at any time. In order to implement a voluntary limit, the manager will, as necessary, forgo management fees or reimburse operating expenses. However, the manager is permitted to recapture amounts previously voluntarily forgone or reimbursed by the manager to the fund during the same fiscal year if the funds total annual operating expenses have fallen to a level below the voluntary limit shown in the footnotes to the fee table of the funds Prospectus, if any. In no case will the manager recapture any amount that would result, on any particular fund business day, in the funds total annual operating expenses exceeding the voluntary limit.
Distributor
LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 International Drive, Baltimore, Maryland 21202, serves as the funds sole and exclusive distributor pursuant to a written agreement dated December 1, 2005 (the distribution agreement). Prior to December 1, 2007, LMIS, Citigroup Global Markets Inc. (CGMI), located at 388 Greenwich Street, New York, New York 10013, and PFS Investments Inc. (PFS), located at 3120 Breckinridge Boulevard, Duluth, Georgia 30099, served as co-distributors of the fund.
LMIS may be deemed to be an underwriter for purposes of the 1933 Act. The distributors obligation is an agency or best efforts arrangement under which the distributor is required to take and pay only for such shares of the fund as may be sold to the public. The distributor is not obligated to sell any stated number of shares.
The distribution agreement is renewable from year to year if approved (a) by the Trustees or by a vote of a majority of the funds outstanding voting securities, and (b) by the affirmative vote of a majority of Independent Trustees who are not parties to such agreement or interested persons of any such party by votes cast in person at a meeting called for such purpose. The distribution agreement provides that it will terminate if assigned, and that it may be terminated without penalty by either party on 60 days written notice.
41
Initial Sales Charge
The aggregate dollar amounts of initial sales charges on Class A shares received by the distributors were as follows:
Class A Shares
For the fiscal year ended April 30:
CGMI | LMIS | PFS | |||||||
2009 |
| $ | 86,486 | | |||||
2008 |
$ | 50,000 | $ | 57,000 | $ | 653,000 | |||
2007 |
$ | 127,000 | $ | 23,000 | $ | 326,000 |
Contingent Deferred Sales Charges
The aggregate dollar amount of contingent deferred sales charges on Class A, Class B and Class C shares received by the distributors were as follows:
Class A Shares
For the fiscal year ended April 30:
CGMI | LMIS | PFS | ||||||||
2009 |
| $ | 331 | | ||||||
2008 |
$ | 0 | $ | 1,000 | $ | 0 | ||||
2007 |
$ | 0 | $ | 0 | * | $ | 0 |
* | Amount represents less than $1,000. |
Class B Shares
For the fiscal year ended April 30:
CGMI | LMIS | PFS | |||||||
2009 |
| $ | 62,315 | | |||||
2008 |
$ | 0 | $ | 201,000 | $ | 0 | |||
2007 |
$ | 0 | $ | 132,000 | $ | 44,000 |
Class C Shares
For the fiscal year ended April 30:
CGMI | LMIS | |||||
2009 |
| $ | 3,156 | |||
2008 |
$ | 0 | $ | 13,000 | ||
2007 |
$ | 0 | $ | 10,000 |
LMIS, CGMI and PFS received no sales charges for Class 1 shares during the fiscal years ended April 30, 2009, April 30, 2008 and April 30, 2007. Class 1 shares were closed to new purchases and incoming exchanges effective July 27, 2007.
Shareholder Services and Distribution Plan
The Trust, on behalf of the fund, has adopted an amended shareholder services and distribution plan (the 12b-1 Plan) pursuant to Rule l2b-1 under the 1940 Act with respect to its Class A, Class B, Class C, Class FI,
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Class R and Class R1 shares. Under the 12b-1 Plan, the fund pays distribution fees to LMIS for the services it provides and expenses it bears with respect to the distribution of Class A, Class B, Class C, Class FI, Class R and Class R1 shares and service fees for Class A, Class B, Class C, Class FI, Class R and Class R1 shares. The distributor will provide the Board with periodic reports of amounts expended under the 12b-1 Plan and the purposes for which such expenditures were made. The fund pays service fees, accrued daily and payable monthly, calculated at the annual rate of 0.25% of the value of the funds average daily net assets attributable to the funds Class A, Class B, Class C, Class FI, Class R and Class R1 shares. In addition, the fund pays distribution fees with respect to the Class B, Class C and Class R1 shares at the annual rate of 0.75% of the funds average daily net assets attributable to each such class and with respect to the Class R shares at the annual rate of 0.25% of the funds average daily net assets attributable to such class.
Fees under the 12b-1 Plan may be used to make payments to the distributor for distribution services, Service Agents and other parties in respect of the sale of shares of the fund, and to make payments for advertising, marketing or other promotional activity, and payments for preparation, printing and distribution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders. The fund may also make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient may vary based upon certain factors, including, among other things, the levels of sales of fund shares and/or shareholder services provided.
The 12b-1 Plan also provides that the distributor and Service Agents may receive all or a portion of the sales charges paid by Class A, Class B and Class C investors.
The 12b-1 Plan permits the fund to pay fees to the distributor, Service Agents and others as compensation for their services, not as reimbursement for specific expenses incurred. Thus, even if their expenses exceed the fees provided for by the 12b-1 Plan, the fund will not be obligated to pay more than those fees and, if their expenses are less than the fees paid to them, they will realize a profit. The fund may pay the fees to the distributor and others until the 12b-1 Plan or distribution agreement is terminated or not renewed. In that event, the distributors or other recipients expenses in excess of fees received or accrued through the termination date will be the distributors or other recipients sole responsibility and not obligations of the fund. In their annual consideration of the continuation of the 12b-1 Plan for the fund, the Trustees will review the 12b-1 Plan and the expenses for each class within the fund separately.
The 12b-1 Plan also recognizes that various service providers to the fund, such as the manager, may make payments for distribution-related expenses out of their own resources, including past profits, or payments received from the fund for other purposes, such as management fees, and that the funds distributor or Service Agents may from time to time use their own resources for distribution-related services, in addition to the fees paid under the 12b-1 Plan. The 12b-1 Plan specifically provides that, to the extent that such payments might be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the fund within the context of Rule 12b-1, then the payments are deemed to be authorized by the 12b-1 Plan, if permitted under applicable law.
The 12b-1 Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trustees and a majority of the Independent Trustees of the fund who have no direct or indirect financial interest in the operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (for purposes of this paragraph Qualified Trustees). The Qualified Trustees, in the exercise of their business judgment in the best interests of the shareholders of the fund and each class, have approved the continuation of the 12b-1 Plan. The 12b-1 Plan requires that the fund and the distributor provide to the Board and the Board review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the 12b-1 Plan. The 12b-1 Plan further provides that the selection and nomination of the Qualified Trustees is committed to the discretion of the Qualified Trustees then in office. The 12b-1 Plan may be terminated with respect to any class of the fund at any time by a vote of a majority of the funds Qualified Trustees or by a vote of a majority of the outstanding voting securities of that class. The 12b-1 Plan may not be amended to increase materially the
43
amount of permitted expenses of the class thereunder without the approval of a majority of the outstanding securities of that class and may not be materially amended in any case without a vote of a majority of both the Trustees and Qualified Trustees. The fund will preserve copies of any plan, agreement or report made pursuant to the 12b-1 Plan for a period of not less than six years, and for the first two years the fund will preserve such copies in an easily accessible place.
As contemplated by the 12b-1 Plan, the distributor acts as an agent of the fund in connection with the offering of shares of the fund pursuant to the distribution agreement.
Dealer reallowances, if any, are described in the funds Prospectus.
The following service and distribution fees were incurred by the fund pursuant to a 12b-1 Plan during the periods indicated:
Fiscal Year
Ended 04/30/2009 |
|||
Class A |
$ | 453,770 | |
Class B |
$ | 521,839 | |
Class C |
$ | 771,261 |
Distribution expenses incurred by LMIS during the fiscal year ended April 30, 2009 for advertising, printing and mailing prospectuses, support services and overhead expenses, payments to Service Agents and for accruals for interest on the excess of expenses incurred in the distribution of the funds shares are expressed in the following tables.
Class |
Third Party
Fees |
Amoritization | Marketing | Printing |
Total
Current Expenses |
||||||||||
A |
$ | 451,282 | $ | 0 | $ | 0 | n/a | $ | 451,282 | ||||||
B |
$ | 344,328 | $ | 97,627 | $ | 15,147 | $ | 1,942 | $ | 459,044 | |||||
C |
$ | 735,560 | $ | 34,782 | $ | 2,532 | $ | 1,634 | $ | 774,508 |
No information is presented for Class FI, Class R and Class R1 shares because no shares of those classes were outstanding during the fiscal year ended April 30, 2009.
Custodian and Transfer Agent
State Street Bank and Trust Company (State Street), One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian of the fund. State Street, among other things, maintains a custody account or accounts in the name of the fund, receives and delivers all assets for the fund upon purchase and upon sale or maturity, collects and receives all income and other payments and distributions on account of the assets of the fund and makes disbursements on behalf of the fund. State Street neither determines the funds investment policies nor decides which securities the fund will buy or sell. For its services, State Street receives a monthly fee based upon the daily average market value of securities held in custody and also receives securities transaction charges, including out-of-pocket expenses. The fund may also periodically enter into arrangements with other qualified custodians with respect to certain types of securities or other transactions such as repurchase agreements or derivatives transactions. State Street may also act as the funds securities lending agent and in that case would receive a share of the income generated by such activities.
Boston Financial Data Services, Inc. (BFDS), located at 2 Heritage Drive, North Quincy, Massachusetts 02171, serves as the funds transfer agent. Under the transfer agency agreement with BFDS, BFDS maintains the shareholder account records for the fund, handles certain communications between shareholders and the fund and distributes dividends and distributions payable by the fund. For these services, BFDS receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the fund during the month and is reimbursed for out-of-pocket expenses.
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PNC Global Investment Servicing (U.S.) Inc. (PNC), located at 4400 Computer Drive, Westborough, Massachusetts 01581, serves as co-transfer agent with BFDS with respect to shares purchased by clients of certain service providers. Under the co-transfer agency agreement with PNC, PNC maintains the shareholder account records for the fund, handles certain communications between shareholders and the fund and distributes dividends and distributions payable by the fund. For these services, PNC receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the fund during the month and is reimbursed for out-of-pocket expenses.
Counsel
Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019, serves as counsel to the Trust and the fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, serves as counsel to the Independent Trustees.
Independent Registered Public Accounting Firm
KPMG LLP, an independent registered public accounting firm, located at 345 Park Avenue, New York, New York 10154, has been selected to audit and report upon the funds financial statements and financial highlights for the fiscal year ending
Code of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, the fund, the manager and the distributor have adopted codes of ethics that permit personnel to invest in securities for their own accounts, including securities that may be purchased or held by the fund. All personnel must place the interests of clients first and avoid activities, interests and relationships that might interfere with the duty to make decisions in the best interests of the clients. All personal securities transactions by employees must adhere to the requirements of the codes and must be conducted in such a manner as to avoid any actual or potential conflict of interest, the appearance of such a conflict or the abuse of an employees position of trust and responsibility. Copies of the codes of ethics of the fund, the manager and the distributor are on file with the SEC.
Proxy Voting Guidelines and Procedures
Although individual Trustees may not agree with particular policies or votes by the manager, the Board has delegated proxy voting discretion to the manager, believing that the manager should be responsible for voting because it is a matter relating to the investment decision making process.
The managers proxy voting policies and procedures govern in determining how proxies relating to the funds portfolio securities are voted, a summary of which is attached as Appendix A to this SAI. Information regarding how the fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 1-888-425-6432, (2) on the funds website at http://www.leggmason.com/individualinvestors and (3) on the SECs website at http://www.sec.gov.
General
Investors may purchase shares from a Service Agent. In addition, certain investors, including retirement plans purchasing through certain Service Agents, may purchase shares directly from the fund. When purchasing shares of the fund, investors must specify whether the purchase is for Class A, Class B, Class C, Class FI,
45
Class R, Class R1 or Class I shares. Service Agents may charge their customers an annual account maintenance fee in connection with a brokerage account through which an investor purchases or holds shares. Accounts held directly at the transfer agent are not subject to a maintenance fee. Effective July 27, 2007, the funds Class 1 shares were closed to all purchases and incoming exchanges. Investors owning Class 1 shares on that date may continue to maintain their then-current Class 1 shares, but are no longer permitted to add to their Class 1 positions (excluding reinvestments of dividends and distributions).
For additional information regarding applicable investment minimums and eligibility requirements, please see the funds Prospectus.
There are minimum investment requirements of $1,000 for initial investments and $50 for subsequent investments for purchases of Class A shares by: (i) current and retired board members of Legg Mason, (ii) current and retired board members of any fund advised by LMPFA or its affiliates (such board members, together with board members of Legg Mason, are referred to herein as Board Members), (iii) current employees of Legg Mason and its affiliates, (iv) the immediate families of such persons (immediate families are such persons spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21) and (v) a pension, profit-sharing or other benefit plan for the benefit of such persons. The fund reserves the right to waive or change minimums, to decline any order to purchase its shares and to suspend the offering of shares from time to time.
Purchase orders received by the fund prior to the close of regular trading on the New York Stock Exchange (the NYSE) on any day the fund calculates its NAV are priced according to the NAV determined on that day (the trade date). Orders received by a Service Agent prior to the close of regular trading on the NYSE on any day the fund calculates its NAV are priced according to the NAV determined on that day, provided the order is received by the funds transfer agent prior to its close of business. Payment must be made with the purchase order.
Class I Shares. The following persons are permitted to purchase Class I shares of the fund: 1) current employees of the funds manager and its affiliates; 2) current and former board members of investment companies managed by affiliates of Legg Mason; 3) current and former board members of Legg Mason; and 4) the immediate families of such persons. For such investors, the minimum initial investment is $1,000 and the minimum for each purchase of additional shares is $50. 2
Under certain circumstances, an investor who purchases fund shares pursuant to a fee-based advisory account program of an Eligible Financial Intermediary as authorized by LMIS may be afforded an opportunity to make a conversion between one or more share classes owned by the investor in the same fund to Class I shares of that fund. Such a conversion in these particular circumstances does not cause the investor to realize taxable gain or loss.
Systematic Investment Plan. Shareholders may make additions to their accounts at any time by purchasing shares through a service known as the Systematic Investment Plan. Under the Systematic Investment Plan, the distributor or the transfer agent is authorized through preauthorized transfers of at least $50 on a monthly, quarterly, every alternate month, semi-annual or annual basis to charge the shareholders account held with a bank or other financial institution as indicated by the shareholder, to provide for systematic additions to the shareholders fund account. A shareholder who has insufficient funds to complete the transfer will be charged a fee of up to $25 by the distributor or the transfer agent. The Systematic Investment Plan authorizes the distributor to apply cash held in the shareholders brokerage account to make additions to the account. Additional information is available from the fund or a Service Agent.
2 |
Employees who leave the employment of Legg Mason will be able to retain ownership of their Class I shares but will not be able to purchase additional shares. |
46
Sales Charge Alternatives
The following classes of shares are available for purchase. See the Prospectus for a discussion of who is eligible to purchase certain classes and of factors to consider in selecting which class of shares to purchase.
Class A Shares . Class A shares are sold to investors at the public offering price, which is the NAV plus an initial sales charge, as described in the funds Prospectus.
Members of the selling group may receive a portion of the sales charge as described in the Prospectus and may be deemed to be underwriters of the fund as defined in the 1933 Act. Sales charges are calculated based on the aggregate of purchases of Class A shares of the fund made at one time by any person, which includes an individual and his or her spouse and children under the age of 21, or a trustee or other fiduciary of a single trust estate or single fiduciary account. For additional information regarding sales charge reductions, see Sales Charge Waivers and Reductions below.
Purchases of Class A shares of $1,000,000 or more will be made at NAV without any initial sales charge, but will be subject to a contingent deferred sales charge of 1.00% on redemptions made within 12 months of purchase. The contingent deferred sales charge is waived in the same circumstances in which the contingent deferred sales charge applicable to Class B and C shares is waived. See Contingent Deferred Sales Charge Provisions and Waivers of Contingent Deferred Sales Charge below.
Class B and Class C Shares. Class B and Class C shares are sold without an initial sales charge but are subject to a contingent deferred sales charge payable upon certain redemptions. See Contingent Deferred Sales Charge Provisions below.
Class 1 Shares. Effective July 27, 2007, the funds Class 1 shares were closed to all purchases and incoming exchanges.
Class FI, Class R, Class R1 and Class I Shares . Class FI, Class R, Class R1 and Class I shares are sold at NAV with no initial sales charge and no contingent deferred sales charge upon redemption.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers . Purchases of Class A shares may be made at NAV without an initial sales charge in the following circumstances:
(a) | sales to (i) current and retired Board Members of Legg Mason, (ii) current and retired Board Members, (iii) current employees of Legg Mason and its subsidiaries, (iv) the immediate families of such persons (immediate families are such persons spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21) and (v) a pension, profit-sharing or other benefit plan for the benefit of such persons; |
(b) | sales to any employees of Service Agents having dealer, service or other selling agreements with the funds distributor or otherwise having an arrangement with any such Service Agent with respect to sales of fund shares, and by the immediate families of such persons or by a pension, profit-sharing or other benefit plan for the benefit of such persons (providing the purchase is made for investment purposes and such securities will not be resold except through redemption or repurchase); |
(c) | offers of Class A shares to any other investment company to effect the combination of such company with the fund by merger, acquisition of assets or otherwise; |
(d) | purchases by shareholders who have redeemed Class A shares in the fund (or Class A shares of another fund sold by the distributor that is offered with a sales charge) and who wish to reinvest their redemption proceeds in the fund, provided the reinvestment is made within 60 calendar days of the redemption; |
47
(e) | purchases by accounts managed by registered investment advisory subsidiaries of Citigroup Inc. (Citigroup); |
(f) | purchases by certain separate accounts used to fund unregistered variable annuity contracts; and |
(g) | purchases by investors participating in wrap fee or asset allocation programs or other fee-based arrangements sponsored by broker/dealers and other financial institutions that have entered into agreements with LMIS. |
In order to obtain such discounts, the purchaser must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the elimination of the sales charge.
All existing retirement plan shareholders who purchased Class A shares at NAV prior to November 20, 2006, are permitted to purchase additional Class A shares at NAV. Certain existing programs for current and prospective retirement plan investors sponsored by financial intermediaries approved by LMIS prior to November 20, 2006 will also remain eligible to purchase Class A shares at NAV.
Accumulation Privilege Please see the funds Prospectus for information regarding accumulation privileges.
Letter of Intent Helps you take advantage of breakpoints in Class A sales charges. You may purchase Class A shares of funds sold by the distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. You have a choice of seven Asset Level Goal amounts, as follows:
(1) $25,000 |
(5) $500,000 | |
(2) $50,000 |
(6) $750,000 | |
(3) $100,000 |
(7) $1,000,000 | |
(4) $250,000 |
Each time you make a Class A purchase under a Letter of Intent, you will be entitled to pay the sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you are investing in for purchases of $100,000. Sales charges and breakpoints vary among the funds sold by the distributor.
When you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases, which are valued at current value as of the date of calculation. Your commitment will be met if at any time during the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a Letter of Intent will not entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.
Eligible Fund Purchases. Generally, any shares of a fund sold by the distributor may be credited towards your Asset Level Goal. Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your Asset Level Goal.
48
The eligible funds may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.
Eligible Accounts. Purchases may be made through any account in your name, or in the name of your spouse or your children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset Level Goal.
Eligible Prior Purchases . You may also credit towards your Asset Level Goal any Eligible Fund Purchases made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.
Increasing the Amount of the Letter of Intent. You may at any time increase your Asset Level Goal. You must, however, contact your Service Agent, or if you purchase your shares directly through the transfer agent, contact the transfer agent, prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way of additional shares at the then-current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter of Intent and (b) the aggregate applicable sales charges for the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.
Sales and Exchanges . Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to meeting the Asset Level Goal will result in the cancellation of the Letter. See Failure to Meet Asset Level Goal below. Exchanges in accordance with the funds Prospectus are permitted, and shares so exchanged will continue to count towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.
Cancellation of Letter of Intent. You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through the transfer agent, by notifying the transfer agent in writing. The Letter will be automatically cancelled if all shares are sold or redeemed as set forth above. See Failure to Meet Asset Level Goal below.
Escrowed Shares . Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted will be held in escrow during the term of your Letter. The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter are met.
Failure to Meet Asset Level Goal . If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal whether because you made insufficient Eligible Fund Purchases, redeemed all of your holdings or cancelled the Letter before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if you had not entered into the Letter. You may, however, be entitled to any breakpoints that would have been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due. For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through the transfer agent, the transfer agent, as your attorney-in-fact for the purposes of holding the Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed Shares remaining after such redemption will be released to your account.
49
Contingent Deferred Sales Charge Provisions
Contingent deferred sales charge shares are: (a) Class B shares, (b) Class C shares and (c) Class A shares that were purchased without an initial sales charge but are subject to a contingent deferred sales charge. A contingent deferred sales charge may be imposed on certain redemptions of these shares.
Any applicable contingent deferred sales charge will be assessed on the NAV at the time of purchase or redemption, whichever is less.
Class C shares and Class A shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge if redeemed within 12 months of purchase. In circumstances in which the contingent deferred sales charge is imposed on Class B shares, the amount of the charge will depend on the number of years since the shareholder made the purchase payment from which the amount is being redeemed, as further described in the Prospectus. Solely for purposes of determining the number of years since a purchase payment, all purchase payments made during a month will be aggregated and deemed to have been made on the last day of the preceding statement month. The following table sets forth the rates of the charge for redemptions of Class B shares by shareholders.
Year Since Purchase Was Made |
Contingent Deferred Sales Charge | ||
First |
5.00 | % | |
Second |
4.00 | % | |
Third |
3.00 | % | |
Fourth |
2.00 | % | |
Fifth |
1.00 | % | |
Sixth and thereafter |
0.00 | % |
Class B shares will convert automatically to Class A shares approximately eight years after the date on which they were purchased and thereafter will no longer be subject to any distribution fees. There will also be converted at that time such proportion of Class B dividend shares (Class B shares that were acquired through the reinvestment of dividends and distributions) owned by the shareholders as the total number of his or her Class B shares converting at the time bears to the total number of outstanding Class B shares (other than Class B dividend shares) owned by the shareholder.
In determining the applicability of any contingent deferred sales charge, it will be assumed that a redemption is made first of shares representing capital appreciation, next of shares representing the reinvestment of dividends and capital gain distributions, next of shares that are not subject to the contingent deferred sales charge and finally of other shares held by the shareholder for the longest period of time. The length of time that contingent deferred sales charge shares acquired through an exchange have been held will be calculated from the date the shares exchanged were initially acquired in one of the other funds sold by the distributor. For federal income tax purposes, the amount of the contingent deferred sales charge will reduce the gain or increase the loss, as the case may be, on the amount realized on redemption. The funds distributor receives contingent deferred sales charges in partial consideration for its expenses in selling shares.
Waivers of Contingent Deferred Sales Charge
The contingent deferred sales charge will be waived on: (a) exchanges (see Exchange Privilege); (b) automatic cash withdrawals in amounts equal to or less than 2.00% per month of the shareholders account balance at the time the withdrawals commence, up to a maximum of 12.00% in one year (see Automatic Cash Withdrawal Plan); (c) redemptions of shares within 12 months following the death or disability (as defined in the Code) of the shareholder; (d) mandatory post-retirement distributions from retirement plans or IRAs commencing on or after attainment of age 70 1 / 2 (except that shareholders who purchased shares subject to a contingent deferred sales charge prior to May 23, 2005 will be grandfathered and will be eligible to obtain the
50
waiver at age 59 1 / 2 by demonstrating such eligibility at the time of redemption); (e) involuntary redemptions; (f) redemptions of shares to effect a combination of the fund with any investment company by merger, acquisition of assets or otherwise; (g) tax-free returns of an excess contribution to any retirement plan; and (h) certain redemptions of shares of the fund in connection with lump-sum or other distributions made by eligible retirement plans or redemption of shares by participants in certain wrap fee or asset allocation programs sponsored by broker/dealers and other financial institutions that have entered into agreements with the distributor or the manager.
The contingent deferred sales charge is waived on Class C shares purchased by retirement plan omnibus accounts held on the books of the fund.
A shareholder who has redeemed shares from other funds sold by the distributor may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption.
Contingent deferred sales charge waivers will be granted subject to confirmation by the distributor or the transfer agent of the shareholders status or holdings, as the case may be.
Grandfathered Retirement Program with Exchange Features
Certain retirement plan programs authorized prior to November 20, 2006 (collectively, the Grandfathered Retirement Program) to offer eligible retirement plan investors the opportunity to exchange all of their Class C shares for Class A shares of an applicable Legg Mason Partners fund are permitted to maintain such share class exchange feature for current and prospective retirement plan investors.
Under the Grandfathered Retirement Program Class C shares may be purchased by plans investing less than $3,000,000. Class C shares are eligible for exchange into Class A shares not later than eight years after the plan joins the program. They are eligible for exchange in the following circumstances:
If a participating plans total Class C holdings in all non-money market Legg Mason Partners funds equal at least $3,000,000, at the end of the fifth year after the date the participating plan enrolled in the Grandfathered Retirement Program, the participating plan will be offered the opportunity to exchange all of its Class C shares for Class A shares of the fund. Such participating plans will be notified of the pending exchange in writing within 30 days after the fifth anniversary of the enrollment date and, unless the exchange offer has been rejected in writing, the exchange will occur on or about the 90th day after the fifth anniversary date. If the participating plan does not qualify for the five-year exchange to Class A shares, a review of the participating plans holdings will be performed each quarter until either the participating plan qualifies or the end of the eighth year.
Any participating plan that has not previously qualified for an exchange into Class A shares will be offered the opportunity to exchange all of its Class C shares for Class A shares of the same fund regardless of asset size at the end of the eighth year after the date the participating plan enrolled in the Grandfathered Retirement Program. Such plans will be notified of the pending exchange in writing approximately 60 days before the eighth anniversary of the enrollment date and, unless the exchange has been rejected in writing, the exchange will occur on or about the eighth anniversary date. Once an exchange has occurred, a participating plan will not be eligible to acquire additional Class C shares, but instead may acquire Class A shares of the same fund. Any Class C shares not converted will continue to be subject to the distribution fee.
For further information regarding this Program, contact your Service Agent or the transfer agent. Participating plans that enrolled in the Grandfathered Retirement Program prior to June 2, 2003 should contact the transfer agent for information regarding Class C exchange privileges applicable to their plan.
51
Determination of Public Offering Price
The fund offers its shares on a continuous basis. The public offering price for each class of shares of the fund is equal to the NAV per share at the time of purchase, plus for Class A shares an initial sales charge based on the aggregate amount of the investment. The public offering price for Class B, Class C, Class FI, Class R, Class R1 and Class I shares (and Class A share purchases, including applicable rights of accumulation, equaling or exceeding $1,000,000) is equal to the NAV per share at the time of purchase and no sales charge is imposed at the time of purchase. A contingent deferred sales charge, however, is imposed on certain redemptions of Class B and Class C shares, and on Class A shares when purchased in amounts equaling or exceeding $1,000,000.
Set forth below is an example of the method of computing the offering price of the Class A shares of the fund based on the NAV of a share of the fund as of April 30, 2009.
Class A (based on a NAV of $4.65 and
|
$ | 4.93 |
The right of redemption may be suspended or the date of payment postponed (a) for any period during which the NYSE is closed (other than for customary weekend and holiday closings), (b) when trading in the markets the fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the funds investments or determination of NAV is not reasonably practicable or (c) for such other periods as the SEC by order may permit for protection of the funds shareholders.
If the shares to be redeemed were issued in certificate form, the certificates must be endorsed for transfer (or be accompanied by an endorsed stock power) and must be submitted to the transfer agent together with the redemption request. Any signature appearing on a share certificate, stock power or written redemption request in excess of $50,000 must be guaranteed by an eligible guarantor institution such as a domestic bank, savings and loan institution, domestic credit union, member bank of the Federal Reserve System or member firm of a national securities exchange.
Written redemption requests of $50,000 or less do not require a signature guarantee unless more than one such redemption request is made in any 10-day period. Redemption proceeds will be mailed to an investors address of record. The transfer agent may require additional supporting documents for redemptions made by corporations, executors, administrators, trustees or guardians. A redemption request will not be deemed properly received until the transfer agent receives all required documents in proper form.
If a shareholder holds shares in more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer shares of the class than specified, the redemption request will be delayed until the transfer agent receives further instructions. The redemption proceeds will be remitted on or before the seventh business day following receipt of proper tender, except on any days on which the NYSE is closed or as permitted under the 1940 Act, in extraordinary circumstances. Redemption proceeds for shares purchased by check, other than a certified or official bank check, will be remitted upon clearance of the check, which may take up to ten days. Each Service Agent is responsible for transmitting promptly orders for its customers.
The Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and disclosed to its customers by each Service Agent.
The fund no longer issues share certificates. Outstanding share certificates will continue to be honored. If you hold share certificates, it will take longer to exchange or redeem shares.
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Additional Information Regarding Telephone Redemption and Exchange Program. Neither the fund nor its agents will be liable for following instructions communicated by telephone that are reasonably believed to be genuine. The fund and its agents will employ procedures designed to verify the identity of the caller and legitimacy of instructions (for example, a shareholders name and account number will be required and phone calls may be recorded). The fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or to impose a charge for this service at any time following at least seven (7) days prior notice to shareholders.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan) is available to shareholders as described in the Prospectus. To the extent withdrawals under the Withdrawal Plan exceed dividends, distributions and appreciation of a shareholders investment in the fund, there will be a reduction in the value of the shareholders investment, and continued withdrawal payments may reduce the shareholders investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in the fund. Furthermore, as it generally would not be advantageous to a shareholder to make additional investments in the fund at the same time he or she is participating in the Withdrawal Plan, purchases by such shareholder in amounts of less than $5,000 ordinarily will not be permitted. The Withdrawal Plan will be carried over on exchanges between funds sold by the distributor or classes of the fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at NAV in additional shares of the fund.
For additional information, shareholders should contact their Service Agent. A shareholder who purchases shares directly through the transfer agent may continue to do so and applications for participation in the Withdrawal Plan should be sent to the transfer agent. Withdrawals may be scheduled on any day of the month; however, if the shareholder does not specify a day, the transfer agent will schedule the withdrawal on the 25th day (or the next business day if the 25th day is a weekend or holiday) of the month.
Distributions in Kind
If the Board determines that it would be detrimental to the best interests of the remaining shareholders to make a redemption payment wholly in cash, the fund may pay, in accordance with SEC rules, any portion of a redemption in excess of the lesser of $250,000 or 1.00% of the funds net assets by a distribution in kind of fund securities in lieu of cash. If a redemption is paid in portfolio securities, such securities will be valued in accordance with the procedures described under Share price in the funds Prospectus. Because redemption in-kind may be used at times of unusual illiquidity in the markets, these valuation methods may include fair value estimations. Securities issued as a distribution in kind may incur brokerage commissions when shareholders subsequently sell those securities and the market price of those securities will be subject to fluctuation until they are sold. A redemption in-kind may be considered the sale of securities by the fund to the party receiving the securities (except for tax purposes). Redemptions in-kind will not be done with LMIS or other affiliated persons of the fund except as permitted by SEC rules or orders, or other interpretive guidance from regulators.
The exchange privilege enables shareholders to acquire shares of the same class in another fund sold by the distributor. This privilege is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Prior to any exchange, the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is being considered. Prospectuses may be obtained from a Service Agent.
Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the then-current NAV, and the proceeds are immediately invested in shares of the fund being
53
acquired at that funds then current NAV. The distributor reserves the right to reject any exchange request. The exchange privilege may be modified or terminated at any time after written notice to shareholders.
Class A, Class FI, Class R, Class R1 and Class I Exchanges . Class A, Class FI, Class R, Class R1 and Class I shareholders of the fund who wish to exchange all or a portion of their shares for shares of the respective class in another fund may do so without imposition of any charge.
Class B Exchanges. Class B shares of the fund may be exchanged for other Class B shares without a contingent deferred sales charge. Upon an exchange, the new Class B shares will be deemed to have been purchased on the same date as the Class B shares of the fund that have been exchanged.
Class C Exchanges. Class C shares of the fund may be exchanged for other Class C shares without a contingent deferred sales charge. Upon an exchange, the new Class C shares will be deemed to have been purchased on the same date as the Class C shares of the fund that have been exchanged.
Class 1 Exchanges . Class 1 shareholders who wish to exchange all or a portion of their shares may exchange Class 1 shares for Class A shares of certain funds available for exchange. Ask your Service Agent about the funds available for exchange.
Certain retirement plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. See Grandfathered Retirement Programs with Exchange Features for additional information.
Additional Information Regarding the Exchange Privilege
The fund is not designed to provide investors with a means of speculation on short-term market movements. A pattern of frequent exchanges by investors can be disruptive to efficient portfolio management and, consequently, can be detrimental to the fund and its shareholders. See Frequent purchases and redemptions of fund shares in the Prospectus.
During times of drastic economic or market conditions, the fund may suspend the exchange privilege temporarily without notice and treat exchange requests based on their separate componentsredemption orders with a simultaneous request to purchase the other funds shares. In such a case, the redemption request would be processed at the funds next determined NAV but the purchase order would be effective only at the NAV next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.
Certain shareholders may be able to exchange shares by telephone. See the funds Prospectus for additional information. Exchanges will be processed at the NAV next determined. Redemption procedures discussed above are also applicable for exchanging shares, and exchanges will be made upon receipt of all supporting documents in proper form. If the account registration of the shares of the fund being acquired is identical to the registration of the shares of the fund exchanged, no signature guarantee is required.
This exchange privilege may be modified or terminated at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should contact the transfer agent or, if they hold fund shares through a Service Agent, their Service Agent, to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares exchanged and could result in taxable gain or
The NAV per share of each class is calculated on each day, Monday through Friday, except days on which the NYSE is closed. As of the date of this SAI, the NYSE is normally open for trading every weekday except in
54
the event of an emergency or for the following holidays (or the days on which they are observed): New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Because of the differences in distribution fees and class-specific expenses, the per share NAV of each class may differ. Please see the
Subject to policies as may be established by the Board from time to time, the manager is primarily responsible for the funds portfolio decisions and the placing of the funds portfolio transactions. Commissions are negotiated with broker/dealers on all transactions.
The cost of securities purchased from underwriters includes an underwriting commission, concession or a net price. The aggregate brokerage commissions paid by the fund for the three most recent fiscal years are set forth below under Aggregate Brokerage Commissions Paid.
Pursuant to the Management Agreement, the manager is authorized to place orders pursuant to its investment determinations for the fund either directly with the issuer or with any broker or dealer, foreign currency dealer, futures commission merchant or others selected by it. The general policy of the manager in selecting brokers and dealers is to obtain the best results achievable in the context of a number of factors which are considered both in relation to individual trades and broader trading patterns, including the reliability of the broker/dealer, the competitiveness of the price and the commission, the research services received and whether the broker/dealer commits its own capital.
In connection with the selection of such brokers or dealers and the placing of such orders, subject to applicable law, brokers or dealers may be selected who also provide brokerage and research services as those terms are defined in Section 28(e) of the 1934 Act to the fund and/or the other accounts over which the manager or its affiliates exercise investment discretion. The manager is authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the fund which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the manager determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer. Investment research services include information and analysis on particular companies and industries as well as market or economic trends and portfolio strategy, market quotations for portfolio evaluations, analytical software and similar products and services. If a research service also assists the manager in a non-research capacity (such as bookkeeping or other administrative functions), then only the percentage or component that provides assistance to the manager in the investment decision making process may be paid in commission dollars. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the manager and its affiliates have with respect to accounts over which they exercise investment discretion. The manager may also have arrangements with brokers pursuant to which such brokers provide research services to the manager, as applicable, in exchange for a certain volume of brokerage transactions to be executed by such brokers. While the payment of higher commissions increases the funds costs, the manager does not believe that the receipt of such brokerage and research services significantly reduces its expenses as manager. Arrangements for the receipt of research services from brokers may create conflicts of interest.
Research services furnished to the manager by brokers that effect securities transactions for the fund may be used by the manager in servicing other investment companies and accounts which it manages. Similarly, research services furnished to the manager by brokers who effect securities transactions for other investment companies and accounts which the manager manages may be used by the manager in servicing the fund. Not all of these
55
research services are used by the manager in managing any particular account, including the fund. For the fiscal year ended April 30, 2009, the fund paid commissions to brokers that provided research services as follows:
Total Dollar Amount of
|
Total Dollar Amount of
Brokerage Commissions Paid on Transactions Related to Research Services |
||
$91,726,545 |
$ | 433,695 |
The fund contemplates that, consistent with the policy of obtaining the best net results,
brokerage transactions may be conducted through affiliated broker/dealers, as defined in the 1940 Act. The funds Board has adopted procedures in accordance with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
Aggregate Brokerage Commissions Paid
For the fiscal years ended April 30, 2007, 2008 and 2009, the fund paid aggregate brokerage commissions as set forth in the table below.
Fiscal Year Ending April 30: |
Total
Brokerage Commissions |
||
2007 |
$ | 1,436,059 | |
2008 |
$ | 599,569 | |
2009 |
$ | 680,075 |
For the fiscal years ended April 30, 2007, 2008 and 2009, the fund did not pay any brokerage commissions to LMIS or its affiliates.
In certain instances there may be securities that are suitable as an investment for the fund as well as for one or more of the managers other clients. Investment decisions for the fund and for the managers other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling the same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could adversely affect the price of or the size of the position obtainable in a security for the fund. When purchases or sales of the same security for the fund and for other funds managed by the manager occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large volume purchases or sales.
At April 30, 2009, the fund held the following equity securities issued by its regular broker/dealers:
Issuer |
Market Value
(000s) |
||
JP Morgan Chase & Co. |
$ | 6,944 | |
Goldman Sachs & Co. |
$ | 4,048 |
DISCLOSURE OF PORTFOLIO HOLDINGS
For funds in the Legg Mason Partners family of funds, each funds board of trustees has adopted policies and procedures developed by LMPFA with respect to the disclosure of the funds portfolio securities and any
56
ongoing arrangements to make available information about each funds portfolio securities. The policy requires that consideration always be given as to whether disclosure of information about any funds portfolio holdings is in the best interests of such funds shareholders, and that any conflicts of interest between the interests of the funds shareholders and those of LMPFA, LMIS or its affiliates, be addressed in a manner that places the interests of fund shareholders first. The policy provides that information regarding the funds portfolio holdings may not be shared with non-Legg Mason employees, with investors or potential investors (whether individual or institutional), or with third parties unless it is done for legitimate fund business purposes and in accordance with the policy.
LMPFAs policy generally provides for the release of details of securities positions once they are considered stale. Data is considered stale 25 calendar days following quarter-end. LMPFA believes that this passage of time prevents a third party from benefiting from an investment decision made by the fund that has not been fully reflected by the market.
Under the policy, the funds complete list of holdings (including the size of each position) may be made available to investors, potential investors, third parties and non-Legg Mason employees with simultaneous public disclosure at least 25 days after calendar quarter end. Typically, simultaneous public disclosure is achieved by the filing of Form N-Q or Form N-CSR in accordance with SEC rules, provided that such filings may not be made until 25 days following quarter-end and/or posting the information to Legg Masons or the funds Internet site that is accessible by the public, or through public release by a third party vendor.
The policy permits the release of limited portfolio holdings information that is not yet considered stale in a number of situations, including:
1. | The funds top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with simultaneous public disclosure. |
2. | The funds top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public disclosure. |
3. | A list of securities (that may include fund holdings together with other securities) followed by portfolio managers (without position sizes or identification of particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers. |
4. | A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction ( i.e. , brokers and custodians). |
5. | The funds sector weightings, performance attribution ( e.g. analysis of the funds out-performance or underperformance of its benchmark based on its portfolio holdings) and other summary and statistical information that does not include identification of specific portfolio holdings may be released, even if non-public, if such release is otherwise in accordance with the policys general principles. |
6. | The funds portfolio holdings may be released on an as-needed basis to its legal counsel, counsel to its Independent Trustees and its independent public accounting firm, in required regulatory filings or otherwise to governmental agencies and authorities. |
Under the policy, if information about the funds portfolio holdings is released pursuant to an ongoing arrangement with any party, the fund must have a legitimate business purpose for the release of the information, and either the party receiving the information must be under a duty of confidentiality, or the release of non-public information must be subject to trading restrictions and confidential treatment to prohibit the entity from sharing with an unauthorized source or trading upon any non-public information provided. Neither the fund, nor Legg Mason nor any other affiliated person may receive compensation or any other consideration in connection with
57
such arrangements. Ongoing arrangements to make available information about the funds portfolio securities will be reviewed at least annually by the funds Board. The release of portfolio holdings other than in ongoing arrangements is subject to a written agreement which requires the recipient to keep the information confidential and to use the information only for the purpose specified in the agreement. The approval of the funds Chief Compliance Officer, or designee, must be obtained prior to the release of the information other than in an ongoing arrangement.
The approval of the funds Chief Compliance Officer, or designee, must be obtained before entering into any new ongoing arrangement or altering any existing ongoing arrangement to make available portfolio holdings information, or with respect to any exceptions to the policy. Any exceptions to the policy must be consistent with the purposes of the policy. Exceptions are considered on a case-by-case basis and are granted only after a thorough examination and consultation with LMPFAs legal department, as necessary. Exceptions to the policies are reported annually to the funds Board.
Generally, the fund discloses its complete portfolio holdings approximately 25 days after calendar quarter-end on Legg Masons website, http://www.leggmason.com/individualinvestors. As an exemption to the policy the fund may disclose its complete portfolio holdings earlier on that website.
Set forth below is a list, as of March 31, 2009, of those parties with whom LMPFA, on behalf of the fund, has authorized ongoing arrangements that include the release of portfolio holdings information, the frequency of the release under such arrangements and the length of the lag, if any, between the date of the information and the date on which the information is disclosed. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.
Recipient |
Frequency |
Delay before dissemination |
||
State Street Bank and Trust Company
|
Daily | None | ||
RiskMetrics Group
|
As necessary | None | ||
Bloomberg |
Quarterly | 25 Days after Quarter End | ||
Lipper |
Quarterly | 25 Days after Quarter End | ||
S&P |
Quarterly | 25 Days after Quarter End | ||
Morningstar |
Quarterly | 25 Days after Quarter End | ||
Thomson/Vestek |
Daily | None | ||
Factset |
Daily | None | ||
The Bank of New York Mellon |
Daily | None | ||
Thomson |
Semi-annually | None | ||
SunGuard/Protogent (formerly Dataware) |
Daily | None | ||
ITG |
Daily | None |
Portfolio holdings information for the fund may also be released from time to time pursuant to ongoing arrangements with the following parties:
Recipient |
Frequency |
Delay before dissemination |
||
Baseline |
Daily | None | ||
Frank Russell |
Monthly | 1 Day | ||
Callan |
Quarterly | 25 Days after Quarter End | ||
Mercer |
Quarterly | 25 Days after Quarter End | ||
eVestment Alliance |
Quarterly | 25 Days after Quarter End | ||
RogersCasey (Equest) |
Quarterly | 25 Days after Quarter End | ||
Cambridge Associates |
Quarterly | 25 Days after Quarter End |
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Recipient |
Frequency |
Delay before dissemination |
||
Marco Consulting |
Quarterly | 25 Days after Quarter End | ||
Wilshire |
Quarterly | 25 Days after Quarter End | ||
Informa Investment Services (Efron) |
Quarterly | 25 Days after Quarter End | ||
CheckFree (Mobius) |
Quarterly | 25 Days after Quarter End | ||
Nelsons Information |
Quarterly | 25 Days after Quarter End | ||
Investor Tools |
Daily | None | ||
Advent |
Daily | None | ||
BARRA |
Daily | None | ||
Plexus |
Quarterly (Calendar) | Sent 1-3 business days following the end of a Quarter | ||
Elkins/McSherry |
Quarterly (Calendar) | Sent 1-3 business days following the end of a Quarter | ||
Quantitative Services Group |
Daily | None | ||
AMBAC |
Daily | None | ||
Deutsche Bank |
Monthly | 6-8 business days | ||
Fitch |
Monthly | 6-8 business days | ||
Liberty Hampshire |
Weekly and Month End | None | ||
Sun Trust |
Weekly and Month End | None | ||
New England Pension Consultants |
Quarterly | 25 Days after Quarter End | ||
Evaluation Associates |
Quarterly | 25 Days after Quarter End | ||
Watson Wyatt |
Quarterly | 25 Days after Quarter End | ||
S&P (Rating Agency) |
Weekly Tuesday Night | 1 business day | ||
Moodys (Rating Agency) |
Monthly | 6-8 business days | ||
Electra Information Systems |
Daily | None | ||
Cabot Research |
Weekly | None | ||
Goldman Sachs |
Daily | None | ||
Chicago Mercantile Exchange |
Daily | None | ||
Canterbury Consulting |
Quarterly | 25 Days after Quarter End | ||
Broadridge |
Daily | None | ||
DST International |
As necessary | Varies | ||
Interactive Data Corp. |
Daily | None | ||
Citigroup Global Markets Inc. |
Daily | None |
The Trust.
The certificate of trust to establish Legg Mason Partners Equity Trust (referred to in this section as the trust) was filed with the State of Maryland on October 4, 2006. The fund was redomiciled as a series of the trust on April 16, 2007. Prior thereto, the fund was a series of Legg Mason Partners Investment Trust, a Massachusetts business trust. Prior to the reorganization of the fund as a series of Legg Mason Partners Investment Trust, the fund was a series of Legg Mason Partners Investment Funds, Inc., a Maryland corporation.
The fund is a series of the trust, a Maryland business trust. A Maryland business trust is an unincorporated business association that is established under, and governed by, Maryland law. Maryland law provides a statutory framework for the powers, duties, rights and obligations of the Board (referred to in this section as the trustees) and shareholders of the trust, while the more specific powers, duties, rights and obligations of the trustees and the shareholders are determined by the trustees as set forth in the trusts declaration of trust (referred to in this section as the declaration). Some of the more significant provisions of the declaration are described below.
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Shareholder Voting.
The declaration provides for shareholder voting as required by the 1940 Act or other applicable laws but otherwise permits, consistent with Maryland law, actions by the trustees without seeking the consent of shareholders. The trustees may, without shareholder approval, amend the declaration or authorize the merger or consolidation of the trust into another trust or entity, reorganize the trust, or any series or class into another trust or entity or a series or class of another entity, sell all or substantially all of the assets of the trust or any series or class to another entity, or a series or class of another entity, or terminate the trust or any series or class.
The fund is not required to hold an annual meeting of shareholders, but the fund will call special meetings of shareholders whenever required by the 1940 Act or by the terms of the declaration. The declaration provides for dollar-weighted voting which means that a shareholders voting power is determined, not by the number of shares he or she owns, but by the dollar value of those shares determined on the record date. All shareholders of all series and classes of the trust vote together, except where required by the 1940 Act to vote separately by series or by class, or when the trustees have determined that a matter affects only the interests of one or more series or classes of shares rather than all series or classes.
Election and Removal of Trustees.
The declaration provides that the trustees may establish the number of trustees and that vacancies on the Board may be filled by the remaining trustees, except when election of trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The declaration also provides that a mandatory retirement age may be set by action of two-thirds of the trustees and that trustees may be removed, with or without cause, by a vote of shareholders holding two-thirds of the voting power of the trust, or by a vote of two-thirds of the remaining trustees. The provisions of the declaration relating to the election and removal of trustees may not be amended without the approval of two-thirds of the trustees.
Amendments to the Declaration.
The trustees are authorized to amend the declaration without the vote of shareholders, but no amendment may be made that impairs the exemption from personal liability granted in the declaration to persons who are or have been shareholders, trustees, officers or employees of the trust, or that limit the rights to indemnification or insurance provided in the declaration with respect to actions or omissions of persons entitled to indemnification under the declaration prior to the amendment.
Issuance and Redemption of Shares.
The fund may issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the trustees may determine. The fund may involuntarily redeem a shareholders shares upon certain conditions as may be determined by the trustees, including, for example, if the shareholder fails to provide the fund with identification required by law, or if the fund is unable to verify the information received from the shareholder. Additionally, as discussed below, shares may be redeemed in connection with the closing of small accounts.
Disclosure of Shareholder Holdings.
The declaration specifically requires shareholders, upon demand, to disclose to the fund information with respect to the direct and indirect ownership of shares in order to comply with various laws or regulations, and the fund may disclose such ownership if required by law or regulation.
60
Small Accounts.
The declaration provides that the fund may close out a shareholders account by redeeming all of the shares in the account if the account falls below a minimum account size (which may vary by class) that may be set by the trustees from time to time. Alternately, the declaration permits the fund to assess a fee for small accounts (which may vary by class) and redeem shares in the account to cover such fees, or convert the shares into another share class that is geared to smaller accounts.
Series and Classes.
The declaration provides that the trustees may establish series and classes in addition to those currently established and to determine the rights and preferences, limitations and restrictions, including qualifications for ownership, conversion and exchange features, minimum purchase and account size, expenses and charges, and other features of the series and classes. The trustees may change any of those features, terminate any series or class, combine series with other series in the trust, combine one or more classes of a series with another class in that series or convert the shares of one class into another class.
Each share of the fund, as a series of the trust, represents an interest in the fund only and not in the assets of any other series of the trust.
Shareholder, Trustee and Officer Liability.
The declaration provides that shareholders are not personally liable for the obligations of the fund and requires the fund to indemnify a shareholder against any loss or expense arising from any such liability. In addition, the fund will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. The declaration further provides that a trustee acting in his or her capacity of trustee is not personally liable to any person other than the trust or its shareholders, for any act, omission or obligation of the trust. Further, a trustee is held to the same standard of conduct as a director of a Maryland corporation. This requires that a trustee perform his or her duties in good faith and in a manner he or she reasonably believes to be in the best interests of the trust or a series thereof, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. The declaration also permits the limitation of a trustees liability to the full extent provided under Maryland law. Under current Maryland law, a trustee is liable to the trust or its shareholders for monetary damages only (a) to the extent that it is proved that he or she actually received an improper benefit or profit in money, property or services or (b) to the extent that a judgment or other final adjudication adverse to the trustee is entered in a proceeding based on a finding in the proceeding that the trustees action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The declaration requires the trust to indemnify any persons who are or who have been trustees, officers or employees of the trust for any liability for actions or failure to act except to the extent prohibited by applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is not available.
The declaration provides that any trustee who serves as chair of the Board or of a committee of the Board, lead independent trustee or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.
Derivative Actions.
The declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction and other harm that can be caused to the fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand by three unrelated shareholders must first be made on the funds trustees. The declaration details various information, certifications, undertakings and acknowledgements that must be
61
included in the demand. Following receipt of the demand, the trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of the fund, the trustees are required to reject the demand and the complaining shareholders may not proceed with the derivative action unless the shareholders are able to sustain the burden of proof to a court that the decision of the trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of the fund. The declaration further provides that shareholders owning shares representing at least 5% of the voting power of the affected fund must join in bringing the derivative action. If a demand is rejected, the complaining shareholders will be responsible for the costs and expenses (including attorneys fees) incurred by the fund in connection with the consideration of the demand if, in the judgment of the independent trustees, the demand was made without reasonable cause or for an improper purpose. If a derivative action is brought in violation of the declaration, the shareholders bringing the action may be responsible for the funds costs, including attorneys fees.
The declaration further provides that the fund shall be responsible for payment of attorneys fees and legal expenses incurred by a complaining shareholder only if required by law, and any attorneys fees that the fund is obligated to pay shall be calculated using reasonable hourly rates. The declaration also requires that actions by shareholders against the fund be brought only in federal court in Baltimore, Maryland, or if not permitted to be brought in federal court, then in state court in Baltimore, Maryland, and that the right to jury trial be waived to the full extent permitted by law.
Annual and Semi-Annual Reports.
The fund sends its shareholders a semi-annual report and an audited annual report, which include listings of investment securities held by the fund at the end of the period covered. In an effort to reduce the funds printing and mailing costs, the fund consolidates the mailing of its semi-annual and annual reports by household. This consolidation means that a household having multiple accounts with the identical address of record will receive a single copy of each report. In addition, the fund also consolidates the mailing of its Prospectus so that a shareholder having multiple accounts (that is, individual, IRA and/or self-employed retirement plan accounts) will receive a single Prospectus annually. Shareholders who do not want this consolidation to apply to their accounts should contact their Service Agent or the transfer agent.
The funds policy is to distribute its net investment income and net realized capital gains, if any, at least annually. The fund may also pay additional dividends from certain amounts of undistributed ordinary and capital gains realized, in order to avoid a federal excise tax liability.
If a shareholder does not otherwise instruct, dividends and capital gains distributions will be reinvested automatically in additional shares of the same class at NAV, with no additional sales charge or contingent deferred sales charge. A shareholder may change the option at any time by notifying his or her Service Agent. Shareholders whose accounts are held directly at the transfer agent should notify the transfer agent in writing, requesting a change to this reinvest option.
Income dividends on a class of shares of the fund may be lower than another class of shares as a result of different expenses with respect to the classes. Distributions of capital gains, if any, will be in the same amount for each class of shares.
The following is a summary of certain material U.S. federal income tax considerations regarding the purchase, ownership and disposition of shares of the fund by U.S. persons. This summary does not address all of
62
the potential U.S. federal income tax consequences that may be applicable to the fund or to all categories of investors, some of which may be subject to special tax rules. Current and prospective shareholders are urged to consult their own tax adviser with respect to the specific federal, state, local and foreign tax consequences of investing in the fund. The summary is based on the laws in effect on the date of this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.
The Fund and Its Investments
The fund intends to continue to qualify to be treated as a regulated investment company each taxable year under the Code. To so qualify, the fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign 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 or 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 (b) diversify its holdings so that, at the end of each quarter of the funds taxable year, (i) at least 50% of the market value of the funds assets is represented by cash, securities of other regulated investment companies, U.S. government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the funds assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer, any two issuers of which 20% or more of the voting stock is held by the fund and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships.
Although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest in a qualified publicly traded partnership. Fund investments in partnerships, including in qualified publicly traded partnerships, may result in the funds being subject to state, local or foreign income, franchise or withholding tax liabilities.
As a regulated investment company, 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 the fund 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.
On April 30, 2009, the unused capital loss carryforward of the fund was approximately $413,486,367. For federal income tax purposes, this amount is available to be applied against the funds future realized capital gains that are realized prior to the expiration of the carryforward, if any. The fund had the following net capital loss carryforward remaining:
Year of Expiration |
Amount | ||
04/30/2010 |
$ | 26,625,535 | |
04/30/2011 |
$ | 107,422,781 | |
04/30/2012 |
$ | 11,972,942 | |
04/30/2013 |
$ | 221,005 | |
04/30/2017 |
$ | 267,244,104 |
63
The Code imposes a 4% nondeductible excise tax on the fund to the extent it does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income for that year and (ii) 98% of its capital gain net income (both long-term and short-term) for the one-year period ending, as a general rule, on October 31 of that 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 anticipates that it will pay such dividends and will make such distributions as are necessary in order to avoid the application of this excise tax.
If, in any taxable year, the fund fails to qualify as a regulated investment company under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be deductible by the fund in computing its taxable income. In addition, in the event of a failure to qualify, the funds distributions, to the extent derived from the funds current or accumulated earnings and profits, will constitute dividends (potentially eligible for the corporate dividends-received deduction and for treatment as qualified dividend income in the case of shareholders taxed as individuals) that are taxable to shareholders as dividend income, even though those distributions might otherwise (at least in part) have been treated in the shareholders hands as long-term capital gains. Moreover, if the fund fails to qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. If the fund failed to qualify as a regulated investment company 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) in order to qualify as a regulated investment company in a subsequent year.
The funds transactions in foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies), to the extent permitted, will be subject to special provisions of the Code (including provisions relating to hedging transactions and straddles) that, among other things, may affect the character of gains and losses realized by the fund ( i.e ., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the fund and defer fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the fund to mark-to-market certain types of the positions in its portfolio ( i.e ., treat them as if they were closed out at the end of each year) and (b) may cause the fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the fund as a regulated investment company.
The funds investment in so-called section 1256 contracts, such as regulated futures contracts, most foreign currency forward contracts traded in the interbank market and options on most stock indexes, are subject to special tax rules. All section 1256 contracts held by the fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the funds 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
64
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.
The fund may be required to treat amounts as taxable income or gain, subject to the distribution requirements referred to above, even though no corresponding amounts of cash are received concurrently, as a result of (1) mark-to-market, constructive sale or rules applicable to PFICs (as defined below) or partnerships or trusts in which the fund invests or to certain options, futures or forward contracts, or appreciated financial positions or (2) the inability to obtain cash distributions or other amounts due to currency controls or restrictions on repatriation imposed by a foreign country with respect to the funds investments (including through depositary receipts) in issuers in such country or (3) tax rules applicable to debt obligations acquired with original issue discount, including zero-coupon or deferred payment bonds and pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. The fund may therefore be required to obtain cash to be used to satisfy these distribution requirements by selling securities at times that it might not otherwise be desirable to do so or borrowing the necessary cash, thereby incurring interest expenses. In certain situations, the fund may, for a taxable year, defer all or a portion of its capital losses and currency losses realized after October until the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and losses realized after October may affect the tax character of shareholder distributions.
In general, gain or loss on a short sale is recognized when the fund closes the sale by delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or loss from a short sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital asset in the funds hands. Except with respect to certain situations where the property used by the fund to close a short sale has a long-term holding period on the date of the short sale, special rules would generally treat the gains on short sales as short-term capital gains. These rules may also terminate the running of the holding period of substantially identical property held by the fund. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, substantially identical property has been held by the fund for more than one year. In general, the fund will not be permitted to deduct payments made to reimburse the lender of securities for dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the short sale is entered into.
Foreign Investments . Dividends or other income (including, in some cases, capital gains) received by the fund from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases. The fund will not be eligible to elect to treat any foreign taxes it pays as paid by its shareholders, who therefore will not be entitled to credits or deductions for such taxes on their own tax returns. Foreign taxes paid by the fund will reduce the return from the funds investments.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time the fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the fund actually collects such income or pays such liabilities are generally treated as ordinary income or ordinary loss. In general, gains (and losses) realized on debt instruments will be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the U.S. dollar and the currencies in which the instruments are denominated. Similarly, gains or losses on foreign currency, foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt securities denominated in foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss unless the fund were to elect otherwise.
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Passive Foreign Investment Companies . If the fund purchases shares in certain foreign investment entities, called passive foreign investment companies (PFICs), it may be subject to U.S. federal income tax on a portion of any excess distribution or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the fund to its shareholders. Additional charges in the nature of interest may be imposed on the fund in respect of deferred taxes arising from such distributions or gains.
If the fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing fund under the Code, in lieu of the foregoing requirements, the fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the fund, and such amounts would be subject to the 90% and excise tax distribution requirements described above. In order to make this election, the fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.
Alternatively, the fund may make a mark-to-market election that will result in the fund being treated as if it had sold and repurchased its PFIC stock at the end of each year. In such case, the fund would report any such gains as ordinary income and would deduct any such losses as ordinary losses to the extent of previously recognized gains. The election must be made separately for each PFIC owned by the fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the Internal Revenue Service (the IRS). By making the election, the fund could potentially ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of PFIC stock. The fund may have to distribute this phantom income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax.
The fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules.
Taxation of U.S. Shareholders
Dividends and Distributions. Dividends and other distributions by the fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is made. However, any dividend or distribution declared by the fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed to have been received by each shareholder on December 31 of such calendar year and to have been paid by the fund not later than such December 31, provided such dividend is actually paid by the fund during January of the following calendar year.
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 shareholders 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.
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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.
Special rules apply, however, to regular dividends paid to individuals. Such a dividend, with respect to taxable years beginning on or before December 31, 2010, may be subject to tax at the rates generally applicable to long-term capital gains for individuals (currently at a maximum rate of 15%), provided that the individual receiving the dividend satisfies certain holding period and other requirements. Dividends subject to these special rules are not actually treated as capital gains, however, and thus are not included in the computation of an individuals net capital gain and generally cannot be used to offset capital losses. The long-term capital gains rates will apply to (i) 100% of the regular dividends paid by the fund to an individual in a particular taxable year if 95% or more of the funds gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) in that taxable year is attributable to qualified dividend income received by the fund; or (ii) the portion of the regular dividends paid by the fund to an individual in a particular taxable year that is attributable to qualified dividend income received by the fund in that taxable year if such qualified dividend income accounts for less than 95% of the funds gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) for that taxable year.
For this purpose, qualified dividend income generally means income from dividends received by the fund from U.S. corporations and certain foreign corporations ( e.g. , foreign corporations incorporated in certain countries with a comprehensive tax treaty with the United States or whose stock is traded on an established securities market in the United States and that are not PFICs), 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. However, qualified dividend income does not include any dividends received from tax-exempt corporations. Also, dividends received by the fund from a real estate investment trust or another regulated investment company generally are qualified dividend income only to the extent the dividend distributions are made out of qualified dividend income received by such real estate investment trust or other regulated investment company. In the case of securities lending transactions, payments in lieu of dividends are not qualified dividend income. If a shareholder elects to treat fund dividends as investment income for purposes of the limitation on the deductibility of investment interest, such dividends would not be a qualified dividend income.
We will send you information after the end of each year setting forth the amount of dividends paid by us that are eligible for the reduced rates.
If an individual receives a 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 taxpayers 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 taxpayers tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period.
Dividends and distributions paid by the fund (except for the portion thereof, if any, attributable to dividends on stock of U.S. corporations received by the fund) will not qualify for the deduction for dividends received by corporations. Distributions in excess of the funds 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 shareholders basis in his shares of the fund, and as a capital gain thereafter (if the shareholder holds his shares of the fund as capital assets).
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Shareholders receiving dividends or distributions in the form of additional shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares of the fund just prior to the record date for a taxable dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If the fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends are included in the funds gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends ( i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, the fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
Under current law, the fund serves to block unrelated business taxable income (UBTI) from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the fund if shares in the fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). Also, certain types of income received by the fund from real estate investment trusts (REITs), real estate mortgage investment conduits, taxable mortgage pools or other investments may cause the fund to designate some or all of its distributions as excess inclusion income. To fund shareholders such excess inclusion income may (1) constitute taxable income, as UBTI for those shareholders who would otherwise be tax-exempt such as IRAs, 401(k) accounts, Keogh plans, pension plans and certain charitable entities; (2) not be offset against net operating losses for tax purposes; (3) not be eligible for reduced US withholding for non-US shareholders even from tax treaty countries; and (4) cause the fund to be subject to tax if certain disqualified organizations as defined by the Code are fund shareholders.
Sales of Shares . Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss equal to the difference between the amount realized and his or her basis in the shares. A redemption of shares by the fund will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholders 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 or loss on the original shares to the extent the subsequent sales charge is reduced. Instead the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired shares. Furthermore, the same rule also applies to a disposition of the newly acquired shares made within 90 days of the second acquisition. This provision prevents a shareholder from immediately deducting the sales charge by shifting his or her investment within a family of mutual funds.
Backup Withholding . The fund may be required to withhold, for U.S. federal income tax purposes, a portion of the dividends, distributions and redemption proceeds payable to shareholders who fail to provide the fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Certain shareholders are exempt from backup withholding. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholders U.S. federal income tax liability.
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Notices . Shareholders will receive, if appropriate, various written notices after the close of the funds taxable year regarding the U.S. federal income tax status of certain dividends, distributions and deemed distributions that were paid (or that are treated as having been paid) by the fund to its shareholders during the preceding taxable year.
If the fund is held through a qualified retirement plan entitled to tax exempt treatment for federal income tax purposes, distributions will generally not be taxable currently. Special tax rules apply to such retirement plans. You should consult your tax adviser regarding the tax treatment of distributions (which may include amounts attributable to fund distributions) which may be taxable when distributed from the retirement plan.
Other Taxes
Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign taxes depending on each shareholders particular situation.
If a shareholder recognizes a loss with respect to the funds 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 regulated investment company are not exempted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
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. shareholders 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 backup withholding at the appropriate rate.
In general, United States federal withholding tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any distributions of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of the fund.
For non-U.S. shareholders of the fund, a distribution attributable to the funds 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 funds 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 funds assets are invested in REITs and other U.S. real property holding corporations.
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 funds 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.
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The rules laid out in the previous two paragraphs, other than the withholding rules, will apply notwithstanding the funds participation in a wash sale transaction or its payment of a substitute dividend.
Provided that 50% or more of the value of the funds stock is held by U.S. shareholders, distributions of U.S. real property interests (including securities in a U.S. real property holding corporation, unless such corporation is regularly traded on an established securities market and the fund has held 5% or less of the outstanding shares of the corporation during the five-year period ending on the date of distribution) occurring on or before December 31, 2009, in redemption of a non-U.S. shareholders 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 funds 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 funds qualified net interest income (generally, the funds 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 funds qualified short-term capital gains (generally, the excess of the funds net short-term capital gain over the funds 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 in the United States and subject to the U.S. estate tax.
The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders should consult their own tax advisers with respect to the particular tax consequences to them of an investment in a fund, including the applicability of non-U.S. taxes.
The foregoing is only a summary of certain material U.S. federal income tax consequences affecting the fund and its shareholders. Current and prospective shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the fund.
Beginning in May 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGMI and a number of its then affiliates, including SBFM and Salomon Brothers Asset Management Inc (SBAM), which were then investment adviser or manager to certain funds (the Managers), substantially all
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of the mutual funds then managed by the Managers (the Defendant Funds) and Board Members of the Defendant Funds (collectively, the Defendants). The complaints alleged, among other things, that CGMI created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGMI for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the Complaint) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Defendant Funds in which none of the plaintiffs had invested, including the fund, and dismissing those Defendant Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to replead as a derivative claim.
On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (Second Amended Complaint) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint under Section 36(b) of the 1940 Act, and against CAM, SBAM and SBFM as investment advisers to the identified funds, as well as CGMI as a distributor for the identified funds (collectively, the Second Amended Complaint Defendants). The Second Amended Complaint alleges no claims against any of the Defendant Funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.
On December 3, 2007, the court granted Defendants motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals. The appeal was fully briefed and oral argument before the U.S. Court of Appeals for the Second Circuit took place on March 5, 2009. The parties currently are awaiting a decision from the U.S. Court of Appeals for the Second Circuit.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.
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On May 31, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against SBFM, the then-investment adviser or manager to the fund, and CGMI, a former distributor of the fund, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the fund (the Affected Funds).
The SEC order found that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the Advisers Act). Specifically, the order found that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (First Data), the Affected Funds then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that CAM, the Citigroup business unit that, at the time, included the Affected Funds investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the
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appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also found that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds best interests and that no viable alternatives existed. SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.
The order required SBFM to recommend a new transfer agent contract to the Affected Funds boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGMI would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
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Beginning in August 2005, five putative class action lawsuits alleging violations of federal securities laws and state law were filed against CGMI, a former distributor of the fund and other affiliated funds (the Funds), and SBFM, based on the May 31, 2005 settlement order issued against CGMI and SBFM by the SEC. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the adviser for the Smith Barney family of funds, rescission of the Funds management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts and an award of attorneys fees and litigation expenses.
The five actions were subsequently consolidated, and a consolidated complaint was filed. On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint, and judgment was entered. An appeal was filed with the U.S. Court of Appeals for the Second Circuit. After full briefing, oral argument before the U.S. Court of Appeals for the Second Circuit took place on March 4, 2009. The parties currently are awaiting a decision from the U.S. Court of Appeals for the Second Circuit.
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As of the date of this SAI, the Funds investment manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Funds investment manager and its affiliates to continue to render services to the Funds under their respective contracts.
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The foregoing speaks only as of the date of this SAI. Additional lawsuits presenting allegations and requests for relief arising out of or in connection
The audited financial statements of the fund and the funds predecessor (Statement of Assets and Liabilities as of April 30, 2009, including the Schedule of Investments as of April 30, 2009, Statement of Operations for the year ended April 30, 2009, Statements of Changes in Net Assets for each of the years in the two-year period ended April 30, 2009, Financial Highlights for each of the years or periods in the five-year period ended April 30, 2009, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm, each of which is included in the Annual Report to Shareholders of the fund), are incorporated by reference into this SAI (filed on July 7, 2009; Accession No. 0001193125-09-145101).
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PROXY VOTING GUIDELINES & PROCEDURES SUMMARY
OVERVIEW
Legg Mason Capital Management, Inc. (LMCM) has implemented the following principles and procedures for voting proxies on behalf of advisory clients. These principles and procedures are reasonably designed to ensure LMCM exercises its voting responsibilities to serve the best interests of its clients and in compliance with applicable laws and regulations. LMCM assumes responsibility and authority for voting proxies for all clients, unless such responsibility and authority has been expressly retained by the client or delegated by the client to others. For each proxy vote LMCM takes into consideration its duty to its clients and all other relevant facts available to LMCM at the time of the vote. Therefore, while these guidelines provide a framework for voting, votes are ultimately cast on a case-by-case basis. LMCM employs the same proxy principles and procedures for all funds for which it has voting responsibility.
PRINCIPLES
Proxy voting is a valuable right of company shareholders. Through the voting mechanism, shareholders are able to protect and promote their interests by communicating views directly to the companys Board of Directors (Board), as well as exercising their right to grant or withhold approval for actions proposed by the Board or company management. LMCM believes the interests of shareholders are best served by the following principles when considering proxy proposals:
Preserve and expand the power of shareholders in areas of corporate governance Equity shareholders are owners of the businesscompany boards and management teams are ultimately accountable to them. LMCM supports policies, plans and structures that promote accountability of the Board and management to owners, and align the interests of the Board and management with owners. Examples include: annual election of all Board members, cumulative voting, and incentive plans that are contingent on delivering value to shareholders. LMCM opposes proposals that reduce accountability or misalign interests, including but not limited to classified boards, poison pills, and incentives that are not linked to owner returns.
Allow responsible management teams to run the business LMCM supports policies, plans and structures that give management teams appropriate latitude to run the business in the way that is most likely to maximize value for owners. Conversely, LMCM opposes proposals that limit managements ability to do this. LMCM generally opposes proposals that seek to place restrictions on management in order to promote political, religious or social agendas.
Please see LMCMs proxy voting guidelines, which are attached as Schedule A, for more details.
PROCEDURES
Oversight
LMCMs Chief Investment Officer (CIO) has full authority to determine LMCMs proxy voting principles and vote proxies on behalf of LMCMs clients. The Chief Investment Officer has delegated oversight and implementation of the proxy voting process, including the principles and procedures that govern it, to one or more Proxy Officers and Compliance Officers. No less than annually, LMCM will review existing principles and procedures in light of LMCMs duties as well as applicable laws and regulations to determine if any changes are necessary.
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Limitations
LMCM recognizes proxy voting as a valuable right of company shareholders. Generally speaking, LMCM will vote all proxies it receives. However, LMCM may refrain from voting in certain circumstances. For instance, LMCM generally intends to refrain from voting a proxy if the companys shares are no longer held by LMCMs clients at the time of the meeting. Additionally, LMCM may refrain from voting a proxy if LMCM concludes the potential impact on shareholders interests is insignificant while the cost associated with analyzing and voting the proxy may be significant.
Proxy Administration
LMCM instructs each client custodian to forward proxy materials to LMCMs Proxy Administrator. New client custodians are notified at account inception of their responsibility to deliver proxy materials to LMCM. LMCM uses Institutional Shareholder Services (ISS) to electronically receive and vote proxies, as well as to maintain proxy voting receipts and records.
Upon receipt of proxy materials:
Compliance Review
A Compliance Officer reviews the proxy issues and identifies any potential conflicts of interests between LMCM, or its employees, and LMCMs clients. LMCM recognizes that it has a duty to vote proxies in the best interests of its clients, even if such votes may result in a loss of business or economic benefit to LMCM or its affiliates.
1. Identifying Potential Conflicts. In identifying potential conflicts of interest the Compliance Officer will review the following issues:
(a) Whether there are any business or personal relationships between LMCM, or an employee of LMCM, and the officers, directors or shareholder proposal proponents of a company whose securities are held in client accounts that may create an incentive for LMCM to vote in a manner that is not consistent with the best interests of its clients;
(b) Whether LMCM has any other economic incentive to vote in a manner that is not consistent with the best interests of its clients; and
(c) Whether the Proxy Officer voting the shares is aware of any business or personal relationship, or other economic incentive, that has the potential to influence the manner in which the Proxy Officer votes the shares.
2. Assessing Materiality. A potential conflict will be deemed to be material if the Compliance Officer determines in the exercise of reasonable judgment that the conflict is likely to have an impact on the manner in which the subject shares are voted.
If the Compliance Officer determines that the potential conflict is not material, the proxy issue will be forwarded to the Proxy Officer for voting.
If the Compliance Officer determines that the potential conflict may be material, the following steps will be taken:
(a) The Compliance Officer will consult with representatives of LMCMs senior management to make a final determination of materiality. The Compliance Officer will maintain a record of this determination.
(b) After the determination is made, the following procedures will apply:
(i) If the final determination is that the potential conflict is not material, the proxy issue will be forwarded to the Proxy Officer for voting.
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(ii) If the final determination is that the potential conflict is material, LMCM will adhere to the following procedures:
A. If LMCMs Proxy Voting Guidelines (Guidelines), a copy of which is included as Schedule A, definitively address the issues presented for vote, LMCM will vote according to the Guidelines.
B. If the issues presented for vote are not definitively addressed in the Guidelines, LMCM will either (x) follow the vote recommendation of an independent voting delegate, or (y) disclose the conflict to clients and obtain their consent to vote.
Proxy Officer Duties
The Proxy Officer reviews proxies and evaluates matters for vote in light of LMCMs principles and procedures and the Guidelines. The Proxy Officer may seek additional information from LMCMs investment personnel, company management, independent research services, or other sources to determine the best interests of shareholders. Additionally, the Proxy Officer may consult with LMCMs Chief Investment Officer for guidance on proxy issues. LMCM will maintain all documents that have a material impact on the basis for the vote. The Proxy Officer will return all signed, voted forms to the Proxy Administrator.
Proxy Administrator Duties
The Proxy Administrator:
1. | Provides custodians with instructions to forward proxies to LMCM for all clients for whom LMCM is responsible for voting proxies; |
2. | Reconciles the number of shares indicated on the proxy ballot with LMCMs internal data on shares held as of the record date and notifies the custodian of any discrepancies or missed proxies; |
3. | Will use best efforts to obtain missing proxies from custodians; |
4. | Informs the Compliance Officer and Proxy Officer if the companys shares are no longer held by Firm clients as of the meeting date; |
5. | Ensures that the Compliance Officer and Proxy Officer are aware of the timeline to vote a proxy and uses best efforts to ensure that votes are cast in a timely manner; |
6. | Follows instructions from the Proxy Officer or Compliance Officer as to how to vote proxy issues, and casts such votes via ISS software, online or via facsimile; and |
7. | Obtains evidence of receipt and maintains records of all proxies voted. |
Record Keeping
The following documents are maintained onsite for two years and in an easily accessible place for another three years:
1. | A copy of all policies and procedures maintained by LMCM during the applicable period relating to proxy voting; |
2. | A copy of each proxy statement received regarding client securities (LMCM intends to rely on the availability of such documents through the Securities and Exchange Commissions EDGAR database); |
3. | A record of each vote cast by LMCM on behalf of a client (LMCM has an agreement with ISS whereby ISS has agreed to maintain these records and make them available to LMCM promptly upon request); |
4. | A copy of each document created by LMCM that was material to making a decision how to vote proxies or that memorializes the basis for such decision. |
5. | A copy of each written client request for information on how LMCM voted proxies on behalf of such client, and a copy of any written response provided by LMCM to any (written or oral) request for information on how LMCM voted proxies on behalf of such client. |
A-3
Schedule A
Proxy Voting Guidelines
LMCM maintains these proxy-voting guidelines, which set forth the manner in which LMCM generally votes on issues that are routinely presented. Please note that for each proxy vote LMCM takes into consideration its duty to its clients, the specific circumstances of the vote and all other relevant facts available at the time of the vote. While these guidelines provide the framework for voting proxies, ultimately proxy votes are cast on a case-by-case basis. Therefore actual votes for any particular proxy issue may differ from the guidelines shown below.
Four principal areas of interest to shareholders:
1) | Obligations of the Board of Directors |
2) | Compensation of management and the Board of Directors |
3) | Take-over protections |
4) | Shareholders rights |
Proxy Issue |
LMCM Guideline | |
BOARD OF DIRECTORS |
||
Independence of Boards of Directors: majority of unrelated directors, independent of management |
For | |
Nominating Process: independent nominating committee seeking qualified candidates, continually assessing directors and proposing new nominees |
For | |
Size and Effectiveness of Boards of Directors: Boards must be no larger than 15 members |
For | |
Cumulative Voting for Directors |
For | |
Staggered Boards |
Against | |
Separation of Board and Management Roles (CEO/Chairman) |
Case-by-Case | |
Compensation Review Process: compensation committee comprised of outside, unrelated directors to ensure shareholder value while rewarding good performance |
For | |
Director Liability & Indemnification: support limitation of liability and provide indemnification |
For | |
Audit Process |
For | |
Board Committee Structure: audit, compensation, and nominating and/or governance committee consisting entirely of independent directors |
For | |
Monetary Arrangements for Directors: outside of normal board activities amounts should be approved by a board of independent directors and reported in proxy |
For | |
Fixed Retirement Policy for Directors |
Case-by-Case | |
Ownership Requirement: all Directors have direct and material cash investment in common shares of Company |
For | |
Proposals on Board Structure: (lead director, shareholder advisory committees, requirement that candidates be nominated by shareholders, attendance at meetings) |
For |
A-4
Proxy Issue |
LMCM Guideline | |
Annual Review of Board/CEO by Board |
For | |
Periodic Executive Sessions Without Mgmt (including CEO) |
For | |
Votes for Specific Directors |
Case-by-Case | |
MANAGEMENT AND DIRECTOR COMPENSATION |
||
Stock Option and Incentive Compensation Plans: |
Case-by-Case | |
Form of Vehicle: grants of stock options, stock appreciation rights, phantom shares and restricted stock |
Case-by-Case | |
Price |
Against plans
whose underlying securities are to be issued at less than 100% of the current market value |
|
Re-pricing: plans that allow the Board of Directors to lower the exercise price of options already granted if the stock price falls or under-performs the market |
Against | |
Expiry: plan whose options have a life of more than ten years |
Case-by-Case | |
Expiry: evergreen stock option plans |
Against | |
Dilution: |
Case-by-
Casetaking into account value creation, commitment to shareholder- friendly policies, etc. |
|
Vesting: stock option plans that are 100% vested when granted |
Against | |
Performance Vesting: link granting of options, or vesting of options previously granted, to specific performance targets |
For | |
Concentration: authorization to allocate 20% or more of the available options to any one individual in any one year |
Against | |
Director Eligibility: stock option plans for directors if terms and conditions are clearly defined and reasonable |
Case-by-Case | |
Change in Control: stock option plans with change in control provisions that allow option holders to receive more for their options than shareholders would receive for their shares |
Against | |
Change in Control: change in control arrangements developed during a take-over fight specifically to entrench or benefit management |
Against | |
Change in Control: granting options or bonuses to outside directors in event of a change in control |
Against |
A-5
Proxy Issue |
LMCM Guideline | |
Board Discretion: plans to give Board broad discretion in setting terms and conditions of programs |
Against | |
Employee Loans: Proposals authorizing loans to employees to pay for stock or options |
Against | |
Director Compensation: % of directors compensation in form of common shares |
For | |
Golden Parachutes |
Case-by-Case | |
Expense Stock Options |
For | |
Severance Packages: must receive shareholder approval |
For | |
Lack of Disclosure about Provisions of Stock-based Plans |
Against | |
Reload Options |
Against | |
Plan Limited to a Small Number of Senior Employees |
Against | |
Employee Stock Purchase Plans |
Case-by-Case | |
TAKEOVER PROTECTIONS |
||
Shareholder Rights Plans: plans that go beyond ensuring the equal treatment of shareholders in the event of a bid and allowing the corp. enough time to consider alternatives to a bid |
Against | |
Going Private Transaction, Leveraged Buyouts and Other Purchase Transactions |
Case-by-Case | |
Lock-up Arrangements: hard lock-up arrangements that serve to prevent competing bids in a takeover situation |
Against | |
Crown Jewel Defenses |
Against | |
Payment of Greenmail |
Against | |
Continuing Director or Deferred Redemption Provisions: provisions that seek to limit the discretion of a future board to redeem the plan |
Against | |
Change Corporations Domicile: if reason for re-incorporation is to take advantage of protective statutes (anti-takeover) |
Against | |
Poison Pills: receive shareholder ratification |
For | |
Redemption/Ratification of Poison Pill |
For | |
SHAREHOLDERS RIGHTS |
||
Confidential Voting by Shareholders |
For | |
Dual-Class Share Structures |
Against | |
Linked Proposals: with the objective of making one element of a proposal more acceptable |
Against | |
Blank Check Preferred Shares: authorization of, or an increase in, blank check preferred shares |
Against | |
Supermajority Approval of Business Transactions: management seeks to increase the number of votes required on an issue above two-thirds of the outstanding shares |
Against | |
Increase in Authorized Shares: provided the amount requested is necessary for sound business reasons |
For | |
Shareholder Proposals |
Case-by-Case | |
Stakeholder Proposals |
Case-by-Case |
A-6
Proxy Issue |
LMCM Guideline | |
Issuance of Previously Authorized Shares with Voting Rights to be Determined by the Board without Prior Specific Shareholder Approval |
Against | |
Fair Price Provisions: Measures to limit ability to buy back shares from particular shareholder at higher-than-market prices |
For | |
Preemptive Rights |
For | |
Actions altering Board/Shareholder Relationship Require Prior Shareholder Approval (including anti-takeover measures) |
For | |
Allow Shareholder action by written consent |
For | |
Allow Shareholders to call Special Meetings |
For | |
Social and Environmental Issues |
As recommended
by Company Management |
|
Reimbursing Proxy Solicitation Expenses |
Case-by-Case |
A-7
PART C
OTHER INFORMATION
Item 23. | Exhibits |
Unless otherwise noted, all references are to the Registrants initial registration statement on Form N-1A (the Registration Statement) as filed with the Securities and Exchange Commission (SEC) on October 21, 1991 (File Nos. 33-43446 and 811-06444).
(a)(1) The Registrants Declaration of Trust dated as of October 2, 2006 is incorporated herein by reference to Post-Effective Amendment No. 70 as filed with the SEC on April 13, 2007 (Post-Effective Amendment No. 70).
(2) Designation of Series of Shares of Beneficial Interests in the Trust effective as of February 8, 2007 is incorporated herein by reference to Post-Effective Amendment No. 70.
(3) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of August 9, 2007 is incorporated herein by reference to Post-Effective Amendment No. 72 as filed with the SEC on August 24, 2007 (Post-Effective Amendment No. 72).
(4) Amended and Restated Designation of Classes effective as of August 9, 2007 is incorporated herein by reference to Post-Effective Amendment No. 72.
(5) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust and Amended and Restated Designation of Classes effective as of November 8, 2007 is incorporated herein by reference to Post-Effective Amendment No. 76 as filed with the SEC on November 30, 2007 (Post-Effective Amendment No. 76).
(6) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of February 7, 2008 is incorporated herein by reference to Post-Effective Amendment No. 87 as filed with the SEC on February 15, 2008 (Post-Effective Amendment No. 87).
(7) Amended and Restated Designation of Classes effective as of February 7, 2008 is incorporated herein by reference to Post-Effective Amendment No. 87.
(8) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of May 8, 2008 is incorporated herein by reference to Post-Effective Amendment No. 109 as filed with the SEC on June 3, 2008 (Post-Effective Amendment No. 109).
(9) Amended and Restated Designation of Classes effective as of May 8, 2008 is incorporated herein by reference to Post-Effective Amendment No. 109.
(10) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of June 6, 2008 is incorporated herein by reference to Post-Effective Amendment No. 110 as filed with the SEC on June 6, 2008 (Post-Effective Amendment No. 110).
(11) Amended and Restated Designation of Classes effective as of June 6, 2008 is incorporated herein by reference to Post-Effective Amendment No. 110.
(12) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of January 28, 2009 is incorporated herein by reference to Post-Effective Amendment No. 133 as filed with the SEC on January 28, 2009 (Post-Effective Amendment No. 133).
(13) Amended and Restated Designation of Classes effective as of January 28, 2009 is incorporated herein by reference to Post-Effective Amendment No. 133.
(14) Amended and Restated Designation of Classes effective as of February 26, 2009 is incorporated herein by reference to Post-Effective Amendment No. 137 as filed with the SEC on February 27, 2009 (Post-Effective Amendment No. 137).
(15) Amended and Restated Designation of Classes effective as of February 26, 2009 is incorporated herein by reference to Post-Effective Amendment No. 146 as filed with the SEC on June 25, 2009 (Post-Effective Amendment No. 146).
(b) The Registrants By-Laws dated October 4, 2006 are incorporated herein by reference to Post-Effective Amendment No. 70.
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(c) Not Applicable.
(d)(1) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Aggressive Growth Fund, and Legg Mason Partners Fund Advisor, LLC (LMPFA) is incorporated herein by reference to Post-Effective Amendment No. 78 as filed with the SEC on December 14, 2007 (Post-Effective Amendment No. 78).
(2) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Convertible Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(3) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Diversified Large Cap Growth Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(4) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Dividend Strategy Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(5) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Emerging Markets Equity Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(6) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Financial Services Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(7) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Fundamental Value Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(8) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners International All Cap Opportunity Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(9) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners All Cap Fund, and Legg Mason Capital Management Inc. (LMCM) is incorporated herein by reference to Post-Effective Amendment No. 73 as filed with the SEC on August 27, 2007 (Post-Effective Amendment No. 73).
(10) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Small Cap Value Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(11) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Appreciation Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(12) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Capital and Income Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(13) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Capital Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(14) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Classic Values Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(15) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Equity Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(16) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Global Equity Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 73.
(17) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Investors Value Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(18) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Large Cap Growth Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
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(19) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 100%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 73.
(20) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 100%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95 as filed with the SEC on April 11, 2008 (Post-Effective Amendment No. 95).
(21) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 30%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(22) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 30%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(23) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 50%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(24) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 50%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(25) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 70%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(26) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 70%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(27) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 85%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(28) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Allocation 85%, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(29) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Income Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(30) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Partners Lifestyle Income Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(31) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Mid Cap Core Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(32) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners S&P 500 Index Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(33) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Small Cap Core Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(34) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Small Cap Growth Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(35) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Social Awareness Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(36) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners 130/30 U.S. Large Cap Equity Fund, and LMPFA, is incorporated herein by reference to Post-Effective Amendment No. 72.
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(37) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners U.S. Large Cap Equity Fund, and LMPFA is incorporated herein by reference from Post-Effective Amendment No. 87.
(38) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Equity Income Builder Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 119 as filed with the SEC on August 28, 2008 (Post-Effective Amendment No. 119).
(39) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2015, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120 as filed with the SEC on August 28, 2008 (Post-Effective Amendment No. 120).
(40) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2020, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(41) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2025, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(42) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2030, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(43) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2035, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(44) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2040, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(45) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2045, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(46) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement 2050, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(47) Form of Management Agreement between the Registrant, on behalf of Legg Mason Partners Target Retirement Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(48) Form of Management Agreement between the Registrant, on behalf of Legg Mason Permal Tactical Allocation Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 141 as filed with the SEC on April 9, 2009 (Post-Effective Amendment No. 141).
(49) Form of Subadvisory Agreement between LMPFA and ClearBridge Advisors, LLC (ClearBridge), with respect to Legg Mason Partners Aggressive Growth Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(50) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Convertible Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(51) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Diversified Large Cap Growth Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(52) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Dividend Strategy Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(53) Form of Subadvisory Agreement between LMPFA and Legg Mason International Equities Limited (LMIE), with respect to Legg Mason Partners Emerging Markets Equity Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(54) Form of Subadvisory Agreement between LMPFA and Barrett Associates, Inc. (Barrett), with respect to Legg Mason Partners Financial Services Fund, is incorporated herein by reference to Post-Effective Amendment No. 73.
(55) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Fundamental Value Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
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(56) Form of Subadvisory Agreement between LMPFA and Brandywine Global Investment Management, LLC (Brandywine), with respect to Legg Mason Partners International All Cap Opportunity Fund, is incorporated herein by reference to Post-Effective Amendment No. 73.
(57) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Small Cap Value Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(58) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Appreciation Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(59) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Capital and Income Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(60) Form of Subadvisory Agreement between ClearBridge and Western Asset Management Company (WAM), with respect to Legg Mason Partners Capital and Income Fund, is incorporated herein by reference to Post-Effective Amendment No. 73.
(61) Form of Subadvisory Agreement between WAM and Western Asset Management Company Limited (WAML), with respect to Legg Mason Partners Capital and Income Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(62) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Capital Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(63) Subadvisory Agreement between LMPFA and Olstein Capital Management, L.P. (Olstein), with respect to Legg Mason Partners Classic Values Fund, is incorporated herein by reference to Post-Effective Amendment No. 73.
(64) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Equity Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(65) Form of Subadvisory Agreement between LMPFA and Batterymarch Financial Management, Inc. (Batterymarch), with respect to Legg Mason Partners Global Equity Fund, is incorporated herein by reference to Post-Effective Amendment No. 73.
(66) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Investors Value Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(67) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Large Cap Growth Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(68) Form of Subadvisory Agreement between LMPFA and Legg Mason Global Asset Allocation, LLC (LMGAA), with respect to Legg Mason Partners Lifestyle Allocation 100%, is incorporated herein by reference to Post-Effective Amendment No. 74 as filed with the SEC on November 1, 2007 (Post-Effective Amendment No. 74).
(69) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Lifestyle Allocation 30%, is incorporated herein by reference to Post-Effective Amendment No. 74.
(70) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Lifestyle Allocation 50%, is incorporated herein by reference to Post-Effective Amendment No. 74.
(71) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Lifestyle Allocation 70%, is incorporated herein by reference to Post-Effective Amendment No. 74.
(72) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Lifestyle Allocation 85%, is incorporated herein by reference to Post-Effective Amendment No. 74.
(73) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Lifestyle Income Fund, is incorporated herein by reference to Post-Effective Amendment No. 74.
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(74) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Mid Cap Core Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(75) Form of Subadvisory Agreement between LMPFA and Batterymarch, with respect to Legg Mason Partners S&P 500 Index Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(76) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Small Cap Core Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(77) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Small Cap Growth Fund, is incorporated herein by reference to Post-Effective Amendment No. 78.
(78) Form of Subadvisory Agreement between LMPFA and Legg Mason Investment Counsel, LLC (LMIC), with respect to Legg Mason Partners Social Awareness Fund, is incorporated herein by reference to Post-Effective Amendment No. 73.
(79) Form of Subadvisory Agreement between LMPFA and Batterymarch, with respect to Legg Mason Partners 130/30 U.S. Large Cap Equity Fund, is incorporated herein by reference to Post-Effective Amendment No. 72.
(80) Form of Subadvisory Agreement between LMPFA and Batterymarch, with respect to Legg Mason Partners U.S. Large Cap Equity Fund, is incorporated herein by reference to Post-Effective Amendment No. 87.
(81) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason Partners Equity Income Builder Fund, is incorporated herein by reference to Post-Effective Amendment No. 119.
(82) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2015, is incorporated herein by reference to Post-Effective Amendment No. 120.
(83) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2020, is incorporated herein by reference to Post-Effective Amendment No. 120.
(84) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2025, is incorporated herein by reference to Post-Effective Amendment No. 120.
(85) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2030, is incorporated herein by reference to Post-Effective Amendment No. 120.
(86) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2035, is incorporated herein by reference to Post-Effective Amendment No. 120.
(87) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2040, is incorporated herein by reference to Post-Effective Amendment No. 120.
(88) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2045, is incorporated herein by reference to Post-Effective Amendment No. 120.
(89) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement 2050, is incorporated herein by reference to Post-Effective Amendment No. 120.
(90) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Partners Target Retirement Fund, is incorporated herein by reference to Post-Effective Amendment No. 120.
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(91) Form of Subadvisory Agreement between LMPFA and Global Currents Investment Management, LLC (GCIM), with respect to Legg Mason Partners International All Cap Opportunity Fund, is incorporated herein by reference to Post-Effective Amendment No. 126 as filed with the SEC on November 26, 2008.
(92) Form of Subadvisory Agreement between LMPFA and Permal Asset Management Inc. (Permal), with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(93) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(94) Form of Sub-Administration Agreement between LMCM and LMPFA, with respect to Legg Mason Partners All Cap Fund, is incorporated herein by reference to Post-Effective Amendment No. 76.
(e)(1) Form of Distribution Agreement with Citigroup Global Markets Inc. (CGMI) is incorporated herein by reference to Post-Effective Amendment No. 30 as filed with the SEC on August 16, 2000 (Post-Effective Amendment No. 30).
(2) Form of Distribution Agreement with PFS Distributors, Inc. is incorporated herein by reference to Post-Effective Amendment No. 30.
(3) Form of Amendment to the Distribution Agreement with CGMI dated as of December 1, 2005, is incorporated herein by reference to Post-Effective Amendment No. 56 as filed with the SEC on January 27, 2006 (Post-Effective Amendment No. 56).
(4) Form of Amendment of Distribution Agreement and Assumption of Duties and Responsibilities, among the Registrant, PFS Distributors, Inc. and PFS Investments, Inc. (PFS), dated as of December 1, 2005, is incorporated herein by reference to Post-Effective Amendment No. 56.
(5) Letter Agreement amending the Distribution Agreements with CGMI dated April 10, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
(6) Letter Agreement amending the Distribution Agreements with PFS dated April 6, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
(7) Form of Distribution Agreement with Legg Mason Investor Services, LLC (LMIS) is incorporated herein by reference to Post-Effective Amendment No. 128 as filed with the SEC on December 15, 2008.
(8) Form of Distribution Agreement with LMIS with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(f)(1) Emeritus Retirement Plan relating to certain funds, established effective as of January 1, 2007, is incorporated herein by reference to Post-Effective Amendment No. 60 as filed with the SEC on December 5, 2006 (Post-Effective Amendment No. 60).
(2) Amended and Restated Trustee Retirement Plan relating to certain funds dated as of January 1, 2005 (the General Retirement Plan), is incorporated herein by reference to Post-Effective Amendment No. 61 as filed with the SEC on January 8, 2007 (Post-Effective Amendment No. 61).
(3) Legg Mason Investment Series (f/k/a Smith Barney Investment Series) Amended and Restated Trustees Retirement Plan dated as of January 1, 2005, is incorporated herein by reference to Post-Effective Amendment No. 61.
(4) Amendment to the General Retirement Plan and the Legg Mason Partners Investment Series Amended and Restated Trustees Retirement Plan is incorporated herein by reference to Post-Effective Amendment No. 61.
(5) Amended and Restated Emeritus Retirement Plan relating to certain funds, established effective as of January 1, 2007, is incorporated herein by reference to Post-Effective Amendment No. 61.
(g)(1) Custodian Services Agreement with State Street Bank and Trust Company (State Street), dated January 1, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
(2) Letter Agreement amending the Custodian Services Agreement with State Street, dated April 9, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
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(h)(1) Transfer Agency and Services Agreement, dated January 1, 2006, between the Registrant and PNC Global Investment Servicing (U.S.) Inc. (PNC GIS) (formerly PFPC Inc.) is incorporated herein by reference to Post-Effective Amendment No. 56.
(2) Co-Transfer Agency and Services Agreement, dated April 1, 2009, between the Registrant and PNC GIS incorporated herein by reference to Post-Effective Amendment No. 147 as filed with the SEC on July 29, 2009.
(3) Transfer Agency and Services Agreement, dated April 4, 2009, between each series of the Registrant and Boston Financial Data Services, Inc. is incorporated herein by reference to Post-Effective Amendment No. 141.
(4) Form of License Agreement between the Registrant and Legg Mason Properties, Inc. is incorporated herein by reference to Post-Effective Amendment No. 58 as filed with the SEC on April 28, 2006 (Post-Effective Amendment No. 58).
(5) License Agreement between the Registrant and Citigroup Inc. dated December 1, 2005 is incorporated herein by reference to Post-Effective Amendment No. 58.
(6) Form of Fee Waiver and Expense Reimbursement Agreement is incorporated herein by reference to Post-Effective Amendment No. 60.
(7) Letter Agreement amending the Transfer Agency and Services Agreement with PNC GIS, dated April 9, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
(8) Form of Fee Waiver and Expense Reimbursement Agreement with respect to Legg Mason Partners 130/30 U.S. Large Cap Equity Fund is incorporated herein by reference to Post-Effective Amendment No. 76.
(9) Form of Fee Waiver and Expense Reimbursement Agreement with respect to Legg Mason Partners Lifestyle Allocation 100%, Legg Mason Partners Lifestyle Allocation 85%, Legg Mason Partners Lifestyle Allocation 70%, Legg Mason Partners Lifestyle Allocation 50%, Legg Mason Partners Lifestyle Allocation 30% and Legg Mason Partners Lifestyle Income Fund is incorporated herein by reference to Post-Effective Amendment No. 95.
(10) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2015, is incorporated herein by reference to Post-Effective Amendment No. 120.
(11) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2020, is incorporated herein by reference to Post-Effective Amendment No. 120.
(12) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2025, is incorporated herein by reference to Post-Effective Amendment No. 120.
(13) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2030, is incorporated herein by reference to Post-Effective Amendment No. 120.
(14) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2035, is incorporated herein by reference to Post-Effective Amendment No. 120.
(15) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2040, is incorporated herein by reference to Post-Effective Amendment No. 120.
(16) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2045, is incorporated herein by reference to Post-Effective Amendment No. 120.
(17) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement 2050, is incorporated herein by reference to Post-Effective Amendment No. 120.
(18) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Partners Target Retirement Fund, is incorporated herein by reference to Post-Effective Amendment No. 120.
(19) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(i) (1) Opinion of Counsel regarding legality of shares being registered is incorporated herein by reference to Pre-Effective Amendment No. 1 filed on December 6, 1991 (Pre-Effective Amendment No. 1).
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(2) Legal Counsels consent is incorporated herein by reference to Post-Effective Amendment No. 24 to the Registrants Registration Statement on Form N-1A as filed with the SEC on March 30, 1999 (Post-Effective Amendment No. 24).
(3) Opinion and Consent of Counsel regarding the legality of shares being registered is incorporated by reference to Post-Effective Amendment No. 70.
(4) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class FI and Class R shares is incorporated herein by reference to Post-Effective Amendment No. 108 filed on May 30, 2008 (Post-Effective Amendment No. 108).
(5) Opinion of Venable LLP regarding legality of Class FI and Class R shares is incorporated herein by reference to Post-Effective Amendment No. 108.
(6) Opinion of Willkie Farr & Gallagher LLP regarding the legality of Class R1 shares is incorporated herein by reference to Post-Effective Amendment No. 146.
(7) Opinion of Venable LLP regarding the legality of Class R1 shares is incorporated herein by reference to Post-Effective Amendment No. 146.
(j)(1) Consent of Independent Registered Public Accounting Firm is filed herewith.
(2) Power of Attorney dated February 7, 2008 is incorporated herein by reference to Post-Effective Amendment No. 83 as filed with the SEC on February 12, 2008.
(3) Power of Attorney dated July 30, 2008 is incorporated herein by reference to Post-Effective Amendment No. 116 as filed with the SEC on August 8, 2008.
(k) Not Applicable.
(l) Purchase Agreement between the Registrant and Shearson Lehman Brothers Inc. is incorporated herein by reference to Pre-Effective Amendment No. 1.
(m)(1) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R and I Shares is incorporated herein by reference to Post-Effective Amendment No. 74.
(2) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R and I Shares is incorporated herein by reference to Post-Effective Amendment No. 81 as filed with the SEC on January 29, 2008.
(3) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R, I and IS Shares dated as of February 7, 2008 is incorporated herein by reference to Post-Effective Amendment No. 86 as filed with the SEC on February 15, 2008.
(4) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R, I and IS Shares dated as of August 7, 2008 is incorporated herein by reference to Post-Effective Amendment No. 119.
(5) Amended Shareholder Services and Distribution Plan relating to Class R1 Shares dated as of February 26, 2009 is incorporated herein by reference to Post-Effective Amendment No. 137.
(6) Amended Shareholder Services and Distribution Plan relating to Class R1 Shares dated as of February 26, 2009 is incorporated herein by reference to Post-Effective Amendment No. 146.
(n)(1) Rule 18f-3(d) Multiple Class Plan of the Registrant pursuant to Rule 18f-3 is incorporated herein by reference to Post-Effective Amendment No. 76.
(o) Not Applicable.
(p)(1) Code of Ethics of Legg Mason & Co., LLC (adopted by LMPFA, LMIS and LMGAA) is incorporated herein by reference to Post-Effective Amendment No. 120.
(2) Code of Ethics of Barrett dated December 15, 2005 is incorporated herein by reference to Post-Effective Amendment No. 61.
(3) Code of Ethics of LMIE is incorporated herein by reference to Post-Effective Amendment No. 61.
(4) Code of Ethics of Batterymarch dated February 1, 2005 is incorporated herein by reference to Post-Effective Amendment No. 61.
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(5) Code of Ethics of WAM and WAML dated as of February, 2005, is incorporated herein by reference to Post-Effective Amendment No. 62 as filed with the SEC on January 10, 2007 (Post-Effective Amendment No. 62).
(6) Code of Ethics of LMIC is incorporated herein by reference to Post-Effective Amendment No. 62.
(7) Code of Ethics of LMCM is incorporated herein by reference to Post-Effective Amendment No. 73.
(8) Code of Ethics of GCIM is incorporated herein by reference to Post-Effective Amendment No. 111 as filed with the SEC on July 3, 2008.
(9) Code of Ethics of Permal is incorporated herein by reference to Post-Effective Amendment No. 141.
(10) Code of Ethics of ClearBridge is filed herewith.
Item 24. | Persons Controlled by or under Common Control with Registrant |
Not Applicable.
Item 25. | Indemnification |
The response to this item is incorporated herein by reference to Pre-Effective Amendment No. 1.
The directors and officers of the Registrant and the personnel of the Registrants manager are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Reference is hereby made to (a) paragraph 9 of the Distribution Agreement between the Registrant and LMIS, incorporated by reference herein.
Item 26. | Business and Other Connections of Investment Adviser |
Investment AdviserLegg Mason Partners Fund Advisor, LLC (LMPFA)
LMPFA was formed in 2006 under the laws of the State of Delaware as a limited liability company. LMPFA is a direct wholly-owned subsidiary of Legg Mason, Inc. (Legg Mason).
LMPFA is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the Advisers Act). The list required by this Item 26 of officers and directors of LMPFA together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMPFA pursuant to the Advisers Act (SEC File No. 801-66785).
Investment AdviserLegg Mason Capital Management, Inc. (LMCM)
LMCM was formed in 1982 under the laws of the State of Maryland as a corporation. LMCM is a direct wholly-owned subsidiary of Legg Mason.
LMCM is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of LMCM together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMCM pursuant to the Advisers Act (SEC File No. 801-18115).
SubadviserClearBridge Advisors, LLC (formerly known as CAM North America, LLC) (ClearBridge)
ClearBridge was organized under the laws of the State of Delaware as a limited liability company. ClearBridge is a direct wholly-owned subsidiary of Legg Mason.
ClearBridge is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of ClearBridge together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by ClearBridge pursuant to the Advisers Act (SEC File No. 801-64710).
- 10 -
SubadviserBarrett Associates, Inc. (Barrett)
Barrett was organized under the laws of the State of New York as a corporation. Barrett is a wholly-owned subsidiary of Legg Mason.
Barrett is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of Barrett together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by Barrett pursuant to the Advisers Act (SEC File No. 801- 831).
SubadviserBatterymarch Financial Management, Inc. (Batterymarch)
Batterymarch was organized under the laws of the State of Maryland as a corporation. Batterymarch is an indirect wholly-owned subsidiary of Legg Mason.
Batterymarch is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of Batterymarch together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by Batterymarch pursuant to the Advisers Act (SEC File No. 801- 48035).
SubadviserGlobal Currents Investment Management, LLC (GCIM)
GCIM was organized under the laws of the State of Delaware as a limited liability corporation. GCIM is a wholly owned subsidiary of Legg Mason.
GCIM is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of GCIM together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by GCIM pursuant to the Advisers Act (SEC File No. 801-68663).
SubadviserLegg Mason International Equities Limited (LMIE)
The list required by this Item 26 of officers and directors of LMIE, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMIE pursuant to the Advisers Act (SEC File No. 801-57655).
SubadviserLegg Mason Global Asset Allocation, LLC (LMGAA).
LMGAA is organized under the laws of the State of Delaware as a limited liability company. LMGAA is a wholly-owned subsidiary of Legg Mason.
LMGAA is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of LMGAA together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMGAA pursuant to the Advisers Act (SEC File No. 801-67287).
SubadviserLegg Mason Investment Counsel, LLC (LMIC)
LMIC is organized under the laws of the State of Maryland as a limited liability company. LMIC is a wholly-owned subsidiary of Legg Mason.
LMIC is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of LMIC together with information as to any other business, profession, vocation or
- 11 -
employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMIC pursuant to the Advisers Act (SEC File No. 801-63656).
SubadviserWestern Asset Management Company (WAM)
WAM is an investment adviser registered with the SEC under the Advisers Act. The following is a list of other substantial business activities in which directors, officers or partners of WAM have been engaged as director, officer, employee, partner, or trustee.
James W. Hirschmann III | Director, WAM | |
Director, WAML | ||
CEO, WAM | ||
Director, Western Asset Management Company Limited | ||
D. Daniel Fleet | President, WAM | |
President, WAML | ||
Director, WAML | ||
Gavin L. James | Director of Global Client Services, WAM | |
Senior Executive Officer, Western Asset Management Company Limited | ||
Jeffrey A. Nattans | Director, WAM | |
Director, WAML | ||
Charles A. Ruys de Perez | General Counsel and Secretary, WAM |
WAM is located at 385 East Colorado Boulevard, Pasadena, CA 91101.
SubadviserWestern Asset Management Limited (WAML)
WAML was incorporated under the laws of England as a corporation. WAML is a wholly-owned subsidiary of Legg Mason.
WAML is registered as an investment adviser under the Advisers Act. The following is a list of other substantial business activities in which directors, officers or partners of WAML have been engaged as director, officer, employee, partner, or trustee.
James W. Hirschmann III | Director, WAML | |
CEO, WAM | ||
Director, WAM | ||
Gavin L. James | Senior Executive Officer, WAML | |
Director of Global Client Services, WAM | ||
Gregory B. McShea | General Counsel and CCO, WAML | |
Michael B. Zelouf | Director, WAML |
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SubadviserPermal Asset Management Inc. (Permal)
Permal was formed in June 2002 under the laws of the State of Delaware as a corporation. Permal is a wholly-owned subsidiary of Legg Mason. Permal is registered as an investment adviser under the Advisers Act. The list required by this Item 26 of officers and directors of Permal, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by Permal pursuant to the Advisers Act (SEC File No. 801-61864).
Item 27. | Principal Underwriter |
(a) LMIS, the distributor of the Registrant, is the distributor for each series of the registrants listed: Legg Mason Partners Premium Money Market Trust, Legg Mason Partners Institutional Trust, Legg Mason Partners Money Market Trust, Legg Mason Partners Variable Equity Trust, Barrett Opportunity Fund, Inc., Legg Mason Partners Variable Income Trust, Legg Mason Partners Income Trust, Legg Mason Cash Reserve Trust, Inc., Legg Mason Charles Street Trust, Inc., Legg Mason Global Trust, Inc., Legg Mason Growth Trust, Inc., Legg Mason Income Trust, Inc., Legg Mason Investment Trust, Inc., Legg Mason Investors Trust, Inc., Legg Mason Light Street Trust, Inc., Legg Mason Special Investment Trust, Inc., Legg Mason Tax Exempt Trust, Inc., Legg Mason Tax-Free Income Fund, Legg Mason Value Trust, Inc., Western Asset Funds, Inc.
LMIS is the placement agent for Institutional Enhanced Portfolio, Prime Cash Reserves Portfolio, U.S. Treasury Reserves Portfolio, Tax Free Reserves Portfolio and Liquid Reserves Portfolio.
(b) The information required by this Item 27 with respect to each director and officer of LMIS is listed below:
Kimberly MustinCo-Managing Director
Matthew SchiffmanCo-Managing Director
George BetziosVice President
W. Talbot DaleyVice President
David J. EikenbergVice President
Mark E. FreemyerVice President
Thomas J. HirschmannVice President
Joseph LaRocqueVice President
Michael P. McAllisterVice President
Theresa P. McGuireVice President
Jeremy OSheaVice President
Joel R. SauberVice President
Robert SheplerVice President
Jason BennettChief Financial Officer, Treasurer and Financial Reporting Officer
Joseph M. FureyGeneral Counsel and Secretary
Erin L. Clark - Assistant Secretary
Vicki SchmelzerAssistant Secretary
Ronald A. Holinsky - Deputy General Counsel
Stephen A. ScarpinoAnti-Money Laundering Compliance Officer
All addresses are 100 Light Street, Baltimore, Maryland 21202.
(c) Not applicable.
Item 28. | Location of Accounts and Records |
With respect to the Registrant:
(1) Legg Mason Partners Equity Trust
55 Water Street
New York, New York 10041
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With respect to the Registrants Investment Managers:
(2) c/o Legg Mason Partners Fund Advisor, LLC
620 Eighth Avenue
New York, NY 10018
(3) Legg Mason Capital Management, Inc.
100 Light Street
Baltimore, MD 21202
With respect to the Registrants Subadvisers:
(4) c/o Legg Mason International Equities Limited
620 Eighth Avenue
New York, NY 10018
(5) Barrett Associates, Inc.
565 Fifth Avenue
New York, NY 10017
(6) Batterymarch Financial Management, Inc.
John Hancock Tower
200 Clarendon Street
Boston, MA 02116
(7) c/o ClearBridge Advisors, LLC
620 Eighth Avenue
New York, NY 10018
(8) c/o Legg Mason Global Asset Allocation, LLC
100 First Stamford Place
Stamford, CT 06902
(9) c/o Western Asset Management Company
385 East Colorado Boulevard
Pasadena, CA 91101
(10) c/o Western Asset Management Company Limited
10 Exchange Square
Primrose Street
London EC2A 2EN England
(11) c/o Legg Mason Investment Counsel, LLC
100 Light Street
Baltimore, MD 21202
(12) c/o Global Currents Investment Management, LLC
100 Light Street
Baltimore, MD 21202
(13) c/o Permal Asset Management Inc.
900 Third Avenue
New York, NY 10022
With respect to the Registrants Custodian:
(14) State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
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With respect to the Registrants Transfer Agent:
(15) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
With respect to the Registrants Distributor:
(16) Legg Mason Investor Services, LLC
100 Light Street
Baltimore, MD 21202
Item 29. | Management Services |
Not applicable.
Item 30. | Undertakings |
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the Securities Act), and the Investment Company Act of 1940, as amended, the Registrant, LEGG MASON PARTNERS EQUITY TRUST, hereby certifies that it meets all the requirements for effectiveness of this Registration Statement under Rule 485(b) under the Securities Act and has duly caused this Post-Effective Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on this 26 th day of August, 2009.
LEGG MASON PARTNERS EQUITY TRUST , on behalf of Legg Mason Partners All Cap Fund
By: |
/s/ R. Jay Gerken |
|
R. Jay Gerken | ||
President and Principal Executive Officer |
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated below on August 26, 2009.
Signature |
Title |
|||
/s/ R. Jay Gerken |
President, Principal Executive Officer and Trustee | |||
R. Jay Gerken | ||||
/s/ Kaprel Ozsolak |
Treasurer and Chief Financial Officer | |||
Kaprel Ozsolak | ||||
/s/ Paul R. Ades* |
Trustee | |||
Paul R. Ades | ||||
/s/ Andrew L. Breech* |
Trustee | |||
Andrew L. Breech | ||||
/s/ Dwight B. Crane* |
Trustee | |||
Dwight B. Crane | ||||
/s/ Robert M. Frayn, Jr.* |
Trustee | |||
Robert M. Frayn, Jr. | ||||
/s/ Frank G. Hubbard* |
Trustee | |||
Frank G. Hubbard | ||||
/s/ Howard J. Johnson* |
Trustee | |||
Howard J. Johnson | ||||
/s/ David E. Maryatt* |
Trustee | |||
David E. Maryatt |
/s/ Jerome H. Miller* |
Trustee | |||
Jerome H. Miller | ||||
/s/ Ken Miller* |
Trustee | |||
Ken Miller | ||||
/s/ John J. Murphy* |
Trustee | |||
John J. Murphy | ||||
/s/ Thomas F. Schlafly* |
Trustee | |||
Thomas F. Schlafly | ||||
/s/ Jerry A. Viscione* |
Trustee | |||
Jerry A. Viscione |
*By: |
/s/ R. Jay Gerken |
|
R. Jay Gerken |
* | Attorney-in-Fact, pursuant to Power of Attorney dated February 7, 2008. |
INDEX TO EXHIBITS
Index No. |
Description of Exhibit |
|
(j)(1) | Consent of Independent Registered Public Accounting Firm | |
(p)(10) | Code of Ethics of ClearBridge Advisors, LLC |
Consent of Independent Registered Public Accounting Firm
The Board of Trustees
Legg Mason Partners Equity Trust
We consent to the use of our report, dated June 25, 2009, incorporated herein by reference, with respect to Legg Mason Partners All Cap Fund, a series of the Legg Mason Partners Equity Trust, as of April 30, 2009, and to the references to our firm under the headings Financial highlights in the Prospectus and Independent Registered Public Accounting Firm in the Statement of Additional Information.
New York, New York
August 24, 2009
CODE OF ETHICS
OF
CLEARBRIDGE ADVISORS 1
SCOPE AND PURPOSE
Set forth below is the Code of Ethics (the Code) for ClearBridge Advisors, LLC and ClearBridge Asset Management Inc (collectively, ClearBridge), as required by Rule 204A-1 under the Investment Advisers Act of 1940, as amended (the Advisers Act), and Rule 17j-1 under the Investment Company Act of 1940, as amended (the Investment Company Act
This Code is based on the principle that ClearBridge and its employees owe a fiduciary duty to ClearBridges clients, and that all persons covered by this code must therefore avoid activities, interests and relationships that might (i) present a conflict of interest or the appearance of a conflict of interest, or (ii) otherwise interfere with ClearBridges ability to make decisions in the best interests of any of its clients.
This Code of Ethics applies to all officers, directors and employees (full and part time) of ClearBridge and certain employees of Legg Mason & Co., LLC and Legg Mason Technology Services, Inc. who directly support ClearBridge and who have been informed that they are so designated (Access Persons).
STATEMENT OF POLICIES
(A) | STANDARDS OF BUSINESS CONDUCT |
All Access Persons must comply with the following standards of business conduct:
Clients Come First. At all times, Access Persons are required to place the interests of clients before their own and not to take inappropriate advantage of their position with ClearBridge. An Access Person may not induce or cause a client to take action, or not to take action, for the Access Persons personal benefit, rather than for the benefit of the client.
Do Not Take Advantage. Access Persons may not use their knowledge of open, executed, or pending portfolio transactions to profit by the market effect of such transactions, nor may they use their knowledge of transactions or portfolio holdings of investment companies managed by ClearBridge to engage in short term or other abusive trading.
1 |
This Code of Ethics pertains to ClearBridge Advisors, LLC and ClearBridge Asset Management, Inc (collectively, ClearBridge). |
Avoid Conflicts of Interest. Conflicts of interest may arise in situations where client relationships may tempt preferential treatment, e.g. , where account size or fee structure would make it more beneficial for the adviser to allocate certain trades to a client. Conflicts of interest may also arise in connection with securities transactions by employees of the adviser, especially those employees who are aware of actual transactions or client holdings or transactions under consideration for clients.
Compliance policies and procedures have been adopted by ClearBridge in order to meet all legal obligations to our clients, particularly those arising under the federal securities laws and ERISA. Procedures have been instituted to mitigate or obviate actual or potential conflicts of interest. The Compliance Departments role is to ensure that appropriate procedures are adopted by the business and to monitor to ascertain that such procedures are followed. Any questions relating to this Code or other policies or procedures should be addressed to the Compliance Department.
(B) | CONFIDENTIALITY |
Access Persons are expected to honor the confidential nature of company and client affairs. Confidential information shall not be communicated outside of ClearBridge or to other affiliated companies of Legg Mason, in compliance with the Information Barrier Policy, and shall only be communicated within ClearBridge on a need to know basis.
Access Persons must also avoid making unnecessary disclosure of ANY internal information concerning ClearBridge, Legg Mason, or their affiliates and their business relationships.
For information relating to material non-public information and insider trading, please see ClearBridges Policy on Material Non-Public Information on the intranet site.
(C) | REQUIREMENTS |
(i) | All Access Persons who are subject to this Code are required to comply with all federal securities laws applicable to ClearBridges business. |
(ii) | All Access Persons are required to comply with the Personal Securities Transactions Policy incorporated herein. |
(D) | DUTY TO REPORT AND NON-RETALIATION POLICY |
Should an employee become aware of any conduct which the employee believes may constitute a violation of this Code, the law, or any ClearBridge policy, the employee must promptly report such conduct to the Chief Compliance Officer or his/her designee. All information about potential or suspected violations reported to the Chief Compliance Officer will be investigated and the identity of the reporting person will be kept confidential. ClearBridges policy prohibits any retaliatory action against a reporting person, including discharge, demotion, suspension, threats or harassment.
2
ADMINISTRATION OF THE CODE
The Human Resources Department is responsible for ensuring that a copy of the Code is delivered to all persons at the commencement of their employment with ClearBridge. As a condition of continuing employment, each employee is required to acknowledge, in writing (See Exhibit A), receipt of a copy of the Code and that he or she understands his/her obligations and responsibilities hereunder within 10 days of becoming an Access Person subject to this Code. Each Access Person is also obligated to acknowledge receipt of any amendments to the Code. On an annual basis, each Access Person must certify that s/he has complied with the Code.
Monitoring for compliance with the Code shall be conducted by the Compliance Department. Any violation of this Code by employees will be considered serious and may result in disciplinary action, which may include the unwinding of trades, disgorgement of profits, monetary fine or censure and suspension or termination of employment. Any violation of this Code will be reported by the Compliance Department to the persons supervisor, and, as appropriate, to ClearBridges Operating/Investment Committee and/or to the Chief Compliance Officers of any funds managed by ClearBridge.
QUESTIONS
All questions about an individuals responsibilities and obligations under the Code of Ethics should be referred to ClearBridges Chief Compliance Officer or her designee.
OUTSIDE DIRECTORSHIPS
Personnel are prohibited from serving on the board of directors of any publicly listed or traded company (other than Legg Mason, Inc. or its proprietary registered investment companies) or of any company whose securities are held in any client portfolio, except with the prior authorization (See Exhibit B) of (i) the Chief Executive Officer of ClearBridge or, in his/her absence, the Operating/Investment Committee, and (ii) the General Counsel of Legg Mason, Inc, or his/her designee, based upon a determination that the board service would be consistent with the best interests of ClearBridges clients. If permission to serve as a director is given, the company will be placed on the Restricted List. Transactions in that companys securities for client and personal securities accounts will only be authorized when certification has been obtained from that companys Secretary or similar officer that its directors are not in possession of material price sensitive information with respect to its securities.
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PERSONAL SECURITIES TRANSACTIONS POLICY
POLICY STATEMENT
While employees are neither prohibited from holding individual securities nor engaging in individual securities transactions, by promulgating this Policy, ClearBridge is not endorsing or encouraging such activity. ClearBridge recognizes that in its role as an investment adviser, its responsibility is to its clients and their investments. Clients always come first. ClearBridge believes that its primary obligation is that any potential investment first be considered from the perspective of its appropriateness for any client portfolios. Only after it is determined that it is not appropriate for any client should an employee consider it for a personal account.
SUMMARY
All Access Persons are subject to the restrictions contained in this Personal Securities Transactions Policy (the Policy) with respect to their securities transactions. The following serves as a summary of the most common restrictions. Please refer to specific sections that follow this summary for more detail, including definitions of persons covered by this Policy, accounts covered by this Policy (Covered Accounts), securities covered by this Policy (Covered Securities), reports required by this Policy (Reports) and the procedures for compliance with this Policy.
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All purchases or sales of equity securities and securities convertible into equity securities (generally, stocks, convertible bonds and their equivalents) by employees, and certain of their family members, must be precleared , except as noted below. |
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All employees must execute their transactions in Covered Securities through approved broker/dealers (Approved Brokers). Currently, the following brokers are approved: E*Trade, TD Ameritrade, Merrill Lynch, Smith Barney, A.G. Edwards, Charles Schwab, Morgan Stanley, UBS, Scottrade, Fidelity, Robert Baird & Co. and T. Rowe Price. Permission to use a non-approved broker will only be granted in exigent circumstances (See Exhibit C). |
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Portfolio Managers and Portfolio Research Analysts are prohibited from purchasing or selling a Covered Security within seven calendar days before or after an account managed by them has traded in the same (or a related) security, unless a de minimis exception applies. This includes a change in a model utilized in an SMA or wrap program. |
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All other Investment Personnel (as defined below) are prohibited from transacting in a Covered Security on any day a client is trading in such security, unless a de minimis exception applies. |
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All other Access Persons are prohibited from transacting in a Covered Security on any day a client is trading in such security, unless a de minimis exception applies. |
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De Minimis Exception: There is a de minimis exception pertaining to transactions of up to 500 shares in any 7 calendar day period of a large cap US equity ($10 billion or greater in market cap) or the equivalent number of shares of non-US large cap companies trading in the US as American Depository Receipts or American Depository Shares (ADRs). |
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Employees are prohibited from profiting from the purchase and sale or sale and purchase of a Covered Security, or a related security, within 60 calendar days. |
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Portfolio Managers are prohibited from buying securities, directly or indirectly, in an initial public offering. Any other Access Person wishing to buy securities, directly or indirectly, in an initial public offering must receive prior permission from the Chief Investment Officer (or his designee) and the Chief Compliance Officer (or her designee). |
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Any employee wishing to buy securities, directly or indirectly, in a private placement must receive prior permission from the Chief Compliance Officer and his/her immediate supervisor (See Exhibit D). |
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All employees must report all trades in Reportable Funds, as defined, below. |
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Funds managed by ClearBridge (Managed Funds): |
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Shares must be held in an Approved Brokerage Account (except if they are in the Legg Mason 401(k) plan or held directly by the transfer agent of the Legg Mason Partners Funds). Compliance must be notified of directly-held LMP Funds.). |
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Shares are subject to a 60 day holding period, as explained below. |
DEFINITIONS
ACCESS PERSON means all employees, directors or officers of ClearBridge and any employee of Legg Mason & Co., LLC (LM & Co.) and Legg Mason Technology Services, Inc. (LMTS) whose duties primarily involve directly supporting ClearBridges business and who have been notified that they are subject to this Code and such other persons as the Chief Compliance Officer shall designate.
Notwithstanding anything herein to the contrary, this Code does not cover any individual covered under the Legg Mason & Co., LLC Code of Ethics (the Legg Mason Access Persons), including, without limitation:
(1) | the Legg Mason representatives on the Clearbridge Board of Directors; and |
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(2) | any other employee of Legg Mason and Co., LLC who may be considered an Access Person to ClearBridge (as such term is defined in Rule 204a-1 under the Advisers Act), unless such person has been designated as an Access Person subject to this Code by the Chief Compliance Officer. |
ClearBridge hereby delegates to the Legg Mason Legal and Compliance Department responsibility for monitoring the Legg Mason Access Persons compliance with the Legg Mason & Co., LLC Code of Ethics and for enforcing the provisions of the Legg Mason Code of Ethics against such persons.
INVESTMENT PERSONNEL means any Access Person who is a portfolio manager, analyst or trader and any other person so designated by the Chief Compliance Officer.
PORTFOLIO RESEARCH ANALYST means any research analyst who supports one or more specific management teams and who has been designated as such by the Chief Compliance Officer.
COVERED SECURITIES means stocks, notes, bonds, closed-end funds, off shore funds, hedge funds, exchange traded funds (ETFs), debentures, and other evidences of indebtedness, including senior debt, subordinated debt, investment contracts, commodity contracts and futures. Managed Funds and Reportable Funds, as defined herein, are also Covered Securities. The same limitations of this Code pertain to transactions in a security related to a Covered Security, such as an option to purchase or sell a Covered Security and any security convertible into or exchangeable for a Covered Security.
COVERED ACCOUNTS means an account in which Covered Securities are owned by you or an account in which you have a Beneficial Interest, as defined below. A Covered Account includes all accounts that could hold Covered Securities in which the Access Person has a Beneficial Interest regardless of what, if any, securities are maintained in such accounts (thus, even if an account does not hold Covered Securities, if it has the capability of holding Covered Securities, the account must be disclosed). Funds held directly with fund companies do not need to be disclosed if no Managed Funds (as defined below) or Reportable Funds (as defined below) are held in such accounts. Qualified Tuition Programs (Section 529 plans or College Savings Plans) are not subject to this Policy.
SECURITIES AND TRANSACTIONS NOT COVERED BY THIS POLICY ARE:
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shares in any open-end US registered investment company (mutual fund), which is not managed, advised or sub-advised by ClearBridge or a Legg Mason affiliate |
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shares issued by money market funds, including Reportable Funds |
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shares issued by unit investment trusts that are invested exclusively in one or more open-end funds other than reportable Funds |
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securities which are direct obligations of the U.S. Government ( i.e., Treasuries) |
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bankers acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments 2 |
IF A SECURITY IS NOT COVERED BY THIS POLICY, YOU MAY PURCHASE OR SELL IT WITHOUT OBTAINING PRECLEARANCE AND YOU DO NOT HAVE TO REPORT IT.
APPROVED BROKER means one of the following broker/dealers: E*Trade, TD Ameritrade, Merrill Lynch, Smith Barney, A.G. Edwards, Charles Schwab, Morgan Stanley, UBS, Wachovia, Scottrade, and Fidelity.
MANAGED FUNDS means US registered investment companies advised or subadvised by ClearBridge. They can include proprietary as well as non-proprietary funds.
REPORTABLE FUNDS means US registered investment companies advised or subadvised by any advisory affiliate of ClearBridge. They can include proprietary and non-proprietary funds.
BENEFICIAL INTEREST means the opportunity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to share at any time in any profit derived from a transaction in a Covered Security.
You are deemed to have a Beneficial Interest in the following:
(1) | any Security owned individually by you; |
(2) | any Security owned jointly by you with others (for example, joint accounts, spousal accounts, partnerships, trusts and controlling interests in corporations); and |
(3) | any Security in which a member of your Immediate Family has a Beneficial Interest if the Security is held in an account over which you have decision making authority (for example, you act as trustee, executor, or guardian). |
You are deemed to have a Beneficial Interest in accounts held by your spouse (including his/her IRA accounts), minor children and other members of your immediate family (children, stepchildren, grandchildren, parents, step parents, grandparents,
2 | High quality short-term debt instruments means any instrument having a maturity at issuance of less than 366 days and which is rated in one of the highest two rating categories by a Nationally Recognized Statistical Rating Organization, or which is unrated but is of comparable quality. |
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siblings, in-laws and adoptive relationships) who share your household. In addition, you are deemed to have a Beneficial Interest in accounts maintained by your domestic partner (an unrelated adult with whom you share your home and contribute to each others support). This presumption may be rebutted by convincing evidence that the profits derived from transactions in the Covered Securities will not provide you with any economic benefit.
You have a Beneficial Interest in the following:
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Your interest as a general partner in Covered Securities held by a general or limited partnership; |
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Your interest as a manager-member in the Covered Securities held by a limited liability company; |
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Your interest as a member of an investment club or an organization that is formed for the purpose of investing a pool of monies in Covered Securities; |
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Your ownership of Covered Securities as trustee where either you or members of your immediate family have a vested interest in the principal of income of the trust; |
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Your ownership of a vested interest in a trust; |
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Your status as a settler or a trust, unless the consent of all of the beneficiaries is required in order for you to revoke the trust. |
You do not have a Beneficial Interest in Covered Securities held by a corporation, partnership, limited liability company or other entity in which you hold an equity interest unless you are a controlling equity holder or you have or share investment control over the Covered Securities held by the entity.
IF YOU ARE IN ANY DOUBT AS TO WHETHER AN ACCOUNT FALLS WITHIN THE DEFINITION OF COVERED ACCOUNT OR WHETHER YOU WOULD BE DEEMED TO HAVE A BENEFICIAL INTEREST IN AN ACCOUNT, PLEASE SEE COMPLIANCE.
BLACK OUT PERIODS
Portfolio Managers - In order to prevent buying or selling securities in competition with orders for clients, or from taking advantage of knowledge of securities being considered for purchase or sale for clients 3 , Portfolio Managers and the Portfolio Research Analysts working directly with the Portfolio Manager on his portfolios will not be able to execute a trade in a Covered Security within seven calendar days before or after an account managed by said Portfolio Manager has traded in the same (or a related) security. The blackout period also pertains to situations when the Portfolio Manager changes a model utilized in an SMA or wrap program.
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A security is being considered for purchase or sale when a recommendation to purchase or sell a security has been made or communicated and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. |
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Investment Personnel are precluded from executing a trade in a Covered Security on the same day that there is a client order for the same (or a related) security, unless a de minimis exception applies.
All Other Access Persons are precluded from executing a trade in a Covered Security on the same day that there is a client order for the same (or a related) security, unless a de minimis exception applies.
De Minimis exception: Transactions involving shares in certain companies traded on US stock exchanges or the NASDAQ will be approved regardless of whether there are outstanding client orders. The exception applies to transactions involving no more than 500 shares, during any 7 calendar day period, per issuer (or the equivalent number of shares represented by ADRs) in securities of companies with market capitalizations of $10 billion or more. In the case of options, an employee may purchase or sell up to 5 option contracts to control up to 500 shares in the underlying security of such large cap company.
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Preclearance is required for all de minimis transactions. |
HOLDING PERIODS
TRADES BY EMPLOYEES IN MANAGED FUNDS ARE SUBJECT TO A 60 CALENDAR DAY HOLDING PERIOD. SECURITIES MAY NOT BE SOLD OR BOUGHT BACK WITHIN 60 CALENDAR DAYS AFTER THE ORIGINAL TRANSACTION WITHOUT THE PERMISSION OF THE CHIEF COMPLIANCE OFFICER.
ACCESS PERSONS CANNOT PURCHASE OR SELL THE SAME COVERED SECURITY WITHIN 60 CALENDAR DAYS IF SUCH TRANSACTIONS WILL RESULT IN A PROFIT.
The Short Term Trading Prohibition does not pertain to individual stock options that are part of a hedged position where the underlying stock has been held for more than 60 calendar days and the entire position (including the underlying security) is closed out.
PRECLEARANCE
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Preclearance is obtained through the Personal Trading Assistant found under Compliance on the ClearBridge intranet site. |
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Preclearance is valid until close of business on the business day during which preclearance was obtained. If the transaction has not been executed within that timeframe, a new preclearance must be obtained. |
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IF YOU WISH TO PURCHASE AN INITIAL PUBLIC OFFERING 4 , YOU MUST OBTAIN PERMISSION FROM THE CIO AND THE CHIEF COMPLIANCE OFFICER. PORTFOLIO MANAGERS CANNOT PARTICIPATE IN IPOS FOR THEIR PERSONAL ACCOUNTS. |
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IF YOU WISH TO PURCHASE SECURITIES IN A PRIVATE PLACEMENT, 5 YOU MUST OBTAIN PERMISSION FROM THE CHIEF COMPLIANCE OFFICER AND YOUR SUPERVISOR. |
The following transactions do not require pre-clearance :
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Transactions in a Covered Account over which the employee has no direct or indirect influence or control such as where investment discretion is delegated in writing to an independent fiduciary. Fully discretionary accounts managed by either an internal or external registered investment adviser are permitted and may be custodied away from an Approved Broker if (i) the employee receives permission from the Chief Compliance Officer or his/her designee; and (ii) there is no communication between the manager and the employee with regard to investment decisions prior to execution. The employee must designate that copies of periodic (monthly or quarterly) statements that contain transaction information as detailed under Reporting Requirements be sent to the Compliance Department; |
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Transactions in estate or trust accounts of which an employee or related person has a beneficial ownership, but no power to affect investment decisions. There must be no communication between the account(s) and the employee with regard to investment decisions prior to execution. The employee must direct the trustee/bank to furnish copies of statements that contain transaction information as detailed under Reporting Requirements to the Compliance Department; |
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Transactions which are non-volitional on the part of the employee ( i.e., the receipt of securities pursuant to a stock dividend or merger, a gift or inheritance). However, the sale of securities acquired in a non-volitional manner is treated as any other transaction and subject to pre-clearance. |
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Sales pursuant to a bona fide tender offer. |
4 | An IPO is an offering of securities registered under the Securities Act, the issuer of which, immediately before the registration, was not subject to reporting requirements under the federal securities laws. |
5 | A private placement is an offering of securities that are not registered under the Securities Act because the offering qualified for an exemption from the registration provisions. |
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Purchases of the stock of a company pursuant to an automatic investment plan which is a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan. Payroll deduction contributions to 401(k) plans are deemed to be pursuant to automatic investment plans. ( Preclearance and reporting of particular instances of dividend reinvestment is not required; annual reporting of holdings is required ). |
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The receipt or exercise of rights issued by a company on a pro rata basis to all holders of a class of security and the sale of such rights. However, if you purchase the rights from a third-party, the transaction must be pre-cleared. Likewise, the sale of such rights must be pre-cleared. |
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Purchases and sales of Legg Masons publicly traded securities or the receipt or exercise of an employee stock option under any of Legg Masons employee stock plans. Note: All employees are subject to the Legg Mason, Inc. Policies and Procedures Regarding Acquisitions and Disposition of Legg Mason Securities, which is an exhibit to this Code. |
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Purchases of an employers securities done under a bona fide employee benefit plan or the receipt or exercise of options in an employers securities done under a bona fide employee stock option plan of a company not affiliated with Legg Mason by an employee of that company who is a member of an Access Persons immediate family do not require preclearance. However, sales of the employers stock, whether part of the employee benefit or stock option plans, do require preclearance and reporting. Furthermore, employee benefit plans that allow the employee to buy or sell Covered Securities other than those of the employer are subject to the requirements of the Code, including preclearance, reporting and holding periods. |
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Any transaction involving non-financial commodities, futures (including currency futures and futures on securities comprising part of a broad-based, publicly traded market based index of stocks) and options on futures. |
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Any acquisition or disposition of a security in connection with an option-related transaction that has been previously approved. For example, if you received clearance to buy a call and then decide to exercise it, you are not required to obtain preclearance in order to exercise the call. |
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Transactions involving options on broad-based indices, including, but not limited to, the S&P 500, the S&P 100, NASDAQ 100, Russell 2000, Russell 1000, Russell 3000, Nikkei 300, NYSE Composite and the Wilshire Small Cap. |
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Access Persons desiring to make a bona fide 6 gift or charitable contribution of Covered Securities or who receive a bona fide gift of Covered Securities, including an inheritance, do not need to preclear the transactions. However, such gift or contribution must be reported in the next quarterly report (See Reporting Requirements). |
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Fixed income investments other than fixed income securities convertible into equity securities. |
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Transactions in Managed Funds and Reportable Funds. |
REPORTING REQUIREMENTS
All personnel are required to report the establishment of any new Covered Accounts established during the quarter to Compliance, even if the Covered Account is with an Approved Broker. Employees are also required to report to the Compliance Department the establishment of any account in a Managed Fund directly with the Legg Mason Partners Funds transfer agent.
The Approved Brokers provide the Compliance Department with a daily report of all transactions executed by personnel. The Legg Mason Partners Funds transfer agent provides the Compliance Department with transactions in the Managed Funds. If you have received permission to maintain a Covered Account at other than an Approved Broker, including spousal accounts for which you received a waiver from the requirement to preclear, you must arrange for the broker to provide Compliance with the following information.
Reports of Each Transaction in a Covered Security
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No later than at the opening of business on the business day following the day of execution of a trade for a Covered Account, Compliance must be provided with the following information: |
name of security
exchange ticker symbol or CUSIP
nature of transaction (purchase, sale, etc.)
number of shares/units or principal amount
price of transaction
date of trade
name of broker
the date the Access Person submits the report
6 | A bona fide gift or contribution is one where the donor does not receive anything of monetary value in return. |
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Quarterly Reports
If you have engaged in a transaction that did not require preclearance but did require reporting, please confirm that Compliance has received the required information, as follows:
No later than 30 days after the end of each calendar quarter, each employee who maintains a Covered Account at other than an Approved Broker will provide Compliance with a report of all transactions in Covered Securities in the quarter, including the name of the Covered Security, the exchange ticker symbol or CUSIP, the number of shares and principal amount, whether it was a buy or sell, the price and the name of the broker through whom effected
Annual Reports
Within 45 days after the end of the calendar year, each employee must report all his/her holdings in Covered Securities as at December 31, including the title, exchange ticker symbol or CUSIP, number of shares and principal amount of each Covered Security the employee owns (as defined above) and the names of all Covered Accounts. The report will be made through certification on the Personal Trading Assistant. Any holdings that do not appear should be provided to Compliance for entry in the system prior to certification. Any employee failing to certify within the required time period will not be allowed to engage in any personal securities transactions.
OTHER REPORTS
Initial Employment
No later than 10 days after initial employment with ClearBridge, or notification of coverage under this Code, each employee must provide Compliance with a list of each Covered Security s/he owns (as defined above). The information provided, which must be current as of a date no more that 45 days prior to the date such person became an employee (or subject to this Code), must include the title of the security, the exchange ticker symbol or CUSIP, the number of shares owned (for equities) and principal amount (for debt securities), The employee must also provide information, which must include the name of the broker, dealer or bank with whom the employee maintains an account in which any securities are held for the direct or indirect benefit of the employee. This information will be entered into the Personal Trading Assistant by Compliance and must be certified to, electronically, by the employee before the employee can effectuate any transactions. If the employee does not maintain a Covered Account with an Approved Broker, s/he will be given a reasonable amount of time to transfer the Covered Account(s) to an Approved Broker.
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Reportable Funds
No later than 30 days after the end of each calendar quarter, TRANSACTIONS IN REPORTABLE FUNDS (OTHER THAN THOSE MANAGED BY CLEARBRIDGE) MUST BE REPORTED.
The information on personal securities transactions received and recorded will be deemed to satisfy the obligations contained in Rule 204A-1 under the Advisers Act and Rule 17j-1 under the Investment Company Act. Such reports may, where appropriate, contain a statement to the effect that the reporting of the transaction is not to be construed as an admission that the person has any direct or indirect beneficial interest or ownership in the security.
ADMINISTRATION OF THE CODE
At least annually, the Chief Compliance Officer, on behalf of ClearBridge, will furnish to the boards or to the Chief Compliance Officer of any US registered investment company to which ClearBridge acts as adviser or subadviser, a written report that:
(i) | Describes any issues arising under the Code or this Policy since the last report to the board, including, but not limited to, information about material violations of the Code or this Policy and sanctions imposed in response to the material violations; and |
(ii) | Certifies that the ClearBridge has adopted procedures reasonably necessary to prevent Access Persons from violating the Code or this Policy. |
Adopted: February 14, 2007*
Amended: April 1, 2007
Amended: June 1, 2007
Amended: December 10, 2008
Amended: August 10, 2009
* | Amending and Restating the Code of Ethics adopted January 28, 2005, as amended. |
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EXHIBIT A
C LEAR B RIDGE A DVISORS , LLC
C LEAR B RIDGE A SSET M ANAGEMENT , I NC .
Acknowledgement of Code of Ethics Form
I acknowledge that I have received and read the Code of Ethics for ClearBridge dated June 1, 2007. I understand the provisions of the Code of Ethics as described therein and agree to abide by them.
Employee Name (Print): |
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Signature: |
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Date: |
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Tax I.D./Social Security Number:
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Date of Hire:
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Job Function & Title:
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Supervisor:
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Location:
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Floor and/or Zone:
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Telephone Number:
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This Acknowledgment form must be completed and returned within 10 days of employment to:
ClearBridge Compliance
620 8th Avenue,
New York NY, 10018
Please Fax to: (877) 406-7343
Original signature must be sent , however a fax copy may be sent to (877) 406-7343 in order to meet the ten (10) day deadline.
EXHIBIT B
C LEAR B RIDGE A DVISORS , LLC
C LEAR B RIDGE A SSET M ANAGEMENT , I NC .
Outside Directorship Form
Employees must obtain prior written approval from the CEO and Legg Mason Legal and Compliance to serve as a director of any publicly held company or any company whose securities are held by clients. Employees serving as outside directors are not entitled to indemnification or insurance coverage by ClearBridge or its affiliates unless service on the board is at the specific written request of ClearBridge or its affiliates.
COMPLETE ONE COPY OF THIS FORM FOR EACH APPLICABLE ENTITY
Print Name
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Social Security Number
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Title
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Office Telephone Number
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Department Name
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Location
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1. Name of Entity
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Date
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2. Main Activity of the Entity
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3. Your Title or Function |
Date Association/Term Begins |
Date Term Expires |
Annual Compensation $ |
4. | Is the Directorship requested by ClearBridge or its affiliates? | ¨ No | ¨ Yes |
¨ Attach copy of Request Letter and other details. |
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5. | Do you know of any significant adverse information about the entity or any actual or potential conflict of interest between the entity and ClearBridge or its affiliates? | ¨ No | ¨ Yes | ¨ Attach detail and documents. | ||||||
6. | For PUBLIC COMPANIES attach the most recent 10-K; 10-Q; Latest Annual Report; 8-Ks; and Prospectus |
¨ 10-K Attached |
¨ Ann. Rpt Attached |
¨ Prospectus Attached |
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For NON-PUBLIC ENTITIES attach Audit Financial Statements |
¨ 10-Q Attached |
¨ 8-Ks Attached |
¨ Fin. Stmts. Attached |
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7. | Does the entity or any principal have an account or other business relationship with ClearBridge or its affiliates? | ¨ No | ¨ Yes | If yes, specify Account No. or describe relationship | ||||||
8. |
Additional Remarks
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Employee Representations:
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I will not use any material non-public information gleaned through my directorship for my own benefit nor share any such information with others. |
Employee Signature
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Employees Signature | Date | ||||
Chief Executive Officer
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Print Name | Signature | Date | |||
General Counsel of Legg Mason, Inc.
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Print Name | Signature | Date |
Upon completion of this form, fax to Compliance at 877-406-7343, then forward via inter-office mail to:
ClearBridge Compliance, 620 8 th Avenue, New York NY, 10018
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EXHIBIT C
C LEAR B RIDGE A DVISORS , LLC
C LEAR B RIDGE A SSET M ANAGEMENT , I NC .
Outside Brokerage Account Approval Request Form
Employee Name: |
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Tax Identification/Social Security Number: |
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The following information is provided in order to obtain Compliance approval to open and/or maintain a brokerage account outside the approved list of brokers:
Outside Brokerage Firm Name: |
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Brokerage Firm Address: (Where letter should be sent) |
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Account Number: |
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Full Account Title: |
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Please indicate the reason why you are requesting to open and/or maintain a brokerage account outside of the approved list of brokers:
¨ | The account is a fully discretionary account managed by an investment adviser, registered with the SEC. |
¨ | The account is a joint account with my spouse who works for the brokerage firm where the account will be maintained. |
¨ | The account is my spouses individual account who works for a regulated entity. |
¨ | Estate or trust accounts of which an employee or related person has a beneficial ownership , but no power to affect investment decisions. There must be no communication between the account(s) and the employee with regard to investment decisions prior to execution. |
¨ | Other: . |
A copy of any relevant statement(s) and this completed form must be provided to:
ClearBridge Compliance
620 8th Avenue
New York, NY 10018
Please Fax to: (877) 406-7343
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Employee Signature | Chief Compliance Officer Signature |
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EXHIBIT D
C LEAR B RIDGE A DVISORS , LLC
C LEAR B RIDGE A SSET M ANAGEMENT , I NC .
Outside Investment Approval Request Form
ClearBridge policy requires employees to obtain the prior written approval of the Chief Compliance Officer and your immediate supervisor before making an outside investment. Examples of outside investments include, but are not limited to, Private Placements and any investments in securities that cannot be made through an Approved Brokerage account. If the investment is a private placement, you must provide a copy of the prospectus, offering statement or other similar document.
Employees must not make an outside investment if such investment may present a potential conflict of interest. Approval of such investment reflects a determination that it does not pose a conflict of interest with clients.
PRINT Name
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Social Security Number | Date |
Title/Position |
Office Telephone Number |
Department Name
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Location |
Name of Investment |
Anticipated Date of Investment |
Amount of investment $ |
Type of | ||||||||
Investment |
¨ | Private Placement | ¨ | Other investment which cannot be made through an approved brokerage account. (specify) |
Is your participation exclusively as | If No, Please explain | |||||
a passive investor? | ¨ Yes | ¨ No |
any other involvement. |
Additional Remarks:
Employee Representations:
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I certify that this investment does not take an investment opportunity from a client. |
Send the completed form and all relevant documents to :
ClearBridge Compliance, 620 8 th Avenue, New York NY, 10018
Please Fax to (877) 406-7343
Employee Signature |
Employees Signature | Date | ||||||
Supervisor Approval |
Print Name of Supervisor | Title of Supervisor | Signature of Supervisor | Date |
Chief Compliance Officer Approval |
Print Name of CCO |
Signature of CCO |
Date |
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EXHIBIT E
C LEAR B RIDGE A DVISORS , LLC
C LEAR B RIDGE A SSET M ANAGEMENT , I NC .
Initial Report of Securities Holdings Form
This report must be signed, dated and returned within 10 days of employment and the holdings report must be current as of a date not more than 45 days prior to the employee becoming a Covered Person. This report must be submitted to the ClearBridge Advisors (CBA) Compliance Department, 620 8 th Avenue, New York NY, 10018. Please Fax to (877) 406-7343
Employee Name:
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Date of Employment:
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Brokerage Accounts:
q | I do not have a beneficial ownership of any account(s) with any financial services firm. Please refer to Exhibit A for definition of beneficial ownership . |
q | I maintain or have a beneficial ownership in the following account(s) with the financial services firm(s) listed below (attach additional information if necessary- e.g ., a brokerage statement). Please include the information required below for any broker, dealer or bank where an account is maintained which holds securities for your direct or indirect benefit as of the date you began your employment. |
Name of Financial Service(s) Firm and Address | Account Title | Account Number | ||
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Securities Holdings:
Complete the following (or attach a copy of your most recent statement(s)) listing all of the securities holdings in which you have a beneficial ownership , with the exception of non-proprietary U.S. registered open-ended mutual funds for which CBA does not serve as adviser or sub-adviser and U.S Government securities if:
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You own securities that are held by financial services firm(s) as described above. If you submit a copy of a statement, it must include all of the information set forth below. Please be sure to include any additional securities purchased since the date of the brokerage statement that is attached. Use additional sheets if necessary. |
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Your securities are not held with a financial service(s) firm (e.g., stock and dividend reinvestment programs and private placements, shares held in certificate form by you or for you or shares held at a transfer agent). |
Title of Security | Ticker Symbol or CUSIP No. | Number of Shares | Principal Amount | Financial Services Firm | ||||
q | I have no securities holdings to report. |
Signature: |
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Date of Signature: |
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