Manag
ement
Investment manager:
Legg
Mason Partners Fund Advisor, LLC
Subadviser:
Western Asset Management Company
Investment
professionals:
Stephen A. Walsh, Robert E. Amodeo, David T. Fare and Dennis J. McNamara. Mr. Fare has been a part of the portfolio management team for the fund since the funds inception. Messrs.
Walsh and Amodeo have been a part of the portfolio management team for the fund since 2007. Mr. McNamara has been a part of the portfolio management team for the fund since 2012. These investment professionals work together with a broader investment
management team. It is anticipated that Mr. Walsh will step down as a member of the funds portfolio management team effective on or about March 31, 2014 and that S. Kenneth Leech will join the funds portfolio management team at
that time.
Purcha
se and sale of fund shares
You may purchase, redeem or exchange 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, subject to any
applicable sales charge.
The funds initial and subsequent investment minimums generally are set forth in the accompanying table:
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Investment minimum initial/additional investment
($)
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Class A
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Class C
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Class FI
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Class I
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General
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1,000/50
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1,000/50
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N/A
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1 million/None*
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Uniform Gifts or Transfers to Minor Accounts
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1,000/50
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1,000/50
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N/A
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1 million/None*
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Systematic Investment Plans
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50/50
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50/50
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N/A
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1 million/None*
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Clients of Eligible Financial Intermediaries
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None/None
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N/A
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None/None
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None/None
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Eligible Investment Programs
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None/None
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N/A
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None/None
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None/None
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Institutional Investors
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1,000/50
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1,000/50
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N/A
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1 million/None
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*
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Available to investors investing directly with the fund.
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Your
financial intermediary may impose different investment minimums.
For more information about how to purchase, redeem or exchange shares, and to learn
which classes of shares are available to you, you should contact your financial intermediary, or, if you hold your shares or plan to purchase shares through the fund, you should contact the fund by phone at 1-877-721-1926 or by mail at Legg Mason
Funds, P.O. Box 55214, Boston, MA 02205-8504.
Tax inform
ation
The fund intends to distribute income that is generally exempt from regular federal income tax. A portion of the funds distributions may be subject to such
tax and/or to the federal alternative minimum tax.
Payments to broke
r/dealers and other financial
intermediaries
The funds related companies may pay broker/dealers or other financial intermediaries (such as a bank or an insurance company) for
the sale of fund shares, shareholder services and other purposes. These payments 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 salesperson or visit your financial intermediarys or salespersons website for more information.
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Western Asset Short Duration Municipal Income Fund
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7
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More o
n the funds investment strategies, investments
and
risks
The fund seeks to generate high current income exempt
from regular federal income tax while preserving capital.
Under normal circumstances, the fund invests at least 80% of its assets in municipal
securities and in participation or other interests in municipal securities issued by banks, insurance companies or other financial institutions.
The
funds 80% policy may not be changed without a shareholder vote.
Except for this policy, the funds investment strategies may be changed
without shareholder approval. The funds investment objective may be changed by the Board of Trustees (the Board) without shareholder approval and on notice to shareholders.
Municipal securities
Municipal securities
include debt obligations issued by any of the 50 states or their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the U.S. Virgin Islands and Guam) and other qualifying issuers, and
investments with similar economic characteristics, the income from which is exempt from regular federal income tax. Although municipal securities are issued by qualifying issuers, payments of principal and interest on municipal securities may be
derived solely from revenues from certain facilities, mortgages or private industries, and may not be backed by the issuers themselves. These securities include participation or other interests in municipal securities issued or backed by banks,
insurance companies and other financial institutions.
Municipal securities include general obligation bonds, revenue bonds, housing authority bonds,
private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial
receipts. General obligation bonds are backed by the full faith and credit of the issuing entity. Revenue bonds are typically used to fund particular projects, such as those relating to education, health care, transportation and utilities, that are
expected to produce income sufficient to make the payments on the bonds, since they are not backed by the full taxing power of the municipality. Housing authority bonds are used primarily to fund low to middle income residential projects and may be
backed by the payments made on the underlying mortgages. Tax and revenue anticipation notes are generally issued in order to finance short-term cash needs or, occasionally, to finance construction. Tax and revenue anticipation notes are expected to
be repaid from taxes or designated revenues in the related period, and they may or may not be general obligations of the issuing entity. Bond anticipation notes are issued with the expectation that their principal and interest will be paid out of
proceeds from renewal notes or bonds and may be issued to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects.
Municipal securities include municipal lease obligations, which are undivided interests issued by a state or municipality in a lease or installment purchase contract which generally relates to equipment or
facilities. In some cases, payments under municipal leases do not have to be made unless money is specifically approved for that purpose by an appropriate legislative body.
The fund may invest more than 25% of its assets in municipal securities that derive income from similar types of projects or that are otherwise related in such a way that an economic, business or political
development or change affecting one of the securities would also affect the others.
The fund purchases municipal securities, the interest on which,
in the opinion of bond counsel at the time the securities are issued, is exempt from regular federal income tax. There is no guarantee that this opinion is correct, and there is no assurance that the Internal Revenue Service (the IRS)
will agree with bond counsels opinion. If the IRS determines that an issuer of a municipal security has not complied with applicable requirements, interest from the security could become subject to regular federal income tax, possibly
retroactively to the date the security was issued, and the value of the security could decline significantly and a portion of the distributions to fund shareholders could be recharacterized as taxable. Future litigation or legislation could
adversely affect the tax treatment of municipal securities held by the fund.
Some of the funds income distributions may be, and distributions
of any gains generally will be, subject to regular federal income tax. Some of the funds income that is exempt from regular federal income tax may be subject to the federal alternative minimum tax. In addition, distributions of the funds
income and capital gains will generally be subject to state and local income taxes.
Subject to the funds 80% policy, the fund may purchase other
securities whose interest is subject to regular federal income tax.
Maturity and duration
The fund may invest in securities of any maturity. The maturity of a fixed income security is a measure of the time remaining until the final payment on the
security is due.
The fund normally maintains a dollar-weighted average effective duration of three years or less as estimated by the funds
subadviser. If the funds effective duration falls outside of this range, the fund will take action to bring it within its expected range within a reasonable period of time.
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Western Asset Short Duration Municipal Income Fund
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Effective duration seeks to measure the expected sensitivity of market price to changes in interest rates, taking into
account the anticipated effects of structural complexities (for example, some bonds can be prepaid by the issuer). The assumptions that are made about a securitys features and options when calculating effective duration may prove to be
incorrect. As a result, investors should be aware that effective duration is not an exact measurement and may not reliably predict a securitys price sensitivity to changes in yield or interest rates.
Credit quality
The fund focuses on
securities rated investment grade (that is, securities rated in the Baa/BBB categories or above, or, if unrated, determined to be of comparable credit quality by the subadviser). The fund may invest up to 20% of its assets in securities rated below
investment grade, or, if unrated, determined to be below investment grade by the subadviser. Below investment grade securities are commonly referred to as junk bonds.
If a security is rated by multiple nationally recognized statistical rating organizations (NRSROs) and receives different ratings, the fund will treat the security as being rated in the highest rating
category received from an NRSRO. Rating categories may include sub-categories or gradations indicating relative standing.
Derivatives
The fund may engage in a
variety of transactions using derivatives, such as futures, options, swaps (including credit default swaps) and warrants. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or
more underlying investments, indexes or currencies. 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 means of changing investment characteristics of the funds portfolio
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As a cash flow management technique
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As a means of attempting to enhance returns
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As a means of providing additional exposure to types of investments or market factors
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The fund from time to time may sell protection on debt securities by entering into credit default swaps. In these transactions, the fund is generally required to pay the par (or other agreed-upon) value of a
referenced debt security to the counterparty in the event of a default on or downgrade of the debt security and/or a similar credit event. In return, the fund receives from the counterparty a periodic stream of payments over the term of the
contract. If no default occurs, the fund keeps the stream of payments and has no payment obligations. As the seller, the fund would effectively add leverage to its portfolio because, in addition to its net assets, the fund would be subject to
investment exposure on the par (or other agreed-upon) value it had undertaken to pay. Credit default swaps may also be structured based on an index or the debt of a basket of issuers, rather than a single issuer, and may be customized with respect
to the default event that triggers purchase or other factors (for example, a particular number of defaults within a basket, or defaults by a particular combination of issuers within the basket, may trigger a payment obligation).
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 fund. Certain derivative transactions may have a leveraging effect on the fund.
Use of derivatives or similar instruments may have different tax consequences for the fund than an investment in the underlying security, and such differences may affect the amount, timing and character of income
distributed to shareholders, including the proportion of income consisting of exempt-interest dividends.
When the fund enters into derivative
transactions, it may be required to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the funds exposure to loss, however, and the fund will have investment risk
with respect to both the derivative itself and the assets that have been segregated to cover the funds derivative exposure. If the segregated assets represent a large portion of the funds portfolio, this may impede portfolio management
or the funds ability to meet redemption requests or other current obligations.
As noted above, instead of, and/or in addition to, investing
directly in particular securities, the fund may use derivatives, such as credit default swaps and futures contracts, synthetic instruments and other instruments that are intended to provide economic exposure to a security, an issuer, an index or
basket of securities, or a market. The fund may use one or more types of these instruments without limit, except that these instruments are taken into account when determining compliance with the funds 80% policy.
The funds subadviser may choose not to make use of derivatives.
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Western Asset Short Duration Municipal Income Fund
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9
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More on the funds investment strategies, investments and risks contd
Other fixed income securities
Subject to the funds 80% policy, the fund may purchase fixed income securities that pay interest that is subject to regular federal income tax. Fixed income
securities represent obligations of corporations, governments and other entities to repay money borrowed, usually at the maturity of the security. These securities may pay fixed, variable or floating rates of interest. However, some fixed income
securities, such as zero coupon bonds, do not pay current interest but are issued at a discount from their face values. Other debt instruments, such as certain mortgage-backed and other asset-backed securities, make periodic payments of interest
and/or principal. Some debt instruments are partially or fully secured by collateral supporting the payment of interest and principal. Fixed income securities are commonly referred to as notes, debt, debt
obligations, debt securities, corporate debt, bonds and corporate bonds, and these terms are used in this Prospectus interchangeably, and, where used, are not intended to be limiting.
Variable and floating rate securities
Variable rate securities reset at specified intervals, while floating rate securities reset whenever there is a change in a specified index rate. In most cases,
these reset provisions reduce the impact of changes in market interest rates on the value of the security. However, the value of these securities may decline if their interest rates do not rise as much, or as quickly, as other interest rates.
Conversely, these securities will not generally increase in value if interest rates decline. The fund may also invest in inverse floating rate debt instruments (inverse floaters). An inverse floater may exhibit greater price volatility
than a fixed rate obligation of similar credit quality.
Structured instruments
The fund may invest in various types of structured instruments, including securities that have demand, tender or put features, or interest rate reset features.
These may include instruments issued by structured investment or special purpose vehicles or conduits, and may be asset-backed or mortgage-backed securities. Structured instruments may take the form of participation interests or receipts in
underlying securities or other assets, and in some cases are backed by a financial institution serving as a liquidity provider. Some of these instruments may have an interest rate swap feature which substitutes a floating or variable interest rate
for the fixed interest rate on an underlying security. Structured instruments are a type of derivative instrument and the payment and credit qualities of these instruments derive from the assets embedded in the structure. For structured securities
that have embedded leverage features, small changes in interest or prepayment rates may cause large and sudden price movements. Structured instruments are often subject to heightened liquidity risk.
Zero coupon, pay-in-kind and deferred interest securities
Zero coupon, pay-in-kind and deferred interest securities may be used by issuers to manage cash flow and maintain liquidity. Zero coupon securities pay no interest during the life of the obligation but are issued
at prices below their stated maturity value. Because zero coupon securities pay no interest until maturity, their prices may fluctuate more than other types of securities with the same maturity in the secondary market. However, zero coupon bonds are
useful as a tool for managing duration.
Pay-in-kind securities have a stated coupon, but the interest is generally paid in the form of obligations of
the same type as the underlying pay-in-kind securities (e.g. bonds) rather than in cash. These securities are more sensitive to the credit quality of the underlying issuer and their secondary market prices may fluctuate more than other types of
securities with the same maturity.
Deferred interest securities are obligations that generally provide for a period of delay before the regular payment
of interest begins and are issued at a significant discount from face value.
Certain zero coupon, pay-in-kind and deferred interest securities are
subject to tax rules applicable to debt obligations acquired with original issue discount. The fund would generally have to accrue income on these securities for federal income tax purposes before it receives corresponding cash payments.
Because the fund intends to make sufficient annual distributions of its taxable income, including accrued non-cash income, in order to maintain its federal income tax status and avoid fund-level income and excise taxes, the fund might be required to
liquidate portfolio securities at a disadvantageous time, or borrow cash, to make these distributions.
When-issued securities,
delayed delivery, to be announced and forward commitment transactions
The fund may purchase securities under arrangements (called when-issued,
delayed delivery, to be announced or forward commitment basis) where the securities will not be delivered or paid for immediately. The fund will set aside assets to pay for these securities at the time of the agreement. Such transactions involve a
risk of loss if the value of the securities declines prior to the settlement date or if the assets set aside to pay for these securities decline in value prior to the settlement date. Therefore, these transactions may have a leveraging effect on the
fund, making the value of an investment in the fund more volatile and increasing the funds overall investment exposure. Typically, no income accrues on securities the fund has committed to purchase prior to the time delivery of the securities
is made, although the fund may earn income on securities it has set aside to cover these positions.
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Western Asset Short Duration Municipal Income Fund
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Short-term investments
The fund may invest in cash, money market instruments and short-term securities, including repurchase agreements, U.S. government securities, bank obligations and commercial paper. A repurchase agreement is a
transaction in which the fund purchases a security from a seller, subject to the obligation of the seller to repurchase that security from the fund at a higher price. The repurchase agreement thereby determines the yield during the funds
holding period, while the sellers obligation to repurchase is secured by the value of the underlying security held by the fund.
Borrowings and reverse repurchase agreements
The fund may enter into borrowing transactions.
Borrowing may make the value of an investment in the fund more volatile and increase the funds overall investment exposure. The fund may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order
to make payments with respect to any borrowings. Interest on any borrowings will be a fund expense and will reduce the value of the funds shares.
The fund may enter into reverse repurchase agreements, which have characteristics like borrowings. In a reverse repurchase agreement, the fund sells securities to a
counterparty, in return for cash, and the fund agrees to repurchase the securities at a later date and for a higher price, representing the cost to the fund for the cash received.
Credit downgrades and other credit events
Credit rating or credit quality of a security is
determined at the time of purchase. If, after purchase, the credit rating on a security is downgraded or the credit quality deteriorates, or if the duration of a security is extended, the subadviser will decide whether the security should be held or
sold. Upon the occurrence of certain triggering events or defaults on a security held by the fund, or if an obligor of such a security has difficulty meeting its obligations, the fund may obtain a new or restructured security or underlying assets.
In that case, the fund may become the holder of securities or other assets that it could not purchase or might not otherwise hold (for example, because they are of lower quality or are subordinated to other obligations of the issuer) at a time when
those assets may be difficult to sell or can be sold only at a loss. In addition, the fund may incur expenses in an effort to protect the funds interest in securities experiencing these events.
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, including by investing in any type of taxable money market instruments and short-term debt securities
or holding cash without regard to any percentage limitations. Although the subadviser has the ability to take defensive positions, it may choose not to do so for a variety of reasons, even during volatile market conditions.
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. New types of mortgage-backed and asset-backed securities, derivative instruments, hedging instruments and other securities or instruments are developed and marketed from time to time. Consistent with its investment limitations, the fund
may invest in new types of securities and instruments.
Percentage and other limitations
For purposes of the funds limitations expressed as a percentage of assets or net assets, the term assets means net assets plus the amount of any
borrowings for investment purposes. The funds compliance with its investment limitations and requirements is usually determined at the time of investment. If a percentage limitation is complied with at the time of an investment, any subsequent
change in percentage resulting from a change in values or assets, or a change in credit quality, will not constitute a violation of that limitation.
Selection process
The subadviser selects securities that it believes have strong credit
quality and are attractively priced. These may include investments with unusual features or privately placed issues that are not widely followed in the fixed income marketplace. In selecting individual securities, the subadviser:
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Uses fundamental credit analysis to estimate the relative value and attractiveness of various securities and sectors and to exploit opportunities in the
municipal bond market
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Considers the potential impact of supply/demand imbalances for fixed versus variable rate securities and for obligations of different states, the yields
available for securities with different durations and a securitys duration in light of the outlook for the issuer and its sector and interest rates
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May trade between general obligation and revenue bonds and among various revenue bond sectors, such as education, housing, hospital and industrial development,
based on their apparent relative values
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Western Asset Short Duration Municipal Income Fund
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11
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More on the funds investment strategies, investments and risks contd
More on risks of investing in the fund
Market and interest rate risk.
The market prices of
fixed income and other securities owned by the fund may go up or down, sometimes rapidly or unpredictably. If the market prices of the securities owned by the fund fall, the value of your investment in the fund will decline. The value of a security
may fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets or adverse investor sentiment.
Changes in market conditions will not typically have the same impact on all types of securities. The value of a security may also fall due to specific conditions
that affect a particular sector of the securities market or a particular issuer.
The market prices of securities may fluctuate significantly when
interest rates change. When interest rates rise, the value of fixed income securities, and therefore the value of your investment in the fund, generally goes down. Interest rates have been historically low and are expected to rise. Generally, the
longer the maturity or duration of a fixed income security, the greater the impact of a rise in interest rates on the securitys value. However, calculations of duration and maturity may be based on estimates and may not reliably predict a
securitys price sensitivity to changes in interest rates. Moreover, securities can change in value in response to other factors, such as credit risk. In addition, different interest rate measures (such as short- and long-term interest rates
and U.S. and foreign interest rates), or interest rates on different types of securities or securities of different issuers, may not necessarily change in the same amount or in the same direction. When interest rates go down, the funds yield
will decline. Also, when interest rates decline, investments made by the fund may pay a lower interest rate, which would reduce the income received by the fund.
Recent market events risk.
The global financial crisis that began in 2008 has caused a significant
decline in the value and liquidity of many securities and unprecedented volatility in the markets. Some events that have contributed to ongoing and systemic market risks include the falling values of some sovereign debt and related investments,
scarcity of credit and high public debt. In response to the crisis, the U.S. government and the Federal Reserve, as well as certain foreign governments and their central banks have taken steps to support financial markets, including by keeping
interest rates at historically low levels. More recently, the Federal Reserve has reduced its market support activities. Further reduction or withdrawal of this support, failure of efforts in response to the crisis, or investor perception that such
efforts are not succeeding could negatively affect financial markets generally as well as result in higher interest rates, increase market volatility and reduce the value and liquidity of certain securities.
This environment could make identifying investment risks and opportunities especially difficult for the subadviser, and whether or not the fund invests in
securities of issuers located in or with significant exposure to countries experiencing economic and financial difficulties, the value and liquidity of the funds investments may be negatively affected. In addition, policy and legislative
changes in the United States and in other countries are affecting many aspects of financial regulation. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.
Credit risk.
If an obligor (such as the
issuer itself or a party offering credit enhancement) for a security held by the fund fails to pay, otherwise defaults, is perceived to be less creditworthy, becomes insolvent or files for bankruptcy, a securitys credit rating is downgraded or
the credit quality or value of any underlying assets declines, the value of your investment in the fund could decline. If the fund enters into financial contracts (such as certain derivatives, repurchase agreements, reverse repurchase agreements,
and when-issued, delayed delivery and forward commitment transactions), the fund will be subject to the credit risk presented by the counterparty. In particular, the number of municipal insurers is relatively small, and, as a result, changes in the
financial condition of an individual municipal insurer may affect the overall municipal market. In addition, the fund may incur expenses in an effort to protect the funds interests or to enforce its rights. Credit risk is broadly gauged by the
credit ratings of the securities in which the fund invests. However, ratings are only the opinions of the companies issuing them and are not guarantees as to quality. Securities rated in the lowest category of investment grade (Baa/BBB) may possess
certain speculative characteristics.
The fund is subject to greater levels of credit risk to the extent it holds below investment grade debt
securities (that is, securities rated below the Baa/BBB categories or unrated securities of comparable quality), or junk bonds. These securities have a higher risk of issuer default because, among other reasons, issuers of junk bonds
often have more debt in relation to total capitalization than issuers of investment grade securities. These securities are considered speculative, tend to be less liquid and are more difficult to value than higher rated securities and may involve
major risk of exposure to adverse conditions and negative sentiments. These securities may be in default or in danger of default as to principal and interest. Unrated securities of comparable quality share these risks.
The fund may invest in securities which are subordinated to more senior securities of the issuer, or which represent interests in pools of such subordinated
securities. The fund is more likely to suffer a credit loss on subordinated securities than on non-subordinated securities of the same issuer. If there is a default, bankruptcy or liquidation of the issuer, most subordinated securities are paid only
if sufficient assets remain after payment of the issuers non-subordinated securities. In addition, any recovery of interest or principal may take more time. As a result, even a perceived decline in creditworthiness of the issuer is likely to
have a greater impact on subordinated securities.
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Western Asset Short Duration Municipal Income Fund
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Derivatives risk.
Derivatives involve special risks and costs and may result in losses to the fund. Using derivatives can increase losses and reduce opportunities for gains when market prices, interest rates or currencies, or the
derivatives themselves, behave in a way not anticipated by the fund, especially in abnormal market conditions. Using derivatives also can have a leveraging effect (which may increase investment losses) and increase fund volatility, which is the
degree to which the funds share price may fluctuate within a short time period. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. The other parties to certain derivatives transactions
present the same types of credit risk as issuers of fixed income securities. Derivatives also tend to involve greater liquidity risk and they may be difficult to value. The fund may be unable to terminate or sell its derivative positions. In fact,
many over-the-counter derivatives will not have liquidity beyond the counterparty to the instrument. The funds use of derivatives may also increase the amount of taxes payable by shareholders. The U.S. government is in the process of adopting
and implementing regulations governing derivatives markets, including mandatory clearing of certain derivatives, margin, and reporting requirements. The ultimate impact of the regulations remains unclear. Additional regulation of derivatives may
make them more costly, may limit their availability, may disrupt markets or may otherwise adversely affect their value or performance. The fund may be exposed to additional risks as a result of the additional regulations. The extent and impact of
the additional regulations are not yet fully known and may not be for some time.
Investments by the fund in structured securities, a type of derivative,
raise certain tax, legal, regulatory and accounting issues that may not be presented by direct investments in securities. These issues could be resolved in a manner that could hurt the performance of the fund.
Swap agreements tend to shift the funds investment exposure from one type of investment to another. For example, the fund may enter into interest rate swaps,
which involve the exchange of interest payments by the fund with another party, such as an exchange of floating rate payments for fixed interest rate payments with respect to a notional amount of principal. If an interest rate swap intended to be
used as a hedge negates a favorable interest rate movement, the investment performance of the fund would be less than what it would have been if the fund had not entered into the interest rate swap.
Credit default swap contracts involve heightened risks and may result in losses to a fund. Credit default swaps may be illiquid and difficult to value, and they
increase credit risk since a fund has exposure to both the issuer whose credit is the subject of the swap and the counterparty to the swap. The absence of a central exchange or market for swap transactions may lead, in some instances, to
difficulties in trading and valuation, especially in the event of market disruptions. Recent legislation requires certain swaps to be executed through a centralized exchange or regulated facility and be cleared through a regulated clearinghouse.
Although this clearing mechanism is generally expected to reduce counterparty credit risk, it may disrupt or limit the swap market and may not result in swaps being easier to trade or value. As swaps become more standardized, the fund may not be
able to enter into swaps that meet its investment needs. The fund also may not be able to find a clearinghouse willing to accept a swap for clearing. In a cleared swap, a central clearing organization will be the counterparty to the transaction. The
fund will assume the risk that the clearinghouse may be unable to perform its obligations.
The fund will be required to maintain its positions with a
clearing organization through one or more clearing brokers. The clearing organization will require the fund to post margin and the broker may require the fund to post additional margin to secure the funds obligations. The amount of margin
required may change from time to time. In addition, cleared transactions may be more expensive to maintain than over-the-counter transactions and may require the fund to deposit larger amounts of margin. The fund may not be able to recover margin
amounts if the broker has financial difficulties. Also, the broker may require the fund to terminate a derivatives position under certain circumstances. This may cause the fund to lose money.
Risks associated with the use of derivatives are magnified to the extent that an increased portion of the funds assets are committed to derivatives in general or are invested in just one or a few types of
derivatives.
Leveraging risk.
The value
of your investment may be more volatile if the fund borrows or uses derivatives or other investments that have a leveraging effect on the funds portfolio. Other risks also will be compounded. This is because leverage generally magnifies the
effect of a change in the value of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations. The use of
leverage is considered to be a speculative investment practice and may result in the loss of a substantial amount, and possibly all, of the funds assets.
Liquidity risk.
Liquidity risk exists when particular investments are impossible or 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. Markets may become illiquid when, for instance, there
are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make a market for certain securities. 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 redemption requests or for other cash needs, the fund may suffer a loss. In addition, when there is illiquidity in the market for certain investments, 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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Western Asset Short Duration Municipal Income Fund
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13
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More on the funds investment strategies, investments and risks contd
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 fee limitation 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.
Tax risk.
There is no guarantee that the income on
the funds municipal securities will remain exempt from regular federal income tax. Unfavorable legislation, adverse interpretations by federal or state authorities, litigation or noncompliant conduct by the issuer of a municipal security could
affect the tax-exempt status of municipal securities.
Prepayment or call
risk.
Many fixed income securities give the issuer the option to repay or call the security prior to its maturity date. Issuers often exercise this right when interest rates fall. Accordingly, if the
fund holds a fixed income security subject to prepayment or call risk, it will not benefit fully from the increase in value that other fixed income securities generally experience when interest rates fall. Upon prepayment of the security, the fund
would also be forced to reinvest the proceeds at then current yields, which would be lower than the yield of the security that was paid off. In addition, if the fund purchases a fixed income security at a premium (at a price that exceeds its stated
par or principal value), the fund may lose the amount of the premium paid in the event of prepayment.
Extension risk.
When interest rates rise, repayments of fixed income securities, particularly asset- and mortgage-backed securities, may occur more
slowly than anticipated, extending the effective duration of these fixed income securities at below market interest rates and causing their market prices to decline more than they would have declined due to the rise in interest rates alone. This may
cause the funds share price to be more volatile.
Risk of investing in fewer
issuers.
To the extent the fund invests its assets in a small number of issuers, the fund will be more susceptible to negative events affecting those issuers.
Risks relating to investments in municipal
securities.
Issuers of municipal securities tend to derive a significant portion of their revenue from taxes, particularly property and income taxes, and decreases in personal income levels and
property values and other unfavorable economic factors, such as a general economic recession, adversely affect municipal securities. Municipal issuers may also be adversely affected by rising health care costs, increasing unfunded pension
liabilities and by the phasing out of federal programs providing financial support. Where municipal securities are issued to finance particular projects, such as those relating to education, health care, transportation, and utilities, issuers often
depend on revenues from those projects to make principal and interest payments. Adverse conditions and developments in those sectors can result in lower revenues to issuers of municipal securities and can also have an adverse effect on the broader
municipal securities market.
There may be less public information available on municipal issuers or projects than other issuers, and valuing
municipal securities may be more difficult. In addition, the secondary market for municipal securities is less well developed and liquid than other markets, and dealers may be less willing to offer and sell municipal securities in times of market
turbulence. Changes in the financial condition of one or more individual municipal issuers (or one or more insurers of municipal issuers), or one or more defaults by municipal issuers or insurers, can adversely affect liquidity and valuations in the
overall market for municipal securities. The value of municipal securities can also be adversely affected by regulatory and political developments affecting the ability of municipal issuers to pay interest or repay principal, actual or anticipated
tax law changes or other legislative actions, and by uncertainties and public perceptions concerning these and other factors. In recent periods an increasing number of municipal issuers have defaulted on obligations, been downgraded or commenced
insolvency proceedings. Financial difficulties of municipal issuers may continue or get worse.
Valuation risk.
Many factors may influence the price at which the fund could sell any particular portfolio investment. The sales price may well
differhigher or lowerfrom the funds last valuation, and such differences could be significant, particularly for illiquid securities and securities that trade in relatively thin markets and/or markets that experience extreme
volatility. If market conditions make it difficult to value some investments, the fund may value these investments using more subjective methods, such as fair value methodologies. Investors who purchase or redeem fund shares on days when the fund is
holding fair-valued securities may receive fewer or more shares, or lower or higher redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different valuation methodology. The value of foreign
securities, certain fixed income securities and currencies, as applicable, may be materially affected by events after the close of the markets on which they are traded, but before the fund determines its net asset value.
Cash management and defensive investing risk.
The
value of the investments held by the fund for cash management or defensive investing purposes can fluctuate. Like other fixed income securities, they are subject to risk, including market, interest rate and credit risk. If the fund holds cash
uninvested, it will be subject to the credit risk of the depository institution holding the cash. If the fund holds cash uninvested, the fund will not earn income on the cash and the funds yield will go down. If a significant amount of the
funds assets are used for cash management or defensive investing purposes, it may not achieve its investment objective.
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14
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Western Asset Short Duration Municipal Income Fund
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Portfolio selection risk.
The value of your investment may decrease if the subadvisers judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest
rates is incorrect.
Not a money market fund.
The fund is not a money market fund and is not subject to the strict rules that govern the quality, maturity, liquidity and other features of securities that money market funds may purchase. Under normal
conditions, the funds investment may be more susceptible than a money market fund to interest rate risk, valuation risk, credit risk and other risks relevant to the funds investments. The fund does not attempt to maintain a stable net
asset value. Therefore, the funds net asset value per share will fluctuate.
Please note that there are other factors that could adversely affect
your investment and that could prevent the fund from achieving its investment objective. More information about risks appears in the SAI. Before investing, you should carefully consider the risks that you will assume.
Portfolio holdings
A description of the
funds policies and procedures with respect to the disclosure of its portfolio holdings is available in the SAI. The fund posts its complete portfolio holdings at http://www.leggmason.com/individualinvestors/prospectuses (click on the name of
the fund) on a quarterly basis. The fund intends to post its complete portfolio holdings 14 calendar days following the quarter-end. The fund intends to post partial information concerning the funds portfolio holdings (such as top 10 holdings
or sector breakdowns, for example) on the Legg Mason funds website on a monthly basis. The fund intends to post this partial information 10 business days following each month-end. Such information will remain available until the next
months or quarters holdings are posted.
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Western Asset Short Duration Municipal Income Fund
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15
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More on fu
nd management
Legg Mason Partners Fund Advisor, LLC (LMPFA) is the funds
investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the fund. LMPFA was
formed in April 2006 as a result of an internal reorganization to consolidate advisory services after Legg Mason, Inc. (Legg Mason) acquired substantially all of Citigroups asset management business in December 2005. As of December
31, 2013, LMPFAs total assets under management were approximately $225.4 billion.
Western Asset Management Company (Western Asset)
provides the day-to-day portfolio management of the fund as subadviser. Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101 and 620 Eighth Avenue, New York, New York 10018. Western Asset acts as
investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2013, the total assets under management of Western Asset and its supervised affiliates were approximately $451.6
billion.
LMPFA pays the subadviser a portion of the management fee that it receives from the fund. The fund does not pay any additional advisory or
other fees for advisory services provided by Western Asset.
LMPFA and Western Asset 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 December 31, 2013, Legg Masons asset management operations, including Western Asset and its supervised
affiliates, had aggregate assets under management of approximately $679.5 billion.
Investment professionals
The fund is managed by a broad team of investment professionals. The particular mix of investment professionals involved in developing and implementing investment
strategies for the fund depends on the asset classes in which the fund invests. Senior members of the portfolio management team are responsible for the development of investment strategy and oversight for the fund and coordination of other relevant
investment team members. They work together with the broader Western Asset investment management team on portfolio structure, duration weighting and term structure decisions.
The individuals responsible for day-to-day portfolio management, development of investment strategy, oversight and coordination of the fund are Stephen A. Walsh, Robert E. Amodeo, David T. Fare and Dennis J.
McNamara. Mr. Fare has been a part of the portfolio management team for the fund since the funds inception. Messrs. Walsh and Amodeo have been a part of the portfolio management team for the fund since 2007. Mr. McNamara has been a part
of the portfolio management team for the fund since 2012. Messrs. Fare, Walsh, Amodeo and McNamara have been employed by Western Asset as investment professionals for more than five years. It is anticipated that Mr. Walsh will step down as a
member of the funds portfolio management team effective on or about March 31, 2014 and that S. Kenneth Leech will join the funds portfolio management team at that time. Mr. Leech has been employed by Western Asset as an
investment professional for more than 20 years.
The SAI provides information about the investment professionals compensation, other accounts
managed by the investment professionals and any fund shares held by the investment professionals.
Management fee
The fund pays a management fee at an annual rate of 0.45% of its average daily net assets.
For the fiscal year ended October 31, 2013, the fund paid LMPFA an effective management fee of 0.45% of the funds average daily net assets for management services.
A discussion regarding the basis for the Boards approval of the funds management agreement and subadvisory agreement is available in the funds
Semi-Annual Report for the period ended April 30, 2013.
Expense limitation
The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and
expenses) so that total annual operating expenses are not expected to exceed 0.75% for Class A shares, 1.10% for Class C shares, 0.85% for Class FI shares and 0.60% for Class I shares, subject to recapture as described below. These arrangements are
expected to continue until December 31, 2015, may be terminated prior to that date by agreement of the manager and the Board, and may be terminated at any time after that date by the manager. These arrangements, however, may be modified by the
manager to decrease total annual operating expenses at any time. The manager is also permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class total annual operating expenses have fallen to a
level below the limits described above. In no case will the manager recapture any amount that would result, on any particular business day of the fund, in the class total annual operating expenses exceeding the applicable limits described
above or any other lower limit then in effect.
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Western Asset Short Duration Municipal Income Fund
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Distribution
LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, serves as the funds sole and exclusive distributor.
The fund has adopted a Rule 12b-1 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 to
0.15% for Class A shares; up to 0.50% for Class C shares; and up to 0.25% for Class FI 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 are not subject to distribution and/or service fees under the plan.
Additional payments
In addition to distribution and service fees and sales charges, the distributor, the manager and/or their affiliates make payments for distribution, shareholder
servicing, marketing and promotional activities and related expenses out of their 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 between the distributor, the manager and/or their affiliates, and the recipients of these payments.
Revenue sharing payments 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.
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Western Asset Short Duration Municipal Income Fund
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17
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Choosing a
class of shares to buy
Individual investors can generally invest in Class A and Class C shares. Individual
investors who invest directly with the fund and who meet the $1,000,000 minimum initial investment requirement may purchase Class I shares. In addition, participants in Eligible Investment Programs may exchange Class A and Class C shares for
Class I shares of the fund under certain limited circumstances.
Institutional Investors and Clients of Eligible Financial Intermediaries should refer to
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:
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How much you plan to invest
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How long you expect to own the shares
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The expenses paid by each class detailed in the fee table and example at the front of this Prospectus
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Whether you qualify for any reduction or waiver of sales charges
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Availability of share classes
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When choosing
between Class A and Class C shares, keep in mind that, generally speaking, the larger the size of your investment and the longer your investment horizon, the more likely it will be that Class C shares will 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 and service fees you would have paid for larger purchases of Class A shares. If you are eligible to
purchase Class I shares, you should be aware that Class I shares are not subject to a front-end sales charge and generally have lower annual expenses than Class A or Class C shares.
Each class of 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:
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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)
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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:
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The front-end sales charges that apply to the purchase of Class A shares
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The contingent deferred sales charges that apply to the redemption of certain Class A shares
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Who qualifies for lower sales charges on Class A shares
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Who qualifies for a sales load waiver
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To
visit the website, go to http://www.leggmason.com/individualinvestors/products, and click on the name of the fund in the dropdown menu.
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18
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Western Asset Short Duration Municipal Income Fund
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Comparing
the funds classes
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 shares. You may be required to provide appropriate documentation confirming your eligibility to invest in this share class. Your Service Agent may receive different compensation depending upon which class you choose.
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Key features
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Initial sales charge
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Contingent deferred sales
charge
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Annual distribution
and/or service fees
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Exchange
privilege
1
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Class A
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Initial sales charge
You may qualify for reduction or
waiver of initial sales charge
Generally lower annual expenses than Class C
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Up to 2.25%; reduced or waived for large purchases and certain investors. No charge for purchases of $500,000 or more
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0.50% on purchases of $500,000 or more if you redeem within 18 months of purchase; waived for certain investors
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0.15% of average daily net assets
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Class A shares of funds sold by the distributor
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Class C
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No initial or contingent deferred sales charge
Generally higher annual expenses than Class A
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None
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None
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0.50% of average daily net assets
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Class C shares of funds sold by the distributor
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Class FI
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No initial or contingent deferred sales charge
Only offered to Clients of Eligible Financial Intermediaries
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None
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None
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0.25% of average daily net assets
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Class FI shares of funds sold by the distributor
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Class I
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No initial or contingent deferred sales charge
Only offered to Institutional Investors, Clients of Eligible Financial Intermediaries and other eligible investors
Generally lower annual expenses than the other classes
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None
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None
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None
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Class I shares of funds sold by the distributor
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1
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Ask your Service Agent about the funds available for exchange.
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Western Asset Short Duration Municipal Income Fund
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19
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Sales char
ges
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 0.15% of the average daily net assets represented by the Class A shares serviced by them.
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Amount of investment
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Sales charge
as a %
of
offering price
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Sales charge
as a % of net
amount
invested
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Broker/dealer
commission as
a % of
offering
price
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Less than $100,000
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2.25
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2.30
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2.00
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$100,000 but less than $250,000
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1.50
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1.52
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1.25
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$250,000 but less than $500,000
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1.25
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1.27
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1.00
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$500,000 or
more
1
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-0-
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-0-
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Up to 0.50
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1
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The distributor may pay a commission of up to 0.50% to a Service Agent for purchase amounts of $500,000 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 0.15% 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.
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Investments of $500,000 or more
You do not pay an initial sales charge when you buy $500,000 or more of Class A shares. However, if you redeem these Class A shares within 18 months of purchase,
you will pay a contingent deferred sales charge of 0.50%.
Qualifying for a reduced Class A sales charge
There are several ways you can combine multiple purchases of shares of funds sold by the distributor to take advantage of the breakpoints in the Class A 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 or the fund 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.
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Accumulation Privilege
allows you to combine the current value of shares of the fund with other shares of funds sold by the distributor that are
owned by:
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your spouse and children under the age of 21
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with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charges.
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.
Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be combined. Shares of money market funds sold by the distributor that were not acquired by
exchange from other funds offered with a sales charge may not be combined. Please contact your Service Agent or the fund for additional information.
Certain trustees and other fiduciaries may be entitled to combine accounts in determining their sales charge.
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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:
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your spouse and children under the age of 21
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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 the current value of
any eligible holdings toward your asset goal amount.
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Western Asset Short Duration Municipal Income Fund
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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 asset goal amount.
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 goal amount. 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:
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Employees of Service Agents
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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
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Directors and officers of any Legg Mason-sponsored fund
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Employees of Legg Mason and its subsidiaries
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If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent or the fund at 1-877-721-1926 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 Mason funds website, http://www.leggmason.com/individualinvestors/products, and click on the name of the
fund in the dropdown menu.
Class C shares
You buy Class C shares at net asset value with no initial sales charge and no contingent deferred sales charge. However, if you exchange Class C shares that were not subject to a contingent deferred sales charge
when initially purchased for Class C shares of a fund that imposes a contingent deferred sales charge, your contingent deferred sales charge will be measured from the date of your exchange.
Service Agents receive an annual distribution and/or service fee of up to 0.50% of the average daily net assets represented by the Class C shares serviced by them.
Class FI shares
You buy Class FI shares at
net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.
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 FI shares serviced by them.
Class I shares
You buy Class I shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Class I shares are not
subject to any distribution and/or service fees.
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Western Asset Short Duration Municipal Income Fund
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21
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More abo
ut 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:
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When you exchange shares for shares of another fund sold by the distributor
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On shares representing reinvested distributions and dividends
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On shares no longer subject to the contingent deferred sales charge
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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:
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On payments made through certain systematic withdrawal plans
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For involuntary redemptions of small account balances
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For 12 months following the death or disability of a shareholder
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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/products, and click on the name of the fund in the dropdown menu.
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22
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Western Asset Short Duration Municipal Income Fund
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Institutional Inve
stors eligible investors
Clients of Eligible Financial Intermediaries
Clients of Eligible Financial Intermediaries are investors who invest in the fund through financial intermediaries that (i) charge such investors an
ongoing fee for advisory, investment, consulting or similar services, or (ii) have entered into an agreement with the distributor to offer Class A, Class FI or Class I shares through a no-load network or platform (Eligible Investment
Programs). Such investors may include pension and profit sharing plans, other employee benefit trusts, endowments, foundations and corporations. Eligible Investment Programs may also include college savings vehicles such as Section 529 plans
and direct retail investment platforms through mutual fund supermarkets, where the sponsor links its clients account to a master account in the sponsors name. The financial intermediary may impose separate investment
minimums.
Clients of Eligible Financial Intermediaries may generally invest in Class A, Class FI and Class I shares. Class I shares are available for
exchange from Class A or Class C shares of the fund held by participants in Eligible Investment Programs under certain limited circumstances.
Institutional Investors
Institutional Investors may include corporations, banks,
trust companies, insurance companies, investment companies, foundations, endowments, defined benefit plans and other similar entities. The distributor or the financial intermediary may impose additional eligibility requirements or criteria to
determine if an investor, including the types of investors listed above, qualifies as an Institutional Investor.
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 and Class C shares, which have different investment minimums, fees and expenses.
Class FI shares
Class FI shares are offered
only to Clients of Eligible Financial Intermediaries.
Class I shares
Class I shares are offered only to Institutional Investors and individual investors (investing directly with the fund) who meet the $1,000,000 minimum initial
investment requirement, Clients of Eligible Financial Intermediaries and other investors authorized by LMIS. Certain waivers of these requirements for individuals associated with the fund, Legg Mason or its affiliates are discussed in the SAI.
Other considerations
Financial intermediaries may choose to impose qualification requirements 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 fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any financial intermediary to impose such
differing requirements. Please consult with your 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.
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Western Asset Short Duration Municipal Income Fund
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23
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Buying s
hares
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Generally
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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 the fund at 1-877-721-1926 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 the fund between 8:00 a.m. and 5:30 p.m. (Eastern time).
|
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, you may be charged a fee
For more information, please contact your Service Agent or the fund or consult the SAI.
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24
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Western Asset Short Duration Municipal Income Fund
|
Exchangi
ng shares
|
|
|
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. For investors who qualify as Clients of Eligible Financial Intermediaries and participate in Eligible Investment Programs
made available through their financial intermediaries (such as investors in fee-based advisory or mutual fund wrap programs), an exchange may be made from Class A or Class C shares to Class I shares of the same fund under certain limited
circumstances. Please refer to the section of this prospectus titled Institutional Investors eligible investors or contact your financial intermediary for more information.
An exchange of shares of one fund for shares of another fund is considered a sale and generally
results in a capital gain or loss for federal income tax purposes. An exchange of shares of one class directly for shares of another class of the same fund normally should not be taxable for federal income tax purposes. You should talk to your tax
advisor before making an exchange.
The exchange privilege is not intended as a
vehicle for short-term trading. The fund may suspend or terminate your exchange privilege if you engage in a pattern of excessive exchanges.
|
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, contact the fund at 1-877-721-1926 to learn which funds are available to you for exchanges
Exchanges may be made only between accounts that have identical registrations
Not all funds offer all classes
Some funds are offered only in a limited number of states. Your Service Agent or the fund will provide information about the funds offered in your state
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. You may be charged an initial or contingent deferred sales charge if the shares being exchanged were not subject to a sales charge
Except as noted above, 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 be subject to the contingent deferred sales charge of the fund that you originally purchased
You will generally be required to meet the minimum investment requirement for the class of shares of the fund or share class 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 or
share class into which you are exchanging shares
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 the fund at 1-877-721-1926 between 8:00 a.m. and 5:30 p.m. (Eastern
time) for information. Exchanges are priced at the net asset value next determined.
|
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
|
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 or the fund or
consult the SAI.
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Western Asset Short Duration Municipal Income Fund
|
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25
|
Redeeming
shares
|
|
|
Generally
|
|
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 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 New York Stock Exchange (NYSE) is closed (other
than on weekends or holidays) or trading is restricted, if 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 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, and you may receive
less for them than the price at which they were valued for purposes of the redemption.
|
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
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 the fund at 1-877-721-1926 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
|
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 and each automatic redemption must be at least $50.
The following conditions apply:
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 or the fund or consult the SAI.
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26
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|
Western Asset Short Duration Municipal Income Fund
|
Other thin
gs 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:
|
|
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)
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Dollar amount or number of shares being bought, exchanged or redeemed
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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 non-U.S. addresses to establish accounts. U.S. citizens with APO/FPO addresses or addresses in the
United States (including its territories) and resident aliens with U.S. addresses are permitted to establish accounts 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 under Exchanging shares and Redeeming
shares.
The transfer agent or the fund 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
|
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|
Waive or change minimum initial and additional investment amounts
|
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Reject any purchase or exchange order
|
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Change, revoke or suspend the exchange privilege
|
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Suspend telephone transactions
|
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Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted or as otherwise permitted by the SEC
|
|
|
Close your account after a period of inactivity, as determined by state law, and transfer your shares to the appropriate state
|
For your protection, the fund or your Service Agent may request additional information in connection with large redemptions, unusual activity in your account, or
otherwise to ensure your redemption request is in good order. Please contact your Service Agent or the fund for more information.
Signature guarantees
To be in good order,
your redemption request must include a signature guarantee if you:
|
|
Are redeeming shares and sending the proceeds to an address or bank not currently on file
|
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|
Changed your account registration or your address within 30 days
|
|
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Want the check paid to someone other than the account owner(s)
|
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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.
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|
Western Asset Short Duration Municipal Income Fund
|
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27
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Other things to know about transactions contd
Small account fees/Mandatory redemptions
Small accounts may be subject to a small account fee or to mandatory redemption, as described below, depending on whether the account is held directly with the fund
or through a Service Agent.
Direct accounts
Direct accounts generally include accounts held in the name of the individual investor on the funds books and records. To offset the relatively higher impact on fund expenses of servicing smaller direct
accounts, if your shares are held in a direct account and the value of your account is below $1,000 (if applicable, $250 for retirement plans that are not employer-sponsored) for any reason (including declines in net asset value), the fund may
charge you a fee of $3.75 per account that is determined and assessed quarterly on the last business day of the quarter (with an annual maximum of $15.00 per account). The small account fee will be charged by redeeming shares in your account. If the
value of your account is $3.75 or less, the amount in the account may be exhausted to pay the small account fee. The small account fee will not be assessed on systematic investment plans until the end of the first quarter after the account has been
established for 15 months. Payment of the small account fee through a redemption of fund shares may result in tax consequences to you (see Taxes for more information).
The small account fee will not be charged on, if applicable: (i) Retirement Plans (but will be charged on other plans that are not employer-sponsored 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); (ii) Legg Mason funds that have been closed to subsequent purchases for all classes; (iii) accounts that do
not have a valid address as evidenced by mail being returned to the fund or its agents; and (iv) Class FI and Class I shares.
If your share class
is no longer offered, you may not be able to bring your account up to the minimum investment amount (although you may exchange into existing accounts of other Legg Mason funds in which you hold the same share class, to the extent otherwise permitted
by those funds and subject to any applicable sales charges).
Some shareholders who hold accounts in Classes A and B of the same fund may have those
accounts aggregated for the purposes of these calculations. Please contact the fund or your Service Agent for more information.
Non-direct accounts
Non-direct
accounts include omnibus accounts and accounts jointly maintained by the Service Agent and the fund. Such accounts are not subject to the small account fee that may be charged to direct accounts.
The fund reserves the right to ask you to bring your non-direct account up to a minimum investment amount 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 share class is no longer offered, you
may not be able to bring your account up to the minimum investment amount. Some shareholders who hold accounts in multiple classes of the same fund may have those accounts aggregated for the purposes of these calculations. 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.
Please contact
your Service Agent for more information. Any redemption of fund shares may result in tax consequences to you (see Taxes for more information).
All accounts
The fund may, with prior notice, change the minimum size of accounts subject to
mandatory redemption, which may vary by class, implement fees for small non-direct accounts or change the amount of the fee for small direct 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 or the fund or consult the SAI.
Frequent trading of fund shares
Frequent
purchases and redemptions of fund shares (also known as short-term trading or frequent trading) may, in many cases, interfere with the efficient management of the fund, increase fund transaction costs, and have a negative effect on the funds
long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the subadviser may need to allocate more assets to cash or other short-term investments or sell securities, rather than maintaining full investment
in securities selected to achieve the funds investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage commissions and market spreads, can detract from the
funds performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an
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28
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|
Western Asset Short Duration Municipal Income Fund
|
effort to take advantage of certain pricing discrepancies, when, for example, it is believed that the funds share price, which is determined at the close of the NYSE on each trading day,
does not accurately reflect the value of the funds investments. Funds investing in foreign securities have been particularly susceptible to this form of arbitrage, but other funds could also be affected.
Some investors are seeking higher yields for their short term investments by investing in shorter term fixed income funds. The fund is often used for short term
investments and permits short term trading of fund shares. This short term trading may result in additional costs to the fund.
The fund does not
anticipate that frequent purchases and redemptions, under normal circumstances, will have significant adverse consequences to the fund or its shareholders. The funds manager and subadviser believe that, because the funds portfolio will
normally include a significant percentage of short-term investments, it can accommodate more frequent purchases and redemptions than longer-term fixed income funds. On this basis, the Board has determined that it is appropriate for the fund not to
have a policy to discourage frequent trading of fund shares. The fund reserves the right to implement frequent trading policies or other restrictions in the future. The fund also reserves the right to refuse any client or reject any purchase order
for shares (including exchanges) for any reason.
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 be entitled to vote your shares and may seek voting instructions from you. If you do not give your Service Agent voting instructions, your Service Agent, under certain circumstances, may nonetheless be entitled to vote your
shares.
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Western Asset Short Duration Municipal Income Fund
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29
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Dividends
, other distributions and taxes
Dividends and other distributions
The fund declares dividends from any net investment income daily and pays them monthly. Shares will begin to earn dividends on the settlement date of purchase. The
fund generally distributes capital gain, if any, once a year, typically in December. The fund may pay additional distributions and dividends in order to avoid a federal tax.
Unless you elect to receive dividends and/or other distributions in cash, your dividends and capital gain distributions will be automatically reinvested in shares of the same class you hold, at the net asset value
determined on the reinvestment date. You do not pay a sales charge on reinvested distributions or dividends.
If you hold Class A or Class C shares
directly with the fund, you may instruct the fund to have your dividends and/or distributions invested in the corresponding class of shares of another fund sold by the distributor, subject to the following conditions:
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You have a minimum account balance of $10,000 in the fund and
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|
The other fund is available for sale in your state.
|
To change those instructions, you must notify your Service Agent or the fund at least three days before the next distribution is to be paid.
Please contact your Service Agent or the fund to discuss what options are available to you for receiving your dividends and other distributions.
The Board reserves the right to revise the dividend policy or postpone the payment of dividends if warranted in the Boards judgment due to unusual circumstances.
Taxes
The following discussion is very
general, applies only to shareholders who are U.S. persons, and does not address shareholders subject to special rules, such as those who hold fund shares through an IRA, 401(k) plan or other tax-advantaged account. Except as specifically noted, the
discussion is limited to federal income tax matters, and does not address state, local, foreign or non-income taxes. Further information regarding taxes, including certain federal income tax considerations relevant to non-U.S. persons, is included
in the SAI. Because each shareholders circumstances are different and special tax rules may apply, you should consult your tax adviser about federal, state, local and/or foreign tax considerations that may be relevant to your particular
situation.
You may receive three different types of distributions from the fund: exempt-interest dividends, ordinary dividends and capital gain
dividends. Most distributions are expected to be exempt-interest dividends, which are exempt from federal income tax but may be subject to state or local income taxes. In general, redeeming shares, exchanging shares and receiving distributions other
than exempt-interest dividends (whether in cash, additional shares or shares of another fund) are all taxable events. An exchange between classes of shares of the same fund normally is not taxable for federal income tax purposes, whether or not the
shares are held in a taxable account.
The following table summarizes the tax status of certain transactions related to the fund.
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Transaction
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Federal income tax status
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Redemption or exchange of shares
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Usually capital gain or loss; long-term only if shares are owned more than one year
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Exempt-interest dividends
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Excludable from gross income
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Dividends of investment income and distributions of net short-term capital gain
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Ordinary income
|
Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)
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Long-term capital gain
|
Distributions attributable to short-term capital gains are taxable to you as ordinary income. The fund does not expect any
distributions to be treated as qualified dividend income, which for noncorporate shareholders may be taxable at reduced rates. Some exempt-interest dividends may be subject to the federal alternative minimum tax. Distributions of net capital gain
reported by the fund as capital gain dividends are taxable to you as long-term capital gain regardless of how long you have owned your shares. Noncorporate shareholders ordinarily pay tax at reduced rates on long-term capital gain.
You may want to avoid buying shares when the fund is about to declare a capital gain distribution because it will be taxable to you even though it may economically
represent a return of a portion of your investment.
A Medicare contribution tax is imposed at the rate of 3.8% on net investment income of U.S.
individuals with income exceeding specified thresholds, and on undistributed net investment income of certain estates and trusts. Net investment income generally includes for this purpose dividends (other than exempt-interest dividends) and capital
gain distributions paid by the fund and gain on the redemption or exchange of fund shares.
A dividend declared by the fund in October, November or
December and paid during January of the following year will, in certain circumstances, be treated as paid in December for tax purposes.
After the end of
each year, your Service Agent or the fund will provide you with information about the distributions and dividends you received, including exempt-interest dividends, and any redemptions of shares during the previous year. Because each
shareholders circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.
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30
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Western Asset Short Duration Municipal Income Fund
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Share pri
ce
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 certain 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 Agent 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 the manager, which generally uses independent third party pricing services approved by the funds Board. Under the procedures,
assets are valued as follows:
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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 broker/dealer quotations or a variety of fair valuation 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.
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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 by
the manager 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 the manager 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.
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The valuations of securities traded on foreign markets and certain fixed income securities will generally be based on prices determined as of the earlier closing
time of the markets on which they primarily trade, unless a significant event has occurred. 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 4:00
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.
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If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be
unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager 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. Fair value of a security is the amount, as determined by the manager in good faith, that the fund might reasonably expect to receive upon a current sale of the security. The fund may also use fair value procedures if the manager 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.
|
Many factors may influence the price at which the fund could sell any particular portfolio investment. The sales price may well differhigher or lowerfrom 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.
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Western Asset Short Duration Municipal Income Fund
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31
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Financial
highlights
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 shares because no Class FI shares were outstanding for the periods shown. The returns for Class FI shares will differ from those of the
other classes to the extent 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 financial statements, which have been audited by KPMG LLP, independent registered public accounting firm, whose report, along with the
funds financial statements, is included in the annual report (available upon request).
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For a share of each class of beneficial interest outstanding throughout each year ended October
31:
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Class A
Shares
1
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2013
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2012
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2011
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2010
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2009
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Net asset value, beginning of year
|
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$5.20
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$5.16
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$5.16
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$5.08
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$4.90
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Income (loss) from operations:
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Net investment income
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0.06
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0.08
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0.10
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0.09
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0.11
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Net realized and unrealized gain (loss)
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(0.05)
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0.04
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(0.00)
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2
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0.08
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0.19
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Total income from operations
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0.01
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0.12
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0.10
|
|
|
|
0.17
|
|
|
|
0.30
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.06)
|
|
|
|
(0.08)
|
|
|
|
(0.10)
|
|
|
|
(0.09)
|
|
|
|
(0.12)
|
|
Total distributions
|
|
|
(0.06)
|
|
|
|
(0.08)
|
|
|
|
(0.10)
|
|
|
|
(0.09)
|
|
|
|
(0.12)
|
|
Net asset value, end of year
|
|
|
$5.15
|
|
|
|
$5.20
|
|
|
|
$5.16
|
|
|
|
$5.16
|
|
|
|
$5.08
|
|
Total
return
3
|
|
|
0.29
|
%
|
|
|
2.35
|
%
|
|
|
1.90
|
%
|
|
|
3.31
|
%
|
|
|
6.21
|
%
|
Net assets, end of year (000s)
|
|
|
$533,298
|
|
|
|
$508,851
|
|
|
|
$413,831
|
|
|
|
$352,911
|
|
|
|
$241,364
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.66
|
%
|
|
|
0.65
|
%
|
|
|
0.65
|
%
|
|
|
0.66
|
%
|
|
|
0.66
|
%
|
Net
expenses
4
,5
|
|
|
0.66
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
0.66
|
|
|
|
0.66
|
|
Net investment income
|
|
|
1.25
|
|
|
|
1.55
|
|
|
|
1.89
|
|
|
|
1.69
|
|
|
|
2.16
|
|
Portfolio turnover rate
|
|
|
28
|
%
|
|
|
10
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
|
|
12
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
Amount represents less than $0.005 per share.
|
3
|
Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of
compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.
|
4
|
As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and
expenses, to average net assets of Class A shares did not exceed 0.75%. This expense limitation arrangement cannot be terminated prior to December 31, 2015 without the Board of Trustees consent.
|
5
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
|
|
32
|
|
Western Asset Short Duration Municipal Income Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended October 31:
|
|
Class C Shares
1
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net asset value, beginning of year
|
|
|
$5.20
|
|
|
|
$5.16
|
|
|
|
$5.16
|
|
|
|
$5.08
|
|
|
|
$4.90
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
0.08
|
|
|
|
0.07
|
|
|
|
0.08
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.05)
|
|
|
|
0.04
|
|
|
|
(0.00)
|
2
|
|
|
0.08
|
|
|
|
0.20
|
|
Total income from operations
|
|
|
0.00
|
2
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
0.15
|
|
|
|
0.28
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.05)
|
|
|
|
(0.06)
|
|
|
|
(0.08)
|
|
|
|
(0.07)
|
|
|
|
(0.10)
|
|
Total distributions
|
|
|
(0.05)
|
|
|
|
(0.06)
|
|
|
|
(0.08)
|
|
|
|
(0.07)
|
|
|
|
(0.10)
|
|
Net asset value, end of year
|
|
|
$5.15
|
|
|
|
$5.20
|
|
|
|
$5.16
|
|
|
|
$5.16
|
|
|
|
$5.08
|
|
Total
return
3
|
|
|
(0.07)
|
%
|
|
|
1.99
|
%
|
|
|
1.53
|
%
|
|
|
2.94
|
%
|
|
|
5.81
|
%
|
Net assets, end of year (000s)
|
|
|
$1,410,227
|
|
|
|
$1,456,232
|
|
|
|
$1,055,424
|
|
|
|
$1,173,874
|
|
|
|
$785,921
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.02
|
%
|
|
|
1.01
|
%
|
|
|
1.02
|
%
|
|
|
1.01
|
%
|
|
|
0.99
|
%
|
Net
expenses
4
,5
|
|
|
1.02
|
|
|
|
1.01
|
|
|
|
1.02
|
|
|
|
1.01
|
|
|
|
0.99
|
|
Net investment income
|
|
|
0.89
|
|
|
|
1.18
|
|
|
|
1.52
|
|
|
|
1.33
|
|
|
|
1.60
|
|
Portfolio turnover rate
|
|
|
28
|
%
|
|
|
10
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
|
|
12
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
Amount represents less than $0.005 per share.
|
3
|
Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating
balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.
|
4
|
As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and
expenses, to average net assets of Class C shares did not exceed 1.10%. This expense limitation arrangement cannot be terminated prior to December 31, 2015 without the Board of Trustees consent.
|
5
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended October 31:
|
|
Class I Shares
1
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net asset value, beginning of year
|
|
|
$5.20
|
|
|
|
$5.16
|
|
|
|
$5.16
|
|
|
|
$5.08
|
|
|
|
$4.91
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.07
|
|
|
|
0.09
|
|
|
|
0.10
|
|
|
|
0.09
|
|
|
|
0.11
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.05)
|
|
|
|
0.04
|
|
|
|
(0.00)
|
2
|
|
|
0.08
|
|
|
|
0.19
|
|
Total income from operations
|
|
|
0.02
|
|
|
|
0.13
|
|
|
|
0.10
|
|
|
|
0.17
|
|
|
|
0.30
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.07)
|
|
|
|
(0.09)
|
|
|
|
(0.10)
|
|
|
|
(0.09)
|
|
|
|
(0.13)
|
|
Total distributions
|
|
|
(0.07)
|
|
|
|
(0.09)
|
|
|
|
(0.10)
|
|
|
|
(0.09)
|
|
|
|
(0.13)
|
|
Net asset value, end of year
|
|
|
$5.15
|
|
|
|
$5.20
|
|
|
|
$5.16
|
|
|
|
$5.16
|
|
|
|
$5.08
|
|
Total
return
3
|
|
|
0.39
|
%
|
|
|
2.50
|
%
|
|
|
2.04
|
%
|
|
|
3.47
|
%
|
|
|
6.13
|
%
|
Net assets, end of year (000s)
|
|
|
$290,098
|
|
|
|
$241,180
|
|
|
|
$145,029
|
|
|
|
$137,323
|
|
|
|
$48,792
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.60
|
%
|
|
|
0.51
|
%
|
|
|
0.52
|
%
|
|
|
0.51
|
%
|
|
|
0.52
|
%
|
Net
expenses
4
,5
|
|
|
0.56
|
6
|
|
|
0.51
|
|
|
|
0.52
|
|
|
|
0.51
|
|
|
|
0.52
|
|
Net investment income
|
|
|
1.35
|
|
|
|
1.68
|
|
|
|
2.02
|
|
|
|
1.84
|
|
|
|
2.14
|
|
Portfolio turnover rate
|
|
|
28
|
%
|
|
|
10
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
|
|
12
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
Amount represents less than $0.005 per share.
|
3
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.
|
4
|
As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and
expenses, to average net assets of Class I shares did not exceed 0.60%. This expense limitation arrangement cannot be terminated prior to December 31, 2015 without the Board of Trustees consent.
|
5
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
6
|
Reflects fee waivers and/or expense reimbursements.
|
|
|
|
Western Asset Short Duration Municipal Income Fund
|
|
33
|
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the Privacy Notice) addresses the Legg Mason Funds privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or
sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
|
|
Personal information included on applications or other forms;
|
|
|
Account balances, transactions, and mutual fund holdings and positions;
|
|
|
Online account access user IDs, passwords, security challenge question responses; and
|
|
|
Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individuals total debt,
payment history, etc.).
|
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law. The Funds may disclose information about you to:
|
|
Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business or comply with obligations to government
regulators;
|
|
|
Service providers, including the Funds affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds behalf, including companies that may perform marketing services solely for the Funds;
|
|
|
The Funds representatives such as legal counsel, accountants and auditors; and
|
|
|
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
Except as otherwise permitted by applicable law, companies acting on the Funds behalf are contractually obligated to keep nonpublic personal information the
Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may
disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or
similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds practice to obtain
protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds Privacy and Security Practices
The Funds will
notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds Security Practices
The
Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds internal data security policies restrict access to your nonpublic personal information to authorized
employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic
personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information,
the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances
using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account
information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds privacy practices, write the Funds using the contact information on your
account statements, email the Funds by clicking on the Contact Us section of the Funds website at www.leggmason.com, or contact the Funds at 1-877-721-1926.
|
THIS PAGE IS NOT PART OF THE PROSPECTUS
|
Western Asset
Short Duration Municipal Income Fund
You may visit the funds website, http://www.leggmason.com/individualinvestors/prospectuses, 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 independent registered public accounting firms report and financial statements in the funds Annual Report are incorporated by reference into (are legally
a part of) this Prospectus.
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 or the fund 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 a 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
the fund at 1-877-721-1926, or by writing to the fund at 100 First Stamford Place, Attn: Shareholder Services
5
th
Floor, Stamford, Connecticut 06902.
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 Room, Washington, D.C. 20549-1520.
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. 811-04254)
FD02716ST 03/14
March 1, 2014
LEGG MASON PARTNERS INCOME TRUST
WESTERN ASSET SHORT DURATION MUNICIPAL INCOME FUND
Class A (SHDAX),
Class C (SHDLX), Class FI and Class I (SMDYX)
620 Eighth Avenue
New York, New York 10018
1-877-721-1926
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 Western Asset Short Duration Municipal Income Fund (the fund), dated March 1, 2014, as amended or supplemented from time to time, and is incorporated by reference in its entirety into the Prospectus.
The fund is a series of Legg Mason Partners Income Trust (the Trust), a Maryland statutory trust. Prior to
October 5, 2009, the fund was known as Legg Mason Partners Short Duration Municipal Income Fund. Prior to August 1, 2012, the fund was known as Legg Mason Western Asset Short Duration Municipal Income 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 funds distributor to sell shares of the
fund (each called a Service Agent), by writing the Trust at 100 First Stamford Place, Attn: Shareholder
Services
5
th
Floor, Stamford, Connecticut 06902, by calling 1-877-721-1926, by
sending an e-mail request to prospectus@leggmason.com or by visiting the funds website at http://www.leggmason.com/individualinvestors. Legg Mason Investor Services, LLC (LMIS or the distributor), a wholly-owned
broker/dealer subsidiary of Legg Mason, Inc. (Legg Mason), serves as the funds sole and exclusive distributor.
1
TABLE OF CONTENTS
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 PRINCIPAL INVESTMENT STRATEGIES
The fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end
management investment company. The fund is classified as a diversified fund under the 1940 Act.
The funds Prospectus
discusses the funds investment objective and strategies. The following discussion supplements the description of the funds investment strategies in its Prospectus.
Investment Objective
The fund seeks to generate high current income exempt
from regular federal income tax while preserving capital.
Principal Investment Strategies and Certain Limitations
Following is a summary of the principal investment strategies and certain investment limitations of the fund.
Under normal circumstances, the fund invests at least 80% of its assets in municipal securities and in participation or other interests
in municipal securities issued by banks, insurance companies or other financial institutions. Municipal securities are securities and other investments with similar economic characteristics the interest on which is exempt from regular federal income
tax. The funds 80% policy may not be changed without a shareholder vote. Interest on municipal securities may be subject to the federal alternative minimum tax.
Municipal securities include debt obligations issued by any of the 50 states and their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the
U.S. Virgin Islands and Guam) and other qualifying issuers. These securities include participation or other interests in municipal securities issued or backed by banks, insurance companies and other financial institutions.
Some municipal securities, such as general obligation issues, are backed by the issuers taxing authority, while other municipal
securities, such as revenue issues, are backed only by revenues from certain facilities or other sources and not by the issuer itself.
Although the fund seeks to minimize risk by investing in municipal securities from a number of different states and localities, the fund may, from time to time, invest over 25% of its assets in municipal
securities from one state or region. The fund attempts to minimize the volatility in its net asset value per share, although there can be no assurance that this will be the case.
The fund focuses on investment grade bonds (that is, securities rated in the Baa/BBB categories or above or, if unrated, determined to be
of comparable credit quality by the subadviser), but may invest up to 20% of its assets in below investment grade bonds (commonly known as junk bonds).
Although the fund may invest in securities of any maturity, the fund will normally maintain a dollar-weighted average effective duration, as estimated by the subadviser, of three years or less. Effective
duration seeks to measure the expected sensitivity of market price to changes in interest rates, taking into account the anticipated effects of structural complexities (for example, some bonds can be prepaid by the issuer).
Instead of, and/or in addition to, investing directly in particular securities, the fund may use instruments such as derivatives,
including options, interest rate swaps, credit default swaps and options on credit default swaps and futures contracts, and synthetic instruments that are intended to provide economic exposure to the securities or the issuer or to be used as a
hedging technique. The fund may use one or more types of these instruments without limit, except that these instruments are taken into account when determining compliance with the funds 80% policy. For additional information regarding
derivatives, see More on the funds investment strategies, investments and risksDerivatives in the funds Prospectus.
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The fund may also engage in a variety of transactions using derivatives in order to change
the investment characteristics of its portfolio (such as shortening or lengthening duration) and for other purposes.
SUPPLEMENTAL INFORMATION REGARDING INVESTMENT PRACTICES AND RISK FACTORS
The funds principal investment
strategies are summarized above. The following provides additional information about these principal strategies and describes other investment strategies and practices that may be used by the fund. To the extent permitted by law and the funds
investment policies, the fund may engage in the practices described below.
Municipal Securities
Municipal securities (which are also referred to herein as municipal obligations or Municipal Bonds) generally
include debt obligations (bonds, notes or commercial paper) issued by or on behalf of any of the 50 states and their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the U.S. Virgin
Islands and Guam) or other qualifying issuers, participations or other interests in these securities and other related investments. The interest paid on municipal securities is excluded from gross income for regular federal income tax purposes,
although it may be subject to federal alternative minimum tax (AMT). Municipal securities are issued to obtain funds for various public purposes, including the construction of a wide range of public facilities, such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets, water and sewer works, gas, and electric utilities. They may also be issued to refund outstanding obligations, to obtain funds for general operating expenses, or to obtain funds to
loan to other public institutions and facilities and in anticipation of the receipt of revenue or the issuance of other obligations.
The two principal classifications of municipal securities are general obligation securities and limited obligation or revenue securities. General obligation securities
are secured by a municipal issuers pledge of its full faith, credit, and taxing power for the payment of principal and interest. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the
repayment of principal when due is affected by the issuers maintenance of its tax base. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue security is a function of the economic viability of the facility or revenue
source. Revenue securities include private activity bonds (described below) which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved. Municipal securities may also include moral obligation bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to
meet its debt service obligations from current revenues, it may draw on a reserve fund the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.
Private Activity Bonds
Private activity bonds are issued by or on behalf of public authorities to provide funds, usually through a loan or lease arrangement, to a private entity for the purpose of financing construction of
privately operated industrial facilities, such as warehouse, office, plant and storage facilities and environmental and pollution control facilities. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due
from the entity, which may or may not be guaranteed by a parent company or otherwise secured. Private activity bonds generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, repayment of such bonds generally
depends on the revenue of a private entity. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors, including the size of the entity, its capital
structure, demand for its products or services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
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Under current federal income tax law, interest on Municipal Bonds issued after
August 7, 1986 which are specified private activity bonds and the proportionate share of any exempt-interest dividend paid by a regulated investment company that receives interest from such private activity bonds, will be treated as an item of
tax preference for purposes of the AMT which is imposed on individuals and corporations by the Internal Revenue Code of 1986, as amended (the Code). For regular federal income tax purposes such interest will remain fully tax-exempt.
Bonds issued in 2009 and 2010 generally will not be treated as private activity bonds, and interest earned on such bonds generally will not be treated as a tax preference item. Although interest on all tax-exempt obligations (including private
activity bonds) is generally included in adjusted current earnings of corporations for AMT purposes, interest on bonds issued in 2009 and 2010 generally is not included in adjusted current earnings.
Industrial Development Bonds
Industrial development bonds (IDBs) are issued by public authorities to obtain funds to provide financing for privately-operated facilities for business and manufacturing, housing, sports,
convention or trade show facilities, airport, mass transit, port and parking facilities, air or water pollution control facilities, and certain facilities for water supply, gas, electricity or sewerage or solid waste disposal. Although IDBs are
issued by municipal authorities, the payment of principal and interest on IDBs is dependent solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of the real and personal
property being financed as security for such payments. IDBs are considered municipal securities if the interest paid is exempt from regular federal income tax. Interest earned on IDBs may be subject to the AMT.
Tender Option Bonds
A tender option bond is a municipal bond (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing
short-term tax-exempt rates, that has been coupled with the agreement of a third party, such as a financial institution, pursuant to which such institution grants the security holders the option, at periodic intervals, to tender their securities to
the institution and receive the face value thereof. As consideration for providing the option, the institution generally receives periodic fees equal to the difference between the municipal bonds fixed coupon rate and the rate, as determined
by a remarketing or similar agent, that would cause the securities, coupled with the tender option, to trade at par. Thus, after payment of this fee, the security holder would effectively hold a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. (See the discussion of Structured Notes and Related Instruments.)
Municipal Leases
Municipal leases or installment purchase contracts are issued by a state or local government to acquire equipment or
facilities. Municipal leases frequently have special risks not normally associated with general obligation bonds or revenue bonds. Many leases include non-appropriation clauses that provide that the governmental issuer has no obligation
to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. Although the obligations are typically secured by the leased equipment or
facilities, the disposition of the property in the event of non-appropriation or foreclosure might, in some cases, prove difficult or, if sold, may not fully cover the funds exposure.
Participation Interests
Tax-exempt participation interests in municipal obligations (such as private activity bonds and municipal lease obligations) are typically issued by a financial institution. A participation interest gives
the fund an undivided interest in the municipal obligation in the proportion that the funds participation interest bears to the total principal amount of the municipal obligation. Participation interests in municipal obligations may be backed
5
by an irrevocable letter of credit or guarantee of, or a right to put to, a bank (which may be the bank issuing the participation interest, a bank issuing a confirming letter of credit to that of
the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the participation interest) or insurance policy of an insurance company. The fund has the right to sell the participation interest back to
the institution or draw on the letter of credit or insurance after a specified period of notice, for all or any part of the full principal amount of the funds participation in the security, plus accrued interest.
Issuers of participation interests will retain a service and letter of credit fee and a fee for providing the liquidity feature, in an
amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased on behalf of the fund. The issuer of the participation interest may bear the cost of insurance backing the
participation interest, although the fund may also purchase insurance, in which case the cost of insurance will be an expense of the fund. Participation interests may be sold prior to maturity. Participation interests may include municipal lease
obligations. Purchase of a participation interest may involve the risk that the fund will not be deemed to be the owner of the underlying municipal obligation for purposes of the ability to claim tax exemption of interest paid on that municipal
obligation.
Municipal Notes
There are four major varieties of municipal notes: Tax and Revenue Anticipation Notes (TRANs); Tax Anticipation Notes (TANs); Revenue Anticipation Notes (RANs); and
Bond Anticipation Notes (BANs). TRANs, TANs and RANs are issued by states, municipalities and other tax-exempt issuers to finance short-term cash needs or, occasionally, to finance construction. Many TRANs, TANs and RANs are general
obligations of the issuing entity payable from taxes or designated revenues, respectively, expected to be received within the related fiscal period. BANs are issued with the expectation that their principal and interest will be paid out of proceeds
from renewal notes or bonds to be issued prior to the maturity of the BANs. BANs are issued most frequently by both general obligation and revenue bond issuers usually to finance such items as land acquisition, facility acquisition and/or
construction and capital improvement projects.
Tax-exempt Commercial Paper
Tax-exempt commercial paper is a short-term obligation with a stated maturity of 270 days or less. It is issued by state and local
governments or their agencies to finance seasonal working capital needs or as short-term financing in anticipation of longer term financing. While tax-exempt commercial paper is intended to be repaid from general revenues or refinanced, it
frequently is backed by a letter of credit, lending arrangement, note repurchase agreement or other credit facility agreement offered by a bank or financial institution.
Demand Instruments
Municipal bonds may be issued as floating- or
variable-rate securities subject to demand features (demand instruments). Demand instruments usually have a stated maturity of more than one year but contain a demand feature (or put) that enables the holder to redeem the
investment. Variable-rate demand instruments provide for automatic establishment of a new interest rate on set dates. Floating-rate demand instruments provide for automatic adjustment of interest rates whenever a specified interest rate (e.g., the
prime rate) changes.
These floating and variable rate instruments are payable upon a specified period of notice which may
range from one day up to one year. The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest
rate adjustment index as provided in the respective instruments. Variable rate instruments include participation interests in variable- or fixed-rate municipal obligations owned by a bank, insurance company or other financial institution or
affiliated organizations. Although the rate of the underlying municipal obligations may be fixed, the terms of the participation interest may result in the fund receiving a variable rate on its investment.
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Because of the variable rate nature of the instruments, when prevailing interest rates
decline, the yield on these instruments will generally decline. On the other hand, during periods when prevailing interest rates increase, the yield on these instruments generally will increase and the instruments will have less risk of capital
depreciation than instruments bearing a fixed rate of return.
Custodial Receipts
The fund may acquire custodial receipts or certificates underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain municipal obligations. The underwriter of these certificates or receipts typically purchases municipal obligations and deposits the obligations in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the obligations. Although under the terms of a custodial receipt, the fund would
be typically authorized to assert its rights directly against the issuer of the underlying obligation, the fund could be required to assert through the custodian bank those rights as may exist against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest when due, the fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the underlying security has been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would
be reduced in recognition of any taxes paid.
Stand-By Commitments
The fund may acquire stand-by commitments with respect to municipal obligations held in its portfolio. Under a stand-by
commitment a dealer agrees to purchase, at the funds option, specified municipal obligations held by the fund at a specified price and, in this respect, stand-by commitments are comparable to put options. A stand-by commitment entitles the
holder to achieve same day settlement and to receive an exercise price equal to the amortized cost of the underlying security plus accrued interest, if any, at the time of exercise. The fund will be subject to credit risk with respect to an
institution providing a stand-by commitment and a decline in the credit quality of the institution could cause losses to the fund.
The fund will generally acquire stand-by commitments to facilitate fund liquidity. The cost of entering into stand-by commitments will increase the cost of the underlying municipal obligation and
similarly will decrease such securitys yield to investors. Gains, if any, realized in connection with stand-by commitments will be taxable.
Additional Risks Relating to Municipal Securities
Tax
risk
. The Code imposes certain continuing requirements on issuers of tax-exempt bonds regarding the use, expenditure and investment of bond proceeds and the payment of rebates to the U.S. government. Failure by the issuer to comply after the
issuance of tax-exempt bonds with certain of these requirements could cause interest on the bonds to become includable in gross income retroactive to the date of issuance.
From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on municipal obligations, and similar proposals may be introduced in the future. In addition, the federal income tax exemption has been, and may in the future be, the subject of litigation. If one of these proposals were
enacted, the availability of tax-exempt obligations for investment by the fund and the value of the funds investments would be affected.
Opinions relating to the validity of municipal obligations and to the exclusion of interest thereon from gross income for regular federal and/or state income tax purposes are rendered by bond counsel to
the respective issuers at the time of issuance. The fund and its service providers will rely on such opinions and will not review the proceedings relating to the issuance of municipal obligations or the bases for such opinions.
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Information risk
. Information about the financial condition of issuers of
municipal obligations may be less available than about corporations whose securities are publicly traded.
State and
Federal law risk
. Municipal obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the federal Bankruptcy Code, and laws, if any, that may be enacted by
Congress or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of any one or more issuers to pay, when due, the principal of and interest on its or their municipal obligations may be materially affected.
Market and ratings risk
. The yields on municipal obligations are dependent on a variety of factors, including economic and
monetary conditions, general market conditions, supply and demand, general conditions of the municipal market, size of a particular offering, the maturity of the obligation and the rating of the issue. Adverse economic, business, legal or political
developments might affect all or substantial portions of the funds municipal obligations in the same manner.
Unfavorable developments in any economic sector may have far-reaching ramifications for the overall or any states municipal market.
Although the ratings of tax-exempt securities by ratings agencies are relative and subjective, and are not absolute standards
of quality, such ratings reflect the assessment of the ratings agency, at the time of issuance of the rating, of the economic viability of the issuer of a general obligation bond or, with respect to a revenue bond, the special revenue source, with
respect to the timely payment of interest and the repayment of principal in accordance with the terms of the obligation, but do not reflect an assessment of the market value of the obligation. See Appendix A for additional information regarding
ratings. Consequently, municipal obligations with the same maturity, coupon and rating may have different yields when purchased in the open market, while municipal obligations of the same maturity and coupon with different ratings may have the same
yield.
Risks associated with sources of liquidity or credit support
. Issuers of municipal obligations may
employ various forms of credit and liquidity enhancements, including letters of credit, guarantees, swaps, puts and demand features, and insurance, provided by domestic or foreign entities such as banks and other financial institutions. Changes in
the credit quality of the entities providing the enhancement could affect the value of the securities or the funds share price. Banks and certain financial institutions are subject to extensive governmental regulation which may limit both the
amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of the banking industry is largely dependent upon the availability and cost of capital for the purpose
of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of the banking industry, and exposure to credit losses arising from possible financial difficulties
of borrowers might affect a banks ability to meet its obligations under a letter of credit.
Other
.
Securities may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates). In addition, a security may be sold and another purchased at approximately the same
time to take advantage of what the subadviser believes to be a temporary disparity in the normal yield relationship between the two securities. In general, the secondary market for tax-exempt securities in the funds portfolio may be less
liquid than that for taxable fixed income securities. Accordingly, the ability of the fund to make purchases and sales of securities in the foregoing manner may be limited. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest rates, but instead due to such factors as changes in the overall demand for or supply of various types of tax-exempt securities or changes in the investment objectives of
investors.
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Taxable Municipal Obligations
The market for taxable municipal obligations is relatively small, which may result in a lack of liquidity and in price volatility of those
securities. Interest on taxable municipal obligations is includable in gross income for regular federal income tax purposes. While interest on taxable municipal obligations may be exempt from personal taxes imposed by the state within which the
obligation is issued, such interest will nevertheless generally be subject to all other state and local income and franchise taxes.
Risks Inherent in an Investment in Different Types of Municipal Securities
General Obligation Bonds
. General obligation bonds are backed by the issuers pledge of its full faith, credit and
taxing power for the payment of principal and interest. However, the taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors. Some such factors are
the entitys tax base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entitys control.
Industrial Development Revenue Bonds (IDRs
)
. IDRs are tax-exempt securities issued by states, municipalities, public authorities or similar entities to finance the cost of
acquiring, constructing or improving various projects. These projects are usually operated by corporate entities. IDRs are not general obligations of governmental entities backed by their taxing power. Issuers are only obligated to pay amounts due
on the IDRs to the extent that funds are available from the unexpended proceeds of the IDRs or receipts or revenues of the issuer. Payment of IDRs is solely dependent upon the creditworthiness of the corporate operator of the project or corporate
guarantor. Such corporate operators or guarantors that are industrial companies may be affected by many factors, which may have an adverse impact on the credit quality of the particular company or industry.
Hospital and Health Care Facility Bonds
. The ability of hospitals and other health care facilities to meet their
obligations with respect to revenue bonds issued on their behalf is dependent on various factors. Some such factors are the level of payments received from private third-party payors and government programs and the cost of providing health care
services. There can be no assurance that payments under governmental programs will be sufficient to cover the costs associated with their bonds. It also may be necessary for a hospital or other health care facility to incur substantial capital
expenditures or increased operating expenses to effect changes in its facilities, equipment, personnel and services. Hospitals and other health care facilities are additionally subject to claims and legal actions by patients and others in the
ordinary course of business. There can be no assurance that a claim will not exceed the insurance coverage of a health care facility or that insurance coverage will be available to a facility.
Single Family and Multi-Family Housing Bonds
. Multi-family housing revenue bonds and single family mortgage revenue bonds
are state and local housing issues that have been issued to provide financing for various housing projects. Multi-family housing revenue bonds are payable primarily from mortgage loans to housing projects for low to moderate income families.
Single-family mortgage revenue bonds are issued for the purpose of acquiring notes secured by mortgages on residences. The ability of housing issuers to make debt service payments on their obligations may be affected by various economic and
non-economic factors. Such factors include: occupancy levels, adequate rental income in multi-family projects, the rate of default on mortgage loans underlying single family issues and the ability of mortgage insurers to pay claims. All
single-family mortgage revenue bonds and certain multi-family housing revenue bonds are prepayable over the life of the underlying mortgage or mortgage pool. Therefore, the average life of housing obligations cannot be determined. However, the
average life of these obligations will ordinarily be less than their stated maturities. Mortgage loans are frequently partially or completely prepaid prior to their final stated maturities.
Power Facility Bonds
. The ability of utilities to meet their obligations with respect to bonds they issue is dependent on
various factors. These factors include the rates that they may charge their customers, the demand for a utilitys services and the cost of providing those services. Utilities are also subject to extensive regulations
9
relating to the rates which they may charge customers. Utilities can experience regulatory, political and consumer resistance to rate increases. Utilities engaged in long-term capital projects
are especially sensitive to regulatory lags in granting rate increases. Utilities are additionally subject to increased costs due to governmental environmental regulation and decreased profits due to increasing competition. Any difficulty in
obtaining timely and adequate rate increases could adversely affect a utilitys results of operations. The subadviser cannot predict the effect of such factors on the ability of issuers to meet their obligations with respect to bonds.
Water and Sewer Revenue Bonds
. Water and sewer bonds are generally payable from user fees. The ability of
state and local water and sewer authorities to meet their obligations may be affected by a number of factors. Some such factors are the failure of municipalities to utilize fully the facilities constructed by these authorities, declines in revenue
from user charges, rising construction and maintenance costs, impact of environmental requirements, the difficulty of obtaining or discovering new supplies of fresh water, the effect of conservation programs, the impact of no growth
zoning ordinances and the continued availability of federal and state financial assistance and of municipal bond insurance for future bond issues.
University and College Bonds
. The ability of universities and colleges to meet their obligations is dependent upon various factors. Some of these factors of which an investor should be aware
are the size and diversity of their sources of revenues, enrollment, reputation, management expertise, the availability and restrictions on the use of endowments and other funds and the quality and maintenance costs of campus facilities. Also, in
the case of public institutions, the financial condition of the relevant state or other governmental entity and its policies with respect to education may affect an institutions ability to make payments on its own.
Lease Rental Bonds
. Lease rental bonds are predominantly issued by governmental authorities that have no taxing power or
other means of directly raising revenues. Rather, the authorities are financing vehicles created solely for the construction of buildings or the purchase of equipment that will be used by a state or local government. Thus, the bonds are subject to
the ability and willingness of the lessee government to meet its lease rental payments, which include debt service on the bonds. Lease rental bonds are subject to the risk that the lessee government is not legally obligated to budget and appropriate
for the rental payments beyond the current fiscal year. These bonds are also subject to the risk of abatement in many states as rents cease in the event that damage, destruction or condemnation of the project prevents its use by the lessee. Also, in
the event of default by the lessee government, there may be significant legal and/or practical difficulties involved in the reletting or sale of the project.
Capital Improvement Facility Bonds
. Capital improvement bonds are bonds issued to provide funds to assist political subdivisions or agencies of a state through acquisition of the underlying
debt of a state or local political subdivision or agency. The risks of an investment in such bonds include the risk of possible prepayment or failure of payment of proceeds on and default of the underlying debt.
Solid Waste Disposal Bonds
. Bonds issued for solid waste disposal facilities are generally payable from tipping fees and
from revenues that may be earned by the facility on the sale of electrical energy generated in the combustion of waste products. The ability of solid waste disposal facilities to meet their obligations depends upon the continued use of the facility,
the successful and efficient operation of the facility and, in the case of waste-to-energy facilities, the continued ability of the facility to generate electricity on a commercial basis. Also, increasing environmental regulation on the federal,
state and local level has a significant impact on waste disposal facilities. While regulation requires more waste producers to use waste disposal facilities, it also imposes significant costs on the facilities.
Moral Obligation Bonds
. A moral obligation bond is a type of revenue bond issued by a state or municipality pursuant to
legislation authorizing the establishment of a reserve fund to pay principal and interest payments if the issuer is unable to meet its obligations. The establishment of such a reserve fund generally requires appropriation by the state legislature,
which is not legally required. Accordingly, the establishment of a reserve fund is generally considered a moral commitment but not a legal obligation of the state or municipality that created the issuer.
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Refunded Bonds
. Refunded bonds are typically secured by direct obligations
of the U.S. government, or in some cases obligations guaranteed by the U.S. government, placed in an escrow account maintained by an independent trustee until maturity or a predetermined redemption date. These obligations are generally non-callable
prior to maturity or the predetermined redemption date. In a few isolated instances to date, however, bonds which were thought to be escrowed to maturity have been called for redemption prior to maturity.
Airport, Port and Highway Revenue Bonds
. Certain facility revenue bonds are payable from and secured by the revenue from
the ownership and operation of particular facilities, such as airports, highways and port authorities. Airport operating income may be affected by the ability of airlines to meet their obligations under the agreements with airports. Similarly,
payment on bonds related to other facilities is dependent on revenues from the projects, such as use fees from ports, tolls on turnpikes and bridges and rents from buildings. Therefore, payment may be adversely affected by reduction in revenues due
to such factors and increased cost of maintenance or decreased use of a facility. The subadviser cannot predict what effect conditions may have on revenues which are required for payment on these bonds.
Special Tax Bonds
. Special tax bonds are payable from and secured by the revenues derived by a municipality from a
particular tax. Examples of such special taxes are a tax on the rental of a hotel room, the purchase of food and beverages, the rental of automobiles or the consumption of liquor. Special tax bonds are not secured by the general tax revenues of the
municipality, and they do not represent general obligations of the municipality. Therefore, payment on special tax bonds may be adversely affected by a reduction in revenues realized from the underlying special tax. Also, should spending on the
particular goods or services that are subject to the special tax decline, the municipality may be under no obligation to increase the rate of the special tax to ensure that sufficient revenues are raised from the shrinking taxable base.
Tax Allocation Bonds
. Tax allocation bonds are typically secured by incremental tax revenues collected on property within
the areas where redevelopment projects financed by bond proceeds are located. Such payments are expected to be made from projected increases in tax revenues derived from higher assessed values of property resulting from development in the particular
project area and not from an increase in tax rates. Special risk considerations include: reduction of, or a less than anticipated increase in, taxable values of property in the project area; successful appeals by property owners of assessed
valuations; substantial delinquencies in the payment of property taxes; or imposition of any constitutional or legislative property tax rate decrease.
Tobacco Settlement Revenue Bonds
. Tobacco settlement revenue bonds are secured by a state or local governments proportionate share in the Master Settlement Agreement (MSA).
The MSA is an agreement, reached out of court in November 1998 between the attorneys general of 46 states (Florida, Minnesota, Mississippi and Texas all settled independently) and six other U.S. jurisdictions (including the District of Columbia,
Puerto Rico and Guam), and the four largest U.S. tobacco manufacturers at that time (Philip Morris, RJ Reynolds, Brown & Williamson, and Lorillard). Subsequently, smaller tobacco manufacturers signed on to the MSA. The MSA basically
provides for payments annually by the manufacturers to the states and jurisdictions in perpetuity, in exchange for releasing all claims against the manufacturers and a pledge of no further litigation. The MSA established a base payment schedule and
a formula for adjusting payments each year. Manufacturers pay into a master escrow trust based on their market share, and each state receives a fixed percentage of the payment as set forth in the MSA. Annual payments are highly dependent on annual
domestic cigarette shipments and inflation, as well as several other factors. As a result, payments made by tobacco manufacturers could be negatively impacted by a decrease in tobacco consumption over time. A market share loss by the MSA companies
to non-MSA participating manufacturers would also cause a downward adjustment in the payment amounts. A participating manufacturer filing for bankruptcy could cause delays or reductions in bond payments.
Certain tobacco settlement revenue bonds are issued with turbo redemption features. Under this turbo structure, all available
excess revenues are applied as an early redemption to the designated first turbo maturity until it is completely repaid, and then to the next turbo maturity until paid in full, and so on. The result is that the returned principal creates an average
maturity that could be much shorter than the legal final maturity.
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Transit Authority Bonds
. Mass transit is generally not self-supporting
from fare revenues. Therefore, additional financial resources must be made available to ensure operation of mass transit systems as well as the timely payment of debt service. Often such financial resources include federal and state subsidies, lease
rentals paid by funds of the state or local government or a pledge of a special tax. If fare revenues or the additional financial resources do not increase appropriately to pay for rising operating expenses, the ability of the issuer to adequately
service the debt may be adversely affected.
Convention Facility Bonds
. Bonds in the convention facilities
category include special limited obligation securities issued to finance convention and sports facilities payable from rental payments and annual governmental appropriations. The governmental agency is not obligated to make payments in any year in
which the monies have not been appropriated to make such payments. In addition, these facilities are limited use facilities that may not be used for purposes other than as convention centers or sports facilities.
Correctional Facility Bonds
. Bonds in the correctional facilities category include special limited obligation securities
issued to construct, rehabilitate and purchase correctional facilities payable from governmental rental payments and/or appropriations.
U.S. Territories
The following is a brief summary of certain factors
affecting the economies of the territories listed below and does not purport to be a complete description of such factors. Many complex political, social and economic forces influence each territorys economy and finances, which may in turn
affect the territorys financial plan. These forces may affect a territory unpredictably from fiscal year to fiscal year and are influenced by governments, institutions and events that are not subject to the territorys control.
Municipal securities include the obligations of the governments of Puerto Rico and other U.S. territories and their political
subdivisions (such as the U.S. Virgin Islands and Guam). Payment of interest and preservation of principal is dependent upon the continuing ability of such issuers and/or obligors of territorial, municipal and public authority debt obligations to
meet their obligations thereunder. The sources of payment for such obligations and the marketability thereof may be affected by financial and other difficulties experienced by such issuers.
Puerto Rico
. General obligations and/or revenue bonds of issuers located in the Commonwealth of Puerto Rico may be affected
by political, social and economic conditions in Puerto Rico. The following is a brief summary of factors affecting the economy of the Commonwealth of Puerto Rico and does not purport to be a complete description of such factors.
The dominant sectors of the Puerto Rico economy are manufacturing and services. The manufacturing sector has undergone fundamental
changes over the years as a result of increased emphasis on higher wage, high technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors, professional and scientific instruments, and certain high technology machinery
and equipment. The services sector, including finance, insurance, real estate, wholesale and retail trade, transportation, communications and public utilities and other services, also plays a major role in the economy. It ranks second only to
manufacturing in contribution to the gross domestic product and leads all sectors in providing employment.
The economy of
Puerto Rico is closely linked to the U.S. economy. Most external factors that affect the Puerto Rico economy are determined by the policies and performance of the United States. These external factors include exports, direct investment, the amount
of federal transfer payments, the level of interest rates, the rate of inflation, and tourist expenditures. Puerto Ricos economy has been in a recession since late 2006, which has contributed to a steep increase in unemployment rates, funding
shortfalls of state employees retirement systems, a budget deficit resulting from a structural imbalance, and reduced government revenues.
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There can be no assurance that current or future economic difficulties in the United
States or Puerto Rico and the resulting impact on Puerto Rico will not adversely affect the market value of Puerto Rico municipal obligations held by the fund or the ability of particular issuers to make timely payments of debt service on these
obligations.
The summary set forth above is included for the purpose of providing a general description of Puerto Ricos
credit and financial conditions, is based on information from statements of issuers of Puerto Rico municipal obligations (and, in the case of the above summary, other information issued by the commonwealth) and does not purport to be complete. The
fund is not responsible for the accuracy, completeness or timeliness of this information.
Guam
. General
obligations and/or revenue bonds of issuers located in Guam may be affected by political, social and economic conditions in Guam. The following is a brief summary of factors affecting the economy of Guam and does not purport to be a complete
description of such factors.
Guam, the westernmost territory of the U.S., is located 3,800 miles to the west-southwest of
Honolulu, Hawaii and approximately 1,550 miles south-southeast of Tokyo, Japan. The population of Guam was estimated to be 159,914 in July 2012. Guams unemployment rate increased from 9.3% in September 2009 to 13.3% in March 2011, and
decreased to 11.8% in March 2012.
Guams economy depends in large measure on tourism and the U.S. military presence,
each of which is subject to uncertainties as a result of global economic, social and political events. Tourism, particularly from Japan, which has been a source of a majority of visitors to Guam, represents the primary source of income for
Guams economy. A weak economy, war, severe weather, epidemic outbreaks or the threat of terrorist activity, among other influences that are beyond Guams control, can adversely affect its tourism industry. Guam is also exposed to periodic
typhoons, tropical storms, super typhoons and earthquakes, such as the March 2011 earthquake and tsunami that occurred in Japan and caused a decline in tourism for a period of time. The U.S. military presence also affects economic activity on Guam
in various ways. The number of U.S. military personnel in Guam declined in 2011. Economic, geopolitical, and other influences which are beyond Guams control could cause the U.S. military to reduce its existing presence on Guam or forgo any
planned enhancements to its presence on Guam. Any reduction in tourism or the U.S. military presence could adversely affect Guams economy.
United States Virgin Islands
. General obligations and/or revenue bonds of issuers located in the U.S. Virgin Islands may be affected by political, social and economic conditions in the U.S.
Virgin Islands. The following is a brief summary of factors affecting the economy of the U.S. Virgin Islands and does not purport to be a complete description of such factors.
The U.S. Virgin Islands consists of four main islands: St. Croix, St. Thomas, St. John, and Water Island and approximately 70 smaller islands, islets and cays. The total land area is about twice the size
of Washington, D.C. The U.S. Virgin Islands is located 60 miles east of Puerto Rico and 1,075 miles south of Miami, Florida in the Caribbean Sea and the Atlantic Ocean. The population of the U.S. Virgin Islands was estimated to be 105,275 in July
2012.
With tourist visits of approximately two million annually, tourism accounts for a substantial portion of the Gross
Domestic Product (GDP). A weak economy, severe weather, war, epidemic outbreaks or the threat of terrorist activity, among other influences that are beyond the control of the territory, can adversely affect its tourism. Tourism-related services help
increase private sector employment. Other private sector employment includes wholesale and retail trade, manufacturing (petroleum refining, rum distilling, watch assembly, pharmaceuticals, textiles and electronics), construction and mining. HOVENSA,
one of the worlds largest petroleum refineries is located on the island of St. Croix and is the territorys largest private sector employer.
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International business and financial services are small but growing components of the economy. The agricultural sector is small, with most of the islands food being imported. The islands
are vulnerable to substantial damage from storms. The global economic recession affected all sectors of the economy and had a negative effect on the employment rate.
Other Debt and Fixed Income Securities
The fund may invest in other debt
and fixed income securities. These securities share three principal risks. First, the level of interest income generated by the funds fixed income investments may decline due to a decrease in market interest rates. Thus, when fixed income
securities mature or are sold, they may be replaced by lower-yielding investments. Second, their values fluctuate with changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of the funds
fixed income investments. Conversely, during periods of rising interest rates, the value of the funds fixed income investments will generally decline. However, a change in interest rates will not have the same impact on all fixed rate
securities. For example, the magnitude of these fluctuations will generally be greater when the funds duration or average maturity is longer. In addition, certain fixed income securities are subject to credit risk, which is the risk that an
issuer of securities will be unable to pay principal and interest when due, or that the value of the security will suffer because investors believe the issuer is unable to pay. Common types of these instruments, and their associated risks, are
discussed below.
Asset-Backed and Mortgage-Related Securities
Asset-Backed Securities
. An asset-backed security represents an interest in a pool of assets such as receivables from credit
card loans, automobile loans and other trade receivables. Changes in the markets perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial
institution providing any credit enhancement, will all affect the value of an asset-backed security, as will the exhaustion of any credit enhancement. The risks of investing in asset-backed securities ultimately depend upon the payment of the
consumer loans by the individual borrowers. In its capacity as purchaser of an asset-backed security, the fund would generally have no recourse to the entity that originated the loans in the event of default by the borrower. Additionally, in the
same manner as described below under Mortgage-Related Securities with respect to prepayment of a pool of mortgage loans underlying mortgage-related securities, the loans underlying asset-backed securities are subject to prepayments,
which may shorten the weighted average life of such securities and may lower their return.
The fund may purchase
commercial paper, including asset-backed commercial paper (ABCP) that is issued by structured investment vehicles or other conduits. These conduits may be sponsored by mortgage companies, investment banking firms, finance companies,
hedge funds, private equity firms and special purpose finance entities. ABCP typically refers to a debt security with an original term to maturity of up to 270 days, the payment of which is supported by cash flows from underlying assets, or one or
more liquidity or credit support providers, or both. Assets backing ABCP, which may be included in revolving pools of assets with large numbers of obligors, include credit card, car loan and other consumer receivables and home or commercial
mortgages, including subprime mortgages. The repayment of ABCP issued by a conduit depends primarily on the cash collections received from the conduits underlying asset portfolio and the conduits ability to issue new ABCP. Therefore,
there could be losses to the fund investing in ABCP in the event of credit or market value deterioration in the conduits underlying portfolio, mismatches in the timing of the cash flows of the underlying asset interests and the repayment
obligations of maturing ABCP, or the conduits inability to issue new ABCP. To protect investors from these risks, ABCP programs may be structured with various protections, such as credit enhancement, liquidity support, and commercial paper
stop-issuance and wind-down triggers. However there can be no guarantee that these protections will be sufficient to prevent losses to investors in ABCP.
Some ABCP programs provide for an extension of the maturity date of the ABCP if, on the related maturity date, the conduit is unable to access sufficient liquidity through the issue of additional ABCP.
This may delay the
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sale of the underlying collateral and the fund may incur a loss if the value of the collateral deteriorates during the extension period. Alternatively, if collateral for ABCP commercial paper
deteriorates in value, the collateral may be required to be sold at inopportune times or at prices insufficient to repay the principal and interest on the ABCP. ABCP programs may provide for the issuance of subordinated notes as an additional form
of credit enhancement. The subordinated notes are typically of a lower credit quality and have a higher risk of default. A fund purchasing these subordinated notes will therefore have a higher likelihood of loss than investors in the senior notes.
Asset-backed securities are relatively new and untested instruments and may be subject to greater risk of default during
periods of economic downturn than other securities which could result in possible losses to the fund. In addition, the secondary market for asset-backed securities may not be as liquid as the market for other securities which may result in the
funds experiencing difficulty in valuing asset-backed securities.
Mortgage-Related Securities
.
Mortgage-related securities may be classified as private, governmental or government-related, depending on the issuer or guarantor. Private mortgage-related securities represent pass-through pools consisting principally of conventional residential
mortgage loans created by non-governmental issuers, such as commercial banks, savings and loan associations and private mortgage insurance companies. Governmental mortgage-related securities are backed by the full faith and credit of the United
States. The Government National Mortgage Association (Ginnie Mae), the principal guarantor of such securities, is a wholly owned United States government corporation within the Department of Housing and Urban Development.
Government-sponsored mortgage-related securities are not backed by the full faith and credit of the United States government. Issuers of such securities include Fannie Mae (formally known as the Federal National Mortgage Association) and Freddie Mac
(formally known as the Federal Home Loan Mortgage Corporation). Fannie Mae is a government-sponsored corporation which is subject to general regulation by the Secretary of Housing and Urban Development. Pass-through securities issued by Fannie Mae
are guaranteed as to timely payment of principal and interest by Fannie Mae. Freddie Mac is a stockholder-owned corporation chartered by Congress and subject to general regulation by the Department of Housing and Urban Development. Participation
certificates representing interests in mortgages from Freddie Macs national portfolio are guaranteed as to the timely payment of interest and ultimate collection of principal by Freddie Mac. The U.S. government has, however, provided financial
support to Fannie Mae and Freddie Mac, but there can be no assurances that it will support these or other government-sponsored entities in the future. Private, U.S. governmental or government-sponsored entities create mortgage loan pools offering
pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity
may be shorter than previously customary. As new types of mortgage-related securities are developed and offered to investors, the fund, consistent with its investment objective and policies, will consider making investments in such new types of
securities.
Mortgage-related securities provide a monthly payment consisting of interest and principal payments.
Additional payments may be made out of unscheduled repayments of principal resulting from the sale of the underlying residential property, refinancing or foreclosure, net of fees or costs that may be incurred. Prepayments of principal on
mortgage-related securities may tend to increase due to refinancing of mortgages as interest rates decline. Mortgage pools created by private organizations generally offer a higher rate of interest than government and government-sponsored pools
because no direct or indirect guarantees of payments are applicable with respect to the former pools. See Asset-Backed and Mortgage-Backed Securities Issued by Nongovernmental Entities below. Prompt payment of principal and interest on
Ginnie Mae mortgage pass-through certificates is backed by the full faith and credit of the United States. Fannie Mae guaranteed mortgage pass-through certificates and Freddie Mac participation certificates are solely the obligations of those
entities but Fannie Mae obligations are supported by the discretionary authority of the United States government to purchase its obligations. Municipal housing bonds include mortgage revenue bonds and multi-family housing bond programs. See
Single Family and Multi-Family Housing Bonds below.
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Collateralized mortgage obligations are a type of bond secured by an underlying pool of
mortgages or mortgage pass-through certificates that are structured to direct payments on underlying collateral to different series or classes of the obligations. To the extent that the fund purchases mortgage-related securities at a premium,
mortgage foreclosures and prepayments of principal by mortgagors (which may be made at any time without penalty) may result in some loss of the funds principal investment to the extent of the premium paid. The funds yield may be affected
by reinvestment of prepayments at higher or lower rates than the original investment. In addition, like other debt securities, the values of mortgage-related securities, including government and government-sponsored mortgage pools, generally will
fluctuate in response to market interest rates. The average maturity of pass-through pools of mortgage-related securities varies with the maturities of the underlying mortgage instruments. In addition, a pools stated maturity may be shortened
by unscheduled payments on the underlying mortgages. Factors affecting mortgage prepayments include the level of interest rates, general economic and social conditions, the location of the mortgaged property and age of the mortgage. Because
prepayment rates of individual pools vary widely, it is not possible to accurately predict the average life of a particular pool. Common practice is to assume that prepayments will result in an average life ranging from two to ten years for pools of
fixed-rate 30-year mortgages. Pools of mortgages with other maturities or different characteristics will have varying average life assumptions.
Structured Mortgage-Backed Securities
. The fund may invest in structured mortgage-backed securities. The interest rate or, in some cases, the principal payable at the maturity of a
structured mortgage-backed security may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators (reference prices). A structured mortgage-backed security may be leveraged
to the extent that the magnitude of any change in the interest rate or principal payable on a structured security is a multiple of the change in the reference price. Thus, structured mortgage-backed securities may decline in value due to adverse
market changes in reference prices. The structured mortgage-backed securities purchased by the fund may include interest only (IO) and principal only (PO) securities, floating rate securities linked to the Cost of Funds Index
(COFI floaters), other lagging rate floating rate securities, floating rate securities that are subject to a maximum interest rate (capped floaters), leveraged floating rate securities (super
floaters), leveraged inverse floating rate securities, leveraged or super IOs and POs, inverse IOs, dual index floaters and range floaters.
Risks of Asset-Backed and Mortgage-Related Securities
. Payments of principal of and interest on mortgage-backed securities and asset-backed securities are made more frequently than are
payments on conventional debt securities. In addition, holders of mortgage-backed securities and of certain asset-backed securities (such as asset-backed securities backed by home equity loans) may receive unscheduled payments of principal at any
time representing prepayments on the underlying mortgage loans or financial assets. When the holder of the security attempts to reinvest prepayments or even the scheduled payments of principal and interest, it may receive a rate of interest that is
higher or lower than the rate on the mortgage-backed security or asset-backed security originally held. To the extent that mortgage-backed securities or asset-backed securities are purchased by the fund at a premium, mortgage foreclosures and
principal prepayments may result in a loss to the extent of the premium paid. If mortgage-backed securities or asset-backed securities are bought at a discount, however, both scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income.
Asset-backed securities may present certain risks not relevant to mortgage-backed securities. Assets underlying asset-backed securities such as credit card receivables are generally unsecured, and debtors
are entitled to the protection of various state and federal consumer protection laws, some of which provide a right of set-off that may reduce the balance owed.
Many mortgage-backed and structured securities are considered to be derivative instruments. Different types of derivative securities are subject to different combinations of prepayment, extension,
interest rate and/or other market risks. Conventional mortgage pass-through securities and sequential pay collateralized mortgage obligations (CMOs) are subject to all of these risks, but are typically not leveraged. Planned amortization
16
classes (PACs), targeted amortization classes (TACs) and other senior classes of sequential and parallel pay CMOs involve less exposure to prepayment, extension and
interest rate risk than other mortgage-backed securities, provided that prepayment rates remain within expected prepayment ranges or collars.
The risk of early prepayments is the primary risk associated with mortgage IOs, super floaters and other leveraged floating rate mortgage-backed securities. The primary risks associated with COFI
floaters, other lagging rate floaters, capped floaters, inverse floaters, POs and leveraged inverse IOs are the potential extension of average life and/or depreciation due to rising interest rates. The residual classes of CMOs are
subject to both prepayment and extension risk.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the risk that the coupon will be reduced to below market rates if a designated interest rate floats outside of a specified interest rate band or collar. Dual index or yield
curve floaters are subject to depreciation in the event of an unfavorable change in the spread between two designated interest rates.
In addition to the interest rate, prepayment and extension risks described above, the risks associated with transactions in these securities may include: (1) leverage and volatility risk and
(2) liquidity and valuation risk.
Asset-Backed Securities and Mortgage-Backed Securities Issued by
Nongovernmental Entities
. Certain of the mortgage-backed securities, as well as certain of the asset-backed securities, in which the fund may invest will be issued by private issuers, and therefore may have exposure to subprime loans as well
as to the mortgage and credit markets generally. Such mortgage-backed securities and asset-backed securities may take a form similar to the pass-through mortgage-backed securities issued by agencies or instrumentalities of the United States, or may
be structured in a manner similar to the other types of mortgage-backed securities or asset-backed securities described below. Private issuers include originators of or investors in mortgage loans and receivables such as savings and loan
associations, savings banks, commercial banks, investment banks, finance companies and special purpose finance subsidiaries of these types of institutions.
Unlike mortgage-backed securities issued or guaranteed by the U.S. government or certain government-sponsored entities, mortgage-backed securities issued by private issuers do not have a government or
government-sponsored entity guarantee, but may have credit enhancement provided by external entities such as banks or financial institutions or achieved through the structuring of the transaction itself.
In addition, mortgage-backed securities that are issued by private issuers are not subject to the underwriting requirements for the
underlying mortgages that are applicable to those mortgage-backed securities that have a government or government-sponsored entity guarantee. As a result, the mortgage loans underlying private mortgage-backed securities may, and frequently do, have
less favorable collateral, credit risk or other underwriting characteristics than government or government-sponsored mortgage-backed securities and have wider variances in a number of terms including interest rate, term, size, purpose and borrower
characteristics. Privately issued pools more frequently include second mortgages, high loan-to-value mortgages and manufactured housing loans. The coupon rates and maturities of the underlying mortgage loans in a private-label mortgage-backed
securities pool may vary to a greater extent than those included in a government guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans refer to loans made to borrowers with weakened credit histories or with a lower
capacity to make timely payments on their loans. For these reasons, the loans underlying these securities have had in many cases higher default rates than those loans that meet government underwriting requirements.
The risk of non-payment is greater for mortgage-backed securities that are backed by mortgage pools that contain subprime loans, but a
level of risk exists for all loans. Market factors adversely affecting mortgage loan repayments may include a general economic turndown, high unemployment, a general slowdown in the real estate market, a drop in the market prices of real estate, or
an increase in interest rates resulting in higher mortgage payments by holders of adjustable rate mortgages.
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If the fund purchases subordinated mortgage-backed securities, the subordinated
mortgage-backed securities may serve as a credit support for the senior securities purchased by other investors. In addition, the payments of principal and interest on these subordinated securities generally will be made only after payments are made
to the holders of securities senior to the funds securities. Therefore, if there are defaults on the underlying mortgage loans, the fund will be less likely to receive payments of principal and interest, and will be more likely to suffer a
loss. Privately issued mortgage-backed securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived weakness in the mortgage and real estate market sectors. Without an active
trading market, mortgage-backed securities held in the funds portfolio may be particularly difficult to value because of the complexities involved in assessing the value of the underlying mortgage loans.
Credit Enhancements
. Credit enhancements for certain mortgage-backed securities and asset-backed securities issued by
nongovernmental entities typically are provided by external entities such as banks or financial institutions or by the structure of a transaction itself. Credit enhancements provided for certain mortgage-backed securities and asset-backed securities
issued by non-governmental entities typically take one of two forms: (a) liquidity protection or (b) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets, to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. This protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring
the transaction or through a combination of these approaches. The degree of credit support provided for each issue is generally based on historical information with respect to the level of credit risk associated with the underlying assets.
Delinquencies or losses in excess of those anticipated could adversely affect the return on an investment in a security. The fund will not pay any additional fees for credit support, although the existence of credit support may increase the price of
a security or decrease the yield or amount distributable on the security.
Examples of such credit support arising out of
the structure of the transaction include senior-subordinated securities (multiple class securities with one or more classes being senior to other subordinated classes as to the payment of principal and interest, with the result that
defaults on the underlying assets are borne first by the holders of the subordinated class), creation of reserve funds (in which case cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held
in reserve against future losses) and overcollateralization (in which case the scheduled payments on, or the principal amount of, the underlying assets exceeds that required to make payment of the securities and pay any servicing or
other fees). The fund may purchase subordinated securities that, as noted above, may serve as a form of credit support for senior securities purchased by other investors.
Bank Obligations
The fund may invest in all types of bank obligations,
including certificates of deposit (CDs) and bankers acceptances. U.S. 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). U.S. 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 held by the fund) and are subject to federal examination and to a
substantial body of federal law and regulation. As a result of federal and state laws and regulations, U.S. branches of U.S. 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 U.S. banks, such as
CDs and time deposits, 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
18
governmental regulation. Such obligations are subject to different risks than are those of U.S. banks or U.S. 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 U.S. banks and
foreign branches of foreign banks are not necessarily subject to the same or similar regulatory requirements that apply to U.S. 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 U.S. bank or about a foreign bank than about a U.S. bank.
Obligations of U.S. 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 federal and
state regulation as well as governmental action in the country in which the foreign bank has its head office. A U.S. 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; 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
U.S. branch of a foreign bank than about a U.S. bank.
Collateralized Debt Obligations
Collateralized debt obligations (CDOs) include collateralized bond obligations (CBOs), collateralized loan
obligations (CLOs) and other similarly structured securities. CDOs are types of asset-backed securities. A CBO is a trust or other special purpose entity (SPE) which is typically backed by a diversified pool of fixed income
securities (which may include high risk, below investment grade securities). A CLO is a trust or other SPE that is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior
unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Although certain CDOs may receive credit enhancement in the form of a senior-subordinate structure,
over-collateralization or bond insurance, such enhancement may not always be present, and may fail to protect the fund against the risk of loss on default of the collateral. Certain CDOs may use derivatives contracts to create synthetic
exposure to assets rather than holding such assets directly. CDOs may charge management fees and administrative expenses, which are in addition to those of the fund.
For both CBOs and CLOs, the cashflows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the equity tranche, which bears the
first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or
CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults,
increased sensitivity to defaults due to collateral default and disappearance of subordinate tranches, market anticipation of defaults, as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be
paid in kind (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which the fund invests. Normally, CBOs, CLOs and other CDOs are privately offered
and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by the fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A
transactions. In addition to the normal risks associated with fixed income securities discussed
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elsewhere in this SAI and the funds Prospectus (e.g., interest rate risk and credit risk), CDOs carry additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the fund may invest in tranches of CDOs that are subordinate to
other tranches; (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results; and (v) the CDOs manager may perform poorly.
Commercial Paper and Other Short-Term Investments
The fund may invest or hold cash or other short-term investments, including commercial paper. Commercial paper represents short-term
unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. The fund may purchase commercial paper issued pursuant to the private placement exemption in Section 4(2) of the Securities
Act of 1933, as amended (the 1933 Act). Section 4(2) paper is restricted as to disposition under federal securities laws in that any resale must similarly be made in an exempt transaction. The fund may or may not regard such
securities as illiquid, depending on the circumstances of each case. A variable amount master demand note represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between an issuer and
an institutional lender, 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.
Deferred Interest Bonds
Deferred interest bonds are debt obligations that generally provide for a period of delay before the regular payment of interest begins and that are issued at a significant discount from face value. The
original discount approximates the total amount of interest the bonds will accrue and compound over the period until the first interest accrual date at a rate of interest reflecting the market rate of the security at the time of issuance. Although
this period of delay is different for each deferred interest bond, a typical period is approximately one-third of the bonds term to maturity. Such investments benefit the issuer by mitigating its initial need for cash to meet debt service, but
some also provide a higher rate of return to attract investors who are willing to defer receipt of such cash.
High Yield
Securities
High yield securities are medium or lower rated securities and unrated securities of comparable quality,
sometimes referred to as junk bonds. Generally, such securities offer a higher current yield than is offered by higher rated securities, but also are predominantly speculative with respect to the issuers capacity to pay interest
and repay principal in accordance with the terms of the obligations. The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality bonds.
In addition, medium and lower rated securities and comparable unrated securities generally present a higher degree of credit risk. The risk of loss because of default by these issuers is significantly greater because medium and lower rated
securities generally are unsecured and frequently subordinated to the prior payment of senior indebtedness. In addition, the market value of securities in lower rated categories is more volatile than that of higher quality securities, and the
markets in which medium and lower rated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the fund to obtain accurate market quotations for
purposes of valuing its securities and calculating its net asset value. Moreover, the lack of a liquid trading market may restrict the availability of securities for the fund to purchase and may also have the effect of limiting the ability of the
fund to sell securities at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment expectations. If an issuer calls the obligation for redemption, the fund may have to replace the security with a lower yielding security,
resulting in a
20
decreased return for investors. Also, the principal value of bonds moves inversely with movements in interest rates; in the event of rising interest rates, the value of the securities held by the
fund may decline more than a portfolio consisting of higher rated securities. If the fund experiences unexpected net redemptions, it may be forced to sell its higher rated bonds, resulting in a decline in the overall credit quality of the securities
held by the fund and increasing the exposure of the fund to the risks of lower rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value because of changes in interest rates than bonds
that pay interest currently.
Subsequent to its purchase by the fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund. Neither event will require sale of these securities by the fund, but the subadviser will consider the event in determining whether the fund should continue to hold the
security.
Stripped Securities
Stripped securities may be issued by agencies or instrumentalities of the U.S. government, or by private originators of, or investors in, government securities or mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Stripped securities have greater volatility than other types of securities. Although mortgage securities are purchased and sold
by institutional investors through several investment banking firms acting as brokers or dealers, the market for such securities has not yet been fully developed. Accordingly, stripped securities may be illiquid.
Stripped securities are structured with two or more classes of securities that receive different proportions of the interest and
principal distributions on a pool of assets. A common type of stripped mortgage security will have at least one class receiving only a small portion of the principal. In the most extreme case, one class will receive all of the interest
(IO or interest-only class), while the other class will receive all of the principal (PO or principal-only class). The yield to maturity on IOs, POs and other mortgage-backed securities that are purchased at a substantial
premium or discount generally are extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on such securities yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the fund may fail to fully recoup its initial investment in these
securities even if the securities have received the highest rating by a nationally recognized statistical rating organization (NRSRO).
Structured Notes and Related Instruments
Structured notes and
other related instruments are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as selected
securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Structured instruments may be issued by corporations, including banks, as well as by
governmental agencies and frequently are assembled in the form of medium-term notes, but a variety of forms is available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal
and/or interest payments are to be adjusted upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the instruments are outstanding. As a result, the interest and/or principal payments that may be made on
a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may
be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of
loss. Investment in indexed securities and structured notes involves certain risks, including the credit risk of the issuer and the normal risks of price changes in response to changes in interest rates. Further, in the case of certain indexed
securities or structured notes, a decline in the reference
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instrument may cause the interest rate to be reduced to zero, and any further declines in the reference instrument may then reduce the principal amount payable on maturity. Finally, these
securities may be less liquid than other types of securities, and may be more volatile than their underlying reference instruments.
U.S. Government Obligations
U.S. government securities include
(1) U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds (maturities generally greater than ten years) and (2) obligations issued or guaranteed by U.S. government
agencies or instrumentalities which are supported by any of the following: (a) the full faith and credit of the U.S. government (such as Ginnie Mae certificates); (b) the right of the issuer to borrow an amount limited to a specific line
of credit from the U.S. government (such as obligations of the Federal Home Loan Banks); (c) the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities (such as securities issued by
Fannie Mae); or (d) only the credit of the instrumentality (such as securities issued by Freddie Mac). U.S. government securities include issues by non-governmental entities (like financial institutions) that carry direct guarantees from U.S.
government agencies as part of government initiatives in response to the market crisis or otherwise. In the case of obligations not backed by the full faith and credit of the United States, the fund must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Neither the U.S.
government nor any of its agencies or instrumentalities guarantees the market value of the securities it issues. Therefore, the market value of such securities will fluctuate in response to changes in interest rates.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations provide that interest rates are adjusted periodically
based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.
The fund may invest in floating rate debt instruments (floaters) and engage in credit spread trades. The interest rate on a
floater is a variable rate which is tied to another interest rate, such as a corporate bond index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset
feature, floaters may provide the fund with a certain degree of protection against rising interest rates, the fund will participate in any declines in interest rates as well. A credit spread trade is an investment position relating to a difference
in the prices or interest rates of two bonds or other securities or currencies, where the value of the investment position is determined by movements in the difference between the prices or interest rates, as the case may be, of the respective
securities or currencies.
The fund may also invest in inverse floating rate debt instruments (inverse floaters).
The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of
similar credit quality.
A floater may be considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in some floaters is associated with greater volatility in their market values.
Such instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it difficult for the fund to dispose of a variable or floating rate note if the
issuer defaulted on its payment obligation or during
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periods that the fund is not entitled to exercise its demand rights, and the fund could, for these or other reasons, suffer a loss with respect to such instruments. In determining
average-weighted portfolio maturity, an instrument will be deemed to have a maturity equal to either the period remaining until the next interest rate adjustment or the time the fund involved can recover payment of principal as specified in the
instrument, depending on the type of instrument involved.
Zero Coupon and Pay-In-Kind Securities
A zero coupon bond is a security that makes no fixed interest payments but instead is issued at a discount from its face value. The bond
is redeemed at its face value on the specified maturity date. Zero coupon bonds may be issued as such, or they may be created by a broker who strips the coupons from a bond and separately sells the rights to receive principal and interest. The
prices of zero coupon bonds tend to fluctuate more in response to changes in market interest rates than do the prices of interest-paying debt securities with similar maturities. The fund generally accrues income on zero coupon bonds prior to the
receipt of cash payments. Since the fund must distribute substantially all of its income to shareholders to qualify as a regulated investment company under federal income tax law, to the extent that the fund invests in zero coupon bonds, it may have
to dispose of other securities, including at times when it may be disadvantageous to do so, to generate the cash necessary for the distribution of income attributable to its zero coupon bonds. Pay-in-kind securities have characteristics similar to
those of zero coupon securities, but interest on such securities may be paid in the form of obligations of the same type rather than cash.
Derivatives
General
. The fund may utilize options, futures contracts (sometimes referred to as futures), options on futures
contracts, forward contracts, swaps, caps, floors, collars, indexed securities, various mortgage-related obligations, structured or synthetic financial instruments and other derivative instruments (collectively, Financial Instruments).
The fund may use Financial Instruments for any purpose, including as a substitute for other investments, to attempt to enhance its portfolios return or yield and to alter the investment characteristics of its portfolio (including to attempt to
mitigate risk of loss in some fashion, or hedge). Except as otherwise provided in its Prospectus, this SAI or by applicable law, the fund may purchase and sell any type of Financial Instrument. The fund may choose not to make use of
derivatives for a variety of reasons, and no assurance can be given that any derivatives strategy employed will be successful.
The U.S. government is in the process of adopting and implementing regulations governing derivatives markets, including mandatory
clearing of certain derivatives, margin and reporting requirements. The ultimate impact of the regulations remains unclear. Additional regulation of derivatives may make them more costly, may limit their availability, may disrupt markets or may
otherwise adversely affect their value or performance.
The use of Financial Instruments may be limited by applicable law
and any applicable regulations of the Securities and Exchange Commission (the SEC), the Commodity Futures Trading Commission (the CFTC), or the exchanges on which some Financial Instruments may be traded. (Note, however, that
some Financial Instruments that the fund may use may not be listed on any exchange and may not be regulated by the SEC or the CFTC.) In addition, the funds ability to use Financial Instruments may be limited by tax considerations.
In addition to the instruments and strategies discussed in this section, the subadviser may discover additional opportunities in
connection with Financial Instruments and other similar or related techniques. These opportunities may become available as the subadviser develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. The subadviser may utilize these opportunities and techniques to the extent that they are consistent with the funds investment objective and permitted by its investment limitations and
applicable regulatory authorities. These opportunities and techniques may involve risks different from or in addition to those summarized herein.
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This discussion is not intended to limit the funds investment flexibility, unless such
a limitation is expressly stated, and therefore will be construed by the fund as broadly as possible. Statements concerning what the fund may do are not intended to limit any other activity. Also, as with any investment or investment technique, even
when the Prospectus or this discussion indicates that the fund may engage in an activity, it may not actually do so for a variety of reasons, including cost considerations.
Summary of Certain Risks
. The use of Financial Instruments involves special considerations and risks, certain of which are summarized below, and may result in losses to the fund. In general,
the use of Financial Instruments may increase the volatility of the fund and may involve a small investment of cash relative to the magnitude of the risk or exposure assumed. Even a small investment in derivatives may magnify or otherwise increase
investment losses to the fund. As noted above, there can be no assurance that any derivatives strategy will succeed.
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Financial Instruments are subject to the risk that the market value of the derivative itself or the market value of underlying instruments will change
in a way adverse to the funds interest. Many Financial Instruments are complex, and successful use of them depends in part upon the subadvisers ability to forecast correctly future market trends and other financial or economic factors or
the value of the underlying security, index, interest rate or currency or other instrument or measure. Even if the subadvisers forecasts are correct, other factors may cause distortions or dislocations in the markets that result in
unsuccessful transactions. Financial Instruments may behave in unexpected ways, especially in abnormal or volatile market conditions.
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The fund may be required to maintain assets as cover, maintain segregated accounts, post collateral or make margin payments when it takes
positions in Financial Instruments. Assets that are segregated or used as cover, margin or collateral may be required to be in the form of cash or liquid securities, and typically may not be sold while the position in the Financial Instrument is
open unless they are replaced with other appropriate assets. If markets move against the funds position, the fund may be required to maintain or post additional assets and may have to dispose of existing investments to obtain assets acceptable
as collateral or margin. This may prevent it from pursuing its investment objective. Assets that are segregated or used as cover, margin or collateral typically are invested, and these investments are subject to risk and may result in losses to the
fund. These losses may be substantial, and may be in addition to losses incurred by using the Financial Instrument in question. If the fund is unable to close out its positions, it may be required to continue to maintain such assets or accounts or
make such payments until the positions expire or mature, and the fund will continue to be subject to investment risk on the assets. In addition, the fund may not be able to recover the full amount of its margin from an intermediary if that
intermediary were to experience financial difficulty. Segregation, cover, margin and collateral requirements may 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 the fund to sell a portfolio security or close out a derivatives position at a disadvantageous time or price.
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The funds ability to close out or unwind a position in a Financial Instrument prior to expiration or maturity depends on the existence of a
liquid market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the counterparty) to enter into a transaction closing out the position. If there is no market or the fund is not
successful in its negotiations, the fund may not be able to sell or unwind the derivative position at a particular time or at an anticipated price. This may also be the case if the counterparty to the Financial Instrument becomes insolvent. The fund
may be required to make delivery of portfolio securities or other assets underlying a Financial Instrument in order to close out a position or to sell portfolio securities or assets at a disadvantageous time or price in order to obtain cash to close
out the position. While the position remains open, the fund continues to be subject to investment risk on the Financial Instrument. The fund may or may not be able to take other actions or enter into other transactions, including hedging
transactions, to limit or reduce its exposure to the Financial Instrument.
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Certain Financial Instruments transactions may have a leveraging effect on the fund, and adverse changes in the value of the underlying security,
index, interest rate, currency or other instrument or measure can result in losses substantially greater than the amount invested in the Financial Instrument itself. When the fund engages in transactions that have a leveraging effect, the value of
the fund is likely to be more volatile and all other risks also are likely to be compounded. This is because leverage generally magnifies the effect of any increase or decrease in the value of an asset and creates investment risk with respect to a
larger pool of assets than the fund would otherwise have. Certain Financial Instruments have the potential for unlimited loss, regardless of the size of the initial investment.
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Many Financial Instruments may be difficult to value which may result in increased payment requirements to counterparties or a loss of value to the
fund.
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Liquidity risk exists when a particular Financial Instrument is difficult to purchase or sell. If a derivative transaction is particularly large or if
the relevant market is illiquid, the fund may be unable to initiate a transaction or liquidate a position at an advantageous time or price. Certain Financial Instruments, including certain over-the-counter (OTC) options and swaps, may be
considered illiquid and therefore subject to the funds limitation on illiquid investments.
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In a hedging transaction there may be imperfect correlation, or even no correlation, between the identity, price or price movements of a Financial
Instrument and the identity, price or price movements of the investments being hedged. This lack of correlation may cause the hedge to be unsuccessful and may result in the fund incurring substantial losses and/or not achieving anticipated gains.
Even if the strategy works as intended the fund might have been in a better position had it not attempted to hedge at all.
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Financial Instruments used for non-hedging purposes may result in losses which would not be offset by increases in the value of portfolio securities or
declines in the cost of holdings or other assets to be acquired. In the event that the fund uses a Financial Instrument as an alternative to purchasing or selling other investments or in order to obtain desired exposure to an index or market, the
fund will be exposed to the same risks as are incurred in purchasing or selling the other investments directly, as well as the risks of the transaction itself.
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Certain Financial Instruments involve the risk of loss resulting from the insolvency or bankruptcy of the counterparty or the failure by the
counterparty to make required payments or otherwise comply with the terms of the contract. In the event of default by a counterparty, the fund may have contractual remedies pursuant to the agreements related to the transaction, which may be limited
by applicable law in the case of the counterpartys bankruptcy.
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Financial Instruments involve operational risk. There may be incomplete or erroneous documentation or inadequate collateral or margin, or transactions
may fail to settle. For Financial Instruments not guaranteed by an exchange or clearing house, the fund may have only contractual remedies in the event of a counterparty default, and there may be delays, costs or disagreements as to the meaning of
contractual terms, and litigation in enforcing those remedies.
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Certain Financial Instruments transactions, including certain options, swaps, forward contracts, and certain options on foreign currencies, are entered
into directly by the counterparties
or
through financial institutions acting as market makers (OTC derivatives), rather than being traded on exchanges or in markets registered with the CFTC or the SEC. Many of the protections afforded to
exchange participants will not be available to participants in OTC derivatives transactions. For example, OTC derivatives transactions are not subject to the guarantee of an exchange, and only OTC derivatives that are either required to be cleared
or submitted voluntarily for clearing to a clearinghouse will enjoy the protections that central clearing provides against default by the original counterparty to the trade. In an OTC derivatives transaction that is not cleared, the fund bears the
risk of default by its counterparty. In a cleared derivatives transaction, the fund is instead exposed to the risk of default of the clearinghouse and the risk of default of the broker through which it has entered into the transaction. Information
available on counterparty creditworthiness may be incomplete or outdated, thus reducing the ability to anticipate counterparty defaults.
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Financial Instruments transactions conducted outside the United States may not be conducted in the same manner as those entered into on U.S. exchanges,
and may be subject to different margin, exercise, settlement or expiration procedures. Many of the risks of OTC Financial Instruments transactions are also applicable to Financial Instruments used outside the United States. Financial Instruments
used outside the United States also are subject to the risks affecting foreign securities, currencies and other instruments.
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Financial Instruments involving currency are subject to additional risks. Currency related transactions may be negatively affected by government
exchange controls, blockages, and manipulations. Exchange rates may be influenced by factors extrinsic to a countrys economy. Also, there is no systematic reporting of last sale information with respect to foreign currencies. As a result, the
information on which trading in currency derivatives is based may not be as complete as, and may be delayed beyond, comparable data for other transactions.
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Use of Financial Instruments involves transaction costs, which may be significant. Use of Financial Instruments also may increase the amount of taxable
income to shareholders, including in a fund that invests largely in municipal securities.
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Hedging
. As stated above, the term hedging often is used to describe a transaction or strategy that is intended
to mitigate risk of loss in some fashion. 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. Thus, 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 the portfolio security that 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 it anticipated purchasing, the effect on the funds
portfolio is the same as if the transaction were entered into for speculative purposes.
In hedging transactions, Financial
Instruments on securities (such as options and/or futures) generally are 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 indices, in
contrast, generally are 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 generally are used to hedge either individual securities or
broad debt market sectors.
OptionsGenerally
. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price during the option period. A put option gives the purchaser the right to sell, and obligates the writer to buy, the underlying investment at the agreed-upon price during
the option period. Purchasers of options pay an amount, known as a premium, to the option writer in exchange for the right under the option contract.
The fund may purchase or write both exchange-traded and OTC options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is
listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between the fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee.
Unlike exchange-traded options, which are standardized with respect to the underlying
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instrument, expiration date, contract size, and strike price, the terms of OTC options generally are established through negotiation with the other party to the option contract. When the fund
purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
Writing put or call options can enable the
fund to enhance income or yield by reason of the premiums paid by the purchasers of such options. However, the fund may also suffer a loss. For example, if the market price of the security underlying a put option written by the fund declines to less
than the exercise price of the option, minus the premium received, it can be expected that the option will be exercised and the fund would be required to purchase the security at more than its market value. If a security appreciates to a price
higher than the exercise price of a call option written by the fund, it can be expected that the option will be exercised and the fund will be obligated to sell the security at less than its market value.
The value of an option position will reflect, among other things, the current market value of the underlying investment, the time
remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions. Options purchased by the fund that
expire unexercised have no value, and the fund will realize a loss in the amount of the premium paid and any transaction costs. If an option written by the fund expires unexercised, the fund realizes a gain equal to the premium received at the time
the option was written. Transaction costs must be included in these calculations.
The fund may effectively terminate its
right or obligation under an option by entering into a closing transaction. For example, the fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, the fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the fund to realize
profits or limit losses on an option position prior to its exercise or expiration. There can be no assurance that it will be possible for the fund to enter into any closing transaction.
A type of put that the fund may purchase is an optional delivery standby commitment, which is entered into by parties selling
debt securities to the fund. An optional delivery standby commitment gives the fund the right to sell the security back to the seller on specified terms. This right is provided as an inducement to purchase the security.
Options on Indices
. Puts and calls on indices are similar to puts and calls on securities (described above) or futures
contracts (described below) except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When the fund writes a call on an index,
it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the fund an amount of cash if the closing level of the index upon which the call is based is greater than
the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (multiplier), which determines the total dollar value for
each point of such difference. When the fund buys a call on an index, it pays a premium and has the same rights as to such call as are indicated above. When the fund buys a put on an index, it pays a premium and has the right, prior to the
expiration date, to require the seller of the put, upon the funds exercise of the put, to deliver to the fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which
amount of cash is determined by the multiplier, as described above for calls. When the fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the fund to deliver to
it an amount of cash equal to the difference between the closing level of the index and exercise price times the multiplier if the closing level is less than the exercise price.
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Options on indices may, depending on the circumstances, involve greater risk than options on
securities. Because index options are settled in cash, when the fund writes a call on an index it may not be able to provide in advance for its potential settlement obligations by acquiring and holding the underlying securities.
Futures Contracts and Options on Futures Contracts
. A financial futures contract sale creates an obligation by the seller
to deliver the type of Financial Instrument or, in the case of index and similar futures, cash, called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser
to take delivery of the asset called for in the contract in a specified delivery month at a stated price. Options on futures give the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time
during the period of the option.
Futures strategies can be used to change the duration of the funds portfolio. If the
subadviser wishes to shorten the duration of the funds portfolio, the fund may sell a debt futures contract or a call option thereon, or purchase a put option on that futures contract. If the subadviser wishes to lengthen the duration of the
funds portfolio, the fund may buy a debt futures contract or a call option thereon, or sell a put option thereon.
Futures contracts may also be used for other purposes, such as to simulate full investment in underlying securities while retaining a
cash balance for portfolio management purposes, as a substitute for direct investment in a security, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract or option is priced more
attractively than the underlying security or index.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the fund is required to deposit initial margin. Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Under certain
circumstances, such as periods of high volatility, the fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.
Subsequent variation margin payments are made to and from the futures broker daily as the value of the futures
position varies, a process known as marking-to-market. Daily variation margin calls could be substantial in the event of adverse price movements. If the fund has insufficient cash to meet daily variation margin requirements, it might
need to sell securities at a disadvantageous time or price.
Although some futures and options on futures call for making or
taking delivery of the underlying securities, currencies or cash, generally those contracts are closed out prior to delivery by offsetting purchases or sales of matching futures or options (involving the same index, currency or underlying security
and delivery month). If an offsetting purchase price is less than the original sale price, the fund realizes a gain, or if it is more, the fund realizes a loss. If an offsetting sale price is more than the original purchase price, the fund realizes
a gain, or if it is less, the fund realizes a loss. The fund will also bear transaction costs for each contract, which will be included in these calculations. Positions in futures and options on futures may be closed only on an exchange or board of
trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or options
position.
Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures
contract or an option on a futures contract can vary from the previous days settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because
prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If the fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market, the imposition of price limits or otherwise, it could incur
substantial losses. The fund would continue to be subject to market risk with respect to the position. In addition, except in the case of
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purchased options, the fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to
maintain cash or securities in a segregated account.
If an index future is used for hedging purposes the risk of imperfect
correlation between movements in the price of index futures and movements in the price of the securities that are the subject of the hedge increases as the composition of the funds portfolio diverges from the securities included in the
applicable index. The price of the index futures may move more than or less than the price of the securities being hedged. To compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the
price of the index futures, the fund may buy or sell index futures in a greater dollar amount than the dollar amount of the securities being hedged if the historical volatility of the prices of such securities being hedged is more than the
historical volatility of the prices of the securities included in the index. It is also possible that, where the fund has sold index futures contracts to hedge against a decline in the market, the market may advance and the value of the securities
held in the fund may decline. If this occurred, the fund would lose money on the futures contract and also experience a decline in value of its portfolio securities.
Where index futures are purchased to hedge against a possible increase in the price of securities before the fund is able to invest in them in an orderly fashion, it is possible that the market may
decline instead. If the subadviser then concludes not to invest in them at that time because of concern as to possible further market decline or for other reasons, the fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities it had anticipated purchasing.
Futures and options on futures are regulated by the
CFTC.
Swaps, Caps, Floors and Collars
. The fund may enter into swaps, caps, floors and collars to
preserve a return or a spread on a particular investment or portion of its portfolio, to protect against any increase in the price of securities the fund anticipates purchasing at a later date or to attempt to enhance yield or total return. A swap
typically involves the exchange by the fund with another party of their respective commitments to pay or receive cash flows, e.g., an exchange of floating rate payments for fixed-rate payments. The purchase of a cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined value, to receive payments on a notional principal amount from the party selling the cap. The purchase of a floor entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the party selling the floor. A collar combines elements of a cap and a floor.
Swap agreements, including caps, floors and collars, can be individually negotiated and structured to include exposure to a variety of different types of investments (such as individual securities,
baskets of securities and securities indices) or market factors (such as those listed below). Depending on their structure, swap agreements may increase or decrease the overall volatility of the funds investments and its share price and yield
because, and to the extent, these agreements affect the funds exposure to long- or short-term interest rates, non-U.S. currency values, mortgage-backed or other security values, corporate borrowing rates or other factors such as security
prices or inflation rates.
Swap agreements will tend to shift the funds investment exposure from one type of investment
to another. Caps and floors have an effect similar to buying or writing options.
If a counterpartys creditworthiness
declines, the value of the agreement would be likely to decline, potentially resulting in losses.
The fund may enter into
credit default swap contracts for investment purposes. As the seller in a credit default swap contract, the fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a
default by a third party, such as a U.S. or a non- U.S. corporate issuer, on the debt obligation. In return, the fund would receive from the counterparty a periodic stream
29
of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the fund would keep the stream of payments and would have no payment obligations.
As the seller, the fund would be subject to investment exposure on the notional amount of the swap which may be significantly larger than the funds cost to enter into the credit default swap. The fund may also invest in credit default indices,
which are indices that reflect the performance of a basket of credit default swaps, and swaptions on credit default swap indices. (See Options on Swaps below.)
The fund may purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its
portfolio, in which case the fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the investment may expire worthless and would only generate income in the event of an actual default by the
issuer of the underlying obligation (or, as applicable, a credit downgrade or other indication of financial instability). It would also involve credit riskthat the seller may fail to satisfy its payment obligations to the fund in the event of
a default.
The fund may enter into an interest rate swap in an effort to protect against declines in the value of fixed
income securities held by the fund. In such an instance, the fund may agree to pay a fixed rate (multiplied by a notional amount) while a counterparty agrees to pay a floating rate (multiplied by the same notional amount). If interest rates rise,
resulting in a diminution in the value of the funds portfolio, the fund would receive payments under the swap that would offset, in whole or in part, such diminution in value.
The net amount of the excess, if any, of the funds obligations over its entitlements with respect to each swap will be accrued on a
daily basis, depending on whether a threshold amount (if any) is exceeded, and an amount of cash or liquid assets having an aggregate net asset value approximately equal to the accrued excess will be set aside as cover, as described below. The fund
will also maintain collateral with respect to its total obligations under any swaps that are not entered into on a net basis, and will maintain cover as required by SEC guidelines from time to time with respect to caps and floors written by the
fund.
Combined Positions
. The fund may purchase and write options in combination with each other, or in
combination with other Financial Instruments, to adjust the risk and return characteristics of its overall position. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to
open and close out.
Options on Swaps
. An option on a swap agreement, or a swaption, is a
contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. In return, the
purchaser pays a premium to the seller of the contract. The seller of the contract receives the premium and bears the risk of unfavorable changes on the underlying swap. The fund may write (sell) and purchase put and call swaptions. The
fund may also enter into swaptions on either an asset-based or liability-based basis, depending on whether the fund is hedging its assets or its liabilities. The fund may write (sell) and purchase put and call swaptions to the same extent it may
make use of standard options on securities or other instruments. The fund may enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its holdings, as a duration management technique, to
protect against an increase in the price of securities the fund anticipates purchasing at a later date, or for any other purposes, such as for speculation to increase returns. Swaptions are generally subject to the same risks involved in the
funds use of options.
Depending on the terms of the particular option agreement, the fund will generally incur a
greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When the fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised.
However, when the fund writes a swaption, upon exercise of the option the fund will become obligated according to the terms of the underlying agreement.
30
Cover
. Transactions using Financial Instruments may involve obligations which
if not covered could be construed as senior securities. The fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, segregate or set aside on its books cash or liquid assets in
the prescribed amount as determined daily. The fund may cover such transactions using other methods permitted under the 1940 Act, orders or releases issued by the SEC thereunder, or no-action letters or other guidance of the SEC staff. Although SEC
guidelines on cover are designed to limit the transactions involving Financial Instruments that the fund may be engaged in at any time, the segregation of assets does not reduce the risks to the fund of entering into transactions in Financial
Instruments.
Turnover
. The funds derivatives activities may affect its turnover rate and brokerage
commission payments. The exercise of calls or puts written by the fund, and the sale or purchase of futures contracts, may cause it to sell or purchase related investments, thus increasing its turnover rate. Once the fund has received an exercise
notice on an option it has written, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. The exercise of puts purchased by the fund
may also cause the sale of related investments, also increasing turnover; although such exercise is within the funds control, holding a protective put might cause it to sell the related investments for reasons that would not exist in the
absence of the put. The fund will pay a brokerage commission each time it buys or sells a put or call or purchases or sells a futures contract. Such commissions may be higher than those that would apply to direct purchases or sales.
Forward Commitments and When-Issued Securities
The fund may purchase securities on a when-issued or to be announced or forward delivery basis. The payment obligation and the interest rate that will be received on
the when-issued securities are fixed at the time the buyer enters into the commitment although settlement, i.e., delivery of and payment for the securities, takes place at a later date. In a to be announced transaction, the
fund commits to purchase securities for which all specific information is not known at the time of the trade.
Securities
purchased on a when-issued or forward delivery basis are subject to changes in value based upon the markets perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest
rates. The value of these securities experiences appreciation when interest rates decline and depreciation when interest rates rise. Purchasing securities on a when-issued or forward delivery basis can involve a risk that the
yields available in the market on the settlement date may actually be higher or lower than those obtained in the transaction itself. At the time the fund enters into a when issued or forward delivery commitment, the fund will
set aside cash or other appropriate liquid securities with a value at least equal to the funds obligation under the commitment. The funds liquidity and ability to manage its assets might be affected when it sets aside cash or portfolio
securities to cover such commitments.
An increase in the percentage of the funds assets committed to the purchase of
securities on a when-issued basis may increase the volatility of its net asset value.
Investment Company Securities
Subject to applicable statutory and regulatory limitations, the fund may invest in shares of other investment companies,
including shares of other mutual funds, closed-end funds, and unregistered investment companies. Investments in other investment companies are subject to the risk 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
31
S&P 500, the NASDAQ 100, or more narrow sector or foreign indices, 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 a trading day, bought and sold based on market values and not at net asset value. For this reason, shares could trade at either a premium
or discount to net asset value. However, the portfolios held by index-based ETFs are publicly disclosed on each trading day, and an approximation of actual net asset value is disseminated throughout the trading day. Because of this transparency, the
trading prices of index based ETFs tend to closely track the actual net asset value of the underlying 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. The fund may invest in ETFs that are actively managed. Actively managed ETFs do not have the transparency of index-based ETFs, and also therefore, are more likely
to trade at a discount or premium to actual net asset values.
The fund may invest in closed-end investment companies 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 investment funds may entail the additional risk that the market value of such investments may be substantially less
than their net asset value.
Illiquid Assets
The fund may not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets would be invested in securities and other assets that are illiquid. Illiquid assets are assets
that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the value at which they are being carried on the funds books. These assets include, among others, certain securities that are subject to
legal or contractual restrictions on resale, certain derivative products and any repurchase transactions that do not mature within seven days. The fund may not be able to sell illiquid securities and other assets in its portfolio at a time when the
sale would be desirable or at a price the fund deems representative of their value. Disposing of illiquid investments may involve time-consuming negotiation and expenses.
Certain restricted securities can be traded freely among qualified purchasers in accordance with Rule 144A under the Securities Act of 1933 (the 1933 Act). 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 this rule is liquid. The Board has delegated to the
subadviser authority to determine whether particular securities eligible for trading under Rule 144A are and continue to be liquid. Investing in these restricted securities could have the effect of increasing the funds illiquidity,
however, if qualified purchasers become uninterested in buying these securities.
Repurchase Agreements
Under the terms of a typical repurchase agreement, the fund would acquire one or more underlying debt obligations, frequently obligations
issued by the U.S. government or its agencies or instrumentalities, for a relatively short period (typically overnight, although the term of an agreement may be many months), subject to an obligation of the seller to repurchase, and the fund to
resell, the obligation at an agreed-upon time and price. The repurchase price is typically greater than the purchase price paid by the fund, thereby determining the funds yield. A repurchase agreement is similar to, and may be treated as, a
secured loan, where the fund loans cash to the counterparty and the loan is secured by the purchased securities as collateral. All repurchase agreements entered into by the fund are required to be collateralized so that at all times during the term
of a repurchase agreement, the value of the underlying securities is at least equal to the amount of the repurchase price. Also, the fund or its custodian is required to have control of the collateral, which the subadviser believes will give the
fund a valid, perfected security interest in the collateral.
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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 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. If the fund enters into a repurchase agreement involving securities the fund could
not purchase directly, and the counterparty defaults, the fund may become the holder of securities that it could not purchase. These repurchase agreements may be subject to greater risks. In addition, these repurchase agreements may be more likely
to have a term to maturity of longer than seven days.
Repurchase agreements maturing in more than seven days are considered
to be illiquid.
Pursuant to an exemptive order issued by the SEC, the fund, along with other affiliated entities managed by
the manager, may transfer uninvested cash balances into one or more joint accounts for the purpose of entering into repurchase agreements secured by cash and U.S. government securities, subject to certain conditions.
Borrowings
The fund
may engage in borrowing transactions as a means of raising cash to satisfy redemption requests, for other temporary or emergency purposes or, to the extent permitted by its investment policies, to raise additional cash to be invested by the
subadviser in other securities or instruments in an effort to increase the funds investment returns. Reverse repurchase agreements may be considered to be a type of borrowing.
When the fund invests borrowing proceeds in other securities, the fund will be at risk for any fluctuations in the market value of the
securities in which the proceeds are invested. Like other leveraging risks, this makes the value of an investment in the fund more volatile and increases the funds overall investment exposure. In addition, if the funds return on its
investment of the borrowing proceeds does not equal or exceed the interest that the fund is obligated to pay under the terms of a borrowing, engaging in these transactions will lower the funds return.
The fund may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments
with respect to its borrowing obligations. This could adversely affect the subadvisers strategy and result in lower fund returns. Interest on any borrowings will be a fund expense and will reduce the value of the funds shares.
The fund may borrow on a secured or on an unsecured basis. If the fund enters into a secured borrowing arrangement, a portion
of the funds assets will be used as collateral. During the term of the borrowing, the fund will remain at risk for any fluctuations in the market value of these assets in addition to any securities purchased with the proceeds of the loan. In
addition, the fund may be unable to sell the collateral at a time when it would be advantageous to do so, which could adversely affect the subadvisers strategy and result in lower fund returns. The fund would also be subject to the risk that
the lender may file for bankruptcy, become insolvent, or otherwise default on its obligations to return the collateral to the fund. In the event of a default by the lender, there may be delays, costs and risks of loss involved in the funds
exercising its rights with respect to the collateral or those rights may be limited by other contractual agreements or obligations or by applicable law.
The 1940 Act requires the fund to maintain at all times an asset coverage of at least 300% of the amount of its borrowings, provided that in the event that the funds asset coverage falls
below 300%, the fund is required to reduce the amount of its borrowings so that it meets the 300% asset coverage threshold within three days (not including Sundays and holidays). 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. Although complying with this guideline would have the effect of limiting the amount that the fund may borrow, it does not otherwise mitigate the risks
of entering into borrowing transactions.
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Reverse Repurchase Agreements
The fund may enter into reverse repurchase agreements. A reverse repurchase agreement has the characteristics of a secured borrowing by
the fund and creates leverage in the funds portfolio. In a reverse repurchase transaction, the fund sells a portfolio instrument to another person, such as a financial institution or broker/dealer, in return for cash. At the same time, the
fund agrees to repurchase the instrument at an agreed-upon time and at a price that is greater than the amount of cash that the fund received when it sold the instrument, representing the equivalent of an interest payment by the fund for the use of
the cash. During the term of the transaction, the fund will continue to receive any principal and interest payments (or the equivalent thereof) on the underlying instruments.
The fund may engage in reverse repurchase agreements as a means of raising cash to satisfy redemption requests or for other temporary or
emergency purposes. Unless otherwise limited in the Prospectus or this SAI, the fund may also engage in reverse repurchase agreements to the extent permitted by its fundamental investment policies in order to raise additional cash to be invested by
the subadviser in other securities or instruments in an effort to increase the funds investment returns.
During
the term of the transaction, the fund will remain at risk for any fluctuations in the market value of the instruments subject to the reverse repurchase agreement as if it had not entered into the transaction. When the fund reinvests the proceeds of
a reverse repurchase agreement in other securities, the fund will also be at risk for any fluctuations in the market value of the securities in which the proceeds are invested. Like other leveraging risks, this makes the value of an investment in
the fund more volatile and increases the funds overall investment exposure. In addition, if the funds return on its investment of the proceeds of the reverse repurchase agreement does not equal or exceed the implied interest that it is
obligated to pay under the reverse repurchase agreement, engaging in the transaction will lower the funds return.
When
the fund enters into a reverse repurchase agreement, it is subject to the risk that the buyer under the agreement may file for bankruptcy, become insolvent, or otherwise default on its obligations to the fund. In the event of a default by the
counterparty, there may be delays, costs and risks of loss involved in the funds exercising its rights under the agreement, or those rights may be limited by other contractual agreements or obligations or by applicable law.
In addition, the fund may be unable to sell the instruments subject to the reverse repurchase agreement at a time when it would be
advantageous to do so, or may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to its obligations under a reverse repurchase agreement. This could adversely
affect the subadvisers strategy and result in lower fund returns. At the time the fund enters into a reverse repurchase agreement, the fund is required to set aside cash or other appropriate liquid securities in the amount of the funds
obligation under the reverse repurchase agreement or take certain other actions in accordance with SEC guidelines, which may affect the funds liquidity and ability to manage its assets. Although complying with SEC guidelines would have the
effect of limiting the amount of fund assets that may be committed to reverse repurchase agreements and other similar transactions at any time, it does not otherwise mitigate the risks of entering into reverse repurchase agreements.
Subordinated Securities
The fund may invest in securities which are subordinated or junior to more senior securities of the issuer, or which represent interests in pools of such subordinated or junior securities.
Such securities may include so-called high yield or junk bonds (i.e., bonds that are rated below investment grade by a rating agency or that are determined by the subadviser to be of equivalent quality) and preferred stock.
Under the terms of subordinated securities, payments that would otherwise be made to their holders may be required to be made to the holders of more senior securities, and/or the subordinated or junior securities may have junior liens, if they have
any rights at all, in any collateral (meaning proceeds of the collateral are required to be paid first to the holders of more senior securities). As a result, subordinated or junior securities will be disproportionately adversely affected by a
default or even a perceived decline in creditworthiness of the issuer.
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EuropeRecent Events
A number of countries in Europe have experienced severe economic and financial difficulties. Many non-governmental issuers, and even
certain governments, have defaulted on, or been forced to restructure, their debts; many other issuers have faced difficulties obtaining credit or refinancing existing obligations; financial institutions have in many cases required government or
central bank support, have needed to raise capital, and/or have been impaired in their ability to extend credit; and financial markets in Europe and elsewhere have experienced extreme volatility and declines in asset values and liquidity. These
difficulties may continue, worsen or spread within and without Europe. Responses to the financial problems by European governments, central banks and others, including austerity measures and reforms, may not work, may result in social unrest and may
limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets and asset valuations
around the world. In addition, one or more countries may abandon the euro, the common currency of the European Union, and/or withdraw from the European Union. The impact of these actions, especially if they occur in a disorderly fashion, is not
clear but could be significant and far-reaching. Even though the fund does not generally invest in securities of issuers located in Europe, these events could negatively affect the value and liquidity of the funds investments due to the
interconnected nature of the global economy and capital markets. The fund may also be susceptible to these events to the extent that the fund invests in municipal obligations with credit support by non-U.S. financial institutions.
Short-Term Trading
Fund
transactions will be undertaken principally to accomplish the funds investment objective in relation to anticipated movements in the general level of interest rates, but the fund may also engage in short-term trading consistent with its
investment objective.
New Investment Products
New types of, derivative instruments, hedging instruments and other securities or instruments are developed and marketed from time to time. Consistent with its investment limitations, the fund expects to
invest in those new types of securities and instruments that its subadviser believes may assist the fund in achieving its investment objective.
Alternative Investment Strategies and Temporary Investments
At times the
subadviser may judge that conditions in the securities markets make pursuing the funds typical investment strategy inconsistent with the best interest of its shareholders. At such times, the subadviser may temporarily use alternative
strategies, primarily designed to reduce fluctuations in the value of the funds assets. In implementing these defensive strategies, the fund may invest without limit in securities that the subadviser believes present less risk to the fund,
including equity securities, debt and fixed income securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, certificates of deposit, demand and time deposits, bankers acceptance or other
securities the subadviser considers consistent with such defensive strategies, such as, but not limited to, options, futures, warrants or swaps. During periods in which such strategies are used, the duration of the fund may diverge from the duration
range for the fund disclosed in its Prospectus (if applicable). It is impossible to predict when, or for how long, the fund will use these alternative strategies. As a result of using these alternative strategies, the fund may not achieve its
investment objective.
Ratings as Investment Criteria
In general, the ratings of NRSROs represent the opinions of these agencies as to the quality of securities that they rate. Such ratings, however, are relative and subjective, are not absolute standards of
quality and do not evaluate the market value risk of the securities. These ratings will be used by the fund as initial criteria for the
35
selection of portfolio securities, but the fund also will rely upon the independent advice of the subadviser to evaluate potential investments. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general economic trends. Appendix A to this SAI contains further information concerning the rating categories of NRSROs and their significance.
If a security is rated by different agencies and receives different ratings from these agencies, the fund will treat the security as
being rated in the highest rating category received from an agency.
If, after purchase, the credit rating on a security is
downgraded or the credit quality deteriorates, or if the maturity is extended, the funds subadviser will decide whether the security should be held or sold. Upon the occurrence of certain triggering events or defaults, the investors in a
security held by the fund may become the holders of underlying assets. In that case, the fund may become the holder of securities that it could not otherwise purchase at a time when those assets may be difficult to sell or can be sold only at a
loss.
Diversification
The fund is currently classified as a diversified fund under the 1940 Act. This means that the 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. With respect to the remaining 25% of its total assets, the fund can invest more than 5% of its assets in one issuer. When the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating the issuing entity and only the assets and revenues of such entity back the security, such entity is deemed to be the sole issuer. Similarly, in the case of a private activity
bond, if only the assets and revenues of the nongovernmental user back that bond, then such nongovernmental user is deemed to be the sole issuer. If, however, in either case, the creating government or some other entity guarantees a security, such a
guarantee would be considered a separate security and is to be treated as an issue of such government or other entity.
The
fund may only change to non-diversified status with the approval of the funds shareholders. Under the 1940 Act, such approval requires the affirmative vote (a) of 67% or more of the voting securities present at an annual or special
meeting, if the holders of more than 50% of the outstanding voting securities of the fund are present or represented by proxy, or (b) of more than 50% of the outstanding voting securities of the fund, whichever is less.
Duration
For the
simplest fixed income securities, duration indicates the average time at which the securitys cash flows are to be received. For simple fixed income securities with interest payments occurring prior to the payment of principal,
duration is always less than maturity. For example, a current coupon bullet bond with a maturity of 3.5 years (i.e., a bond that pays interest at regular intervals and that will have a single principal payment of the entire principal
amount in 3.5 years) might have a duration of approximately three years. In general, the lower the stated or coupon rate of interest of a fixed income security, the closer its duration will be to its final maturity; conversely, the higher the stated
or coupon rate of interest of a fixed income security, the shorter its duration will be compared to its final maturity.
Determining duration becomes more complex when fixed income security features like floating or adjustable coupon payments, optionality
(for example, the right of the issuer to prepay or call the security), and structuring (for example, the right of the holders of certain securities to receive priority as to the issuers cash flows) are considered. The calculation of
effective duration attempts to take into account optionality and other complex features. Generally, the longer the effective duration of a security, the greater will be the expected change in the percentage price of the security with
respect to a change in the securitys own yield. By way of
36
illustration, a security with an effective duration of 3.5 years might normally be expected to go down in price by 35 basis points if its yield goes up by 10 basis points, while another security
with an effective duration of 4.0 years might normally be expected to go down in price by 40 basis points if its yield goes up by 10 basis points.
The assumptions that are made about a securitys features and options when calculating effective duration may prove to be incorrect. For example, many mortgage pass-through securities may have stated
final maturities of 30 years, but current prepayment rates, which can vary widely under different economic conditions, may have a large influence on the pass-through securitys response to changes in yield. In these situations, the subadviser
may consider other analytical techniques that seek to incorporate the securitys additional features into the determination of its response to changes in its yield.
A security may change in price for a variety of reasons. For example, floating rate securities may have final maturities of ten or more years, but their effective durations will tend to be very short. If
there is an adverse credit event, or a perceived change in the issuers creditworthiness, these securities could experience a far greater negative price movement than would be predicted by the change in the securitys yield in relation to
its effective duration.
As a result, investors should be aware that effective duration is not an exact measurement and may
not reliably predict a securitys price sensitivity to changes in yield or interest rates.
Lending of Portfolio Securities
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. Loans of securities will be secured continuously by collateral in cash, cash equivalents, or U.S. government
obligations maintained on a current basis at an amount at least equal to the market value of the securities loaned. Cash collateral received by the fund will be invested in high quality short-term instruments, or in one or more funds maintained by
the lending agent for the purpose of investing cash collateral. During the term of the loan, the fund will continue to have investment risk with respect to the security loaned, as well as risk with respect to the investment of the cash collateral.
Either party has the right to terminate a loan at any time on customary industry settlement notice (which will not usually exceed three business days). During the existence of a loan, the fund will continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities loaned and, with respect to cash collateral, will receive any income generated by the funds investment of the collateral (subject to a rebate payable to the borrower and a percentage of the
income payable to the lending agent). Where the borrower provides the fund with collateral other than cash, the borrower is also obligated to pay the fund or portfolio a fee for use of the borrowed securities. The fund does not have the right to
vote any securities having voting rights during the existence of the loan, but would retain the right to call the loan in anticipation of an important vote to be taken among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. In addition, the fund could suffer loss if the
loan terminates and the fund is forced to liquidate investments at a loss in order to return the cash collateral to the buyer. If the subadviser determines to make loans, it is not intended that the value of the securities loaned by the fund would
exceed 33
1
/3% of the value of its net assets.
The fund does not currently intend to engage in securities lending, although it may engage in transactions (such as reverse
repurchase agreements) which have similar characteristics.
Commodity Exchange Act Regulation
The fund is operated by persons who have claimed an exclusion, granted to operators of registered investment companies like the fund, from
registration as a commodity pool operator with respect to the fund under the Commodity Exchange Act (the CEA), and, therefore, are not subject to registration or regulation
37
with respect to the fund under the CEA. As a result, the fund is limited in its ability to trade instruments subject to the CFTCs jurisdiction, including commodity futures (which include
futures on broad-based securities indexes, interest rate futures and currency futures), options on commodity futures, certain swaps or other investments (whether directly or indirectly through investments in other investment vehicles).
Under this exclusion, the fund must satisfy one of the following two trading limitations whenever it enters into a new commodity trading
position: (1) the aggregate initial margin and premiums required to establish the funds positions in CFTC-regulated instruments may not exceed 5% of the liquidation value of the funds portfolio (after accounting for unrealized profits
and unrealized losses on any such investments); or (2) the aggregate net notional value of such instruments, determined at the time the most recent position was established, may not exceed 100% of the liquidation value of the funds portfolio
(after accounting for unrealized profits and unrealized losses on any such positions). The fund would not be required to consider its exposure to such instruments if they were held for bona fide hedging purposes, as such term is defined
in the rules of the CFTC. In addition to meeting one of the foregoing trading limitations, the fund may not market itself as a commodity pool or otherwise as a vehicle for trading in the markets for CFTC-regulated instruments.
INVESTMENT POLICIES
The fund has adopted the fundamental and non-fundamental investment policies below for the protection of shareholders. Fundamental investment policies of the fund may not be changed without the vote of a
majority of the outstanding voting securities of the fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting securities of the fund present at a shareholder meeting, if the holders of more than 50% of the voting securities of
the fund are present in person or represented by proxy, or (b) more than 50% of the voting securities of the fund. The Board may change non-fundamental investment policies at any time.
If any percentage restriction described below is complied with at the time of an investment, a later increase or decrease in the
percentage resulting from a change in values or assets will not constitute a violation of such restriction.
The funds
investment objective is non-fundamental.
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.
38
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.
8. As a matter of fundamental policy, under normal circumstances, the fund invests at least 80% of its assets in municipal securities and in participation or other interests in municipal securities issued
by banks, insurance companies or other financial institutions.
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. (The funds total assets include the amounts being borrowed.) To limit the risks attendant to borrowing, the 1940 Act requires the fund to maintain an asset coverage of at least 300% of the
amount of its borrowings, provided that in the event that the funds asset coverage falls below 300%, the fund is required to reduce the amount of its borrowings so that it meets the 300% asset coverage threshold within three days (not
including Sundays and holidays). Asset coverage means the ratio that the value of the funds total assets (including amounts borrowed), 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 borrowing, 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 a 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 a 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 does not contemplate borrowing money for leverage, but if the fund does so, it will not
likely do so to a substantial degree. 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 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
39
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 a 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 or subadviser 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 a 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. A fund also may 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
the 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 a fund from owning real estate; however, a 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 a 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.
With respect to the fundamental policy relating to commodities set forth in (6) above, the 1940 Act does not
prohibit a 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, a 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 a
funds purchases of illiquid securities to 15% of net assets. If a 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 also may 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.
40
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. In addition, the term industry will be interpreted to include a related group of industries. 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; 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 or groups of industries. The fund has been advised by the staff of the SEC that the staff currently views securities issued by a foreign
government to be in a single industry for purposes of calculating applicable limits on concentration.
The funds
fundamental policies are written and 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.
Non-Fundamental Investment Policy
The fund has adopted the following non-fundamental investment policy:
If at any time another registered open-end investment company that is part of the same group of investment companies as the fund invest
in the fund in reliance upon the provisions of subparagraph (G) of Section 12(d)(1) of the 1940 Act, the fund will not invest in other registered open-end investment companies and registered unit investment trusts in reliance upon the
provisions of subparagraphs (G) or (F) of Section 12(d)(1) of the 1940 Act.
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.
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 capital gains, shareholders will receive distributions of such gains in the form of a taxable ordinary or capital gain dividend.
Portfolio turnover will not be a limiting factor should the subadviser deem it advisable to purchase or sell securities.
For the fiscal years ended October 31, 2012 and October 31, 2013, the funds portfolio turnover rates were as follows:
41
MANAGEMENT
The business and affairs of the fund are conducted by management under the supervision and subject to the direction
of its Board. The business address of each Trustee (including each Trustee of the fund who is not an interested person of the fund (an Independent Trustee)) is c/o Kenneth D. Fuller, Legg Mason, 100 International Drive,
11
th
Floor, Baltimore, Maryland 21202. Information
pertaining to the Trustees and officers of the fund is set forth below.
|
|
|
|
|
|
|
|
|
|
|
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
Memberships
Held by Trustee
During
Past 5 Years
|
Independent Trustees
#
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elliott J. Berv
Born 1943
|
|
Trustee
|
|
Since 1989
|
|
President and Chief Executive Officer, Catalyst (consulting) (since 1984); formerly, Chief Executive Officer, Rocket City Enterprises (media) (2000 to 2005)
|
|
54
|
|
World Affairs Council (since 2009); Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001); formerly,
Director, Lapoint Industries (industrial filter company) (2002 to 2007); formerly, Director, Alzheimers Association (New England Chapter) (1998 to 2008)
|
|
|
|
|
|
|
Jane F. Dasher
Born 1949
|
|
Trustee
|
|
Since 1999
|
|
Chief Financial Officer, Long Light Capital, LLC, formerly known as Korsant Partners, LLC (a family investment company) (since 1997)
|
|
54
|
|
None
|
|
|
|
|
|
|
Mark T. Finn
Born 1943
|
|
Trustee
|
|
Since 1989
|
|
Adjunct Professor, College of William & Mary (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988);
Principal/Member, Balvan Partners (investment management) (2002 to 2009)
|
|
54
|
|
None
|
42
|
|
|
|
|
|
|
|
|
|
|
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
Memberships
Held by Trustee
During
Past 5 Years
|
Stephen Randolph Gross
Born 1947
|
|
Trustee
|
|
Since 1986
|
|
Chairman Emeritus (since 2011) and formerly, Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (1974 to 2011); Executive Director of Business Builders Team, LLC
(since 2005); Principal, Gross Consulting Group, LLC (since 2011); CEO, Gross Capital Advisors, LLC (since 2011); CEO, Trusted CFO Solutions, LLC (since 2011)
|
|
54
|
|
None
|
|
|
|
|
|
|
Richard E. Hanson, Jr.
Born 1941
|
|
Trustee
|
|
Since 1985
|
|
Retired; formerly, Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000)
|
|
54
|
|
None
|
|
|
|
|
|
|
Diana R. Harrington
Born 1940
|
|
Trustee and
Chair of the
Board
|
|
Since 1992
(Chair of the Board
since 2013)
|
|
Babson Distinguished Professor of Finance, Babson College (since 1992)
|
|
54
|
|
None
|
|
|
|
|
|
|
Susan M. Heilbron
Born 1945
|
|
Trustee
|
|
Since 1994
|
|
Retired; formerly, President, Lacey & Heilbron (communications consulting) (1990 to 2002); formerly, General Counsel and Executive Vice President, The Trump Organization (1986
to 1990); formerly, Senior Vice President, New York State Urban Development Corporation (1984 to 1986); formerly, Associate, Cravath, Swaine & Moore LLP (1980 to 1984) and (1977 to 1979)
|
|
54
|
|
Formerly, Director, Lincoln Savings Bank, FSB (1991 to 1994); formerly, Director, Trump Shuttle, Inc. (air transportation) (1989 to 1990); formerly, Director, Alexanders Inc.
(department store) (1987 to 1990)
|
43
|
|
|
|
|
|
|
|
|
|
|
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
Memberships
Held by Trustee
During
Past 5 Years
|
Susan B. Kerley
Born 1951
|
|
Trustee
|
|
Since 1992
|
|
Investment Consulting Partner, Strategic Management Advisors, LLC
(investment consulting)
(since 1990)
|
|
54
|
|
Director and Trustee
(since
1990) and formerly, Chairman (2005 to 2012) of various series of MainStay Family of Funds (66 funds); Investment Company Institute (ICI) Board of Governors (since 2006); ICI Executive Committee (since 2011); Chairman of the Independent Directors
Council (since 2012)
|
|
|
|
|
|
|
Alan G. Merten
Born 1941
|
|
Trustee
|
|
Since 1990
|
|
President Emeritus (since 2012) and formerly, President, George Mason University (1996 to 2012)
|
|
54
|
|
Director Emeritus, Cardinal Financial Corporation (since 2006); Trustee, First Potomac Realty Trust (since 2005); Director, DeVry Inc.
(educational services) (since 2012); formerly, Director, Xybernaut Corporation (information technology) (2004 to 2006); formerly, Director, Digital Net Holdings, Inc. (2003 to 2004); formerly, Director, Comshare, Inc. (information
technology)
(1985 to 2003)
|
|
|
|
|
|
|
R. Richardson Pettit
Born 1942
|
|
Trustee
|
|
Since 1990
|
|
Retired; formerly, Duncan Professor of Finance, University of Houston (1977 to 2006); previous academic or management positions include: University of Washington, University of
Pennsylvania and Purdue University
|
|
54
|
|
None
|
44
|
|
|
|
|
|
|
|
|
|
|
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
Memberships
Held by Trustee
During
Past 5 Years
|
Interested Trustee and Officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth D. Fuller
Born 1958
|
|
Trustee, President and Chief Executive Officer
|
|
Since 2013
|
|
Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.) (since 2013); Officer and/or Trustee/Director of 168 funds associated with Legg Mason Partners Fund
Advisor, LLC (LMPFA) or its affiliates (since 2013); President and Chief Executive Officer of LMPFA (since 2013); President and Chief Executive Officer of LM Asset Services, LLC (LMAS) and Legg Mason Fund Asset Management,
Inc. (LMFAM) (formerly registered investment advisers) (since 2013); formerly, Senior Vice President of LMPFA (2012 to 2013); formerly, Director of Legg Mason & Co. (2012 to 2013); formerly, Vice President of Legg Mason & Co.
(2009 to 2012); formerly, Vice PresidentEquity Division of T. Rowe Price Associates (1993 to 2009), as well as Investment Analyst and Portfolio Manager for certain asset allocation accounts (2004 to 2009)
|
|
156
|
|
None
|
#
|
Trustees who are not interested persons of the fund within the meaning of Section 2(a) (19) of the 1940 Act.
|
*
|
Each Trustee 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 Trustee became a board member for a fund in the Legg Mason fund complex.
|
|
Mr. Fuller is an interested person of the fund, as defined in the 1940 Act, because of his position with LMPFA and/or certain of its affiliates.
|
45
|
|
|
|
|
|
|
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
|
Additional Officers:
|
|
|
|
|
Ted P. Becker
Born 1951
620 Eighth Avenue
49
th
Floor
New York, NY 10018
|
|
Chief Compliance Officer
|
|
Since 2007
|
|
Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief
Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006)
|
|
|
|
|
Susan Kerr
Born 1949
620 Eighth Avenue
49
th
Floor
New York, NY 10018
|
|
Chief Anti-Money Laundering Compliance Officer
|
|
Since 2013
|
|
Assistant Vice President of Legg Mason & Co. and LMIS (since 2010); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co.
or its affiliates (since 2013) and Anti-Money Laundering Compliance Officer of LMIS (since 2012); Senior Compliance Officer of LMIS (since 2011); formerly, AML Consultant, DTCC (2010); formerly, AML Consultant, Rabobank Netherlands, (2009);
formerly, First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008)
|
|
|
|
|
Vanessa A. Williams
Born 1979
100 First Stamford Place
6
th
Floor
Stamford, CT 06902
|
|
Identity Theft Prevention Officer
|
|
Since 2011
|
|
Vice President of Legg Mason & Co. (since 2012); Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011);
formerly, Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (2011 to 2013); formerly, Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance
Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006)
|
|
|
|
|
Robert I. Frenkel
Born 1954
100 First Stamford Place
6
th
Floor
Stamford, CT 06902
|
|
Secretary and Chief Legal Officer
|
|
Since 2007
|
|
Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg
Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)
|
|
|
|
|
Thomas C. Mandia
Born 1962
100 First Stamford Place
6
th
Floor
Stamford, CT 06902
|
|
Assistant Secretary
|
|
Since 2007
|
|
Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant
Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LMAS (since 2002) and LMFAM (since 2013)
|
46
|
|
|
|
|
|
|
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
|
Richard F. Sennett
Born 1970
100 International Drive
7
th
Floor
Baltimore, MD 21202
|
|
Principal Financial Officer
|
|
Since 2011
|
|
Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and since 2013); Managing Director of Legg Mason
& Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SECs Division of Investment Management (2007 to 2011); formerly, Assistant
Chief Accountant within the SECs Division of Investment Management (2002 to 2007)
|
|
|
|
|
James Crowley
Born 1966
620 Eighth Avenue
49
th
Floor
New York, NY 10018
|
|
Treasurer
|
|
Since 2011
|
|
Vice President of Legg Mason & Co. (since 2010); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Controller of
certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2011); formerly, Controller of Security Fair Valuation and Project Management for Legg Mason & Co. or its affiliates (prior to 2010)
|
|
|
|
|
Jeanne M. Kelly
Born 1951
620 Eighth Avenue
49
th
Floor
New York, NY 10018
|
|
Senior Vice President
|
|
Since 2007
|
|
Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006) and LMFAM (since
2013); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior 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 such office.
|
Each of the Trustees, except for Mr. Fuller, previously served as a trustee or director of certain predecessor funds in the Legg Mason-sponsored fund complex, and each Trustee, except for
Mr. Fuller, was thus initially selected by the board of the predecessor funds. In connection with a restructuring of the fund complex completed in 2007, the Board was established to oversee mutual funds in the fund complex that invest primarily
in fixed income securities, including the fund, with a view to ensuring continuity of representation by board members of predecessor funds on the Board and in order to establish a Board with experience in and focused on overseeing fixed income
mutual funds, which experience would be further developed and enhanced over time.
In connection with the restructuring, the
Independent Trustees were selected to join the Board based upon the following as to each Board Member: his or her contribution as a board member of predecessor funds; such persons character and integrity; such persons willingness to
serve and willingness and ability to commit the time necessary to perform the duties of a Trustee; the fact that such persons service would be consistent with the requirements of the retirement policies of the Trust; and his or her status as
not being an interested person as defined in the 1940 Act. Mr. Fuller was selected to join the Board based upon the following: character and integrity; willingness to serve and willingness and ability to commit the time necessary to
perform the duties of a Trustee; the fact that service as a Trustee would be consistent with requirements of the Trusts retirement policies, and his status as a representative of Legg Mason.
The Board believes that each Trustees experience, qualifications, attributes or skills on an individual basis and in combination
with those of the other Trustees lead to the conclusion that the Board possesses the requisite
47
skills and attributes. The Board believes that the Trustees ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the
manager, subadviser, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties, support this conclusion. The Board has also considered the contributions that each
Trustee can make to the Board and the fund, as well as the perspectives gained from the Independent Trustees service on the board of the predecessor funds. In addition, the following specific experience, qualifications, attributes and/or
skills apply as to each Trustee: Mr. Berv, experience as a chief executive officer and board member of various businesses and organizations and organizational consulting experience; Ms. Dasher, experience as a chief financial officer of a
private investment company; Mr. Finn, investment management experience as an executive, consultant and portfolio manager; Mr. Gross, accounting background and experience as an officer and board member of various organizations;
Mr. Hanson, experience in academic leadership; Dr. Harrington, background in investment and finance; Ms. Heilbron, legal background and experience, business and consulting experience and experience as a board member of public
companies; Ms. Kerley, investment consulting experience and background and mutual fund board experience; Dr. Merten, academic leadership experience, background in investments and finance, and board experience; Dr. Pettit, economic and
finance background and academic management experience; and Mr. Fuller, investment management and risk oversight experience as an executive and portfolio manager and leadership roles within Legg Mason and affiliated entities and another investment
advisory firm. References to the qualifications, attributes and skills of Trustees are pursuant to requirements of the Securities and Exchange Commission, do not constitute holding out of the Board or any Trustee as having any special expertise or
experience, and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.
The Board is responsible for overseeing the management and operations of the fund. Mr. Fuller is an interested person of the fund.
Independent Trustees constitute more than 75% of the Board. Dr. Harrington serves as Chair of the Board.
The Board has
three standing committees: the Audit Committee, Nominating and Governance Committee (referred to as the Governance Committee), and Investment and Performance Committee (referred to as the Performance Committee). Each of the Audit, Governance and
Performance Committees is chaired by an Independent Trustee and composed of all of the Independent Trustees. Where deemed appropriate, the Board constitutes
ad hoc
committees.
The Chair of the Board and the chairs of the Audit, Governance and Performance Committees work with the Chief Executive Officer of the
Trust to set the agendas for Board and committee meetings. The Chair of the Board also serves as a key point person for dealings between management and the other Independent Trustees. As noted below, through the committees the Independent Trustees
consider and address important matters involving the fund, including those presenting conflicts or potential conflicts of interest for management. The Independent Trustees also regularly meet outside the presence of management and are advised by
independent legal counsel. The Board has determined that its committees help ensure that the fund has effective and independent governance and oversight. The Board also has determined that its leadership structure, in which the Chair of the Board is
not affiliated with Legg Mason, is appropriate. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from management, including the subadviser.
The Audit Committee oversees, among other things, the scope of the funds audit, the funds accounting and financial reporting
policies and practices and the internal controls over financial accounting and reporting. The primary purposes of the Boards Audit Committee are to assist the Board in fulfilling its responsibility for oversight of the integrity of the
accounting, auditing and financial reporting practices of the fund, and the qualifications and independence of the funds independent registered public accounting firm. 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.
48
The Governance Committee is the forum for consideration of a number of issues required to be
considered separately by independent trustees of mutual funds, including, among other things, recommending candidates to fill vacancies on the Board. The Governance Committee also considers issues that the Independent Trustees believe it is
advisable for them to consider separately. When addressing vacancies, 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 appropriate, a professional search firm. The committee meets to discuss and consider such candidates qualifications and then chooses a candidate by majority vote. The
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 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 investment adviser, 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;
|
|
|
|
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 committee may consider relevant;
|
|
|
|
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 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 Performance Committee is charged with, among other things, reviewing investment
performance. The Performance Committee also assists the Board in fulfilling its responsibility for the review and negotiation of the funds investment management and subadvisory arrangements.
As an integral part of its responsibility for oversight of the fund in the interests of shareholders, the Board oversees risk management
of the funds investment programs and business affairs. The Board has emphasized to the funds manager and subadviser the importance of maintaining vigorous risk management. The manager and the subadviser also have their own independent
interest in risk management and in maintaining risk management programs. Oversight of the risk management process is part of the Boards general oversight of the fund and its service providers. The Board exercises oversight of the risk
management process primarily through the Performance Committee and the Audit Committee, and through oversight by the Board itself.
The fund faces a number of risks, such as investment risk, counterparty risk, valuation risk, reputational risk, risk of operational failure or lack of business continuity, and legal, compliance and
regulatory risk. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the fund. Under
49
the overall oversight of the Board or the applicable committee, the fund, or the manager, the funds subadviser, and the affiliates of the manager and the subadviser, or other service
providers to the fund employ a variety of processes, procedures and controls to identify various of those possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances
if they do occur.
Different processes, procedures and controls are employed with respect to different types of risks. Various
personnel, including the funds and the managers CCO and the managers chief risk officer, as well as various personnel of the subadviser and other service providers such as the funds independent accountants, also make periodic
reports to the Performance Committee or Audit Committee or to the Board, pursuant to the committees or Boards request, with respect to various aspects of risk management, as well as events and circumstances that have arisen and responses
thereto.
The Board recognizes that not all risks that may affect the fund can be identified, that it may not be practical or
cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds goals, and that the processes, procedures and controls employed to address certain
risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. As a result of the foregoing and other factors, the Boards risk
management oversight is subject to substantial limitations.
The Board met 4 times during the funds fiscal year ended
October 31, 2013. Each of the Audit, Governance and Performance Committees met 4 times 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 overseen by the Trustees as of December 31, 2013.
|
|
|
|
|
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:
|
|
|
|
|
Elliott J. Berv
|
|
None
|
|
None
|
Jane F. Dasher
|
|
None
|
|
10,001-50,000
|
Mark T. Finn
|
|
None
|
|
Over 100,000
|
Stephen Randolph Gross
|
|
None
|
|
None
|
Richard E. Hanson, Jr.
|
|
None
|
|
Over 100,000
|
Diana R. Harrington
|
|
None
|
|
Over 100,000
|
Susan M. Heilbron
|
|
None
|
|
Over 100,000
|
Susan B. Kerley
|
|
None
|
|
Over 100,000
|
Alan G. Merten
|
|
None
|
|
Over 100,000
|
R. Richardson Pettit
|
|
None
|
|
Over 100,000
|
Interested Trustee:
|
|
|
|
|
Kenneth D. Fuller
|
|
None*
|
|
Over 100,000
|
*
|
As of January 15, 2013, the dollar range of equity securities owned by Mr. Fuller in the fund was $10,001-$50,000.
|
As of December 31, 2013, none of the Independent Trustees or their immediate family members owned beneficially or of record any
securities of the funds manager, subadviser or distributor, or of a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the manager, subadviser 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. Fuller, 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.
50
Each fund pays a pro rata share of the Trustee fees based upon asset size. Prior to
January 1, 2014, each fund paid each of the Trustees who is not a director, officer or employee of the manager or any of its affiliates its pro rata share of: an annual fee of $160,000, plus $20,000 for each regularly scheduled Board meeting
attended in person and, prior to January 1, 2013, $2,500 for certain telephonic Board and committee meetings in which that Trustee participates. Effective January 1, 2013, each fund pays each of the Trustees who is not a director, officer
or employee of the manager or any of its affiliates its pro rata share of $1,500 for certain telephonic Board and committee meetings in which that Trustee participates. Effective June 1, 2013, each fund pays a pro rata share of $75,000 per year
to the Independent Trustee serving as Chair of the Board. Each of the Chairs of the Audit Committee and the Performance Committee, and, as of June 1, 2013, the Governance Committee receives an additional $15,000 per year. Each of the other
members of the Performance Committee receives an additional $10,000 per year in connection with the annual consideration of the funds advisory, subadvisory and distribution arrangements.
As of January 1, 2014, each fund currently pays each of the Trustees who is not a director, officer or employee of the manager or
any of its affiliates its pro rata share of: an annual fee of $180,000, plus $20,000 for each regularly scheduled Board meeting attended in person and, prior to January 1, 2013, $2,500 for certain telephonic Board and committee meetings in
which that Trustee participates. Effective January 1, 2013, each fund pays each of the Trustees who is not a director, officer or employee of the manager or any of its affiliates its pro rata share of $1,500 for certain telephonic Board and
committee meetings in which that Trustee participates. Effective June 1, 2013, each fund pays a pro rata share of $75,000 per year to the Independent Trustee serving as Chair of the Board. Each of the Chairs of the Audit Committee and the
Performance Committee, and, as of June 1, 2013, the Governance Committee receives an additional $15,000 per year. Each of the other members of the Performance Committee receives an additional $10,000 per year in connection with the annual
consideration of the funds advisory, subadvisory and distribution arrangements.
Information regarding compensation
paid to the Trustees is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation
From the
Fund for
Fiscal
Year
Ended
October 31, 2013 ($)
|
|
|
Total Pension or
Retirement
Benefits Paid as
Part of Fund
Expenses for
Fiscal
Year
Ended
October 31, 2013 ($)
|
|
|
Total
Compensation
from the Fund
Complex
Paid to Trustee
for
Calendar Year
Ended
December 31, 2013 ($)
|
|
|
Number of
Funds in Fund
Complex Overseen
by Trustee as of
Fiscal
Year
Ended
October 31, 2013
|
|
Independent Trustees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elliott J. Berv
|
|
|
3,373
|
|
|
|
None
|
|
|
|
258,750
|
|
|
|
54
|
|
A. Benton Cocanougher
(1)
|
|
|
3,257
|
|
|
|
None
|
|
|
|
250,000
|
|
|
|
54
|
|
Jane F. Dasher
|
|
|
3,256
|
|
|
|
None
|
|
|
|
250,000
|
|
|
|
54
|
|
Mark T. Finn
|
|
|
3,257
|
|
|
|
None
|
|
|
|
250,000
|
|
|
|
54
|
|
Stephen Randolph Gross
|
|
|
3,257
|
|
|
|
None
|
|
|
|
250,000
|
|
|
|
54
|
|
Richard E. Hanson, Jr.
|
|
|
3,257
|
|
|
|
None
|
|
|
|
250,000
|
|
|
|
54
|
|
Diana R. Harrington
|
|
|
3,935
|
|
|
|
None
|
|
|
|
301,250
|
|
|
|
54
|
|
Susan M. Heilbron
|
|
|
3,257
|
|
|
|
None
|
|
|
|
250,000
|
|
|
|
54
|
|
Susan B. Kerley
|
|
|
3,373
|
|
|
|
None
|
|
|
|
258,750
|
|
|
|
54
|
|
Alan G. Merten
|
|
|
3,451
|
|
|
|
None
|
|
|
|
265,000
|
|
|
|
54
|
|
R. Richardson Pettit
|
|
|
3,453
|
|
|
|
None
|
|
|
|
265,000
|
|
|
|
54
|
|
Interested Trustee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jay Gerken
(2)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
N/A
|
|
Kenneth D. Fuller
(2)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
155
|
|
(1)
|
Effective December 31, 2013, Dr. Cocanougher retired as Trustee.
|
(2)
|
Mr. Gerken retired as a Trustee effective May 31, 2013, and Mr. Fuller became a Trustee effective June 1, 2013. Mr. Gerken was not compensated
for his services as a Trustee, and Mr. Fuller is not compensated for such services, because of their affiliations with the manager.
|
51
Officers of the fund 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.
As of January 31, 2014, the
Trustees and officers of the fund, as a group, owned less than 1% of the outstanding shares of each class of the fund.
To the
knowledge of the fund, as of January 31, 2014, the following shareholders owned or held of record 5% or more, as indicated, of the outstanding shares of the following classes of the fund:
|
|
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|
|
|
|
Class
|
|
Name and Address
|
|
Percent of Ownership (%)
|
|
A
|
|
UBS WM USA
OMNI ACCOUNT
M/F
ATTN: DEPARTMENT MANAGER
499
WASHINGTON BLVD FL 9
JERSEY CITY NJ 07310-2055
|
|
|
16.75
|
|
|
|
|
A
|
|
FIRST CLEARING, LLC
SPECIAL
CUSTODY ACCT FOR THE
EXCLUSIVE BENEFIT OF CUSTOMER
2801 MARKET STREET
ST LOUIS MO 63103-2523
|
|
|
9.66
|
|
|
|
|
A
|
|
AMERICAN ENTERPRISE INVESTMENT
SVC
707 2ND AVE S
MINNEAPOLIS MN 55402-2405
|
|
|
8.71
|
|
|
|
|
A
|
|
MLPF&S FOR THE SOLE BENEFIT OF ITS
CUSTOMERS
ATTN: FUND ADMINISTRATION
4800 DEER LAKE DRIVE EAST 3RD FLOOR
JACKSONVILLE FL
32246-6484
|
|
|
6.53
|
|
|
|
|
A
|
|
LPL FINANCIAL
FBO
CUSTOMER ACCOUNTS
ATTN: MUTUAL FUND OPERATIONS
PO BOX 509046
SAN DIEGO CA 92150-9046
|
|
|
6.23
|
|
|
|
|
C
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
|
43.40
|
|
|
|
|
C
|
|
UBS WM USA
OMNI ACCOUNT
M/F
ATTN: DEPARTMENT MANAGER
499
WASHINGTON BLVD FL 9
JERSEY CITY NJ 07310-2055
|
|
|
19.97
|
|
|
|
|
C
|
|
FIRST CLEARING, LLC
SPECIAL
CUSTODY ACCT FOR THE
EXCLUSIVE BENEFIT OF CUSTOMER
2801 MARKET STREET
ST LOUIS MO 63103-2523
|
|
|
8.77
|
|
52
|
|
|
|
|
|
|
Class
|
|
Name and Address
|
|
Percent of Ownership (%)
|
|
C
|
|
AMERICAN ENTERPRISE INVESTMENT SVC
707 2ND AVE S
MINNEAPOLIS MN 55402-2405
|
|
|
6.09
|
|
|
|
|
I
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
|
42.04
|
|
|
|
|
I
|
|
MLPF&S FOR THE SOLE BENEFIT OF ITS
CUSTOMERS
ATTN: FUND ADMINISTRATION
4800 DEER LAKE DRIVE EAST 3RD FLOOR
JACKSONVILLE FL
32246-6484
|
|
|
13.19
|
|
|
|
|
I
|
|
CHARLES SCHWAB & CO INC
ATTN MUTUAL FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905
|
|
|
10.18
|
|
|
|
|
I
|
|
FIRST CLEARING, LLC
SPECIAL
CUSTODY ACCT FOR THE
EXCLUSIVE BENEFIT OF CUSTOMER
2801 MARKET STREET
ST LOUIS MO 63103-2523
|
|
|
9.00
|
|
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager
Legg Mason
Partners Fund Advisor, LLC (LMPFA or the manager) serves as investment manager to the fund and provides certain oversight services to the fund pursuant to an investment management agreement (the Management
Agreement). LMPFA is a wholly-owned subsidiary of Legg Mason.
The manager has agreed, under the Management Agreement,
subject to the supervision of the funds Board, to provide the fund with investment research, advice, management and supervision, furnish a continuous investment program for the funds portfolio of securities and other investments
consistent with the funds investment objectives, policies and restrictions, and place orders pursuant to its investment determinations. The manager is permitted to enter into contracts with subadvisers or subadministrators, subject to the
Boards approval. The manager has entered into subadvisory agreement, as described below.
As compensation for services
performed, facilities furnished and expenses assumed by the manager, the fund pays the manager a fee computed daily at an annual rate of the funds average daily net assets as described below. The manager also performs administrative and
management services as reasonably requested by the fund necessary for the operation of the fund, such as (i) supervising the overall administration of the fund, including negotiation of contracts and fees with, and monitoring of performance and
billings of, the funds transfer agent, shareholder servicing agents, custodian and other independent contractors or agents; (ii) providing certain compliance, fund accounting, regulatory reporting and tax reporting services;
(iii) preparing or participating in the preparation of Board materials, registration statements, proxy statements and reports and other communications to shareholders; (iv) maintaining the funds existence; and (v) maintaining
the registration or qualification of the funds shares under federal and state laws.
53
The Management Agreement will continue in effect from year to year, provided 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 by the Board or by vote of a majority of the outstanding voting securities of the fund on not more than 60 days nor less than 30 days written
notice to the manager, or by the manager on not less than 90 days written notice to the fund, and will automatically terminate in the event of its assignment (as defined in the 1940 Act) by the manager. The Management Agreement is not
assignable by the Trust except with the consent of the manager.
The Management Agreement provides that the manager, its
affiliates performing services contemplated by the Management Agreement, and the partners, shareholders, directors, officers and employees of the manager and such affiliates, will not be liable for any error of judgment or mistake of law, for any
loss arising out of any investment, or for any act or omission in the execution of securities transactions for the fund, but the manager is not protected against any liability to the fund to which the manager would be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under the Management Agreement.
For its services under the Management Agreement, the manager receives an investment management fee that is calculated daily and payable
monthly at the annual rate of 0.45% of the funds average daily net assets. The manager may reimburse the fund or waive all or a portion of its management fees.
For the periods below, the fund paid investment management fees to the manager as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Gross Management Fees ($)
|
|
|
Management Fees
Waived/Expenses
Reimbursed ($)
|
|
|
Net Management Fees
(after fee waivers/expense
reimbursements)
($)
|
|
October 31, 2011
|
|
|
6,975,506
|
|
|
|
0
|
|
|
|
6,975,506
|
|
October 31, 2012
|
|
|
8,502,491
|
|
|
|
0
|
|
|
|
8,502,491
|
|
October 31, 2013
|
|
|
10,711,749
|
|
|
|
101,362
|
|
|
|
10,610,387
|
|
Subadviser
Western Asset Management Company (Western Asset or the subadviser) provides the day-to-day portfolio management of the fund as subadviser pursuant to a subadvisory agreement (the
Subadvisory Agreement). Western Asset is a wholly-owned subsidiary of Legg Mason.
Under the Subadvisory
Agreement, subject to the supervision of the Board and the manager, the subadviser regularly provides investment research, advice, management and supervision; furnishes a continuous investment program consistent with the funds investment
objectives, policies and restrictions; and places orders pursuant to its investment determinations. The subadviser may delegate to companies that the subadviser controls, is controlled by, or is under common control with, certain of the
subadvisers duties under the Subadvisory Agreement, subject to the subadvisers supervision, provided the subadviser will not be relieved of its duties or obligations under the Subadvisory Agreement as a result of any delegation.
The Subadvisory Agreement will continue in effect from year to year, provided continuance is specifically approved at least
annually with respect to the fund (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.
54
The Board or a majority of the outstanding voting securities of the fund (as defined in the
1940 Act) may terminate the Subadvisory Agreement on not more than 60 days nor less than 30 days written notice to the subadviser without penalty. The subadviser may terminate the Subadvisory Agreement on not less than 90 days
written notice to the fund and the manager without penalty. The manager and the subadviser may terminate the Subadvisory Agreement upon their mutual written consent. The Subadvisory Agreement will terminate automatically in the event of assignment
(as defined in the 1940 Act) by the subadviser. The manager may not assign the Subadvisory Agreement except with the subadvisers consent.
The Subadvisory Agreement provides that the subadviser, its affiliates performing services contemplated by the Subadvisory Agreement, and the partners, shareholders, directors, officers and employees of
the subadviser and such affiliates will not 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 securities transactions for the fund, but the subadviser
is not protected against any liability to the fund or the manager to which the subadviser would be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Subadvisory Agreement.
As compensation for its services, the manager pays to the subadviser
a fee equal to 70% of the management fee paid to the manager by the fund, net of any waivers and expense reimbursements.
Investment
Professionals
The following table sets forth additional information with respect to the investment professionals
responsible for the day-to-day management of the fund. Unless noted otherwise, all information is provided as of October 31, 2013.
Other Accounts Managed by Investment Professionals
The table below
identifies, for each investment professional, the number of accounts (other than the fund with respect to which information is provided) for which the investment professional 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 and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance
are also indicated.
|
|
|
|
|
|
|
|
|
|
|
Investment Professional
|
|
Type of Account
|
|
Number of
Accounts Managed
|
|
Total Assets
Managed ($)
|
|
Number of Accounts
Managed for which
Advisory Fee is
Performance-Based
|
|
Assets Managed for
which Advisory Fee
is
Performance-Based ($)
|
David T. Fare
|
|
Registered investment companies
|
|
16
|
|
12.2 billion
|
|
None
|
|
None
|
|
Other pooled investment vehicles
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Other accounts
|
|
2
|
|
1.3 billion
|
|
None
|
|
None
|
|
|
|
|
|
|
Stephen A. Walsh*
|
|
Registered investment companies
|
|
104
|
|
184.3 billion
|
|
None
|
|
None
|
|
Other pooled investment vehicles
|
|
246
|
|
92.6 billion
|
|
9
|
|
1.6 billion
|
|
Other accounts
|
|
711
|
|
171.2 billion
|
|
59
|
|
15.5 billion
|
55
|
|
|
|
|
|
|
|
|
|
|
Investment Professional
|
|
Type of Account
|
|
Number of
Accounts Managed
|
|
Total Assets
Managed ($)
|
|
Number of Accounts
Managed for which
Advisory Fee is
Performance-Based
|
|
Assets Managed for
which Advisory Fee
is
Performance-Based ($)
|
|
|
|
|
|
|
Robert E. Amodeo
|
|
Registered investment companies
|
|
21
|
|
14.5 billion
|
|
None
|
|
None
|
|
Other pooled investment vehicles
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Other accounts
|
|
16
|
|
3.2 billion
|
|
None
|
|
None
|
|
|
|
|
|
|
Dennis J. McNamara
|
|
Registered investment
companies
|
|
36
|
|
140.8 billion
|
|
None
|
|
None
|
|
Other pooled
investment
vehicles
|
|
27
|
|
10.5 billion
|
|
1
|
|
0.27 billion
|
|
Other accounts
|
|
135
|
|
47.6 billion
|
|
8
|
|
1.5 billion
|
|
|
|
|
|
|
S. Kenneth Leech*
|
|
Registered investment
companies
|
|
24
|
|
18.5 billion
|
|
None
|
|
None
|
|
Other pooled
investment
vehicles
|
|
55
|
|
34.2 billion
|
|
None
|
|
None
|
|
Other accounts
|
|
119
|
|
35.2 billion
|
|
10
|
|
3.4 billion
|
*
|
It is anticipated that Mr. Walsh will step down as a member of the funds portfolio management team effective on or about March 31, 2014 and that S.
Kenneth Leech will join the funds portfolio management team at that time. Information in this table relating to Mr. Leech does not reflect additional accounts for which he is expected to join the portfolio management team on or about
March 31, 2014.
|
Investment Professional Compensation
With respect to the compensation of the funds investment professionals, the subadvisers compensation system assigns each
employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market
value of their skills, experience and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits and a retirement plan.
In addition, the subadvisers employees are eligible for bonuses. These are structured to closely align the interests of employees
with those of the subadviser, and are determined by the professionals job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment
professionals investment performance versus appropriate peer groups and benchmarks (
e.g.,
a securities index and with respect to the fund, the benchmark set forth in the funds Prospectus to which the funds average annual
total returns are compared or, if none, the benchmark set forth in the funds annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensationwith 3 and 5 years having a larger emphasis. The subadviser may also measure
an investment professionals pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the fund) with similar investment
strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development,
length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadvisers business.
56
Finally, in order to attract and retain top talent, all investment professionals are
eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the
award date.
Conflicts of Interest
The manager, subadviser and investment professionals have interests which conflict with the interests of the fund. There is no guarantee that the policies and procedures adopted by the manager, the
subadviser and the fund will be able to identify or mitigate these conflicts of interest.
Some examples of material conflicts
of interest include:
Allocation of Limited Time and Attention
. An investment professional 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. An investment professional may not be able to formulate as complete a strategy or identify equally attractive
investment opportunities for each of those funds and accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. Such an investment professional may make general determinations across
multiple funds, rather than tailoring a unique approach for the fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular investment professional have different investment strategies.
Allocation of Limited Investment Opportunities; Aggregation of Orders
. If an investment professional identifies a limited
investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit the funds ability to take full advantage of the investment opportunity.
Additionally, the subadviser may aggregate transaction orders for multiple accounts for the purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were
not being executed concurrently for other accounts. In addition, the subadvisers trade allocation policies may result in the funds orders not being fully executed or being delayed in execution.
Pursuit of Differing Strategies
. At times, an investment professional 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 investment professional 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. For example, an investment professional may determine that it would be in the interest of another account to sell a security that the fund holds long, potentially resulting in a decrease in the market value of the security
held by the fund.
Cross Trades
. Investment professionals may manage funds that engage in cross trades, where
one of the managers funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to
another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.
Selection of Broker/Dealers
. Investment professionals may 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 the subadviser with brokerage and research services. These services may be taken into
account in the selection of brokers and dealers whether a broker is being selected to effect a trade on an agency basis for a commission or (as is normally the case for the fund) whether a dealer is being selected to effect a trade on a principal
basis. This may result in the payment of higher
57
brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the managers funds
or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits
among the funds and/or accounts managed.
Variation in Financial and Other Benefits
. A conflict of interest
arises where the financial or other benefits available to an investment professional differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment managers management fee and/or an investment
professionals compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the investment professional might be motivated to help certain funds
and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the investment professionals performance record or to derive other rewards, financial or otherwise, could influence the investment
professional in affording preferential treatment to those funds and/or accounts that could most significantly benefit the investment professional. An investment professional may, for example, have an incentive to allocate favorable or limited
opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, an investment professionals or the managers or the subadvisers desire to increase assets under management could influence the
investment professional to keep the fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the investment professional might be motivated to favor funds and/or accounts in which he or she
has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if an investment professional does not personally hold an investment in the fund, the investment professionals conflicts
of interest with respect to the fund may be more acute.
Related Business Opportunities
. The investment
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, an investment professional 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 investment manager and its affiliates.
Investment Professional Securities Ownership
The table below
identifies ownership of the funds equity securities by each investment professional responsible for the day-to-day management of the fund as of October 31, 2013.
|
|
|
Investment Professional
|
|
Dollar Range of
Ownership of Securities ($)
|
David T. Fare
|
|
None
|
|
|
Stephen A. Walsh
*
|
|
Over 1 million
|
|
|
Robert E. Amodeo
|
|
None
|
|
|
Dennis J. McNamara
|
|
None
|
|
|
S. Kenneth Leech
*
|
|
None
|
*
|
It is anticipated that Mr. Walsh will step down as a member of the funds portfolio management team effective on or about March 31, 2014 and that S.
Kenneth Leech will join the funds portfolio management team at that time.
|
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
58
organizations; organizational costs of the fund; costs (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 the issuing 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, members of the Board 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, members of the Board 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 the legal obligation which the fund may have to indemnify the funds Board members and officers with respect thereto.
Management may agree to implement an expense limitation and/or reimburse operating expenses for one or more classes of shares. Any such
expense limitations and/or reimbursements are described in the funds Prospectus. The expense limitations and/or reimbursements do not cover (a) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and
taxes; (b) extraordinary expenses, such as any expenses or charges related to litigation, derivative actions, demands 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; 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 board members 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. Some of these arrangements do not cover interest expenses.
These arrangements may be reduced or terminated under certain circumstances.
In
order to implement an expense limitation, the manager will, as necessary, waive management fees or reimburse operating expenses. However, the manager is permitted to recapture amounts waived or reimbursed to a class during the same fiscal year if
the class total annual operating expenses have fallen to a level below the class expense limitation. In no case will the manager recapture any amount that would result, on any particular business day of the fund, in the class total
annual operating expenses exceeding such expense limitation or any lower limit then in effect.
Distributor
LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 International Drive, Baltimore, Maryland 21202, serves as the
sole and exclusive distributor of the fund pursuant to a written agreement (as amended, the Distribution Agreement).
Under the Distribution Agreement, the distributor is appointed as principal underwriter and distributor in connection with the offering and sale of shares of the fund. The distributor offers the shares on
an agency or best efforts basis under which the fund issues only the number of shares actually sold. Shares of the fund are continuously offered by the distributor.
59
The Distribution Agreement is renewable from year to year with respect to the fund if
approved (a) by the Board or by a vote of a majority of the funds outstanding voting securities, and (b) by the affirmative vote of a majority of Trustees who are not parties to such agreement or interested persons of any party by
votes cast in person at a meeting called for such purpose.
The Distribution Agreement is terminable with respect to the fund
without penalty by the Board or by vote of a majority of the outstanding voting securities of the fund, or by the distributor, on not less than 60 days written notice to the other party (unless the notice period is waived by mutual consent).
The Distribution Agreement will automatically and immediately terminate in the event of its assignment.
LMIS may be deemed to
be an underwriter for purposes of the 1933 Act. Dealer reallowances are described in the funds Prospectus.
LMPFA,
LMIS, their affiliates and their personnel have interests in promoting sales of the Legg Mason Funds, including remuneration, fees and profitability relating to services to and sales of the funds. Employees of LMPFA, LMIS or their affiliates
(including wholesalers registered with LMIS) may receive additional compensation related to the sale of individual Legg Mason Funds or categories of Legg Mason Funds. LMPFA, the subadvisers, and their advisory or other personnel may also benefit
from increased amounts of assets under management.
Financial intermediaries, including broker/dealers, investment advisers,
financial consultants or advisers, mutual fund supermarkets, insurance companies, financial institutions and other financial intermediaries through which investors may purchase shares of the fund, also may benefit from the sales of shares of the
Legg Mason Funds. For example, in connection with such sales, financial intermediaries may receive compensation from the fund (with respect to the fund as a whole or a particular class of shares) and/or from LMPFA, LMIS, and/or their affiliates, as
further described below. The structure of these compensation arrangements, as well as the amounts paid under such arrangements, vary and may change from time to time. In addition, new compensation arrangements may be negotiated at any time. The
compensation arrangements described in this section are not mutually exclusive, and a single financial intermediary may receive multiple types of compensation.
LMIS has agreements in place with financial intermediaries defining how much each firm will be paid for the sale of a particular mutual fund from sales charges, if any, paid by fund shareholders and from
Rule 12b-1 Plan fees paid to LMIS by the fund. These financial intermediaries then pay their employees or associated persons who sell fund shares from the sales charges and/or fees they receive. The financial intermediary, and/or its employees or
associated persons may receive a payment when a sale is made and will, in most cases, continue to receive ongoing payments while you are invested in the fund. In other cases, LMIS may retain all or a portion of such fees and sales charges.
In addition, LMIS, LMPFA and/or certain of their affiliates may make additional payments (which are often referred to as
revenue sharing payments) to the financial intermediaries from their past profits and other available sources, including profits from their relationships with the fund. Revenue sharing payments are a form of compensation paid to a
financial intermediary in addition to the sales charges paid by fund shareholders or Rule 12b-1 Plan fees paid by the fund. LMPFA, LMIS and/or certain of its affiliates may revise the terms of any existing revenue sharing arrangement, and may enter
into additional revenue sharing arrangements with other financial services firms.
Revenue sharing arrangements are intended,
among other things, to foster the sale of fund shares and/or to compensate financial services firms for assisting in marketing or promotional activities in connection with the sale of fund shares. In exchange for revenue sharing payments, LMPFA and
LMIS generally expect to receive the opportunity for the fund to be sold through the financial intermediaries sales forces or to have access to third-party platforms or other marketing programs, including but not limited to mutual fund
supermarket platforms or other sales programs. To the extent that financial intermediaries receiving revenue sharing payments sell more shares of the fund, LMPFA and LMIS and/or their affiliates benefit from the increase in fund assets
as a result of the fees they receive from the fund.
60
Revenue sharing payments are usually calculated based on a percentage of fund sales
and/or fund assets attributable to a particular financial intermediary. Payments may also be based on other criteria or factors such as, for example, a fee per each transaction. Specific payment formulas are negotiated based on a number of factors,
including, but not limited to, reputation in the industry, ability to attract and retain assets, target markets, customer relationships and scope and quality of services provided. In addition, LMIS, LMPFA and/or certain of their affiliates may pay
flat fees on a one-time or irregular basis for the initial set-up of the fund on a financial intermediarys systems, participation or attendance at a financial intermediarys meetings, or for other reasons. In addition, LMIS, LMPFA and/or
certain of their affiliates may pay certain education and training costs of financial intermediaries (including, in some cases, travel expenses) to train and educate the personnel of the financial intermediaries. It is likely that financial
intermediaries that execute portfolio transactions for the fund will include those firms with which LMPFA, LMIS and/or certain of their affiliates have entered into revenue sharing arrangements.
The fund generally pays the transfer agent for certain recordkeeping and administrative services. In addition, the fund may pay financial
intermediaries for certain recordkeeping, administrative, sub-accounting and networking services. These services include maintenance of shareholder accounts by the firms, such as recordkeeping and other activities that otherwise would be performed
by a funds transfer agent. Administrative fees may be paid to a firm that undertakes, for example, shareholder communications on behalf of the fund. Networking services are services undertaken to support the electronic transmission of
shareholder purchase and redemption orders through the National Securities Clearing Corporation (NSCC). These payments are generally based on either (1) a percentage of the average daily net assets of fund shareholders serviced by a
financial intermediary or (2) a fixed dollar amount for each account serviced by a financial intermediary. LMIS, LMPFA and/or their affiliates may make all or a portion of these payments.
In addition, the fund reimburses LMIS for NSCC fees that are invoiced to LMIS as the party to the agreement with NSCC for the
administrative services provided by NSCC to the fund and its shareholders. These services include transaction processing and settlement through Fund/SERV, electronic networking services to support the transmission of shareholder purchase and
redemption orders to and from financial intermediaries, and related recordkeeping provided by NSCC to the fund and its shareholders.
If your fund shares are purchased through a retirement plan, LMIS, LMPFA or certain of their affiliates may also make similar payments to those described in this section to the plans recordkeeper or
an affiliate.
Revenue sharing payments, as well as the other types of compensation arrangements described in this section,
may provide an incentive for financial intermediaries and their employees or associated persons to recommend or sell shares of the fund to customers and in doing so may create conflicts of interest between the firms financial interests and the
interests of their customers. Please contact your financial intermediary for details about any payments it (and its employees) may receive from the fund and/or from LMIS, LMPFA and/or their affiliates. You should review your financial
intermediarys disclosure and/or talk to your broker/dealer or financial intermediary to obtain more information on how this compensation may have influenced your broker/dealers or financial intermediarys recommendation of the fund.
Dealer Commissions and Concessions
From time to time, the funds distributor or the manager, at its expense, may provide compensation or promotional incentives (concessions) to dealers that sell or arrange for the sale of
shares of the fund or a managed account strategy of which the fund is part. Such concessions provided by the funds distributor or the manager may include financial assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives and other employees, payment for travel expenses, including lodging, incurred by registered representatives and other employees for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more funds, and/or other dealer-sponsored events. From time to time, the funds distributor or manager may make expense
61
reimbursements for special training of a dealers registered representatives and other employees in group meetings or to help pay the expenses of sales contests. Other concessions may be
offered to the extent not prohibited by state laws or any self-regulatory agency, such as the Financial Industry Regulatory Authority (FINRA).
Services and Distribution Plan
The Trust, on behalf of the fund, has
adopted a shareholder services and distribution plan (the 12b-1 Plan) in accordance with Rule 12b-1 under the 1940 Act. Under the 12b-1 Plan, the fund may pay monthly fees to LMIS at an annual rate not to exceed 0.15% of the average
daily net assets of the fund attributable to Class A shares, not to exceed 0.50% of the average daily net assets of the fund attributable to Class C shares and not to exceed 0.25% of the average daily net assets of the fund attributable to
Class FI shares. The fund will provide the Board with periodic reports of amounts expended under the 12b-1 Plan and the purposes for which such expenditures were made.
Fees under the 12b-1 Plan may be used to make payments to the distributor, Service Agents and other parties in respect of the sale of shares of the fund, 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 existing shareholders. The fund also may 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 shares and/or shareholder services;
provided, however, that the fees paid to a recipient with respect to a particular class that may be used to cover expenses primarily intended to result in the sale of shares of that class, or that may be used to cover expenses primarily intended for
personal service and/or maintenance of shareholder accounts, may not exceed the maximum amounts, if any, as may from time to time be permitted for such services under FINRA Conduct Rule 2830 or any successor rule, in each case as amended or
interpreted by FINRA.
Since fees paid under the 12b-1 Plan are not tied directly to expenses, the amount of the fees paid by
a class of the fund during any year may be more or less than actual expenses incurred pursuant to the 12b-1 Plan. This type of distribution fee arrangement is characterized by the staff of the SEC as being of the compensation variety (in
contrast to reimbursement arrangements by which a distributors payments are directly linked to its expenses). Thus, even if the 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 expenses incurred are less than the fees paid to the distributor and others, they will realize a profit.
The 12b-1 Plan recognizes that various service providers to the fund, such as its manager, may make payments for distribution, marketing or sales-related expenses out of their own resources of any kind,
including profits or payments received from the fund for other purposes, such as management fees. The 12b-1 Plan 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, the payments are deemed to be authorized by the 12b-1 Plan.
Under its terms, the 12b-1 Plan
continues in effect for successive annual periods, provided continuance is specifically approved at least annually by vote of the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the
operation of the 12b-1 Plan or in any agreements related to it (Qualified Trustees). The 12b-1 Plan may not be amended to increase the amount of the service and distribution fees without shareholder approval, and all amendments of the
12b-1 Plan also must be approved by the Trustees, including the Qualified Trustees, in the manner described above. The 12b-1 Plan may be terminated with respect to a class of the fund at any time, without penalty, by vote of a majority of the
Qualified Trustees or by vote of a majority of the outstanding voting securities of the class (as defined in the 1940 Act).
62
The following service and distribution fees were incurred by the fund pursuant to the
distribution plan in effect during the fiscal year ended October 31, 2013:
|
|
|
|
|
Class
|
|
Service and Distribution
Fees Incurred ($)
|
|
Class A
|
|
|
809,201
|
|
Class C
|
|
|
7,789,528
|
|
No information is given for Class FI shares of the fund because no Class FI shares of the fund
were outstanding during the fiscal year ended October 31, 2013.
For the fiscal year ended October 31, 2013, LMIS incurred
distribution expenses for advertising, printing and mailing prospectuses, support services and overhead expenses and compensation to Service Agents and third parties as expressed in the following table. The distributor may have made revenue sharing
payments in addition to the expenses shown here.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
|
|
Third Party
Fees
($)
|
|
|
Financial
Consultant
Compensation
(Amortized) ($)
|
|
|
Marketing ($)
|
|
|
Printing ($)
|
|
|
Total
Current
Expenses ($)
|
|
Class A
|
|
|
806,394
|
|
|
|
0
|
|
|
|
1,159,627
|
|
|
|
343
|
|
|
|
1,966,364
|
|
Class C
|
|
|
7,747,681
|
|
|
|
3,603
|
|
|
|
3,724,332
|
|
|
|
967
|
|
|
|
11,476,583
|
|
No information is given for Class FI shares of the fund because no Class FI shares of the fund
were outstanding during the fiscal year ended October 31, 2013.
Sales Charges
The following expenses were incurred during the periods indicated:
Initial Sales Charges
The aggregate dollar amounts of initial
sales charge on Class A shares and the amounts retained by the distributor were as follows:
Class A Shares
|
|
|
|
|
|
|
For the fiscal year ended October 31:
|
|
Total Commissions ($)
|
|
Amounts Retained
by LMIS ($)
|
|
2011
|
|
458,961
|
|
|
16,107
|
|
2012
|
|
855,761
|
|
|
28,993
|
|
2013
|
|
683,858
|
|
|
16,011
|
|
Contingent Deferred Sales Charges
The aggregate dollar amounts of contingent deferred sales charges on Class A and Class C shares received and retained by the distributor
were as follows:
Class A Shares
|
|
|
|
|
For the fiscal year ended October 31:
|
|
LMIS
($)
|
|
2011
|
|
|
89,439
|
|
2012
|
|
|
94,260
|
|
2013
|
|
|
125,056
|
|
63
Class C Shares
|
|
|
|
|
For the fiscal year ended October 31:
|
|
LMIS
($)
|
|
2011
|
|
|
99
|
|
2012
|
|
|
98
|
|
2013
|
|
|
2,048
|
|
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 or the transfer agent), located at 2000 Crown Colony
Drive, Quincy, Massachusetts 02169, 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.
Counsel
Bingham McCutchen LLP, located at One Federal Street, Boston, Massachusetts 02110, serves as counsel to the fund.
Sullivan & Worcester LLP, located at 1666 K Street, N.W., Washington, D.C. 20006, 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 October 31, 2014.
Code of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, the fund, the manager, the subadviser and the distributor each has adopted a code of ethics that permits its 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, must not act upon non-public information, must not take inappropriate advantage of their positions, and are required
to fulfill their fiduciary obligations. All personal securities transactions by employees must adhere to the requirements of the codes of ethics 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.
64
Copies of the Codes of Ethics of the fund, the manager, the subadviser and the distributor
are on file with the SEC.
Proxy Voting Policies and Procedures
Although individual Trustees may not agree with particular policies or votes by the manager or the subadviser, the Board has delegated
proxy voting discretion to the manager and/or the subadviser, believing that the manager and/or the subadviser should be responsible for voting because it is a matter relating to the investment decision making process.
The manager delegates the responsibility for voting proxies for the fund to the subadviser through its contract with the subadviser. The
subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, the manager does not expect to have proxy-voting responsibility for the fund. Should the manager become responsible for voting proxies for any reason,
such as the inability of the subadviser to provide investment advisory services, the manager will utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained. In the case of a
material conflict between the interests of the manager (or its affiliates if such conflict is known to persons responsible for voting at the manager) and the fund, the board of directors of the manager will consider how to address the conflict
and/or how to vote the proxies. The manager will maintain records of all proxy votes in accordance with applicable securities laws and regulations, to the extent that the manager votes proxies. The manager will be responsible for gathering relevant
documents and records related to proxy voting from the subadviser and providing them to the fund as required for the fund to comply with applicable rules under the 1940 Act.
The subadvisers Proxy Voting Policies and Procedures govern in determining how proxies relating to the funds portfolio
securities are voted and are attached as Appendix B 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- 877-721-1926, (2) on the funds website at http://www.leggmason.com/individualinvestors and (3) on the SECs website at http://www.sec.gov.
PURCHASE OF SHARES
General
See the funds Prospectus for a discussion of which classes
of shares of the fund are available for purchase and who is eligible to purchase shares of each class.
Investors may purchase
shares from a Service Agent. In addition, certain investors may purchase shares directly from the fund. When purchasing shares of the fund, investors must specify the class of shares being purchased. 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 with the transfer agent are not subject to a maintenance fee.
Class A Shares
. Class A shares are sold to investors at the public offering price, which is the net asset value
(NAV) plus an initial sales charge, as described in the funds Prospectus.
The distributor and Service
Agents may receive a portion of the sales charge as described in the funds 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.
65
Purchases of Class A shares of $500,000 or more will be made at NAV without any
initial sales charge, but will be subject to a contingent deferred sales charge of 0.50% on redemptions made within 18 months of purchase. The contingent deferred sales charge is waived in the same circumstances in which the contingent deferred
sales charge applicable to Class C shares is waived. See Contingent Deferred Sales Charge Provisions and Waivers of Contingent Deferred Sales Charge below.
There are no minimum investment requirements 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 (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
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. 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.
Class C Shares
. Class C shares are sold at net asset value without an initial sales charge and are not subject to
contingent deferred sales charges.
Class FI and Class I Shares
. Class FI and Class I shares are sold at net
asset value without an initial sales charge and are not subject to contingent deferred sales charges.
Class I
Shares
. The following persons are eligible to purchase Class I shares directly from the fund: (i) current employees of the funds manager and its affiliates; (ii) former employees of the funds manager and its affiliates
with existing accounts; (iii) current and former board members of investment companies managed by affiliates of Legg Mason; (iv) current and former board members of Legg Mason; and (v) 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. For such investors, the minimum initial investment is $1,000 and the minimum for each purchase of additional shares
is $50. Current employees may purchase additional Class I shares through a systematic investment plan.
Systematic
Investment Plan
. Shareholders may purchase additional Class A and Class C shares of the fund through a service known as the Systematic Investment Plan. For information about the Systematic Investment Plan, please see the funds
Prospectus. A shareholder who has insufficient funds to complete a pre-authorized transfer may be charged a fee of up to $25 by a Service Agent or the transfer agent. Additional information is available from the fund or a Service Agent.
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, (ii) current employees of Legg Mason and its subsidiaries,
(iii) 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 (iv) 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;
66
(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;
(e) purchases by certain separate accounts used to fund unregistered variable annuity contracts;
(f) 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; and
(g) purchases by direct retail investment platforms through mutual fund supermarkets, where the sponsor links its clients account (including IRA accounts on such platforms) to a master
account in the sponsors name.
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 initial sales charge.
There are several ways you can combine multiple purchases of shares of funds sold by the distributor to take advantage of the breakpoints
in the Class A 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 or the fund 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 shares of the fund with other shares
of funds sold by the distributor that are owned by:
|
|
|
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.
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.
Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be combined.
Shares of money market funds sold by the distributor that were not acquired by exchange from other funds offered with a sales charge may not be combined. Please contact your Service Agent or the fund for additional information.
Certain trustees and other fiduciaries may be entitled to combine accounts in determining their sales charge.
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 three Asset Level Goal amounts, as follows:
(1) $100,000
(2)
$250,000
(3) $500,000
67
Each time you make a Class A purchase under a Letter of Intent, you will be entitled to
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 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 of Intent will be credited towards your Asset Level Goal. You may include any
Eligible Fund Purchases towards the Letter of Intent, 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 of Intent.
Eligible Fund Purchases
. Generally, any shares of a fund sold by the
distributor may be credited towards your Asset Level Goal. Shares of certain money market funds acquired by exchange from other funds offered with a sales charge and sold by the distributor may be credited toward your Asset Level Goal.
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 of Intent. 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 the 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 of Intent will be automatically cancelled if all shares
are sold or redeemed as set forth above. See Failure to Meet Asset Level Goal below.
68
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 of Intent) is accepted, will be held in escrow during the term of your Letter of Intent. 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 of Intent 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 of
Intent 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 of Intent. 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.
Contingent Deferred Sales Charge Provisions
Contingent deferred sales charge shares are 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 net asset value at the time of purchase or redemption, whichever is less.
Class A shares that are
contingent deferred sales charge shares are subject to a 0.50% contingent deferred sales charge if redeemed within 18 months of purchase. 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.
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 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% of the shareholders
account balance at the time the withdrawals commence per month, 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 by the
Code) of the shareholder; (d) involuntary redemptions; (e) redemptions of shares to effect a combination of the fund with any investment company by merger, acquisition of assets or otherwise; and (f) certain redemptions of shares of the fund in
connection with lump-sum or other distributions made by eligible retirement plans or
69
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.
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.
For additional information regarding applicable investment
minimums and eligibility requirements for purchases of fund shares, please see the funds Prospectus.
Determination of Public
Offering Price
The fund offers its shares to the public on a continuous basis. The public offering price for each
class of shares of the fund is equal to the net asset value (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. A contingent deferred sales charge,
however, is imposed on certain redemptions of Class A shares.
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 net asset value of a share of the fund as of October 31, 2013.
|
|
|
|
|
Class A (based on a NAV of $5.15 and a maximum
initial sales charge of 2.25%)
|
|
$
|
5.27
|
|
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a) for any period during which the New York Stock
Exchange (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 net asset value is not reasonably practicable or (c) for any other periods as the SEC by order may permit for protection of the funds shareholders.
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 Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and should be
disclosed to its customers by each Service Agent.
Additional Information Regarding Telephone Redemption and Exchange
Program
. 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 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 funds 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
70
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. The Withdrawal Plan will be carried over on exchanges between funds or, if permitted, between classes of the fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at net asset value in additional
shares of the fund.
For additional information shareholders should contact their Service Agents. 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.
Legg Mason Institutional Funds Systematic Withdrawal Plan
Certain
shareholders of Class FI or Class I shares with an initial NAV of $1,000,000 or more may be eligible to participate in the Legg Mason Institutional Funds Systematic Withdrawal Plan. Receipt of payment of proceeds of redemptions made through the
Systematic Withdrawal Plan will be wired through ACH to your checking or savings accountredemptions of fund shares may occur on any business day of the month and the checking or savings account will be credited with the proceeds in
approximately two business days. Requests must be made in writing to the fund or a Service Agent to participate in, change or discontinue the Systematic Withdrawal Plan. You may change the monthly amount to be paid to you or terminate the Systematic
Withdrawal Plan at any time, without charge or penalty, by notifying the fund or a Service Agent. The fund, its transfer agent and the distributor also reserve the right to modify or terminate the Systematic Withdrawal Plan at any time.
Distributions in Kind
If the Board determines that it would be detrimental to the best interests of the remaining shareholders of the fund to make a redemption payment wholly in cash, the fund may pay, in accordance with SEC
rules, any portion of a redemption 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. Securities issued as a distribution in kind may incur transaction costs when shareholders subsequently sell those securities, and the market price of those securities will be subject to fluctuation until
they are sold.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to acquire shares of the same class in another fund with different investment objectives when
they believe that a shift between funds is an appropriate investment decision. 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. The funds
Prospectus describes the requirements for exchanging shares of the fund.
Upon receipt of proper instructions and all
necessary supporting documents, shares submitted for exchange are redeemed at the then-current net asset value, and the proceeds, net of any applicable sales charge, are immediately invested in shares of the fund being acquired at that funds
then-current net asset value. The fund reserves the right to reject any exchange request. The exchange privilege may be modified or terminated at any time after written notice to shareholders.
71
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 trading of fund shares in the funds 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 net asset
value but the purchase order would be effective only at the net asset value next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.
The 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 loss to the shareholder making the exchange.
VALUATION OF SHARES
The net asset value 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 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 net asset value of each class may differ. Please see the funds Prospectus for a description of the procedures used by the fund in valuing its assets.
PORTFOLIO TRANSACTIONS
Subject to such policies as may be established by the Board from time to time, the subadviser is primarily responsible for the funds portfolio decisions and the placing of the funds portfolio
transactions with respect to assets allocated to the subadviser.
Pursuant to the Subadvisory Agreement, the subadviser 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
subadviser 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 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 Securities Exchange Act of 1934, as amended) to the fund and/or the other accounts over which the subadviser or its affiliates exercise investment discretion. The subadviser 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
72
have charged for effecting that transaction if the subadviser 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. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the subadviser and its affiliates have with respect to accounts over which they exercise
investment discretion. The subadviser may also have arrangements with brokers pursuant to which such brokers provide research services to the subadviser 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 subadviser does not believe that the receipt of such brokerage and research services significantly reduced its expenses as the funds subadviser. Arrangements for the
receipt of research services from brokers may create conflicts of interest.
Research services furnished to the subadviser by
brokers who effect securities transactions for the fund may be used by the subadviser in servicing other investment companies and accounts which it manages. Similarly, research services furnished to the subadviser by brokers who effect securities
transactions for other investment companies and accounts which the subadviser manages may be used by the subadviser in servicing the fund. Not all of these research services are used by the subadviser in managing any particular account, including
the fund.
Debt securities purchased and sold by the fund generally are traded on a net basis (
i.e.,
without a
commission) through dealers acting for their own account and not as brokers, or otherwise involve transactions directly with the issuer of the instrument. This means that a dealer makes a market for securities by offering to buy at one price and
sell at a slightly higher price. The difference between the prices is known as a spread. Other portfolio transactions may be executed through brokers acting as agent. The fund will pay a spread or commission in connection with such
transactions.
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 subadvisers other clients. Investment decisions for the fund and for the subadvisers 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.
Under the subadvisers procedures, investment professionals and their trading desks may seek to aggregate (or bunch)
orders that are placed or received concurrently for more than one fund or account managed by the subadviser. In some cases, this policy may adversely affect the price paid or received by the fund or an account, or the size of the position obtained
or liquidated. In other cases, however, the ability of the fund or account to participate in volume transactions will produce better executions for the fund or account. Certain brokers or dealers may be selected because of their ability to handle
special executions such as those involving large block trades or broad distributions. Generally, when trades are aggregated, the fund or account within the block will receive the same price and commission. However, random allocations of aggregate
transactions may be made to minimize custodial transaction costs. In addition, at the close of the trading day, when reasonable and practicable, the securities of partially filled orders will generally be allocated to each participating fund and
account in the proportion that each order bears to the total of all orders (subject to rounding to round lot amounts).
For the fiscal year ended October 31, 2013, the fund did not direct any amounts to brokerage transactions related to research services and did not pay any brokerage commissions related to research
services.
Aggregate Brokerage Commissions Paid
For the fiscal years ended October 31, 2013, 2012 and 2011, the fund paid the following aggregate brokerage commissions for portfolio transactions (including commissions on derivatives transactions):
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
2011
|
|
$0
|
|
$
|
0
|
|
|
$
|
4,999
|
|
73
LMIS is an underwriter of the fund under the 1940 Act. For the fiscal years ended
October 31, 2013, 2012 and 2011, the fund did not pay any brokerage commissions to LMIS or its affiliates.
During the fiscal
year ended October 31, 2013, the fund held no securities issued by its regular broker/dealers.
DISCLOSURE OF PORTFOLIO HOLDINGS
The funds Board has adopted policies and procedures (the policy) developed by the manager with respect to the
disclosure of a funds portfolio securities and any ongoing arrangements to make available information about the funds portfolio securities. The manager believes the policy is in the best interests of each fund and its shareholders and
that it strikes an appropriate balance between the desire of investors for information about fund portfolio holdings and the need to protect funds from potentially harmful disclosures.
General rules/Website disclosure
The policy provides that information
regarding a funds portfolio holdings may be shared at any time with employees of the manager, a funds subadviser and other affiliated parties involved in the management, administration or operations of the fund (referred to as
fund-affiliated personnel). With respect to non-money market funds, a funds complete list of holdings (including the size of each position) may be made available to investors, potential investors, third parties and Legg Mason personnel that
are not fund-affiliated personnel (i) upon the filing of Form N-Q or Form N-CSR in accordance with SEC rules, provided that such filings are not made until 15 calendar days following the end of the period covered by the Form N-Q or Form N-CSR or
(ii) no sooner than 15 days after month end, provided that such information has been made available through public disclosure at least one day previously. Typically, public disclosure is achieved by required filings with the SEC 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 fund currently discloses its complete portfolio holdings 14 calendar days after quarter-end on Legg Masons website: http://www.leggmason.com/individualinvestors/prospectuses (click on the name
of the fund).
Ongoing arrangements
Under the policy, a fund may release portfolio holdings information on a regular basis to a custodian, sub-custodian, fund accounting agent, proxy voting provider, rating agency or other vendor or service
provider for a legitimate business purpose, where the party receiving the information is under a duty of confidentiality, including a duty to prohibit the sharing of non-public information with unauthorized sources and trading upon non-public
information. A fund may enter into other ongoing arrangements for the release of portfolio holdings information, but only if such arrangements serve a legitimate business purpose and are with a party who is subject to a confidentiality agreement and
restrictions on trading upon non-public information. None of the funds, Legg Mason or any other affiliated party may receive compensation or any other consideration in connection with such arrangements. Ongoing arrangements to make available
information about a funds portfolio securities will be reviewed at least annually by the funds board.
Set
forth below is a list, as of December 31, 2013, of those parties with whom the manager, on behalf of each fund, has authorized ongoing arrangements that include the release of portfolio holdings information in accordance with the policy, as
well as the maximum frequency of the release under such arrangements, and the minimum length of the lag, if any, between the date of the information and the date on which the information is disclosed. The ongoing arrangements may vary for each
party, and it is possible that not every party will receive information for each fund. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.
74
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay Before Dissemination
|
Bloomberg AIM
|
|
Daily
|
|
None
|
Bloomberg L.P.
|
|
Daily
|
|
None
|
Bloomberg Portfolio Analysis
|
|
Daily
|
|
None
|
Brown Brothers Harriman
|
|
Daily
|
|
None
|
Charles River
|
|
Daily
|
|
None
|
Emerging Portfolio Fund Research, Inc. (EPFR), an Informa Company
|
|
Monthly
|
|
None
|
eVestment Alliance
|
|
Quarterly
|
|
8-10 Days
|
FactSet
|
|
Daily
|
|
None
|
Institutional Shareholder Services
(Proxy Voting Services)
|
|
Daily
|
|
None
|
ITG
|
|
Daily
|
|
None
|
LightPORT InvestCloud
|
|
Daily
|
|
None
|
Middle Office Solutions, LLC
|
|
Daily
|
|
None
|
Morningstar
|
|
Daily
|
|
None
|
NaviSite, Inc.
|
|
Daily
|
|
None
|
State Street Bank and Trust Company (Fund Custodian and Accounting Agent)
|
|
Daily
|
|
None
|
SunGard/Protegent (formerly Dataware)
|
|
Daily
|
|
None
|
The Bank of New York Mellon
|
|
Daily
|
|
None
|
The Northern Trust Company
|
|
Daily
|
|
None
|
Thomson
|
|
Semi-annually
|
|
None
|
Thomson Reuters
|
|
Daily
|
|
None
|
Portfolio holdings information for a fund may also be released from time to time pursuant to ongoing
arrangements with the following parties:
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay Before Dissemination
|
Advent
|
|
Daily
|
|
None
|
Broadridge
|
|
Daily
|
|
None
|
Deutsche Bank
|
|
Monthly
|
|
6-8 Business Days
|
DST International plc (DSTi)
|
|
Daily
|
|
None
|
Electra Information Systems
|
|
Daily
|
|
None
|
Fidelity
|
|
Quarterly
|
|
5 Business Days
|
Fitch
|
|
Monthly
|
|
6-8 Business Days
|
Frank Russell
|
|
Monthly
|
|
1 Day
|
Glass Lewis & Co.
|
|
Daily
|
|
None
|
Informa Investment Solutions
|
|
Quarterly
|
|
8-10 Days
|
Interactive Data Corp
|
|
Daily
|
|
None
|
Liberty Hampshire
|
|
Weekly and Month End
|
|
None
|
S&P (Rating Agency)
|
|
Weekly Tuesday Night
|
|
1 Business Day
|
SunTrust
|
|
Weekly and Month End
|
|
None
|
Wilshire Associates Inc.
|
|
Quarterly
|
|
10 Business Days
|
Excluded from the lists of ongoing arrangements set forth above are ongoing arrangements where
either (i) the disclosure of portfolio holdings information occurs concurrently with or after the time at which the portfolio holdings information is included in a public filing with the SEC that is required to include the information, or (ii) a
funds portfolio holdings information is made available no earlier than the day next following the day on which
75
the fund makes the information available on its website, as disclosed in the funds prospectus. 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 from the policy.
Release of limited portfolio holdings information
In addition to the
ongoing arrangements described above, a funds complete or partial list of holdings (including size of positions) may be released to another party on a one-time basis, provided the party receiving the information has executed a non-disclosure
and confidentiality agreement and provided that the specific release of information has been approved by the funds Chief Compliance Officer or designee as consistent with the policy. By way of illustration and not of limitation, release of
non-public information about a funds portfolio holdings may be made (i) to a proposed or potential adviser or subadviser or other investment manager asked to provide investment management services to the fund, or (ii) to a third party in
connection with a program or similar trade.
In addition, the policy permits the release to investors, potential
investors, third parties and Legg Mason personnel that are not fund-affiliated personnel of limited portfolio holdings information in other circumstances, including:
1. A 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.A 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 an investment professional (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.A funds sector weightings, yield and duration (for fixed income and money market funds), 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.A small number of a funds portfolio holdings (including information that the fund no longer holds a particular holding) may be released, but only if the release of the information could not
reasonably be seen to interfere with current or future purchase or sales activities of the fund and is not contrary to law.
7.A 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.
Exceptions to the policy
A funds Chief Compliance Officer, or designee, may, as is deemed appropriate, approve exceptions from the policy. Exceptions are
granted only after a thorough examination and consultation with the managers legal department, as necessary. Exceptions from the policy are reported annually to each funds board.
76
Limitations of policy
The funds portfolio holdings policy is designed to prevent sharing of portfolio information with third parties that have no legitimate business purpose for accessing the information. The policy may
not be effective to limit access to portfolio holdings information in all circumstances, however. For example, the manager or the subadviser may manage accounts other than a fund that have investment objectives and strategies similar to those of the
fund. Because these accounts, including a fund, may be similarly managed, portfolio holdings may be similar across the accounts. In that case, an investor in another account managed by the manager or the subadviser may be able to infer the portfolio
holdings of the fund from the portfolio holdings in that investors account.
TAXES
The following is a summary of certain material U.S. federal (and, where noted, state and local) income tax considerations
affecting the fund and its shareholders. This discussion is very general and, except where noted, does not address investors subject to special rules, such as investors who hold shares in the fund through an IRA, 401(k) or other tax-advantaged
account. Current and prospective shareholders are therefore urged to consult their own tax advisers 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 will be treated as a separate
taxpayer for U.S. federal income tax purposes. The fund has elected to be treated, and intends to qualify each year, as a regulated investment company or RIC under Subchapter M of 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 certain securities loans, and gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in
qualified publicly traded partnerships (i.e., partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends,
capital gains, and other traditionally permitted mutual fund income); and (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, in the securities (other than the securities of other regulated investment companies) of any two or more issuers that the fund controls 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.
The funds investments in partnerships, if any, including in qualified publicly traded partnerships, may result in the fund 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 it satisfies a minimum distribution requirement. To satisfy the minimum
distribution requirement, the fund must distribute to its shareholders at least the sum of (i) 90% of its investment company taxable income (
i.e
.
, generally, the taxable income of a RIC other than its net capital gain,
plus or minus certain other adjustments), and (ii) 90% of its net tax-exempt income for the taxable year. The fund will be subject to income tax at regular corporate tax rates on any taxable income or gains that it does not distribute to its
shareholders.
77
If, for any taxable year, the fund were to fail to qualify as a regulated investment
company under the Code or were to fail to meet the distribution requirement, it would be taxed in the same manner as an ordinary corporation and distributions to its shareholders would not be deductible by the fund in computing its taxable income.
In addition, in the event of a failure to qualify, the funds distributions, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary dividend income for federal income
tax purposes to the extent of the funds current and accumulated earnings and profits. However, such dividends would be eligible, subject to any generally applicable limitations, (i) to be treated as qualified dividend income in the case of
shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. Moreover, if the fund were to fail to qualify as a regulated investment company in any year, it would be required to pay out
its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. Under certain circumstances, the fund may cure a failure to qualify as a regulated investment company, but in order to do so the fund may
incur significant fund-level taxes and may be forced to dispose of certain assets. If the fund failed to qualify as a regulated investment company for a period greater than two taxable years, the fund would generally be required to recognize any net
built-in gains with respect to certain of its assets upon a disposition of such assets within ten years of qualifying as a regulated investment company in a subsequent year.
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) 98.2% 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 that is
retained by the fund and 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 to avoid the application of this excise tax, but there can
be no assurance that this will be the case.
The funds transactions in zero coupon securities, foreign currencies,
forward contracts, options and futures contracts (including options and futures contracts on foreign currencies), if any, 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 prior to the receipt of cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. In order to distribute this income and avoid a tax at the fund level, the fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially
resulting in additional taxable gain or loss. The fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any zero coupon securities, foreign
currency, forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the fund as a regulated investment company.
The funds investments 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 indices, 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 or 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.
78
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.
As a result of
entering into swap contracts, the fund may make or receive periodic net payments. The fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net
payments will generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the fund has been a party to the swap for more than one
year).
The 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 rules, constructive sale rules or rules applicable to 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. In order to distribute this income and avoid a tax on the fund, the fund might be required to liquidate portfolio securities that it
might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. The fund might also meet the distribution requirements by borrowing the necessary cash, thereby incurring interest expenses.
Capital Loss Carryforwards.
On October 31, 2013, the unused capital loss carry forwards for the fund were $5,534,078.
For U.S. federal income tax purposes, unused capital loss carryforwards that arose in tax years that began on or before
December 22, 2010 (Pre-2011 Losses) are available to be applied against future capital gains, if any, realized by the fund prior to the expiration of the carryforwards.
Those carryforwards expire as follows:
|
|
|
|
|
Year of Expiration
|
|
Amount of
Capital Loss
Carryforward
that Expires ($)
|
|
October 31, 2014
|
|
|
489,111
|
|
October 31, 2015
|
|
|
943,924
|
|
October 31, 2016
|
|
|
110,168
|
|
October 31, 2018
|
|
|
3,990,875
|
|
Net short- and long-term capital losses incurred in taxable years beginning after December 22,
2010 (Post-2010 Losses) may be carried forward without limit, and such carryforwards must be fully utilized before the fund will be permitted to utilize any carryforwards of Pre-2011 Losses. As of October 31, 2013, the fund had no
unused carryforwards of Post-2010 Losses.
Under certain circumstances, the fund may elect to treat certain losses as
though they were incurred on the first day of the taxable year following the taxable year in which they were actually incurred.
79
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, if any dividend or distribution is 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 but is actually paid during the following January, such dividend or distribution will be deemed to have been received by each shareholder on December 31 of the year in which the dividend was declared.
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 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 income 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 the excess of the amount of undistributed net capital gain included in their respective income over their respective income tax
credits. 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 timely filing appropriate returns or claims for refund with the
IRS.
Exempt-interest dividends paid by the fund are exempt from regular federal income taxes. Other distributions from the
funds net investment income and net realized short-term capital gains are taxable to a U.S. shareholder as ordinary income, whether paid in cash or in shares. Distributions of net realized long-term capital gains, if any, that the fund reports
as capital gain 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.
Dividends and distributions from the fund other than exempt-interest dividends will generally be taken into account in determining a shareholders net investment income for purposes of
the Medicare contribution tax applicable to certain individuals, estates and trusts.
The fund does not anticipate that any of
its dividends paid will qualify for the dividends-received deduction for corporate shareholders. The fund also does not expect any distributions to be treated as qualified dividend income, which is taxable to noncorporate shareholders at
reduced rates.
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 the shareholders basis in his or her shares of the fund, and as a capital gain thereafter (if the shareholder holds his or her shares of the fund as capital assets). Each
shareholder who receives distributions in the form of additional shares will be treated for U.S. income tax purposes as if receiving a distribution in an amount equal to the amount of money that the shareholder would have received if he or she had
instead elected to receive cash distributions. The shareholders tax basis in the shares so received will be equal to such amount.
Investors considering buying shares just prior to a capital gain distribution should be aware that, although the price of shares purchased at that time may reflect the amount of the forthcoming
distribution, such distribution may nevertheless be taxable to them.
Because the fund will distribute exempt-interest
dividends, interest on indebtedness incurred by shareholders, directly or indirectly, to purchase or carry shares is not deductible for U.S. federal income tax
80
purposes. Investors receiving social security or railroad retirement benefits should be aware that exempt-interest dividends received from the fund may, under certain circumstances, cause a
portion of such benefits to be subject to federal income tax. Furthermore, a portion of any exempt-interest dividend paid by the fund that represents income derived from certain revenue or private activity bonds held by the fund may not retain its
tax-exempt status in the hands of a shareholder who is a substantial user of a facility financed by such bonds, or a related person thereof. Moreover, some or all of the exempt-interest dividends distributed by the fund may
be a specific preference item, or a component of an adjustment item, for purposes of the federal individual and corporate alternative minimum taxes.
Shareholders should consult their own tax advisors to determine whether they are (i) substantial users with respect to a facility or related to such users within the meaning of the
Code or (ii) subject to a federal alternative minimum tax, the federal branch profits tax, or the federal excess net passive income tax.
Sales of Shares
.
Upon the sale or exchange of his or her shares, a shareholder will generally recognize 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 fund shares held by the shareholder for six months or fewer 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 (including amounts credited to the shareholder as undistributed capital gains) with respect to such shares.
If a shareholder incurs a sales charge in acquiring shares of the fund, disposes of those shares within 90 days and then acquires, before
February 1 of the calendar year following the calendar year of the disposition, 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 in 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.
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 IRS Form 8886. Direct shareholders of portfolio securities are in many cases
excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. 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.
If a shareholders shares are redeemed to pay a fee because the shareholders account balance is less than a certain threshold,
the redemption will be treated as a taxable sale or exchange of shares, as described above. The deductibility of that fee by a shareholder that is an individual may be subject to generally applicable limitations on miscellaneous itemized deductions.
Basis Reporting.
The fund, or, if you hold your shares through a Service Agent, your Service Agent, will report to
the IRS the amount of proceeds that a shareholder receives from a redemption or exchange of fund
81
shares. For redemptions or exchanges of shares acquired on or after January 1, 2012, the fund will also report the shareholders basis in those shares and the character of any gain or loss
that the shareholder realizes on the redemption or exchange (i.e., short-term or long-term), and certain related tax information. If a shareholder has a different basis for different shares of the fund in the same account (e.g., if a shareholder
purchased fund shares held in the same account when the shares were at different prices), the fund will by default report the basis of the shares redeemed or exchanged using the average basis method, under which the basis per share is the average of
the bases of all the shareholders fund shares in the account. (For these purposes, shares acquired prior to January 1, 2012 and shares acquired on or after January 1, 2012 will be treated as held in separate accounts.)
A shareholder may instruct the fund to use a method other than average basis for an account. If redemptions, including in connection with
payment of an account fee, or exchanges have occurred in an account to which the average basis method applied, the basis of the fund shares remaining in the account will continue to reflect the average basis notwithstanding the shareholders
subsequent election of a different method. For further assistance, shareholders who hold their shares directly with the fund may call the fund at 1-877-721-1926 Monday through Friday between 8:00 a.m. and 5:30 p.m. (Eastern time). Shareholders who
hold shares through a Service Agent should contact the Service Agent for further assistance or for information regarding the Service Agents default method for calculating basis and procedures for electing to use an alternative method.
Shareholders should consult their tax advisers concerning the tax consequences of applying the average basis method or electing another method of basis calculation, and should consider electing such other method prior to making redemptions or
exchanges in their accounts.
Backup Withholding.
The fund may be required in certain circumstances to apply backup
withholding on dividends (including exempt-interest dividends), distributions and redemption proceeds payable to non-corporate shareholders who fail to provide the fund with their correct taxpayer identification numbers or to make required
certifications, or who have been notified by the IRS that they are subject to backup withholding. The backup withholding rate is currently 28%. Backup withholding is not an additional tax and any amount withheld may be credited against a
shareholders U.S. federal income tax liabilities. Backup withholding will not be applied to payments that have already been subject to the 30% withholding tax described below under Taxation of Non-U.S. Shareholders.
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 redemption proceeds that were paid (or that are treated as having been paid) by the fund to its shareholders during the preceding taxable year.
Other Taxes.
Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign taxes
depending on each shareholders particular situation. Generally, shareholders will have to pay state or local taxes on exempt-interest dividends and other fund distributions, although distributions derived from interest on U.S. government
obligations (but not distributions of gain from the sale of such obligations) may be exempt from certain state and local taxes.
Taxation
of Non-U.S. Shareholders
Ordinary dividends and certain other payments made by the fund to non-U.S. shareholders are
generally subject to withholding tax at a 30% rate (or such lower rate as may be determined in accordance with any applicable treaty). 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 an IRS 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 a 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.
82
The 30% withholding tax generally will not apply to exempt-interest dividends, to
distributions of the excess of net long-term capital gains over net short-term capital losses or to redemption proceeds.
For fund taxable years beginning before January 1, 2014, the 30% withholding tax also will not apply to dividends that the fund reports
as (a) interest-related dividends, to the extent such dividends are derived from the funds qualified net interest income, or (b) short-term capital gain dividends, to the extent such dividends are derived from the funds
qualified short-term gain. Qualified net interest income is the funds net income derived from U.S.-source interest and original issue discount, subject to certain exceptions and limitations. Qualified short-term
gain generally means the excess of net short-term capital gain of the fund for the taxable year over its net long-term capital loss, if any. However, depending on its circumstances, the fund may report all, some or none of its potentially
eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or the fund may treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In the case of shares held through
an intermediary, the intermediary may withhold even if the fund reports a payment as an interest-related dividend or short-term capital gain dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these
rules to their accounts.
Under legislation known as FATCA (the Foreign Account Tax Compliance Act), the fund will
be required to withhold 30% of certain ordinary dividends it pays after June 30, 2014, and 30% of the gross proceeds of share redemptions and certain capital gain dividends it pays after December 31, 2016, to shareholders that fail to meet
prescribed information reporting or certification requirements. In general, no such withholding will be required with respect to a U.S. person or non-U.S. individual that timely provides the certifications required by the fund or its agent on a
valid IRS Form W-9 or W-8, respectively. Shareholders potentially subject to withholding include foreign financial institutions (FFIs), such as non-U.S. investment funds, and non-financial foreign entities (NFFEs). To avoid
withholding under FATCA, an FFI generally must enter into an information sharing agreement with the IRS in which it agrees to report certain identifying information (including name, address, and taxpayer identification number) with respect to its
U.S. account holders (which, in the case of an entity shareholder, may include its direct and indirect U.S. owners), and an NFFE generally must identify and provide other required information to the fund or other withholding agent regarding its U.S.
owners, if any. Such non-U.S. shareholders also may fall into certain exempt, excepted or deemed compliant categories as established by regulations and other guidance. A non-U.S. shareholder resident or doing business in a country that has entered
into an intergovernmental agreement with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the shareholder and the applicable foreign government comply with the terms of such agreement.
The IRS has indicated that an FFI that is subject to the information sharing requirement will need to ensure that it will be identified
as FATCA-compliant in sufficient time to allow the fund to refrain from withholding beginning on July 1, 2014. A non-U.S. entity that invests in the fund will need to provide the fund with documentation properly certifying the entitys status
under FATCA in order to avoid FATCA withholding.
Non-U.S. investors should consult their own tax advisers regarding the
impact of these requirements on their investment in the fund.
The foregoing is only a summary of certain material U.S.
federal income tax consequences (and, where noted, state and local 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.
83
THE TRUST
The certificate of trust to establish Legg Mason Partners Income Trust (referred to in this section as the Trust) was filed
with the State of Maryland on October 4, 2006. As of April 16, 2007, the fund was redomiciled as a series of the Trust. Immediately prior to such redomiciliation, the fund was reorganized on April 16, 2007 as a series of Legg Mason
Partners Income Funds, a Massachusetts business trust.
The Trust is a Maryland statutory trust. A Maryland statutory
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 trustees and shareholders of a statutory
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 a trusts declaration of trust. Some of the more significant provisions of the
Trusts declaration of trust (the Declaration) are described below.
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 record 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.
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 then in office.
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 limits the rights to indemnification, advancement of expenses or insurance provided in
the Declaration with respect to actions or omissions of persons entitled to indemnification, advancement of expenses or insurance under the Declaration prior to the amendment.
84
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, or as the Trustees otherwise decide.
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 shares of 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. 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 as a Trustee is not personally liable to any person, other than the Trust or its shareholders, in connection with the affairs of the Trust. Each Trustee is required to perform his or her duties in good faith and in a
manner he or she believes to be in the best interests of the Trust. All actions and omissions of Trustees are presumed to be in accordance with the foregoing standard of performance, and any person alleging the contrary has the burden of proving
that allegation.
The Declaration limits a Trustees liability to the Trust or any shareholder to the full extent
permitted under current Maryland law by providing that 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
85
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 to the fullest extent permitted by law against liability and expenses in connection with any claim or proceeding in which he or she is involved by virtue of having been a Trustee, officer or
employee. 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, a member or chair of a committee of the Board, lead independent Trustee, 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 no fewer than three unrelated shareholders must be made on the
Trustees. The Declaration details information, certifications, undertakings and acknowledgements that must be included in the demand. The Trustees are not required to consider a demand that is not submitted in accordance with the requirements
contained in the Declaration. The Declaration also requires that, in order to bring a derivative action, the complaining shareholders must be joined in the action by shareholders owning, at the time of the alleged wrongdoing, at the time of demand,
and at the time the action is commenced, shares representing at least 5% of the voting power of the affected funds. 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 a suit should be maintained, then the Trust will commence the suit and the suit will proceed directly and not derivatively. If a majority of the
independent Trustees determines 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 consistent with the standard of performance required of the Trustees in performing their duties. If a demand
is rejected, the complaining shareholders will be responsible for the costs and expenses (including attorneys fees) incurred by the Trust 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.
LEGAL MATTERS
On or about May 30, 2006, John Halebian, a purported shareholder of Western Asset New York Tax Free Money Market
Fund (formerly known as
Citi
SM
New York Tax Free Reserves), a series of Legg Mason Partners Money
Market Trust, formerly a series of CitiFunds Trust III (the Subject Trust), filed a complaint in the United States District Court for the Southern District of New York against the persons who were then the independent trustees of the
Subject Trust. The Subject Trust was also named in the complaint as a nominal defendant.
86
The complaint raised derivative claims on behalf of the Subject Trust and putative class
claims against the then independent trustees in connection with the 2005 sale of Citigroups asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the
derivative claim, the plaintiff alleged that the independent trustees had breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or to seek competing bids from other qualified investment advisers
in connection with Citigroups sale to Legg Mason. In the claims brought on behalf of a putative class of shareholders, the plaintiff alleged that the echo voting provisions applicable to the proxy solicitation process violated the 1940 Act and
constituted a breach of fiduciary duty. The relief sought included rescission of the advisory agreement and an award of costs and attorney fees.
In advance of filing the complaint, Plaintiffs lawyers had made written demand for relief on the Board of the Subject Trust, and the Boards independent trustees formed a demand review
committee to investigate those matters raised in the demand, and the expanded set of matters subsequently raised in the complaint. The demand review committee recommended that the action demanded by Plaintiff would not be in the best interests of
the Subject Trust. The independent trustees of the Subject Trust considered the committees report, adopted the recommendation of the committee, and directed counsel to move to dismiss the complaint.
The Federal district court dismissed the complaint in its entirety in July 2007. In May 2011, the U.S. Court of Appeals for the
Second Circuit affirmed the district courts dismissal as to the class claims, and remanded the remaining claim relating to the demand review committee that had examined the derivative claim to the district court with instructions to convert
the motion to dismiss into a motion for summary judgment. In July 2012, the district court granted summary judgment in favor of the defendants. In August 2012, Plaintiff filed an appeal. In November 2013, the U.S. Court of Appeals for the Second
Circuit issued a summary order affirming the dismissal of the case in its entirety. On November 26, 2013, Plaintiff filed a petition for panel rehearing and for rehearing
en banc
with the U.S. Court of Appeals for the Second Circuit. On
January 13, 2014, the appeals court denied Plaintiffs petition.
* * *
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 with the foregoing matter may be filed against these and related parties in the future.
FINANCIAL STATEMENTS
The audited financial statements of the fund (Statement of Assets and Liabilities, including
the Schedule of Investments as of October 31, 2013, Statement of Operations for the year ended October 31, 2013, Statements of Changes in Net Assets for each of the years in the two-year period ended October 31, 2013, Financial Highlights for each
of the years in the five-year period ended October 31, 2013, 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 December 23, 2013; Accession Number 0001193125-13-483101).
87
APPENDIX A
DESCRIPTION OF RATINGS
The ratings of Moodys Investors Service, Inc., Standard & Poors Ratings Group and Fitch Ratings represent their opinions as to the quality of various debt obligations. It should be
emphasized, however, that ratings are not absolute standards of quality. Consequently, debt obligations with the same maturity, coupon and rating may have different yields while debt obligations of the same maturity and coupon with different ratings
may have the same yield. As described by the rating agencies, ratings are generally given to securities at the time of issuances. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.
Moodys Investors Service, Inc. Global Rating Scales
Ratings
assigned on Moodys global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates,
financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a
default on contractually promised payments and the expected financial loss suffered in the event of default.
1
Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect the likelihood of a default on contractually promised payments.
2
Moodys differentiates structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial corporate, financial
institution, and public sector entities) on the global long-term scale by adding (sf ) to all structured finance ratings. The (sf ) indicator was introduced on August 11, 2010 and explained in a special comment entitled, Moodys
Structured Finance Rating Scale. The addition of (sf ) to structured finance ratings should eliminate any presumption that such ratings and fundamental ratings at the same letter grade level will behave the same. The (sf ) indicator for
structured finance security ratings indicates that otherwise similarly rated structured finance and fundamental securities may have different risk characteristics. Through its current methodologies, however, Moodys aspire to achieve broad
expected equivalence in structured finance and fundamental rating performance when measured over a long period of time.
Description of
Moodys Investors Service, Inc.s Global Long-Term Obligation Ratings:
Aaa
Obligations rated Aaa are
judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
Obligations rated Aa are
judged to be of high quality and are subject to very low credit risk.
A
Obligations rated A are judged to be
upper-medium grade and are subject to low credit risk.
Baa
Obligations rated Baa are judged to be medium-grade
and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
Obligations
rated Ba are judged to be speculative and are subject to substantial credit risk.
B
Obligations rated B are
considered speculative and are subject to high credit risk.
1
|
For certain structured finance, preferred stock and hybrid securities in which payment default events are either not defined or do not match investors
expectations for timely payment, the ratings reflect the likelihood of impairment and the expected financial loss in the event of impairment.
|
2
|
For certain structured finance, preferred stock and hybrid securities in which payment default events are either not defined or do not match investors
expectations for timely payment, the ratings reflect the likelihood of impairment.
|
A-1
Caa
Obligations rated Caa are judged to be speculative of poor standing and
are subject to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest
rated and are typically in default, with little prospect for recovery of principal or interest.
Note
: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that
generic rating category. Additionally, a (hyb) indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
*
* By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can
potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation
rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Description of
Moodys Investors Service, Inc.s Global Short-Term Obligation Ratings:
P-1
Issuers (or supporting
institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
Issuers (or
supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
Issuers
(or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Description of Moodys
Investors Service, Inc.s US Municipal Ratings:
US Municipal Short-Term Obligation Ratings:
The Municipal Investment Grade (MIG) scale is used to rate US municipal bond anticipation notes of up to three years maturity.
Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuers long-term rating is
only one consideration in assigning the MIG rating. MIG ratings are divided into three levelsMIG 1 through MIG 3while speculative grade short-term obligations are designated SG.
MIG 1
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
This
designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
A-2
MIG 3
This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins
of protection.
US Municipal Demand Obligation Ratings:
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned: a long or short-term debt rating
and a demand obligation rating. The first element represents Moodys evaluation of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of risk associated with the ability to
receive purchase price upon demand (demand feature). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade (VMIG) scale.
The rating transitions on the VMIG scale, differ from those on the Prime scale to reflect the risk that external liquidity support
generally will terminate if the issuers long-term rating drops below investment grade.
VMIG 1
This
designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 2
This designation denotes strong credit quality. Good protection is afforded by the strong short-term
credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 3
This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal
protections that ensure the timely payment of purchase price upon demand.
SG
This designation denotes
speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the
timely payment of purchase price upon demand.
Description of Standard & Poors Ratings Groups Long-Term Issue
Credit Ratings:
Long-Term Issue Credit Ratings are based, in varying degrees, on Standard & Poors
analysis of the following considerations: (1) likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the
obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the
event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured
and unsecured obligations, or operating company and holding company obligations.)
AAA
An obligation
rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated AA differs from the highest-rated obligations only to a small degree. The
obligors capacity to meet its financial commitment on the obligation is very strong.
A-3
A
An obligation rated A is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong.
BBB
An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics.
BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB
An obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the
obligation.
CCC
An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC
An obligation rated CC is
currently highly vulnerable to nonpayment.
C
A C rating is assigned to obligations that are
currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a
payment default. Among others, the C rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instruments terms or when preferred stock is
the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
D
An obligation rated D is in payment default. The D rating category is used when payments on
an obligation are not made on the date due, unless Standard & Poors believes that such payments will be made within five business days, irrespective of any grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligations rating is lowered to D upon completion of a distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
NR:
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation as a matter of policy.
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories.
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Description of Standard & Poors Ratings Groups Short-Term Issue Credit Ratings:
Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the
U.S., for example, that means obligations with an original maturity date of no more than 365 daysincluding commercial paper.
A-1
A short-term obligation rated A-1 is rated in the highest category by Standard & Poors. The obligors capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its financial commitment on the obligation is satisfactory.
A-3
A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B
A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial
commitments; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial
commitments.
C
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D
A short-term obligation rated D is in payment
default. The D rating category is used when payments on an obligation are not made on the date due, unless Standard & Poors believes that such payments will be made within any stated grace period. However, any stated grace
period longer than five business days will be treated as five business days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Description of Standard & Poors Ratings Groups Municipal Short-Term Note Ratings Definitions:
A Standard & Poors U.S. municipal note rating reflects Standard & Poors opinion about the liquidity
factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which
type of rating, if any, to assign, Standard & Poors analysis will review the following considerations: (1) amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be treated as a
note; and (2) source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1
Strong capacity
to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
A-5
Description of Standard & Poors Ratings Groups Dual Ratings:
Dual ratings may be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the
likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature. The first component of the rating can relate to either a short-term or long-term transaction and accordingly use
either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term rating symbol (for example, AAA/A-1+ or A-1+/A-1). With U.S. municipal short-term demand
debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, SP-1+/A-1+).
Description of Standard & Poors Ratings Groups Active Qualifiers (Currently applied and/or outstanding)
Standard & Poors uses six qualifiers that limit the scope of a rating. The structure of the transaction can require the use
of a qualifier such as a p qualifier, which indicates the rating addressed the principal portion of the obligation only. Likewise, the qualifier can indicate a limitation on the type of information used, such as pi for public
information. A qualifier appears as a suffix and is part of the rating.
Federal deposit insurance limit: L
qualifier. Ratings qualified with L apply only to amounts invested up to federal deposit insurance limits.
Principal Payment: p qualifier. This suffix is used for issues in which the credit factors, the terms, or both, that
determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The p suffix indicates that the rating addresses the
principal portion of the obligation only. The p suffix will always be used in conjunction with the i suffix, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of
AAApNRi indicating that the principal portion is rated AAA and the interest portion of the obligation is not rated.
Interest Payment: i qualifier. This suffix is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from
the credit factors, terms or both that determine the likelihood of receipt of principal on the obligation. The i suffix indicates that the rating addresses the interest portion of the obligation only. The i suffix will always
be used in conjunction with the p suffix, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of AAApNRi indicating that the principal portion is rated AAA
and the interest portion of the obligation is not rated.
Public Information Ratings: pi qualifier. Ratings with a
pi suffix are based on an analysis of an issuers published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuers management and
therefore may be based on less comprehensive information than ratings without a pi suffix. Ratings with a pi suffix are reviewed annually based on a new years financial statements, but may be reviewed on an interim
basis if a major event occurs that may affect the issuers credit quality.
Preliminary Ratings: prelim
qualifier. Preliminary ratings, with the prelim suffix, may be assigned to obligors or obligations, including financial programs, in the circumstances described below. Assignment of a final rating is conditional on the receipt by
Standard & Poors of appropriate documentation. Standard & Poors reserves the right not to issue a final rating. Moreover, if a final rating is issued, it may differ from the preliminary rating. (1)Preliminary ratings
may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. (2) Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined
terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poors policies. (3) Preliminary ratings may be assigned to obligations that will likely be issued upon the
obligors emergence from bankruptcy or similar
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reorganization, based on late-stage reorganization plans, documentation and discussions with the obligor. Preliminary ratings may also be assigned to the obligors. These ratings consider the
anticipated general credit quality of the reorganized or post-bankruptcy issuer as well as attributes of the anticipated obligation(s). (4) Preliminary ratings may be assigned to entities that are being formed or that are in the process of being
independently established when, in Standard & Poors opinion, documentation is close to final. Preliminary ratings may also be assigned to these entities obligations. (5) Preliminary ratings may be assigned when a previously
unrated entity is undergoing a well-formulated restructuring, recapitalization, significant financing or other transformative event, generally at the point that investor or lender commitments are invited. The preliminary rating may be assigned to
the entity and to its proposed obligation(s). These preliminary ratings consider the anticipated general credit quality of the obligor, as well as attributes of the anticipated obligation(s), assuming successful completion of the transformative
event. Should the transformative event not occur, Standard & Poors would likely withdraw these preliminary ratings. (6) A preliminary recovery rating may be assigned to an obligation that has a preliminary issue credit rating.
Termination Structures: t qualifier. This symbol indicates termination structures that are designed to honor
their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.
Description of Fitch Ratings Corporate Finance Long-Term Obligation Ratings:
Ratings of individual securities or financial obligations of a corporate issuer address relative vulnerability to default on an ordinal scale. In addition, for financial obligations in corporate finance,
a measure of recovery given default on that liability is also included in the rating assessment. This notably applies to covered bonds ratings, which incorporate both an indication of the probability of default and of the recovery given a default of
this debt instrument,
The relationship between issuer scale and obligation scale assumes an historical average recovery of
between 30%-50% on the senior, unsecured obligations of an issuer. As a result, individual obligations of entities, such as corporations, are assigned ratings higher, lower, or the same as that entitys issuer rating or IDR. At the lower end of
the ratings scale, Fitch Ratings now additionally publishes explicit Recovery Ratings in many cases to complement issuer and obligation ratings.
AAA
Highest credit quality
.
AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of
financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA
Very high credit quality. AA ratings denote expectations of very low credit risk. They indicate very
strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A
High credit quality. A ratings denote expectations of low credit risk. The capacity for payment of
financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB
Good credit quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate
but adverse business or economic conditions are more likely to impair this capacity.
BB
Speculative.
BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial
commitments to be met.
A-7
B
Highly speculative. B ratings indicate that material
credit risk is present.
CCC
Substantial credit risk. CCC ratings indicate that
substantial credit risk is present.
CC
Very high levels of credit risk. CC ratings
indicate very high levels of credit risk.
C
Exceptionally high levels of credit risk. C
indicates exceptionally high levels of credit risk.
Defaulted obligations typically are not assigned RD or
D ratings, but are instead rated in the B to C rating categories, depending upon their recovery prospects and other relevant characteristics. This approach better aligns obligations that have comparable overall
expected loss but varying vulnerability to default and loss.
Note
: The modifiers
+ or - may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the AAA obligation rating category, or to corporate finance obligation ratings in the
categories below CCC.
The subscript emr is appended to a rating to denote embedded market risk
which is beyond the scope of the rating. The designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the analysis of the counterparty risk, which
in all other respects follows published Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to any degree subject to market risk.
Description of Fitch Ratings Structured, Project & Public Finance Long-Term Obligation Ratings:
Ratings of structured finance, project finance and public finance obligations on the long-term scale, including the financial obligations
of sovereigns, consider the obligations relative vulnerability to default. These ratings are typically assigned to an individual security or tranche in a transaction and not to an issuer.
AAA
Highest credit quality. AAA ratings denote the lowest expectation of default risk. They are assigned
only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA
Very high credit quality. AA ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
A
High credit quality. A ratings denote
expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB
Good credit quality. BBB ratings indicate that expectations of default risk are currently low. The
capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB
Speculative. BB ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.
B
Highly speculative. B ratings indicate that material default risk is present, but a limited
margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC
Substantial credit risk. Default is a real possibility.
A-8
CC
Very high levels of credit risk. Default of some kind appears
probable.
C
Exceptionally high levels of credit risk. Default appears imminent or inevitable.
D
Default. Indicates a default. Default generally is defined as one of the following: (1) failure to make payment of
principal and/or interest under the contractual terms of the rated obligation; (2) the bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of the business of an issuer/obligor; or (2) the distressed
exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation to avoid a probable payment default.
Structured Finance Defaults
Imminent default, categorized under C, typically refers to the
occasion where a payment default has been intimated by the issuer, and is all but inevitable. Alternatively where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the
immediate future.
Additionally, in structured finance transactions, where analysis indicates that an instrument is
irrevocably impaired such that it is not expected to pay interest and/or principal in full in accordance with the terms of the obligations documentation during the life of the transaction, but where no payment default in accordance with the
terms of the documentation is imminent, the obligation will typically be rated in the C category.
Structured Finance Write-downs
Where an instrument has experienced an involuntary and, in the agencys opinion,
irreversible write-down of principal (
i.e.
other than through amortization, and resulting in a loss to the investor), a credit rating of D will be assigned to the instrument. Where the agency believes the
write-down may prove to be temporary (and the loss may be written up again in future if and when performance improves), then a credit rating of C will typically be as signed. Should the write-down then
later be reversed, the credit rating will be raised to an appropriate level for that instrument. Should the write-down later be deemed as irreversible, the credit rating will be lowered to D.
Notes
: In the case of structured and project finance, while the ratings do not address the
loss severity given default of the rated liability, loss severity assumptions on the underlying assets are nonetheless typically included as part of the analysis. Loss severity assumptions are used to derive pool cash flows available to service the
rated liability.
The suffix sf denotes an issue that is a structured finance transaction. For an
explanation of how Fitch determines structured finance ratings, please see our criteria available at www.Fitchratings.com.
In the case of public finance, the ratings do not address the loss given default of the rated liability, focusing instead on the
vulnerability to default of the rated liability.
The modifiers + or - may be appended to a
rating to denote relative status within major rating categories. Such suffixes are not added to the AAA Long-Term Rating category, or categories below B.
Description of Fitch Ratings Corporate, Public and Structured Finance Short-Term Obligation Ratings:
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations
in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as short term based on market convention. Typically, this means up to 13 months for
corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.
F1
Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added + to denote any exceptionally strong credit feature.
A-9
F2
Good short-term credit quality. Good intrinsic capacity for timely
payment of financial commitments.
F3
Fair short-term credit quality. The intrinsic capacity for timely
payment of financial commitments is adequate.
B
Speculative short-term credit quality. Minimal capacity
for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C
High short-term default risk. Default is a real possibility.
RD
Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it
continues to meet other financial obligations. Typically applicable to entity ratings only.
D
Default.
Indicates a broad-based default event for an entity, or the default of a short-term obligation.
Notes to Fitch Ratings
Long-Term and Short-Term Obligation Ratings:
Rating Watch: Rating Watches indicate that there is a heightened
probability of a rating change and the likely direction of such a change. These are designated as Positive, indicating a potential upgrade, Negative, for a potential downgrade, or Evolving, if ratings may be
raised, lowered or affirmed. However, ratings that are not on Rating Watch can be raised or lowered without being placed on Rating Watch first, if circumstances warrant such an action.
A Rating Watch is typically event-driven and, as such, it is generally resolved over a relatively short period. The event driving the
Watch may be either anticipated or have already occurred, but in both cases, the exact rating implications remain undetermined. The Watch period is typically used to gather further information and/or subject the information to further analysis.
Additionally, a Watch may be used where the rating implications are already clear, but where a triggering event (
e.g.
shareholder or regulatory approval) exists. The Watch will typically extend to cover the period until the triggering event
is resolved or its outcome is predictable with a high enough degree of certainty to permit resolution of the Watch.
Rating
Watches can be employed by all analytical groups and are applied to the ratings of individual entities and/or individual instruments. At the lowest categories of speculative grade (CCC, CC and C) the high
volatility of credit profiles may imply that almost all ratings should carry a Watch. Watches are nonetheless only applied selectively in these categories, where a committee decides that particular events or threats are best communicated by the
addition of the Watch designation.
Rating Outlook: Ratings Outlooks indicate the direction a rating is likely to move over a
one- to two-year period. They reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. The majority of Outlooks are generally Stable, which is consistent
with the historical migration experience of ratings over a one- to two-year period. Positive or Negative rating Outlooks do not imply that a rating change is inevitable and, similarly, ratings with Stable Outlooks can be raised or lowered without a
prior revision to the Outlook, if circumstances warrant such an action. Occasionally, where the fundamental trend has strong, conflicting elements of both positive and negative, the Rating Outlook may be described as Evolving.
Outlooks are currently applied on the long-term scale to issuer ratings in corporate finance (including sovereigns, industrials,
utilities, financial institutions and insurance companies) and public finance outside the U.S.; to issue ratings in public finance in the U.S.; to certain issues in project finance; to Insurer Financial Strength Ratings; to issuer and/or issue
ratings in a number of National Rating scales; and to the ratings of structured finance transactions and covered bonds. Outlooks are not applied to ratings assigned on the short-term scale and are applied selectively to ratings in the
CCC, CC and C categories. Defaulted ratings typically do not carry an Outlook.
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Deciding When to Assign Rating Watch or Outlook
Timing is informative but not critical to the choice of a Watch rather than an Outlook. A discrete event that is largely clear and the
terms of which are defined, but which will not happen for more than six monthssuch as a lengthy regulatory approval processwould nonetheless likely see ratings placed on Watch rather than a revision to the Outlook.
An Outlook revision may, however, be deemed more appropriate where a series of potential event risks has been identified, none of which
individually warrants a Watch but which cumulatively indicate heightened probability of a rating change over the following one to two years.
A revision to the Outlook may also be appropriate where a specific event has been identified, but where the conditions and implications of that event are largely unclear and subject to high execution risk
over an ex tended periodfor example a proposed, but politically controversial, privatization.
Expected Ratings: Where a
rating is referred to as expected, alternatively referred to as expects to rate or suffixed as (EXP), this indicates that a full rating has been assigned based upon the agencys expectations regarding final
documentation, typically based upon a review of the final draft documentation provided by the issuer. If such final documentation is received and is as expected, the expected rating will typically be converted to a final rating. Fitch may also
employ expects to rate language for new issuers (currently unrated) for ratings that are assigned in the course of a restructuring, refinancing or corporate reorganization. The expects to rate will reflect and refer to the
rating level expected following the conclusion of the proposed operation (debt issuance, restructure, or merger). While expected ratings typically convert to final ratings within a short time, determined by timing of transaction closure, in the
period between assignment of an expected rating and a final rating, expected ratings may be raised, lowered or placed on Rating Watch or withdrawn, as with final ratings.
Private Ratings: Fitch Ratings also prepares a limited number of private ratings, for example for entities with no publicly traded debt, or where the rating is required for internal benchmarking or
regulatory purposes. These ratings are generally provided directly to the rated entity, which is then responsible for ensuring that any party to whom it discloses the private rating is updated when any change in the rating occurs.
Private ratings undergo the same analysis, committee process and surveillance as published ratings, unless otherwise disclosed as
point-in-time in nature.
Program Ratings: Program ratings assigned to corporate and public finance note issuance
programs (
e.g.
medium-term note programs) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program.
Interest-Only Ratings: Interest-only ratings are assigned to interest strips. These ratings do not address the possibility
that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal-Only Ratings: Principal-only ratings address the likelihood that a security holder will receive its initial principal investment either before or by the scheduled maturity date.
Rate of Return Ratings: Ratings also may be assigned to gauge the likelihood of an investor receiving a
certain predetermined internal rate of return without regard to the precise timing of any cash flows.
Matured/Paid-In-Full: a. MaturedThis action is used when an issue has reached the end of its repayment term and rating
coverage is discontinued. Denoted as NR. b. Paid-In-FullThis action indicates that the issue has been paid in full. As the issue no longer exists, it is therefore no longer rated. Denoted as PIF.
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A designation of Not Rated or NR is used to denote securities
not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
Withdrawn:
The rating has been withdrawn and the issue or issuer is no longer rated by Fitch Ratings. Indicated in rating databases with the symbol WD.
Unenhanced Ratings: Unenhanced ratings reflect the underlying creditworthiness of financial instruments absent any credit enhancement that may be provided through bond insurance,
financial guarantees, dedicated letters of credit, liquidity facilities, or intercept mechanisms.
In some cases, Fitch may
choose to assign an unenhanced rating along with credit rating based on enhancement. The unenhanced rating indicates the creditworthiness of the financial instrument without considering any benefit of such enhancement. Financial obligations may be
enhanced by a guarantee instrument provided by a rated third party.
Non-Credit Rating Scales: In addition, Fitch Ratings
provides specialist ratings on other topics. Operational risk ratings are assigned to servicers of commercial and residential mortgages and other asset types.
Asset manager ratings opine on the relative operational and financial capabilities of asset managers, trustees and others. Fund Credit and/or Volatility Ratings are assigned to funds or local
government investment pools portfolio. Many of these ratings are offered internationally and in some cases on a national basis applying appropriate ratings modifiers and identifiers.
A-12
PART C
OTHER INFORMATION
(a) (1) The Registrants Declaration of Trust dated as of October 2, 2006 as
amended and restated as of August 18, 2011 (the Declaration of Trust) is incorporated herein by reference to Post-Effective Amendment No. 175 to the Registrants Registration Statement on Form N-1A as filed with the SEC on
August 22, 2011 (Post-Effective Amendment No. 175).
(2) Amended and Restated Designation of Series of Shares of
Beneficial Interests in the Registrant and Amended and Restated Designation of Classes, in each case effective as of May 15, 2013 and incorporated into the Declaration of Trust are incorporated herein by reference to Post-Effective Amendment
No. 220 to the Registrants Registration Statement on
Form N-1A as filed with the SEC on June 20, 2013 (Post-Effective Amendment No. 220).
(3) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Registrant, dated September 19, 2013 is
incorporated herein by reference to Post-Effective Amendment No. 240 to the Registrants Registration Statement on
Form N-1A as filed with the SEC on November 19, 2013 (Post-Effective Amendment No. 240).
(b) The Registrants By-Laws as amended and restated as of August 18, 2011 is incorporated herein by reference to Post-Effective Amendment
No. 175.
(c) Instruments defining rights of security holders of series of the Registrant are contained in the Registrants Declaration of Trust
and Bylaws, each as amended to date, which are incorporated by reference to Exhibits (a) and (b) of this Item 28.
(d) (1) Management
Agreement between the Registrant, on behalf of Western Asset Adjustable Rate Income Fund (formerly, Legg Mason Western Asset Adjustable Rate Income Fund), and Legg Mason Partners Fund Advisor, LLC (LMPFA) dated April 13, 2007, as
amended effective August 1, 2012, is incorporated herein by reference to Post-Effective Amendment No. 240.
(2) Management
Agreement between the Registrant, on behalf of Western Asset California Municipals Fund (formerly, Legg Mason Western Asset California Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective
Amendment No. 85 to the Registrants Registration Statement on Form N-1A as filed with the SEC on June 27, 2007 (Post-Effective Amendment No. 85).
(3) Management Agreement between the Registrant, on behalf of Western Asset Global Strategic Income Fund (formerly, Legg Mason Western Asset
Strategic Income Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(4) Management Agreement between the Registrant, on behalf of Western Asset Global High Yield Bond Fund (formerly, Legg Mason Western Asset
Global High Yield Bond Fund), and LMPFA dated April 13, 2007, as amended effective August 1, 2012, is incorporated herein by reference to Post-Effective Amendment No. 240.
(5) Management Agreement between the Registrant, on behalf of Western Asset Mortgage Backed Securities Fund (formerly, Legg Mason Western Asset
Mortgage Backed Securities Fund), and LMPFA dated April 13, 2007, as amended effective August 1, 2012, is incorporated herein by reference to Post-Effective Amendment No. 240.
(6) Management Agreement between the Registrant, on behalf of Western Asset Short Duration High Income Fund (formerly, Western Asset High
Income Fund and before that, Legg Mason Western Asset High Income Fund), and LMPFA dated April 13, 2007, as amended effective May 1, 2013, is incorporated herein by reference to Post-Effective Amendment No. 240.
(7) Management Agreement between the Registrant, on behalf of Western Asset Intermediate Maturity California Municipals Fund (formerly, Legg
Mason Western Asset Intermediate Maturity California Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(8) Management Agreement between the Registrant, on behalf of Western Asset Intermediate Maturity
New York Municipals Fund (formerly, Legg Mason Western Asset Intermediate Maturity New York Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(9) Management Agreement between the Registrant, on behalf of Western Asset Intermediate-Term Municipals Fund (formerly, Legg Mason Western
Asset Intermediate-Term Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(10) Management Agreement between the Registrant, on behalf of Western Asset Corporate Bond Fund (formerly, Legg Mason Western Asset Corporate
Bond Fund), and LMPFA dated April 13, 2007, as amended effective August 1, 2012, is incorporated herein by reference to Post-Effective Amendment No. 240.
(11) Management Agreement between the Registrant, on behalf of Western Asset Managed Municipals Fund (formerly, Legg Mason Western Asset
Managed Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 133 to the Registrants Registration Statement on Form N-1A as filed with the SEC on June 26, 2009.
(12) Management Agreement between the Registrant, on behalf of Western Asset Massachusetts Municipals Fund (formerly, Legg Mason Western Asset
Massachusetts Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(13) Management Agreement between the Registrant, on behalf of Western Asset Municipal High Income Fund (formerly, Legg Mason Western Asset
Municipal High Income Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(14) Management Agreement between the Registrant, on behalf of Western Asset New Jersey Municipals Fund (formerly, Legg Mason Western Asset New
Jersey Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(15) Management Agreement between the Registrant, on behalf of Western Asset New York Municipals Fund (formerly, Legg Mason Western Asset New
York Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(16) Management Agreement between the Registrant, on behalf of Western Asset Oregon Municipals Fund (formerly, Legg Mason Western Asset Oregon
Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(17)
Management Agreement between the Registrant, on behalf of Western Asset Pennsylvania Municipals Fund (formerly, Legg Mason Western Asset Pennsylvania Municipals Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to
Post-Effective Amendment No. 85.
(18) Management Agreement between the Registrant, on behalf of Western Asset Short Duration
Municipal Income Fund (formerly, Legg Mason Western Asset Short Duration Municipal Income Fund), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(19) Management Agreement between the Registrant, on behalf of Western Asset Short-Term Bond Fund (formerly, Legg Mason Western Asset
Short-Term Bond Fund), and LMPFA dated April 13, 2007, as amended October 5, 2012, is incorporated herein by reference to Post-Effective Amendment No. 240.
(20) Management Agreement between the Registrant, on behalf of Western Asset Emerging Markets Debt Fund (formerly, Western Asset Emerging
Markets Debt Portfolio), and LMPFA dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(21) Management Agreement between the Registrant, on behalf of Western Asset Short Term Yield Fund, and LMPFA dated June 1, 2011, is
incorporated herein by reference to Post-Effective Amendment No. 169 to the Registrants Registration Statement on Form N-1A as filed with the SEC June 14, 2011 (Post-Effective Amendment No. 169).
(22) Form of Management Agreement between the Registrant, on behalf of Western Asset Ultra Short Obligations Fund, and LMPFA is incorporated
herein by reference to Post-Effective Amendment No. 223 to the Registrants Registration Statement on Form N-1A as filed with the SEC on July 19, 2013 (Post-Effective Amendment No. 223).
(23) Subadvisory Agreement between LMPFA and Western Asset Management Company (WAM),
with respect to Legg Mason Western Asset Adjustable Rate Income Fund (formerly, Legg Mason Partners Adjustable Rate Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(24) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset California Municipals Fund (formerly, Legg Mason Western Asset
California Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(25)
Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Global Strategic Income Fund (formerly, Legg Mason Western Asset Strategic Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective
Amendment No. 85.
(26) Subadvisory Agreement between WAM and Western Asset Management Company Limited (WAML), with
respect to Western Asset Global Strategic Income Fund (formerly, Legg Mason Western Asset Strategic Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(27) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Global High Yield Bond Fund (formerly, Legg Mason Western Asset
Global High Yield Bond Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(28)
Subadvisory Agreement between WAM and WAML, with respect to Western Asset Global High Yield Bond Fund (formerly, Legg Mason Western Asset Global High Yield Bond Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective
Amendment No. 85.
(29) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Mortgage Backed Securities Fund
(formerly, Legg Mason Western Asset Mortgage Backed Securities Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(30) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Short Duration High Income Fund (formerly, Western Asset High
Income Fund and before that, Legg Mason Western Asset High Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(31) Subadvisory Agreement between WAM and WAML, with respect to Western Asset Short Duration High Income Fund (formerly, Western Asset High
Income Fund and before that, Legg Mason Western Asset High Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(32) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Intermediate Maturity California Municipals Fund (formerly,
Legg Mason Western Asset Intermediate Maturity California Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(33) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Intermediate Maturity New York Municipals Fund (formerly, Legg
Mason Western Asset Intermediate Maturity New York Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(34) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Intermediate-Term Municipals Fund (formerly, Legg Mason Western
Asset Intermediate-Term Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(35) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Corporate Bond Fund (formerly, Legg Mason Western Asset
Corporate Bond Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(36)
Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Managed Municipals Fund (formerly, Legg Mason Western Asset Managed Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment
No. 85.
(37) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Massachusetts Municipals Fund (formerly, Legg
Mason Western Asset Massachusetts Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(38) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Municipal High
Income Fund (formerly, Legg Mason Western Asset Municipal High Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(39) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset New Jersey Municipals Fund (formerly, to Legg Mason Western
Asset New Jersey Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(40) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset New York Municipals Fund (formerly, Legg Mason Western Asset
New York Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(41)
Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Oregon Municipals Fund (formerly, Legg Mason Western Asset Oregon Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment
No. 85.
(42) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Pennsylvania Municipals Fund (formerly, Legg
Mason Western Asset Pennsylvania Municipals Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(43) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Short Duration Municipal Income Fund (formerly, Legg Mason
Western Asset Short Duration Municipal Income Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(44) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Short-Term Bond Fund (formerly, Legg Mason Western Asset
Short-Term Bond Fund) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(45)
Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Emerging Markets Debt Fund (formerly, Western Asset Emerging Markets Debt Portfolio) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment
No. 85.
(46) Subadvisory Agreement between WAM and WAML, with respect to Western Asset Emerging Markets Debt Fund (formerly, Western
Asset Emerging Markets Debt Portfolio) dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(47) Subadvisory Agreement between WAM and Western Asset Management Company Ltd., a corporation organized under the laws of Japan
(Western Japan), with respect to Western Asset Global Strategic Income Fund (formerly, Legg Mason Western Asset Strategic Income Fund) dated November 3, 2008, is incorporated herein by reference to Post-Effective Amendment
No. 118 to the Registrants Registration Statement on Form N-1A as filed with the SEC on November 19, 2008 (Post-Effective Amendment No. 118).
(48) Subadvisory Agreement between WAM and Western Asset Management Company Pte. Ltd. (Western Singapore), with respect to Western
Asset Global Strategic Income Fund (formerly, Legg Mason Western Asset Strategic Income Fund) dated November 3, 2008, is incorporated herein by reference to Post-Effective Amendment No. 118.
(49) Subadvisory Agreement between WAM and Western Singapore, with respect to Western Asset Global High Yield Bond Fund (formerly, Legg Mason
Western Asset Global High Yield Bond Fund) dated November 3, 2008, is incorporated herein by reference to Post-Effective Amendment No. 118.
(50) Subadvisory Agreement between WAM and Western Singapore, with respect to Western Asset Emerging Markets Debt Fund (formerly, Western Asset
Emerging Markets Debt Portfolio) dated November 3, 2008, is incorporated herein by reference to Post-Effective Amendment No. 118.
(51) Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Short Term Yield Fund dated June 1, 2011, is incorporated
herein by reference to Post-Effective Amendment No. 169.
(52) Letter Amendment to Management Agreement between the Registrant, on
behalf of Western Asset Corporate Bond Fund (formerly, Legg Mason Western Asset Corporate Bond Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 137 to the Registrants Registration Statement on Form N-1A
as filed with the SEC on July 29, 2009 (Post-Effective Amendment No. 137).
(53) Subadvisory Agreement between WAM
and WAML with respect to Western Asset Short-Term Bond Fund, dated November 6, 2012 is incorporated herein by reference to Post-Effective Amendment No. 207.
(54) Form of Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Ultra
Short Obligations Fund is incorporated herein by reference to Post-Effective Amendment No. 223.
(e) (1) Distribution Agreement between the
Registrant and Legg Mason Investor Services, LLC (LMIS), on behalf of Western Asset Adjustable Rate Income Fund, Western Asset California Municipals Fund, Legg Mason Western Asset Core Bond Fund, Legg Mason Western Asset Core Plus Bond
Fund, Western Asset Corporate Bond Fund, Western Asset Global High Yield Bond Fund, Legg Mason Western Asset Global Inflation Management Fund, Western Asset Mortgage Backed Securities Fund, Western Asset Short Duration High Income Fund (formerly
Western Asset High Income Fund), Western Asset Intermediate Maturity California Municipals Fund, Western Asset Intermediate Maturity New York Municipals Fund, Western Asset Intermediate-Term Municipals Fund, Western Asset Managed Municipals Fund,
Western Asset Massachusetts Municipals Fund, Western Asset Municipal High Income Fund, Western Asset New Jersey Municipals Fund, Western Asset New York Municipals Fund, Western Asset Oregon Municipals Fund, Western Asset Pennsylvania Municipals
Fund, Western Asset Short Duration Municipal Income Fund, Western Asset Short-Term Bond Fund, Western Asset Global Strategic Income Fund, Western Asset Emerging Markets Debt Fund and Western Asset Short Term Yield Fund dated June 1, 2011, as
amended November 5, 2012 is incorporated herein by reference to Post-Effective Amendment No. 212 to the Registrants Registration Statement on Form N-1A, as filed with the SEC on February 22, 2013 (Post-Effective Amendment
No. 212).
(2) Letter Agreement to the Distribution Agreement between the Registrant, on behalf of Western Asset Ultra Short
Obligations Fund, and LMIS to be filed by amendment.
(f) (1) 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. 78 to the Registrants Registration Statement on Form N-1A as filed with the SEC on January 8, 2007
(Post-Effective Amendment No. 78).
(2) Legg Mason Investment Series (formerly, 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. 78.
(3) Amendment to the General Retirement Plan and the Legg Mason Partners Investment Series Amended and Restated Trustees Retirement Plan dated
as of July 10, 2006 is incorporated herein by reference to Post-Effective Amendment No. 78.
(4) 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. 78.
(5) Emeritus Retirement Plan relating to certain funds established effective as of January 1, 2007 is incorporated herein by reference to
Post-Effective Amendment No. 78.
(g) (1) Custodian Services Agreement with State Street Bank and Trust Company (State Street) dated
October 5, 2012 is incorporated herein by reference to Post-Effective Amendment No. 207.
(2) Fund Accounting Services Agreement
with State Street dated as of October 5, 2012 is incorporated herein by reference to Post-Effective Amendment No. 207.
(3)
Letter Agreement with State Street amending the Custodian Services Agreement and Fund Accounting Services with respect to Western Asset Ultra Short Obligations Fund to be filed by amendment.
(h) (1) Form of License Agreement between the Registrant and Legg Mason Properties, Inc. is incorporated herein by reference to Post-Effective Amendment
No. 77 to the Registrants Registration Statement on Form N-1A as filed with the SEC on November 30, 2006.
(2) Transfer
Agency and Services Agreement with Boston Financial Data Services, Inc. (BFDS) dated as of April 4, 2009 is incorporated herein by reference to Post-Effective Amendment No. 129 to the Registrants Registration Statement
on
Form N-1A as filed April 6, 2009.
(3) Letter Agreement amending the Transfer Agency and Services Agreement with BFDS, with respect
to Western Asset Short Term Yield Fund, is incorporated herein by reference to Post-Effective Amendment No. 170 to the Registrants Registration Statement on Form N-1A as filed with the SEC on June 22, 2011.
(4) Letter Agreement amending the Transfer Agency and Services Agreement with BFDS, with respect to Western Asset Ultra Short Obligations Fund
to be filed by amendment.
(5) Co-Transfer Agency and Services Agreement with BNY Mellon Investment Servicing (US) Inc. (formerly, PNC
Global Investment Servicing (U.S.) Inc.) dated as of April 1, 2009 is incorporated herein by reference to Post-Effective Amendment No. 137.
(6) Letter Agreement amending the Co-Transfer Agency and Services Agreement with BNY Mellon, with respect to Western Asset Ultra Short
Obligations Fund to be filed by amendment.
(7) Board Resolutions regarding Expense Limitation Arrangements, with respect to Western Asset
Ultra Short Obligations Fund, are incorporated herein by reference to Post-Effective Amendment No. 220.
(8) Board Resolutions
regarding Expense Limitation Arrangements are incorporated herein by reference to Post-Effective Amendment No. 240.
(i) (1) Opinion and Consent
of Venable LLP as to the legality of the securities being registered is incorporated herein by reference to the Registrants Registration Statement on Form N-14 as filed with the SEC on June 1, 2007.
(2) Opinion and Consent of Venable LLP regarding the legality of Class R shares of Legg Mason Western Asset Global Inflation Management Fund
(formerly, Legg Mason Partners Global Inflation Management Fund) and Class FI shares of Western Asset Short Duration Municipal Income Fund (formerly, Legg Mason Western Asset Short Duration Municipal Income Fund), is incorporated herein by reference
to Post-Effective Amendment No. 97 to the Registrants Registration Statement on Form N-1A as filed with the SEC on February 14, 2008 (Post-Effective Amendment No. 97).
(3) Opinion and Consent of Venable LLP regarding the legality of Class FI shares of each of Western Asset Intermediate Maturity California
Municipals Fund (formerly, Legg Mason Western Asset Intermediate Maturity California Municipals Fund), Western Asset Intermediate Maturity New York Municipals Fund (formerly, Legg Mason Western Asset Intermediate Maturity New York Municipals Fund)
and Western Asset Massachusetts Municipals Fund (formerly, Legg Mason Western Asset Massachusetts Municipals Fund), is incorporated herein by reference to Post-Effective Amendment No. 99 to the Registrants Registration Statement on Form
N-1A as filed with the SEC on March 14, 2008.
(4) Opinion and Consent of Venable LLP as to the legality of Class FI shares of Western
Asset Mortgage Backed Securities Fund (formerly, Legg Mason Western Asset Mortgage Backed Securities Fund) and Western Asset Corporate Bond Fund (formerly, Legg Mason Western Asset Corporate Bond Fund); and Class R Shares of Western Asset Global
High Yield Bond Fund (formerly, Legg Mason Western Asset Global High Yield Bond Fund), Western Asset Mortgage Backed Securities Fund (formerly, Legg Mason Western Asset Mortgage Backed Securities Fund), Western Asset Corporate Bond Fund (formerly,
Legg Mason Western Asset Corporate Bond Fund) and Western Asset Short-Term Bond Fund (formerly, Legg Mason Western Asset Short-Term Bond Fund), is incorporated herein by reference to Post-Effective Amendment No. 103 to the Registrants
Registration Statement on Form N-1A as filed with the SEC on April 24, 2008.
(5) Opinion and Consent of Venable LLP as to the
legality of Class FI shares of Western Asset Managed Municipals Fund (formerly, Legg Mason Western Asset Managed Municipals Fund), Western Asset California Municipals Fund (formerly, Legg Mason Western Asset California Municipals Fund) and Western
Asset Emerging Markets Debt Fund (formerly, Western Asset Emerging Markets Debt Portfolio) is incorporated herein by reference to Post-Effective Amendment No. 108 to the Registrants Registration Statement on Form N-1A as filed with the
SEC on June 11, 2008 (Post-Effective Amendment No. 108).
(6) Opinion and Consent of Venable LLP as to the legality
of Class FI shares of Western Asset Intermediate-Term Municipals Fund (formerly, Legg Mason Western Asset Intermediate-Term Municipals Fund), Western Asset New Jersey Municipals Fund (formerly, Legg Mason Western Asset New Jersey Municipals Fund),
Western Asset New York Municipals Fund (formerly, Legg Mason Western Asset New York Municipals Fund) and Western Asset Pennsylvania Municipals Fund (formerly, Legg Mason Western Asset Pennsylvania Municipals Fund) is incorporated herein by reference
to Post-Effective Amendment No. 111.
(7) Opinion and Consent of Venable LLP as to the legality of Class FI shares of Western Asset
Oregon Municipals Fund (formerly, Legg Mason Western Asset Oregon Municipals Fund) is incorporated herein by reference to Post-Effective Amendment No. 114 to the Registrants Registration Statement on Form N-1A as filed with the SEC on August
6, 2008 (Post-Effective Amendment No. 114).
(8) Opinion and Consent of Venable LLP as to the legality of Class FI and Class R
shares of Western Asset Adjustable Rate Income Fund (formerly, Legg Mason Western Asset Adjustable Rate Income Fund) is incorporated herein by reference to Post-Effective Amendment No. 116.
(9) Opinion and Consent of Venable LLP as to the legality of Class FI and Class R shares of Western Asset Global Strategic Income Fund
(formerly, Legg Mason Western Asset Strategic Income Fund), Class FI shares of Western Asset Municipal High Income Fund (formerly, Legg Mason Western Asset Municipal High Income Fund) and Class R shares of Western Asset High Income Fund (formerly,
Legg Mason Western Asset High Income Fund) is incorporated by reference to Post-Effective Amendment No. 119 to the Registrants Registration Statement on Form N-1A as filed with the SEC on November 25, 2008 (Post-Effective Amendment No.
119).
(10) Opinion and Consent of Bingham McCutchen LLP regarding the reorganization of High Yield Bond Fund into Legg Mason
Partners High Income Fund is incorporated by reference to Post-Effective Amendment No. 119.
(11) Opinion and Consent of Venable LLP as to
the legality of Class A, Class C and Class IS shares of Western Asset Emerging Markets Debt Fund (formerly, Western Asset Emerging Markets Debt Portfolio) is incorporated by reference to Post-Effective Amendment No. 123.
(12) Opinion and Consent of Venable LLP as to the legality of Class P shares of Western Asset Corporate Bond Fund (formerly, Legg Mason Western
Asset Corporate Bond Fund) is incorporated herein by reference to Post-Effective Amendment No. 131 to the Registrants Registration Statement on Form N-1A as filed with the SEC on April 30, 2009.
(13) Opinion and Consent of Venable LLP as to the legality of Class R1 shares of Western Asset Adjustable Rate Income Fund (formerly, Legg
Mason Western Asset Adjustable Rate Income Fund) is incorporated herein by reference to Post-Effective Amendment No. 135 to the Registrants Registration Statement on Form N-1A as filed with the SEC on July 24, 2009.
(14) Opinion and Consent of Venable LLP as to the legality of Class R1 shares of Legg Mason Western Asset Core Bond Fund, Legg Mason Western
Asset Core Plus Bond Fund, Western Asset High Income Fund and Western Asset Global Strategic Income Fund is incorporated herein by reference to Post-Effective Amendment No. 141 as filed with the SEC on November 23, 2009.
(15) Opinion and Consent of Venable LLP as to the legality of Class R1 shares of Legg Mason Western Asset Global Inflation Management Fund is
incorporated herein by reference to Post-Effective Amendment No. 148 to the Registrants Registration Statement on Form N-1A as filed with the SEC on February 22, 2010 (Post-Effective Amendment No. 148).
(16) Opinion and Consent of Venable LLP as to the legality of Class R1 shares of Western Asset Corporate Bond Fund, Western Asset Global High
Yield Bond Fund, Western Asset Short-Term Bond Fund and Western Asset Mortgage Backed Securities Fund is incorporated herein by reference to Post-Effective Amendment No. 153 to the Registrants Registration Statement on Form N-1A as filed with
the SEC on April 27, 2010.
(17) Opinion and Consent of Venable LLP as to the legality of Class FI, Class I and Class IS shares of Western
Asset Short Term Yield Fund, is incorporated herein by reference to Post-Effective Amendment No. 169.
(18) Opinion and Consent of Venable
LLP as to the legality of Class FI shares of Western Asset Global High Yield Bond Fund and Western Asset Short-Term Bond Fund, Class IS shares of Western Asset Adjustable Rate Income Fund, Western Asset Corporate Bond Fund, Western Asset Global High
Yield Bond Fund, Western Asset Mortgage Backed Securities Fund, Western Asset Short-Term Bond Fund and Western Asset Global Strategic Income Fund, and Class R and Class R1 shares of Western Asset Emerging Markets Debt Fund, is incorporated herein by
reference to Post-Effective Amendment No. 197 to the Registrants Registration Statement on Form N-1A as filed with the SEC on July 30, 2012.
(19) Opinion and Consent of Venable LLP as to the legality of Class FI, Class I and Class IS
shares of Western Asset Ultra Short Obligations Fund to be filed by amendment.
(20) Opinion and Consent of Venable LLP as to the legality
of Class A2 shares of Western Asset Emerging Markets Debt Fund, is incorporated herein by reference to Post-Effective Amendment No. 228 to the Registrants Registration Statement on Form N-1A as filed with the SEC on August 29, 2013.
(21) Opinion and Consent of Venable LLP as to the legality of Class IS shares of Western Asset Short Duration High Income Fund is incorporated
herein by reference to Post-Effective Amendment No. 240.
(j) Consent of Independent Registered Public Accounting Firm is filed herewith.
(k) Not Applicable.
(l) Not Applicable.
(m) Shareholder Services and Distribution Plan pursuant to Rule 12b-1 of the Registrant, on behalf of Western Asset Adjustable Rate Income Fund, Western Asset
California Municipals Fund, Western Asset Corporate Bond Fund, Western Asset Global High Yield Bond Fund, Western Asset Mortgaged Backed Securities Fund, Western Asset Short Duration High Income Fund, Western Asset Intermediate Maturity California
Municipals Fund, Western Asset Intermediate Maturity New York Municipals Fund, Western Asset Intermediate-Term Municipals Fund, Western Asset Managed Municipals Fund, Western Asset Massachusetts Municipals Fund, Western Asset Municipal High Income
Fund, Western Asset New Jersey Municipals Fund, Western Asset New York Municipals Fund, Western Asset Oregon Municipals Fund, Western Asset Pennsylvania Municipals Fund, Western Asset Short Duration Municipal Income Fund, Western Asset Short-Term
Bond Fund, Western Asset Global Strategic Income Fund, Western Asset Emerging Markets Debt Fund, Western Asset Short Term Yield Fund and Western Asset Ultra Short Obligations Fund, dated February 8, 2007, as amended as of May 15, 2013, is
incorporated herein by reference to Post-Effective Amendment No. 220.
(n) Rule 18f-3(d) Multiple Class Plan of the Registrant dated February 6,
2007 is incorporated herein by reference to Post-Effective Amendment No. 85.
(o) (1) Power of Attorney dated February 13, 2014 is
incorporated herein by reference to Post-Effective Amendment No. 247 to the Registrants Registration Statement on Form N-1A as filed with the SEC on February 14, 2014 (Post-Effective Amendment No. 247).
(2) Power of Attorney dated May 15, 2013 is incorporated herein by reference to Post-Effective Amendment No. 220.
(3) Power of Attorney dated February 13, 2014 is incorporated herein by reference to Post-Effective Amendment No. 247.
(p) (1) Code of Ethics of Legg Mason & Co., LLC dated as of March 10, 2011 (adopted by LMPFA and LMIS) is incorporated herein by reference
to Post-Effective Amendment No. 175.
(2) Code of Ethics of WAM, WAML, Western Singapore and certain supervised affiliates dated
November 1, 2013 is incorporated herein by reference to Post-Effective Amendment No. 247.
(3) Code of Ethics of Western Japan is
incorporated herein by reference to Post-Effective Amendment No. 116.
Item 29.
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Persons Controlled by or under Common Control with Registrant
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Not Applicable.
Article IX of the Registrants Declaration of Trust addresses the limitation of
liability and indemnification of the Registrants Trustees, officers and others. Section 9.2(a) of the Declaration of Trust provides that no current or former Trustee, officer, or employee of the Registrant will be subject to any personal
liability whatsoever to any
person, other than the Registrant or its shareholders, in connection with the affairs of the Registrant. Further, Section 9.2(b) of the Declaration of Trust provides that, subject to
applicable federal law, no current or former Trustee or officer of the Registrant will be liable to the Registrant or to any shareholder for money damages except:
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to the extent that it is proved that the person actually received an improper benefit or profit in money, property, or services, or
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to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the persons 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.
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Section 9.5 of the Declaration of
Trust states requires that, subject to certain exceptions and limitation expressed in the Declaration of Trust, each current and former Trustee, officer, or employee of the Registrant, including persons who serve at the request of the Registrant as
directors, trustees, officers, employees, agents or independent contractors of another organization in which the Registrant has an interest as a shareholder, creditor or otherwise (each, a Covered Person), be indemnified by the
Registrant to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim in which he becomes involved as a party or otherwise by virtue of his being (or having
served) in such position and against amounts paid or incurred by him in settlement thereof. Section 9.5 of the Declaration of Trust further provides that no indemnification shall be provided to the that extent such indemnification is prohibited
by applicable federal law. The Declaration of Trust also sets forth provisions outlining presumptions that may be made relating to a persons standard of conduct and when expenses may be advanced.
In addition, to the foregoing, the Registrant has entered into an Indemnification Agreement with each of its Trustees that provides for indemnification
consistent with the principles described above. These Indemnification Agreements set forth certain procedural aspects with respect to indemnification, including the advancement of expenses, and presumptions relating to the determination of whether
the standard of conduct required for indemnification has been met, as well as remedies for the indemnitee in the event that, among other things, determinations as to entitlement to indemnification, advancement of expenses and indemnity payments are
not made in accordance with the procedures specified therein.
The Trustees 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, as amended.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be provided to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in connection with
the successful defense of any action, suit or proceeding or payment pursuant to any insurance policy) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is prohibited as against public policy as
expressed in the Act and will be governed by the final adjudication of such issue.
Under the Distribution Agreement, the Registrant agrees to indemnify
LMIS, its officers, directors and employees and any person who controls LMIS within the meaning of Section 15 of the 1933 Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the reasonable
cost of investigating or defending such claims, demands or liabilities and any counsel fees incurred in connection therewith) which LMIS, its officers, directors and employees or any such controlling person may incur, under the 1933 Act or under
common law or otherwise, arising out of or based upon any alleged untrue statement of a material fact contained in the Registrants Registration Statement or arising out of or based upon any alleged omission to state a material fact required to
be stated or necessary to make the Registration Statement not misleading, provided that in no event shall
anything contained in the Distribution Agreement be construed so as to protect LMIS or such other parties against any liability to the Registrant or its shareholders to which LMIS or such other
parties would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of their duties, or by reason of reckless disregard of their obligations and duties under the Distribution Agreement.
The Registrants Management Agreements and Subadvisory Agreements provide that the manager or subadvisor, as applicable, assumes no responsibility under
the Agreements other than to render the services called for under the Agreements in good faith. The Management Agreements and Subadvisory Agreements further provide that the manager or the subadvisor, as applicable, shall not 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 securities transactions for the fund, provided that nothing in the Agreements protect with the manager or the subadvisor, as
applicable, against any liability to the Fund to which the manager or subadvisor, as applicable, would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under the Agreements.
Item 31.
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Business and Other Connections of Investment Adviser
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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 31 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).
Western Asset Management CompanySubadviserWestern Asset Management Company (WAM) is an investment adviser registered with the SEC
under the Advisers Act. The following is a list of the officers and directors of WAM.
Directors
James W. Hirschmann III
Jeffrey A. Nattans
F. Barry Bilson
Officers
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Bruce D. Alberts
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Chief Financial Officer
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Brett B. Canon
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Director of Risk Management and Operations
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Daniel E. Giddings
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Assistant Secretary
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James W. Hirschmann III
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Chief Executive Officer and President
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James J. Flick
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Director of Global Client Service and Marketing
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Gavin L. James
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Director of Portfolio Operations
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Charles A. Ruys de Perez
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Secretary, General Counsel and Head of Legal and Compliance
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Western Asset Management Company LimitedSubadviserWestern Asset Management Company Limited (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 the officers and directors of WAML.
Directors
Charles A. Ruys de Perez
Michael B. Zelouf
Officers
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Kate Blackledge
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Secretary
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Western Asset Management Company Pte. LtdSubadviserWestern Asset Management Company Pte. Ltd. (Western
Singapore) was incorporated under the laws of Singapore as a corporation. Western Singapore is a wholly-owned subsidiary of Legg Mason. The following is a list of the officers and directors of Western Singapore.
Directors
Charles A. Ruys de Perez
Alvin Lee Lip Sin
Officers
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Hui Kwoon Thor
|
|
Finance Manager
|
Henry H. Hamrock
|
|
Head of Singapore Operations
|
Western Asset Management Company LtdSubadviserWestern Asset Management Company Ltd (Western Japan) was
incorporated under the laws of Japan as a corporation. Western Japan is a wholly-owned subsidiary of Legg Mason. Western Japan is authorized and regulated in Japan by the Japanese Securities and Exchange Surveillance Commission. The following is a
list of the officers and directors of Western Japan.
Directors
Takashi Komatsu
Naoya Orime
Charles A. Ruys de Perez
Officers
|
|
|
Yasuaki Sudo
|
|
Finance Officer
|
Naoya Orime
|
|
Head of Tokyo Operations
|
Following is a list of other substantial business activities in which directors, officers or partners of WAM, WAML, Western
Singapore and Western Japan have been engaged as director, officer, employee, partner or trustee.
|
|
|
Officer/Director
|
|
Other Offices Held
|
|
|
Jeffrey A. Nattans
|
|
Director, WAM
|
|
|
Vice President, Legg Mason, Inc.
|
|
|
Manager and Vice President, LMIH
|
|
|
Director, WAML
|
|
|
Director, Western Japan
|
|
|
Director, WAM Australia
|
|
|
Director, WAMCO Hldgs Ltd.
|
|
|
Director, Western Singapore
|
|
|
Officer/Director
|
|
Other Offices Held
|
|
|
James W. Hirschmann III
|
|
Director, WAM
|
|
|
Director, WAML
|
Following is a list of addresses for Item 31 with respect to WAM, WAML, Western Japan and Western Singapore:
Bartlett & Co. (Bartlett)
36 East
Fourth Street
Cincinnati, OH 45202
Batterymarch Financial
Management, Inc. (Batterymarch)
John Hancock Tower
200 Clarendon Street, 49
th
Floor
Boston, MA 02116
Brandywine Global Investment Management, LLC
(Brandywine)
2929 Arch Street, 8
th
Floor
Philadelphia, PA 19104
Brandywine Global Investment Management
(Asia) Pte. Ltd. (Brandywine Singapore)
36 Robinson House, #18
City House
Singapore
ClearBridge Investments, LLC (Clear Investments)
620 Eighth Avenue
New York, NY 10018
ClearBridge Asset Management, Inc. (Clear Asset)
620 Eighth Avenue
New York, NY 10018
Global Currents Investment Management, LLC (GCIM)
100 International Drive
Baltimore, MD 21202
Legg Mason Capital Management, Inc. (LMCM)
100
International Drive
Baltimore, MD 21202
Legg Mason Canada
Holdings Ltd. (LM Canada Hldg)
44 Chipman Hill, 10
th
Floor
St. John, New Brunswick E2L 4S6
Canada
Legg Mason Fund Adviser, Inc. (LMFA)
100
International Drive
Baltimore, MD 21202
Legg Mason Funding
Corp. (LM Funding)
100 International Drive
Baltimore, MD 21202
Legg Mason Global Asset Allocation, LLC
(LMGAA)
100 First Stamford Place
Stamford, CT
06902
and
620 Eighth Avenue
New York, NY 10018
Legg Mason, Inc.
100 International Drive
Baltimore, MD 21202
Legg Mason International Holdings, LLC (LMIH)
100 International Drive
Baltimore, MD 21202
Legg Mason Investment Counsel, LLC (LMIC)
100
International Drive
Baltimore, MD 21202
Legg Mason
Partners Fund Advisor, LLC (LMPFA)
620 Eighth Avenue
New York, NY 10018
Legg Mason Real Estate Investors, Inc.
(LMREI)
100 International Drive
Baltimore, MD
21202
Legg Mason Real Estate Securities Advisors, Inc. (LMRESA)
100 International Drive
Baltimore, MD 21202
Legg Mason Realty Capital, Inc. (LMRC)
100
International Drive
Baltimore, MD 21202
Legg Mason Realty
Group, Inc. (LMRG)
100 International Drive
Baltimore, MD 21202
Legg Mason Realty Partners, Inc.
(LMRP)
100 International Drive
Baltimore, MD
21202
Legg Mason Tower, Inc. (LM Tower)
100
International Drive
Baltimore, MD 21202
LMRC II, Inc.
(LMRC II)
100 International Drive
Baltimore, MD
21202
LMRC Properties, Inc. (LMRC Properties)
100 International Drive
Baltimore, MD 21202
PCM Holdings I, Inc. (PCM I)
8889 Pelican Bay
Boulevard, Suite 500
Naples, FL 34108-7512
PCM Holdings
II, LLC (PCM II)
8889 Pelican Bay Boulevard, Suite 500
Naples, FL 34108-7512
Permal Asset Management, Inc.
(Permal)
900 Third Ave. 28
th
Floor
New York, NY 10022
Royce & Associates, LLC
(Royce)
1414 Avenue of the Americas
New York,
NY 10019
Western Asset Management Company (WAM)
385 East Colorado Boulevard
Pasadena, CA 91101
and
620 Eighth Avenue
New York, NY 10018
Western Asset Management Company Limited
(WAML)
10 Exchange Square
Primrose Street
London EC2A2EN England
Western Asset Management Company Ltd
(Western Japan)
36F Shin-Marunouchi Building
5-1 Marunouchi 1-Chome Chiyoda-Ku
Tokyo 100-6536 Japan
Western Asset Management Company Pty Ltd (WAM Australia)
Level 48
120 Collins Street
GPO Box 507
Melbourne Victoria 3000 Australia
Western Asset Management (UK) Holdings Limited (WAMCO Hldgs Ltd)
10 Exchange Square
Primrose Street
London EC2A2EN England
Western Asset Management Company Pte.
Ltd. (Western Singapore)
1 George Street, #23-01
Singapore 049145
Item 32.
|
Principal Underwriters
|
(a) Legg Mason Investor Services, LLC (LMIS), the distributor of the
Registrant, is a distributor of funds that are series of the following registrants: Legg Mason Partners Income Trust, Legg Mason Partners Variable Income Trust, Legg Mason Partners Equity Trust, Legg Mason Partners Variable Equity Trust, Legg Mason
Partners Money Market Trust, Legg Mason Partners Premium Money Market Trust, Legg Mason Partners Institutional Trust, Legg Mason Global Asset Management Trust, Legg Mason Investment Trust, Legg Mason Tax-Free Income Fund, and Western Asset Funds,
Inc.
LMIS is the placement agent for funds that are series of Master Portfolio Trust.
(b) The information required by this Item 32 with respect to each director and officer of LMIS is listed below:
|
|
|
|
|
Name and Principal
Business Address*
|
|
Position and Offices
with Underwriter LMIS
|
|
Positions and Offices
with Registrant
|
Frances Cashman
|
|
Manager and Co Managing Director
|
|
None
|
|
|
|
Jeffrey Masom
|
|
Manager and Co Managing Director
|
|
None
|
|
|
|
Matthew Schiffman
100 First Stamford Pl.
Stamford, CT 06902-6732
|
|
Manager and Co Managing Director
|
|
None
|
|
|
|
|
|
Jason Bennett
|
|
Chief Financial Officer, Treasurer
and
Financial Reporting Officer
|
|
None
|
|
|
|
Kenneth Cieprisz
620 8th Avenue, 49th Floor
New York, NY 10018
|
|
Vice President and Chief
Compliance
Officer
|
|
None
|
|
|
|
Elisabeth F. Craig
|
|
Secretary
|
|
None
|
|
|
|
Vicki Schmelzer
|
|
Assistant Secretary
|
|
None
|
|
|
|
Susan Kerr
100 First Stamford Pl.
Stamford, CT 06902-6732
|
|
Anti Money Laundering Compliance
Officer
|
|
None
|
*
|
All Addresses are 100 International Drive, Baltimore, Maryland 21202, unless otherwise indicated.
|
(c) Not
applicable.
Item 33.
|
Location of Accounts and Records
|
With respect to the Registrant:
(1)
|
Legg Mason Partners Income Trust
|
620 Eighth Avenue
New York, NY 10018
With respect to the
Registrants Investment Manager:
(2)
|
c/o Legg Mason Partners Fund Advisor, LLC
|
620 Eighth Avenue
New York, NY 10018
With respect to the
Registrants Subadvisers:
(3)
|
c/o Western Asset Management Company, Western Asset Management Company Limited, Western Singapore and Western Japan
|
620 Eighth Avenue
New York, NY
10018
With respect to the Registrants Custodian:
(4)
|
State Street Bank & Trust Company
|
One Lincoln Street
Boston, MA 02111
With respect to the
Registrants Transfer Agent:
(5)
|
BNY Mellon Investment Servicing (US) Inc.
|
P.O. Box 9699
Providence, RI 02940-9699
(6)
|
Boston Financial Data Services, Inc.
|
2000 Crown Colony Drive
Quincy, MA 02169
With respect to the Registrants Distributor:
(7)
|
Legg Mason Investor Services, LLC
|
100 International Drive
Baltimore, MD 21202
Item 34.
|
Management Services
|
Not applicable.
Not applicable.