As filed with the U.S. Securities and Exchange Commission on March 21, 2013
Securities Act File No. 33-43446
Investment Company Act File No. 811-06444
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
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UNDER
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THE SECURITIES ACT OF 1933
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x
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 265
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x
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and/or
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REGISTRATION STATEMENT
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UNDER
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THE INVESTMENT COMPANY ACT OF 1940
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x
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Amendment No. 265
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(Check appropriate box or boxes)
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Legg Mason Partners Equity Trust
(Exact Name of Registrant as Specified in Charter)
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620 Eighth Avenue, 49th Floor, New York, New York
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10018
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants Telephone Number, including Area Code (877) 721-1926
Robert I. Frenkel
Legg Mason Partners Equity Trust
100 First Stamford Place
Stamford, Connecticut 06902
(Name and Address of Agent for Service)
COPY TO:
Benjamin J. Haskin, Esq.
Willkie Farr & Gallagher LLP
1875 K Street, N.W.
Washington, D.C. 20006
Continuous
(Approximate Date of Proposed Offering)
It is proposed that this filing will become effective:
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immediately upon filing pursuant to paragraph (b)
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on pursuant to paragraph (b)
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x
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60 days after filing pursuant to paragraph (a)(1)
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on pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
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¨
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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This filing relates solely to ClearBridge Small Cap Value Fund and ClearBridge Tactical Dividend Income Fund.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Subject to Completion,
[ ], 2013
Prospectus
ClearBridge
Small Cap
Value
Fund
Class : Ticker Symbol
The Securities and Exchange Commission has not approved or disapproved these securities or
determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE
VALUE
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2
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ClearBridge Small Cap Value Fund
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Investment objective
The fund seeks long-term capital growth.
Fees and expenses of the fund
The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.
You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $25,000 in funds sold by Legg Mason Investor Services, LLC (LMIS),
the funds distributor. More information about these and other discounts is available from your financial intermediary, in this Prospectus on page 17 under the heading Sales charges and in the funds statement of additional
information (SAI) on page 48 under the heading Sales Charge Waivers and Reductions.
The fund no longer
offers Class B shares or Class R1 shares for purchase by new or existing investors. Class B shares will continue to be available for dividend reinvestment and incoming exchanges.
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Shareholder fees
(fees paid directly from your investment)
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Class A
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Class B
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Class C
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Class FI
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Class R
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Class R1
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Class I
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Class IS
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Maximum sales charge (load) imposed on purchases (as a % of offering price)
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5.75
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None
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None
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None
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None
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None
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None
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None
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Maximum deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption) (may be reduced over
time)
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Generally,
none
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5.00
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1.00
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None
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None
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None
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None
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None
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Small account fee
1
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$15
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$15
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$15
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None
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None
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None
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None
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None
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Annual fund operating expenses
(expenses that you pay each year as a percentage of the
value of
your investment)
(%)
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Class A
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Class B
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Class C
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Class FI
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Class R
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Class R1
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Class I
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Class IS
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Management fees
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0.75
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0.75
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0.75
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0.75
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0.75
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0.75
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0.75
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0.75
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Distribution and service (12b-1) fees
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0.25
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1.00
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1.00
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0.25
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0.50
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1.00
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None
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None
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Other expenses
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0.23
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0.62
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0.38
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0.31
2
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0.31
2
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0.31
2
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0.38
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0.11
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Acquired fund fees and expenses
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0.02
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0.02
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0.02
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0.02
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0.02
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0.02
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0.02
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0.02
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Total annual fund operating expenses
3
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1.25
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2.39
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2.15
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1.33
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1.58
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2.08
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1.15
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0.88
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Fees waived and/or expenses reimbursed
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N/A
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(0.12)
4
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N/A
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4
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4
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4
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(0.08)
4
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4
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Total annual fund operating expenses after waiving fees and/or reimbursing expenses
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1.25
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2.27
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2.15
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1.33
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1.58
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2.08
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1.07
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0.88
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1
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If your shares are held in a direct account and the value of your account is below $1,000 ($250 for retirement plans that are not
employer-sponsored), the fund may charge you a fee of $3.75 per account that is determined and assessed quarterly (with an annual maximum of $15.00 per account). Direct accounts generally include accounts held in the name of the individual investor
on the funds books and records.
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Other expenses for Class FI, Class R, Class R1 and Class
IS shares are estimated for the current fiscal year. Actual expenses may differ from estimates.
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Total annual fund operating expenses do not correlate with the ratios of expenses to average net assets reported in the financial highlights
tables contained in this Prospectus and in the funds shareholder reports, because the ratios in the financial highlights tables reflect the funds operating expenses and do not include acquired fund fees and expenses.
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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 2.25% for Class B shares, 1.35% for Class FI shares, 1.60% for Class R
shares, 2.10% for Class R1 shares and 1.05% for Class I shares. In addition, total annual fund operating expenses for Class IS shares will not exceed total annual fund operating expenses for Class I shares. Total annual fund operating expenses after
waiving fees and/or reimbursing expenses exceed the expense cap by 0.02% as a result of acquired fund fees and expenses. These arrangements cannot be terminated prior to December 31, 2014 without the Board of Trustees consent. The manager
is 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.
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ClearBridge Small Cap Value Fund
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3
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Example
This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:
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You invest $10,000 in the fund for the time periods indicated
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Your investment has a 5% return each year and the funds operating expenses remain the same
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You reinvest all distributions and dividends without a sales charge
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Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Number of years you own your shares ($)
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1 year
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3 years
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5 years
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10 years
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Class A (with or without redemption at end of period)
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695
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949
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1,222
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1,999
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Class B (with redemption at end of period)
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730
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1,034
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1,365
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2,434
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Class B (without redemption at end of period)
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230
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734
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1,265
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2,434
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Class C (with redemption at end of period)
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318
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673
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1,154
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2,482
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Class C (without redemption at end of period)
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218
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673
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1,154
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2,482
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Class FI (with or without redemption at end of period)
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135
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421
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728
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1,600
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Class R (with or without redemption at end of period)
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161
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499
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861
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1,879
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Class R1 (with or without redemption at end of period)
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211
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652
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1,119
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2,411
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Class I (with or without redemption at end of period)
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109
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358
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625
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1,391
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Class IS (with or without redemption at end of period)
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90
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281
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488
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1,084
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Portfolio turnover.
The fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the funds performance. During the most recent fiscal year, the
funds portfolio turnover rate was 23% of the average value of its portfolio.
Principal investment strategies
Under normal circumstances, the fund invests at least 80% of its net assets, plus borrowings for investment purposes, if any, in common stocks and
other equity securities of small capitalization U.S. companies or in other investments with similar economic characteristics. The fund may invest up to 20% of its net assets in shares of companies with larger market capitalizations.
Certain risks
Risk is inherent in all investing. There is no assurance that the fund will meet its investment objective. The value of your investment in the fund, as well as the amount of return you receive on
your investment, may fluctuate significantly. You may lose part or all of your investment in the fund or your investment may not perform as well as other similar investments. The following is a summary description of certain risks of investing in
the fund.
Stock market and equity securities risk.
The securities markets are volatile and the market prices of the funds securities may decline generally. Securities fluctuate in price based on changes in a companys financial condition
and overall market and economic conditions. If the market prices of the securities owned by the fund fall, the value of your investment in the fund will decline. The financial crisis that began in 2008 has caused a significant decline in the value
and liquidity of many securities of issuers worldwide. In response to the crisis, the U.S. and other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets. The withdrawal of this support,
failure of efforts to respond to the crisis,
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4
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ClearBridge Small Cap Value Fund
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Certain risks contd
or investor perception that such efforts are not succeeding could also negatively affect financial markets generally as well as the value and liquidity of certain securities. In addition, policy
and legislative changes in the United States and in other countries are changing 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.
Small capitalization company risk.
The fund will be exposed to additional risks as a result of its investments in the securities of small capitalization companies. Small capitalization companies may fall out of favor with investors;
may have limited product lines, operating histories, markets or financial resources; or may be dependent upon a limited management group. The prices of securities of small capitalization companies generally are more volatile than those of large
capitalization companies and are more likely to be adversely affected than large capitalization companies by changes in earnings results and investor expectations or poor economic or market conditions, including those experienced during a recession.
Securities of small capitalization companies may underperform large capitalization companies, may be harder to sell at times and at prices the portfolio managers believe appropriate and may offer greater potential for losses.
Value investing risk.
The value approach to investing involves the risk that stocks may remain undervalued. Value stocks may underperform the overall equity market while the market concentrates on growth stocks.
Although the fund will not concentrate its investments in any one industry or industry group, it may, like many value funds, weight its investments toward certain industries, thus increasing its exposure to factors adversely affecting issuers within
those industries.
Issuer risk.
The value of a security can go up or down more than the market as a whole and can perform differently from the value of the market as a whole, often due to disappointing earnings reports by the
issuer, unsuccessful products or services, loss of major customers, major litigation against the issuer or changes in government regulations affecting the issuer or the competitive environment. The fund may experience a substantial or complete loss
on an individual security. Historically, the prices of securities of small and medium capitalization companies have generally gone up or down more than those of large capitalization companies, although even large capitalization companies may fall
out of favor with investors.
Portfolio selection risk.
The value of your investment may decrease if the subadvisers judgment about the attractiveness, value or market trends affecting a particular security, industry or sector or about market
movements is incorrect.
Liquidity risk.
Some assets held by the fund may be difficult to sell, or illiquid, particularly during times of market turmoil. Illiquid assets may also be difficult to value. If the fund is forced to sell an
illiquid asset to meet redemption requests or other cash needs, the fund may be forced to sell at a loss.
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.
These risks are discussed in more detail later in this Prospectus
or in the SAI.
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ClearBridge Small Cap Value Fund
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5
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Performance
The accompanying bar chart and table provide some indication of the risks of investing in the fund. The bar chart shows
changes in the funds performance from year to year for Class A shares. The table shows the average annual total returns of each class of the fund that has been in operation for at least one full calendar year and also compares the
funds performance with the average annual total returns of an index or other benchmark. Performance for classes other than those shown may vary from the performance shown to the extent the expenses for those classes differ. The fund makes
updated performance information available at the funds website, http://www.leggmason.com/individualinvestors/products/mutual-funds/annualized_performance (select share class), or by calling the fund at 1-877-721-1926.
The funds past performance (before
and after taxes) is not necessarily an indication of how the fund will perform in the future.
Sales charges are not
reflected in the accompanying bar chart, and if those charges were included, returns would be less than those shown.
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Total returns
(before taxes)
(%)
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Best quarter
(09/30/2009): 22.93
Worst quarter
(12/31/2008): (27.47)
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Average annual total returns
(for periods ended December 31, 2012)
(%)
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1 year
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5 years
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10 years
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Since
inception
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Inception
date
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Class
A
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Return before taxes
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8.68
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1.42
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7.50
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Return after taxes on distributions
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8.68
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1.03
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6.54
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Return after taxes on distributions and sale of fund shares
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5.64
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1.03
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6.32
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Other Classes (Return
before taxes only)
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Class B
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9.07
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1.73
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7.57
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Class C
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13.29
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1.75
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7.24
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Class I
1
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15.50
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2.95
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N/A
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9.14
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4/14/2003
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Russell 2000 Value Index (reflects no deduction for fees, expenses or taxes)
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18.05
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3.55
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9.50
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1
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For Class I shares, from the class commencement of operations to
December 31, 2012, the average annual total return of the Russell 2000 Value Index was 9.92%.
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The after-tax
returns are shown only for Class A shares, are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investors
tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns for
classes other than Class A will vary from returns shown for Class A.
Management
Investment manager:
Legg Mason Partners Fund Advisor, LLC
Subadviser:
ClearBridge Investments, LLC (ClearBridge)
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6
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ClearBridge Small Cap Value Fund
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Management contd
Portfolio managers:
Peter Hable, Mark Bourguignon, Marina Chinn, CFA, Mark Feasey, CFA, and Michael Kang. Mr. Hable (a Managing Director and a Senior Portfolio Manager of ClearBridge) is the lead portfolio
manager and has been a portfolio manager for the fund since its inception in February 1999. Mr. Bourguignon, Ms. Chinn, Mr. Feasey and Mr. Kang (each a Director and Portfolio Analyst of ClearBridge) have been portfolio managers
for the fund since January 2009.
Purchase 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 as follows:
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Investment minimum initial/additional investment ($)
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Class A
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Class B
1
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Class C
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Class FI
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Class R
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Class R1
2
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Class I
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Class IS
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General
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1,000/50
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1,000/50
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1,000/50
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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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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1,000/50
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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IRAs
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250/50
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250/50
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250/50
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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SIMPLE IRAs
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None/None
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None/None
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None/None
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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Systematic Investment Plans
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50/50
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50/50
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50/50
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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Eligible Investment Programs
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None/None
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N/A
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N/A
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None/None
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None/None
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N/A
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None/None
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N/A
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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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N/A
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None/None
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N/A
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N/A
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None/None
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N/A
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Retirement Plans with omnibus accounts held on the books of the fund and certain rollover IRAs
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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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None/None
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N/A
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None/None
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None/None
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Other Retirement Plans
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None/None
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None/None
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None/None
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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Institutional Investors
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1,000/50
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1,000/50
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1,000/50
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N/A
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N/A
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N/A
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1 million/None
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1 million/None
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1
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Class B shares are not available for purchase by new and existing investors. Class B shares will continue to be available for dividend
reinvestment and incoming exchanges.
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2
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Class R1 shares are closed to all new purchases and incoming exchanges.
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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 information
The funds distributions are taxable as ordinary income or capital gain, except when your investment is through
an IRA, 401(k) or other tax-advantaged account.
Payments to broker/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 and related services. 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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ClearBridge Small Cap Value Fund
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7
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More on the funds investment strategies, investments and risks
The fund was named Legg Mason ClearBridge Small Cap Value
Fund prior to January 1, 2013.
* * *
The fund seeks long-term capital growth.
Under normal circumstances, the fund invests
at least 80% of its net assets, plus borrowings for investment purposes, if any, in common stocks and other equity securities of small capitalization U.S. companies or in other investments with similar economic characteristics. Small capitalization
companies are those companies whose market capitalizations at the time of investment do not exceed (i) $3 billion or (ii) the highest month-end market capitalization value of any stock in the Russell 2000 Index (the Index) for
the previous 12 months, whichever is greater. Securities of companies whose market capitalizations no longer meet this definition after purchase by the fund still will be considered to be securities of small capitalization companies for purposes of
the funds 80% investment policy. The size of companies in the Index changes with the market conditions and the composition of the Index. The fund may invest up to 20% of its net assets in shares of companies with larger market capitalizations.
The funds 80% investment policy may be changed by the Board of Trustees (the Board) upon 60 days prior notice to
shareholders.
The funds investment strategies may be changed without shareholder approval. The funds investment objective
may be changed by the Board without shareholder approval and on notice to shareholders.
Equity investments
Equity securities include exchange-traded and over-the-counter (OTC) common and preferred stocks, warrants and rights, securities convertible into
common stocks, and securities of other investment companies and of real estate investment trusts.
Foreign investments
The fund may invest up to 10% of its net assets in the equity securities of foreign issuers, either directly or through depositary receipts.
Derivatives and hedging techniques
Derivatives are financial instruments whose value depends upon, or is derived from, the value of an asset, such as one or more underlying investments, indexes or currencies. The fund may engage in a
variety of transactions using derivatives, such as futures and options on securities, securities indexes, interest rates or currencies, or options on these futures. 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 enhancing returns
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As a cash flow management technique
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A derivative contract will obligate or entitle the fund to deliver or receive an asset or cash payment based on the change in value of one or more underlying investments, indexes or currencies. When
the fund enters into derivatives transactions, it may be required to segregate assets or enter into offsetting positions, in accordance with applicable regulations. Such segregation is not a hedging technique and will not limit the funds
exposure to loss. The fund will, therefore, have investment risk with respect to both the derivative itself and the assets that have been segregated to offset the funds derivative exposure. If such segregated assets represent a large portion
of the funds portfolio, portfolio management may be affected as covered positions may have to be reduced if it becomes necessary for the fund to reduce the amount of segregated assets in order to meet redemptions or other obligations.
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8
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ClearBridge Small Cap Value Fund
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More on the funds investment strategies, investments and risks contd
Short sales
A short sale is a transaction in which the fund sells securities it does not own in anticipation of a decline in the market price of the securities. The fund may hold no more than 25% of its net
assets (taken at the then current market value) as required collateral for such sales at any one time.
Cash management
The fund may hold cash pending investment, and may invest in money market instruments for cash management purposes. The amount of assets the fund
may hold for cash management purposes will depend on market conditions and the need to meet expected redemption requests.
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 without limit in any type of money market instruments, short-term debt securities or 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.
Fund of funds
investments
The fund may be an investment option for other Legg Mason-managed mutual funds that are managed as a fund of
funds.
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.
Selection process
The portfolio managers emphasize individual security selection while spreading the funds investments among industries and sectors. The
portfolio managers use both quantitative and fundamental methods to identify stocks of smaller capitalization companies the portfolio managers believe have a high probability of outperforming other stocks in the same industry or sector.
The portfolio managers use quantitative parameters to select a universe of smaller capitalized companies that fit the funds general investment
criteria. In selecting individual securities from within this range, the portfolio managers look for value attributes, such as:
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Low stock price relative to earnings, book value and cash flow
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High return on invested capital
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The portfolio managers also use quantitative methods to identify catalysts and trends that might influence the funds industry or sector focus, or the portfolio managers individual
security selection.
More on risks of investing in the fund
Stock market and equity securities risk.
Securities fluctuate
in price based on changes in a companys financial condition and overall market and economic conditions. The value of a particular security may decline due to factors that affect a particular industry or industries, such as an increase in
production costs, competitive conditions or labor shortages; or due to general market conditions, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or
generally adverse investor sentiment.
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ClearBridge Small Cap Value Fund
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9
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Small capitalization company
risk.
The fund will be exposed to additional risks as a result of its investments in the securities of small capitalization companies. Small capitalization companies may fall out of
favor with investors; may have limited product lines, operating histories, markets or financial resources; or may be dependent upon a limited management group. The prices of securities of small capitalization companies generally are more volatile
than those of large capitalization companies and are more likely to be adversely affected than large capitalization companies by changes in earnings results and investor expectations or poor economic or market conditions, including those experienced
during a recession. Securities of small capitalization companies may underperform large capitalization companies, may be harder to sell at times and at prices the portfolio managers believe appropriate and may offer greater potential for losses.
Value investing risk.
The value approach to investing involves the risk that value stocks may remain undervalued. Value stocks as a group may be out of favor and underperform the overall equity market for a long period
of time, while the market concentrates on growth stocks. Although the fund will not concentrate its investments in any one industry or industry group, it may, like many value funds, weight its investments toward certain industries, thus increasing
its exposure to factors adversely affecting issuers within those industries.
Issuer risk.
The value of a security can be more volatile than the market as a whole and can perform differently from the value
of the market as a whole. The value of a companys securities may deteriorate because of a variety of factors, including disappointing earnings reports by the issuer, unsuccessful products or services, loss of major customers, major litigation
against the issuer or changes in government regulations affecting the issuer or the competitive environment.
Liquidity risk.
Liquidity risk exists when particular investments are difficult to sell. Although most of the funds
investments must be liquid at the time of investment, investments may become illiquid after purchase by the fund, particularly during periods of market turmoil. When the fund holds illiquid investments, the portfolio may be harder to value,
especially in changing markets, and if the fund is forced to sell these investments to meet 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.
Foreign investments risk.
The funds investments in securities of foreign issuers or issuers with significant exposure to
foreign markets involve additional risk. Foreign countries in which the fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of the funds investments may decline because of
factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable government actions, and political or financial instability. Lack of information may also affect the value of these securities.
The value of the funds foreign investments may also be affected by foreign tax laws, special U.S. tax considerations and restrictions on
receiving the investment proceeds from a foreign country. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S. withholding taxes.
In some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. It may be difficult for the
fund to pursue claims against a foreign issuer in the courts of a foreign country. Some securities issued by non-U.S. governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of such
governments. Even where a security is backed by the full faith and credit of a government, it may be difficult for the fund to pursue its rights against the government. Some non-U.S. governments have defaulted on principal and interest payments, and
more may do so.
The risks of foreign investments are heightened when investing in issuers in emerging market countries.
Currency
risk.
The value of investments in securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change.
Currency conversion costs and currency fluctuations could erase investment gains or add to investment losses. Currency
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10
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ClearBridge Small Cap Value Fund
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More on the funds investment strategies, investments and risks contd
exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency
controls and speculation.
Portfolio selection risk.
The value of your investment may decrease if the subadviser's judgment about the attractiveness, value or market trends affecting a particular security, industry or sector or about market movements
is incorrect.
Derivatives risk.
Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may
not behave in the manner anticipated. Certain derivatives transactions may have a leveraging effect on the fund. Even a small investment in derivative contracts can have a significant impact on the funds stock market, interest rate or currency
exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when stock prices, interest rates or currency rates are changing. The fund may not fully benefit from or may lose money on derivatives
if changes in their value do not correspond as anticipated to changes in the value of the funds holdings. Using derivatives may increase the funds volatility, which is the degree to which the funds share price may fluctuate within
a short time period. Holdings of derivatives also can make the fund less liquid and harder to value, especially in declining markets. The fund may incur additional costs related to derivatives, such as transaction costs and custody expenses, which
can adversely affect the funds performance.
Derivatives are subject to counterparty risk, which is the risk that the other party
in the transaction will not fulfill its contractual obligation.
Recent legislation calls for new regulation of the derivatives markets.
The extent and impact of the regulation are not yet fully known and may not be for some time. New regulation of derivatives may make them more costly, may limit their availability, or may otherwise adversely affect their value or performance.
Risks associated with the use of derivatives are magnified to the extent that a large portion of the funds assets are committed to
derivatives in general or are invested in just one or a few types of derivatives.
Short sales risk.
A short sale of a security involves the risk that instead of declining, the price of the security sold short
will rise. If the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security, the fund will realize a loss. The short sale of securities involves the possibility of a
theoretically unlimited loss since there is a theoretically unlimited potential for the market price of the security sold short to increase.
Fund of funds investments risk.
From time to time, the fund may
experience relatively large redemptions or investments due to rebalancings of a fund of funds portfolio. In the event of such redemptions or investments, the fund could be required to sell securities or to invest cash at a time when it is not
advantageous to do so.
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. If
a significant amount of the funds assets are used for cash management or defensive investing purposes, it may not achieve its investment objective.
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.
Recent market events risk.
The equity and debt capital markets in the United States and internationally have experienced
unprecedented volatility. The financial crisis that began in 2008 has caused a significant decline
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ClearBridge Small Cap Value Fund
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11
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in the value and liquidity of many securities; in particular, the values of some sovereign debt and of securities of issuers that invest in sovereign debt and related investments have fallen,
credit has become more scarce worldwide and there has been significant uncertainty in the markets. This environment could make identifying investment risks and opportunities especially difficult for the subadviser. These market conditions may
continue or get worse. In response to the crisis, the U.S. and other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets. The withdrawal of this support, failure of efforts to respond
to the crisis, or investor perception that such efforts are not succeeding could also negatively affect financial markets generally as well as the value and liquidity of certain securities. In addition, policy and legislative changes in the United
States and in other countries are changing 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.
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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12
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ClearBridge Small Cap Value Fund
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More on fund management
Legg Mason Partners Fund Advisor, LLC (LMPFA or the
manager) 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 September 30, 2012, LMPFAs total assets under management were approximately $185.8 billion.
ClearBridge Investments, LLC (ClearBridge or the subadviser) provides the day-to-day portfolio management of the fund,
except for management of cash and short-term instruments. ClearBridge has offices at 620 Eighth Avenue, New York, New York 10018 and is an investment adviser that was formed to succeed to the equity securities portfolio management business of
Citigroup Asset Management, which was acquired by Legg Mason in December 2005, but traces back its asset management expertise over 45 years to several prominent firms including Smith Barney Asset Management, Davis Skaggs Investment Management and
Salomon Brothers Asset Management. As of September 30, 2012, ClearBridges total assets under management were approximately $57.1 billion.
Western Asset Management Company (Western Asset) manages the funds cash and short-term instruments. 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 September 30, 2012, the
total assets under management of Western Asset and its supervised affiliates were approximately $459.7 billion.
LMPFA, ClearBridge 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 September 30, 2012, Legg
Masons asset management operations had aggregate assets under management of approximately $650.7 billion.
Portfolio managers
Peter Hable is the lead portfolio manager of the fund and is assisted by a team of portfolio managers that includes Mark Bourguignon,
Marina Chinn, CFA, Mark Feasey, CFA, and Michael Kang.
Mr. Hable is ultimately responsible for all buy and sell decisions and
sector allocations and has been responsible for the day-to-day management of the funds portfolio since its inception in February 1999. Ms. Chinn and Messrs. Bourguignon, Feasey and Kang have been portfolio managers of the fund since
January 2009.
Mr. Hable is a Managing Director and Senior Portfolio Manager of ClearBridge. Mr. Hable has been with
ClearBridge or its predecessor companies since 1983.
Mr. Bourguignon is a director and portfolio analyst of ClearBridge. He joined
the subadviser or its predecessor companies in 2003 and has 15 years of investment industry experience. From 2001 to 2002, he was a research analyst at Option Advantage Partners, LP.
Ms. Chinn is a director and portfolio analyst of ClearBridge. She joined the subadviser or its predecessor companies in 2005 and has 11 years of investment industry experience. From 2001 to
2005, she was an investment banker at Citigroup Global Corporate and Investment Bank.
Mr. Feasey is a director and portfolio
analyst of ClearBridge. He joined the subadviser or its predecessor companies in 2005 and has 16 years of investment industry experience. From 2002 to 2005, he was an equity analyst at Hotchkis and Wiley Capital Management.
Mr. Kang is a director and portfolio analyst of ClearBridge. He joined the subadviser or its predecessor companies in 2004 and has 14 years of
investment industry experience. In January 2003, Mr. Kang joined Carlin Financial Group as a proprietary trader and prior to that, he was a global technology analyst at Montgomery Asset Management.
The SAI provides information about the compensation of the portfolio managers, other accounts managed by the portfolio managers and any fund shares
held by the portfolio managers.
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ClearBridge Small Cap Value Fund
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13
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Management fee
The fund pays a management fee at an annual rate of 0.75% of its average daily net assets.
For the fiscal year ended September 30, 2012, the fund paid LMPFA an effective management fee of 0.74% of the funds average daily net assets for management services.
A discussion regarding the basis for the Board's approval of the funds management agreement and subadvisory agreements is available in the
funds Semi-Annual Report for the period ended March 31, 2012.
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 2.25% for Class B shares, 1.35% for Class FI shares, 1.60% for Class R shares, 2.10% for Class R1 shares and 1.05% for Class I shares, subject to recapture as
described below. In addition, total annual fund operating expenses for Class IS shares will not exceed total annual fund operating expenses for Class I shares, subject to recapture as described below. These arrangements are expected to continue
until December 31, 2014, 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.
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 0.25% for Class A shares; up to 1.00% for Class B shares; up to 1.00% for Class C shares; up to 0.25% for Class FI shares; up to 0.50% for Class R shares; and up to 1.00% for Class R1 shares. These fees are an ongoing expense
and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I shares and Class IS shares are not subject to distribution and/or service fees under the plan.
In addition, 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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14
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ClearBridge Small Cap Value Fund
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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. Individual investors who held Class I shares prior to November 20, 2006 are permitted
to make additional investments in Class I shares.
Retirement Plan and Institutional Investors and Clients of Eligible Financial
Intermediaries should refer to Retirement and Institutional Investors eligible investors below for a description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose a class
that may be appropriate for you.
When choosing which class of shares to buy, you should consider:
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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, you should be aware 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.
Class R1 shares are closed to all new purchases and incoming exchanges.
The fund no longer offers Class B shares for purchase by new or existing investors. Individual investors who owned Class B shares on June 30, 2011 may continue to hold those shares, but they
may not add to their Class B share positions except through dividend reinvestment. Class B shares are also available for incoming exchanges.
Each class of shares, except Class IS 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 Class B shares, Class C shares and 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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ClearBridge Small Cap Value Fund
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15
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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 or Class R shares. You may be required to provide appropriate documentation confirming your eligibility to invest in Class FI or Class R shares. 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 5.75%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or more
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1.00% on purchases of $1 million or more if you redeem within 18 months of purchase (or within 12 months for shares purchased prior to
August 1, 2012); waived for certain investors
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0.25% of average daily net assets
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Class A shares of funds sold by the distributor
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Class
B
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Closed to all new purchases
No initial sales charge
Contingent
deferred sales charge declines over time
Converts to Class A after approximately 8 years
Generally higher annual expenses than Class A
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None
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Up to 5.00% charged if you redeem shares. This charge is reduced over time and there is no contingent deferred sales charge after 5
years; waived for certain investors
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1.00% of average daily net assets
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Class B shares of funds sold by the distributor
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Class
C
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No initial sales charge
Contingent deferred sales charge for only 1 year
Does not convert
to Class A
Generally higher
annual expenses than Class A
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None
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1.00% if you redeem within 1 year of purchase; waived for certain investors
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1.00% 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 and eligible Retirement
Plans
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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 R
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No initial or contingent
deferred sales charge
Only offered to
eligible Retirement Plans with omnibus accounts held on the books of the fund, Clients of Eligible Financial Intermediaries and Eligible Investment Programs
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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 R shares of funds sold by the distributor
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ClearBridge Small Cap Value Fund
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Comparing the funds classes contd
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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
R1
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Closed to all new
purchases
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None
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None
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1.00% of average daily net assets
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N/A
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Class
I
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No initial or contingent deferred sales charge
Only offered to institutional and other eligible investors
Generally lower annual
expenses than all classes except Class IS
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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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Class
IS
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No initial or contingent deferred sales charge
Only offered to institutional 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 IS 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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ClearBridge Small Cap Value Fund
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Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called
breakpoints. You do not pay a sales charge on the funds distributions or dividends that you reinvest in additional Class A shares.
The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you
buy shares from a Service Agent. For Class A shares sold by the distributor, the distributor will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain
the full amount of such sales charge. Service Agents will receive a distribution and/or service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by
them.
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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
|
Less than $25,000
|
|
|
|
5.75
|
|
|
|
|
6.10
|
|
|
|
|
5.00
|
|
$25,000 but less than $50,000
|
|
|
|
5.00
|
|
|
|
|
5.26
|
|
|
|
|
4.25
|
|
$50,000 but less than $100,000
|
|
|
|
4.50
|
|
|
|
|
4.71
|
|
|
|
|
3.75
|
|
$100,000 but less than $250,000
|
|
|
|
3.50
|
|
|
|
|
3.63
|
|
|
|
|
2.75
|
|
$250,000 but less than $500,000
|
|
|
|
2.50
|
|
|
|
|
2.56
|
|
|
|
|
2.00
|
|
$500,000 but less than $750,000
|
|
|
|
2.00
|
|
|
|
|
2.04
|
|
|
|
|
1.60
|
|
$750,000 but less than $1 million
|
|
|
|
1.50
|
|
|
|
|
1.52
|
|
|
|
|
1.20
|
|
$1 million or more
1
|
|
|
|
-0-
|
|
|
|
|
-0-
|
|
|
|
|
up to 1.00
|
|
1
|
The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the
thirteenth month after purchase, the Service Agent will also receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month,
the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution and/or service fee starting immediately after purchase. Please contact your
Service Agent for more information.
|
Investments of $1,000,000 or more
You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares
within 18 months of purchase (or within 12 months for shares purchased prior to August 1, 2012), you will pay a contingent deferred sales charge of 1.00%.
Qualifying for a reduced Class A sales charge
There are several ways you can
combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you
purchase fund shares, you must inform your Service Agent 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.
|
|
|
18
|
|
ClearBridge Small Cap Value Fund
|
Sales charges contd
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
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:
|
|
|
|
your spouse, and children under the age of 21
|
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.
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:
|
|
|
Employees of Service Agents
|
|
|
|
Investors who redeemed Class A shares of a fund sold by the distributor in the past 60 days, if the investors Service Agent is
notified
|
|
|
|
Directors and officers of any Legg Mason-sponsored fund
|
|
|
|
Employees of Legg Mason and its subsidiaries
|
|
|
|
Investors investing through certain Retirement Plans
|
|
|
|
Investors who rollover fund shares from a qualified retirement plan into an individual retirement account administered on the same
retirement plan platform
|
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.
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
|
|
19
|
|
Class B shares
The fund no longer offers Class B shares for purchase by new or existing investors. If you owned Class B shares on June 30, 2011, you may continue to hold those shares, but you may not add to
your Class B share position except through dividend reinvestment. Class B shares are also available for incoming exchanges. Class B shares are issued at net asset value with no initial sales charge. If you redeem your Class B shares within five
years of your purchase payment, you will pay a contingent deferred sales charge based on the schedule of the fund that you originally purchased. The contingent deferred sales charge decreases as the number of years since your purchase payment
increases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year after Purchase
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
5th
|
|
6th through 8th
|
Contingent deferred sales charge (%)
|
|
|
|
5
|
|
|
|
|
4
|
|
|
|
|
3
|
|
|
|
|
2
|
|
|
|
|
1
|
|
|
|
|
0
|
|
LMIS will retain the contingent deferred sales charges. The fund pays annual distribution and/or service fees of up
to 1.00% of the average daily net assets of Class B shares. Service Agents receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets represented by the Class B shares serviced by them.
Class B conversion
After
approximately 8 years, Class B shares automatically convert into Class A shares. This helps you because Class A shares have lower annual expenses. Your Class B shares will convert to Class A shares as follows:
|
|
|
|
|
Shares issued: at initial purchase
|
|
Shares issued: on reinvestment of
dividends and distributions
|
|
Shares issued: upon exchange
from another fund sold by LMIS
|
Approximately 8 years after the date of purchase
|
|
In same proportion as the number of Class B shares converting is to total Class B shares you own (excluding shares issued as
dividends)
|
|
On the date the shares originally acquired would have converted into Class A shares
|
Class C shares
You buy Class C shares at net asset value with no initial sales charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of
1.00%.
LMIS generally will pay Service Agents selling Class C shares a commission of up to 1.00% of the purchase price of the Class C
shares they sell. LMIS will retain the contingent deferred sales charges and an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the
thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced
by them.
Class FI, Class R and Class R1 shares
You buy Class FI and Class R shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Class R1 shares are closed to all new purchases and
incoming exchanges.
Service Agents receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets
represented by Class FI shares serviced by them, up to 0.50% of the average daily net assets represented by Class R shares serviced by them and up to 1.00% of the average daily net assets represented by Class R1 shares serviced by them.
Class I and Class IS shares
You buy Class I and Class IS shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.
Class I and Class IS shares are not subject to any distribution and/or service fees.
|
|
|
20
|
|
ClearBridge Small Cap Value Fund
|
More about contingent deferred sales charges
The contingent deferred sales charge is based on the net asset value at
the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.
In addition, you do not pay a contingent deferred sales charge:
|
|
|
When you exchange shares for shares of another fund sold by the distributor
|
|
|
|
On shares representing reinvested distributions and dividends
|
|
|
|
On shares no longer subject to the contingent deferred sales charge
|
Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred
sales charge and then redeem the shares in your account that have been held the longest.
If you redeem shares of a fund sold by the
distributor and pay a contingent deferred sales charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior
redemption. Please contact your Service Agent for additional information.
The distributor receives contingent deferred sales charges as
partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.
Contingent
deferred sales charge waivers
The contingent deferred sales charge for each share class will generally be waived:
|
|
|
On payments made through certain systematic withdrawal plans
|
|
|
|
On certain distributions from a Retirement Plan
|
|
|
|
For Retirement Plans with omnibus accounts held on the books of the fund
|
|
|
|
For involuntary redemptions of small account balances
|
|
|
|
For 12 months following the death or disability of a shareholder
|
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.
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
|
|
21
|
|
Retirement and Institutional Investors eligible investors
Retirement Plans
Retirement Plans include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred
compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual
403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs or similar accounts.
Retirement Plans with omnibus accounts
held on the books of the fund can generally invest in Class A, Class C, Class FI, Class R, Class I and Class IS shares.
Investors who rollover fund shares from a Retirement Plan into an individual retirement account administered on the same retirement plan platform
may hold, purchase and exchange shares of the fund to the same extent as the applicable Retirement Plan.
Although Retirement Plans with
omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary. The distributor may impose certain
additional requirements. Please contact your Service Agent for more information.
Other Retirement Plans
Other Retirement Plans include Retirement Plans investing through brokerage accounts and also include certain Retirement Plans with
direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Other Retirement Plans and individual retirement vehicles, such as IRAs, are treated like individual investors for purposes of
determining sales charges and any applicable sales charge reductions or waivers.
Other Retirement Plans do not include
arrangements whereby an investor would rollover fund shares from a Retirement Plan into an individual retirement account administered on the same retirement plan platform. Such arrangements are deemed to be Retirement Plans and are
subject to the rights and privileges described under Retirement and Institutional Investors eligible investors Retirement Plans.
Other Retirement Plan investors can generally invest in Class A, Class C and Class I shares. Individual retirement vehicles may also choose between these share classes.
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, Class R 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 (including IRA accounts on such platforms) 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, Class R or
Class I shares. Class I shares are available for exchange from Class A or Class C shares of the fund by participants in the Eligible Investment Programs.
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.
|
|
|
22
|
|
ClearBridge Small Cap Value Fund
|
Retirement and Institutional Investors eligible investors contd
Institutional Investors may invest in Class I or Class IS 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 A shares Retirement Plans
Retirement Plans may buy Class A shares. Under certain programs for current and prospective Retirement Plan investors sponsored by financial intermediaries, the initial sales charge and
contingent deferred sales charge for Class A shares are waived where:
|
|
|
Such Retirement Plans recordkeeper offers only load-waived shares,
|
|
|
|
Fund shares are held on the books of the fund through an omnibus account, and
|
|
|
|
The Retirement Plan has more than 100 participants or has total assets exceeding $1 million.
|
LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on
the purchase price of Class A shares sold by them. However, for certain Retirement Plans that are permitted to purchase shares at net asset value, LMIS may pay Service Agents commissions of up to 1.00% of the purchase price of the Class A
shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.
Class C
shares Retirement Plans
Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares at net asset
value without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to Retirement Plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by
them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.
Certain Retirement Plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will be eligible for
exchange from Class C shares to Class A shares in accordance with the program terms. Please see the SAI for more details.
Class FI
shares
Class FI shares are offered only to Clients of Eligible Financial Intermediaries and Retirement Plan programs.
Class R shares
Class R shares are
offered only to Retirement Plans with omnibus accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary), to Clients of Eligible Financial Intermediaries and through Eligible Investment Programs.
Class R1 shares
Class
R1 shares are closed to all new purchases and incoming exchanges.
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, Retirement Plans with omnibus accounts held on the books of the fund and certain rollover IRAs, Clients of Eligible Financial Intermediaries and other investors authorized by LMIS. Individual
investors who held Class I shares prior to November 20, 2006 are permitted to make additional investments in Class I shares. Certain waivers of these requirements for individuals associated with the fund, Legg Mason or its affiliates are discussed
in the SAI.
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
|
|
23
|
|
Class IS shares
Class IS shares may be purchased only by Retirement Plans with omnibus accounts held on the books of the fund, certain rollover IRAs and Institutional Investors, and other investors authorized by
LMIS. In order to purchase Class IS shares, an investor must hold its shares in one account with the fund, which account is not subject to payment of recordkeeping or similar fees by the fund to any intermediary.
Class B shares
The fund no longer
offers Class B shares for purchase by new or existing investors. Institutional Investors and certain Retirement Plans that owned Class B shares may continue to hold those shares, but they may not add to their Class B share positions except through
dividend reinvestment. Class B shares are also available for incoming exchanges.
Other considerations
Plan sponsors, plan fiduciaries and other 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 plan sponsor, plan fiduciary or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.
Your Service Agent may not offer all share classes. Please contact your Service Agent for additional details.
|
|
|
24
|
|
ClearBridge Small Cap Value Fund
|
Buying shares
|
|
|
Generally
|
|
You may buy shares at their net asset value next determined after receipt by your Service
Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge.
You must provide the following information for your order to be processed:
Name of fund being
bought
Class of shares being bought
Dollar amount or number
of shares being bought
Account number (if existing account)
|
Through a Service Agent
|
|
You should contact your Service Agent to open a brokerage account and make arrangements to
buy shares.
Your Service Agent may charge an annual account
maintenance fee.
|
Through the fund
|
|
Investors should contact 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.
|
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
|
|
25
|
|
Exchanging 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 Retirement and 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, unless you are investing through an IRA, 401(k) or other tax-advantaged account. 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
Funds that offer Class B
shares may continue to make them available for incoming exchanges
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
|
|
|
|
26
|
|
ClearBridge Small Cap Value Fund
|
Exchanging shares contd
|
|
|
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.
|
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
|
|
27
|
|
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
|
|
|
|
28
|
|
ClearBridge Small Cap Value Fund
|
Redeeming shares contd
|
|
|
Automatic cash withdrawal plans
|
|
You may be permitted to schedule automatic redemptions of a portion of your shares. To qualify, you must own shares of the fund
with a value of at least $10,000 ($5,000 for Retirement Plan accounts) and each automatic redemption must be at least $50.
The following conditions apply:
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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ClearBridge Small Cap Value Fund
|
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29
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|
Other things to know about transactions
When you buy, exchange or redeem shares, your request must be in good
order. This means you have provided the following information, without which your request may not be processed:
|
|
In the case of a purchase (including a purchase as part of an exchange transaction), the class of shares being bought
|
|
|
In the case of an exchange or redemption, the class of shares being exchanged or redeemed (if you own more than one class)
|
|
|
Dollar amount or number of shares being bought, exchanged or redeemed
|
|
|
In certain circumstances, the signature of each owner exactly as the account is registered (see Redeeming shares)
|
The fund generally will not permit non-resident aliens with 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
|
|
|
Waive or change minimum initial and additional investment amounts
|
|
|
Reject any purchase or exchange order
|
|
|
Change, revoke or suspend the exchange privilege
|
|
|
Suspend telephone transactions
|
|
|
Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted or as otherwise permitted by the SEC
|
|
|
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
|
|
|
Changed your account registration or your address within 30 days
|
|
|
Want the check paid to someone other than the account owner(s)
|
|
|
Are transferring the redemption proceeds to an account with a different registration
|
You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, but not from a
notary public.
|
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30
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|
ClearBridge Small Cap Value Fund
|
Other things to know about transactions contd
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.
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, Class R, Class R1,
Class I and Class IS 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).
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ClearBridge Small Cap Value Fund
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31
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|
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 may 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 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.
Because of the potential harm to funds sold by the funds distributor and their
long-term shareholders, the Board has approved policies and procedures that are intended to detect and discourage excessive trading and market timing abuses through the use of various surveillance techniques. Under these policies and procedures, the
fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds sold by the distributor. In the event that an exchange or
purchase request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging, or similar activities that may
nonetheless result in frequent trading of fund shares.
Under the funds policies and procedures, the fund reserves the right to
restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected in funds sold by the distributor. A committee established by the manager administers the policy.
The policy provides that the committee may take action, which may include using its best efforts to restrict a shareholders trading privileges in funds sold by the distributor, if that shareholder has engaged in one or more Round
Trips across all funds sold by the distributor. However, the committee has the discretion to determine that action is not necessary if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the
committee will consider, among other things, the nature of the shareholders account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the
discretion to make inquiries or to take any action against a shareholder whose trading appears inconsistent with the frequent trading policy, regardless of the number of Round Trips. Examples of the types of actions the committee may take include
heightened surveillance of a shareholder account, providing a written warning letter to an account holder, restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring
purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund. The committee will generally follow a system of progressive deterrence, although it is not required to do so.
A Round Trip is defined as a purchase (including subscriptions and exchanges) into a fund sold by the distributor followed by a sale
(including redemptions and exchanges) of the same or a similar number of shares out of that fund within 30 days of such purchase. Purchases and sales of the funds shares pursuant
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|
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32
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|
ClearBridge Small Cap Value Fund
|
Other things to know about transactions contd
to an automatic investment plan or similar program for periodic transactions are not considered in determining Round Trips. These policies and procedures do not apply to money market funds sold
by the distributor.
The policies apply to any account, whether a direct account or accounts with financial intermediaries such as
investment advisers, broker/dealers or retirement plan administrators, commonly called omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The funds ability to monitor trading in omnibus
accounts may, however, be severely limited due to the lack of access to an individual investors trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability
of the funds service providers to identify or terminate frequent trading activity within the various types of omnibus accounts. The distributor has entered into agreements with intermediaries requiring the intermediaries to, among other
things, help identify frequent trading activity and prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading.
The fund has also adopted policies and procedures to prevent the selective release of information about the funds holdings, as such information may be used for market-timing and similar
abusive practices.
The policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the
Board reserves the right to modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in
the future may not be effective, particularly where the trading takes place through certain types of omnibus accounts. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be
able to engage in frequent trading while others will bear the costs and effects of that trading.
Although the fund will attempt to
monitor shareholder transactions for certain patterns of frequent trading activity, there can be no assurance that all such trading activity can be identified, prevented or terminated. Monitoring of shareholder transactions may only occur for
shareholder transactions that exceed a certain transaction amount threshold, which may change from time to time. The fund 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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|
|
|
|
ClearBridge Small Cap Value Fund
|
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33
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|
Dividends, other distributions and taxes
Dividends and distributions
The fund generally pays dividends and distributes capital gain, if any, once in December and at such other times as are necessary. 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:
|
|
You have a minimum account balance of $10,000 in the fund and
|
|
|
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.
In general, redeeming shares, exchanging
shares and receiving dividends and distributions (whether received in cash or reinvested in 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.
|
|
|
Transaction
|
|
Federal income tax status
|
Redemption or exchange of shares
|
|
Usually capital gain or loss; long-term only if shares are owned more than one year
|
Dividends of investment income and distributions of net short-term capital gain
|
|
Ordinary income, or in certain cases qualified dividend income
|
Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)
|
|
Long-term capital gain
|
Distributions of investment income that the fund reports as qualified dividend income may be
eligible to be taxed to noncorporate shareholders at the reduced rates applicable to long-term capital gain if certain requirements are satisfied. 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 dividend or capital gain distribution because it will be taxable to you even though it may economically represent a return of
a portion of your investment.
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34
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|
ClearBridge Small Cap Value Fund
|
Dividends, other distributions and taxes contd
Beginning in 2013, a Medicare contribution tax will be 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
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 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.
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
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35
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|
Share price
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, in turn, uses independent third party pricing services approved by the funds Board. Under the
procedures, assets are valued as follows:
|
|
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 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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|
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.
|
|
|
For investments in exchange-traded funds, the market price is usually the closing sale or official closing price on that exchange.
|
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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.
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36
|
|
ClearBridge Small Cap Value Fund
|
Share price contd
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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|
|
|
ClearBridge Small Cap Value Fund
|
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37
|
|
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, Class R, Class R1 or Class IS shares because no Class FI, Class R, Class R1 or Class IS shares were outstanding
for the periods shown. The returns for Class FI, Class R, Class R1 and Class IS shares will differ from those of the other classes to the extent that their expenses differ. Certain information reflects financial results for a single share. Total
return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the funds financial statements,
which have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the funds financial statements, is included in the Annual Report (available upon request).
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|
|
For a share of each class of beneficial interest outstanding throughout each year ended September 30:
|
|
Class A Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Net asset value, beginning
of year
|
|
|
$14.65
|
|
|
|
$15.71
|
|
|
|
$13.83
|
|
|
|
$17.02
|
|
|
|
$24.66
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.00
|
|
|
|
0.03
|
|
|
|
(0.04)
|
|
|
|
0.03
|
|
|
|
0.06
|
|
Net realized and unrealized gain (loss)
|
|
|
4.16
|
|
|
|
(1.09)
|
|
|
|
1.91
|
|
|
|
(1.93)
|
|
|
|
(3.96)
|
|
Proceeds from settlement of a regulatory matter
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Total income (loss) from operations
|
|
|
4.16
|
|
|
|
(1.06)
|
|
|
|
1.88
|
|
|
|
(1.90)
|
|
|
|
(3.90)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Total distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Net asset value, end of
year
|
|
|
$18.81
|
|
|
|
$14.65
|
|
|
|
$15.71
|
|
|
|
$13.83
|
|
|
|
$17.02
|
|
Total
return
2
|
|
|
28.33
|
%
|
|
|
(6.75)
|
%
|
|
|
13.59
|
%
3
|
|
|
(8.71)
|
%
|
|
|
(17.70)
|
%
|
Net assets, end of year
(000s)
|
|
|
$120,011
|
|
|
|
$107,016
|
|
|
|
$122,478
|
|
|
|
$122,118
|
|
|
|
$161,478
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.23
|
%
|
|
|
1.36
|
%
|
|
|
1.36
|
%
4
|
|
|
1.34
|
%
|
|
|
1.24
|
%
|
Net expenses
5
|
|
|
1.23
|
|
|
|
1.36
|
|
|
|
1.36
|
4
|
|
|
1.34
|
|
|
|
1.24
|
|
Net investment income (loss)
|
|
|
0.02
|
|
|
|
0.16
|
|
|
|
(0.28)
|
|
|
|
0.22
|
|
|
|
0.33
|
|
Portfolio turnover
rate
|
|
|
23
|
%
|
|
|
21
|
%
|
|
|
46
|
%
|
|
|
40
|
%
|
|
|
16
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
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.
|
3
|
The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been
13.52%. Class A received $118,199 related to this distribution.
|
4
|
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would both have been 1.34% for the year ended September 30, 2010.
|
5
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
Amount represents less than $0.005 per share.
|
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38
|
|
ClearBridge Small Cap Value Fund
|
Financial highlights contd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended September 30:
|
|
Class B Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Net asset value, beginning
of year
|
|
|
$13.44
|
|
|
|
$14.55
|
|
|
|
$12.79
|
|
|
|
$15.99
|
|
|
|
$23.56
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment loss
|
|
|
(0.18)
|
|
|
|
(0.12)
|
|
|
|
(0.16)
|
|
|
|
(0.06)
|
|
|
|
(0.07)
|
|
Net realized and unrealized gain (loss)
|
|
|
3.80
|
|
|
|
(0.99)
|
|
|
|
1.76
|
|
|
|
(1.85)
|
|
|
|
(3.76)
|
|
Proceeds from settlement of a regulatory matter
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Total income (loss) from operations
|
|
|
3.62
|
|
|
|
(1.11)
|
|
|
|
1.76
|
|
|
|
(1.91)
|
|
|
|
(3.83)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Total distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Net asset value, end of
year
|
|
|
$17.06
|
|
|
|
$13.44
|
|
|
|
$14.55
|
|
|
|
$12.79
|
|
|
|
$15.99
|
|
Total return
2
|
|
|
27.03
|
%
|
|
|
(7.70)
|
%
|
|
|
13.76
|
%
3
|
|
|
(9.40)
|
%
|
|
|
(18.32)
|
%
|
Net assets, end of year
(000s)
|
|
|
$6,324
|
|
|
|
$7,780
|
|
|
|
$12,099
|
|
|
|
$20,527
|
|
|
|
$37,973
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
2.37
|
%
|
|
|
2.25
|
%
|
|
|
2.20
|
%
4
|
|
|
2.11
|
%
|
|
|
1.97
|
%
|
Net expenses
5
|
|
|
2.37
|
|
|
|
2.25
|
|
|
|
2.20
|
4
|
|
|
2.11
|
|
|
|
1.97
|
|
Net investment loss
|
|
|
(1.14)
|
|
|
|
(0.71)
|
|
|
|
(1.14)
|
|
|
|
(0.53)
|
|
|
|
(0.41)
|
|
Portfolio turnover
rate
|
|
|
23
|
%
|
|
|
21
|
%
|
|
|
46
|
%
|
|
|
40
|
%
|
|
|
16
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
Performance figures, exclusive of contingent deferred 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.
|
3
|
The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been
12.51%. Class B received $170,270 related to this distribution.
|
4
|
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would both have been 2.18% for the year ended September 30, 2010.
|
5
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
|
|
|
|
ClearBridge Small Cap Value Fund
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended September 30:
|
|
Class C Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Net asset value, beginning
of year
|
|
|
$13.22
|
|
|
|
$14.30
|
|
|
|
$12.69
|
|
|
|
$15.90
|
|
|
|
$23.48
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment loss
|
|
|
(0.14)
|
|
|
|
(0.10)
|
|
|
|
(0.15)
|
|
|
|
(0.07)
|
|
|
|
(0.09)
|
|
Net realized and unrealized gain (loss)
|
|
|
3.75
|
|
|
|
(0.98)
|
|
|
|
1.74
|
|
|
|
(1.85)
|
|
|
|
(3.75)
|
|
Proceeds from settlement of a regulatory matter
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
Total income (loss) from operations
|
|
|
3.61
|
|
|
|
(1.08)
|
|
|
|
1.61
|
|
|
|
(1.92)
|
|
|
|
(3.84)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Total distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Net asset value, end of
year
|
|
|
$16.83
|
|
|
|
$13.22
|
|
|
|
$14.30
|
|
|
|
$12.69
|
|
|
|
$15.90
|
|
Total return
2
|
|
|
27.31
|
%
|
|
|
(7.55)
|
%
|
|
|
12.69
|
%
3
|
|
|
(9.52)
|
%
|
|
|
(18.43)
|
%
|
Net assets, end of year
(000s)
|
|
|
$74,686
|
|
|
|
$78,290
|
|
|
|
$104,612
|
|
|
|
$72,421
|
|
|
|
$100,575
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
2.13
|
%
|
|
|
2.14
|
%
|
|
|
2.20
|
%
4
|
|
|
2.28
|
%
|
|
|
2.09
|
%
|
Net expenses
5
|
|
|
2.13
|
|
|
|
2.14
|
|
|
|
2.20
|
4
|
|
|
2.28
|
|
|
|
2.09
|
|
Net investment loss
|
|
|
(0.90)
|
|
|
|
(0.63)
|
|
|
|
(1.12)
|
|
|
|
(0.71)
|
|
|
|
(0.51)
|
|
Portfolio turnover
rate
|
|
|
23
|
%
|
|
|
21
|
%
|
|
|
46
|
%
|
|
|
40
|
%
|
|
|
16
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
Performance figures, exclusive of contingent deferred 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.
|
3
|
The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been
12.53%. Class C received $160,840 related to this distribution.
|
4
|
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would both have been 2.18% for the year ended September 30, 2010.
|
5
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
|
|
40
|
|
ClearBridge Small Cap Value Fund
|
Financial highlights contd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended September 30:
|
|
Class I Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Net asset value, beginning
of year
|
|
|
$15.16
|
|
|
|
$16.19
|
|
|
|
$14.20
|
|
|
|
$17.37
|
|
|
|
$25.02
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.04
|
|
|
|
0.10
|
|
|
|
0.03
|
|
|
|
0.06
|
|
|
|
0.13
|
|
Net realized and unrealized gain (loss)
|
|
|
4.30
|
|
|
|
(1.13)
|
|
|
|
1.96
|
|
|
|
(1.94)
|
|
|
|
(4.04)
|
|
Total income (loss) from operations
|
|
|
4.34
|
|
|
|
(1.03)
|
|
|
|
1.99
|
|
|
|
(1.88)
|
|
|
|
(3.91)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Total distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.29)
|
|
|
|
(3.74)
|
|
Net asset value, end of
year
|
|
|
$19.50
|
|
|
|
$15.16
|
|
|
|
$16.19
|
|
|
|
$14.20
|
|
|
|
$17.37
|
|
Total return
2
|
|
|
28.63
|
%
|
|
|
(6.36)
|
%
|
|
|
14.01
|
%
|
|
|
(8.38)
|
%
|
|
|
(17.46)
|
%
|
Net assets, end of year
(000s)
|
|
|
$20,154
|
|
|
|
$18,681
|
|
|
|
$42,531
|
|
|
|
$14,313
|
|
|
|
$15,554
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.13
|
%
|
|
|
0.93
|
%
|
|
|
0.93
|
%
3
|
|
|
1.02
|
%
|
|
|
0.94
|
%
|
Net expenses
4
|
|
|
1.05
|
5,6
|
|
|
0.90
|
5,6
|
|
|
0.93
|
3,5
|
|
|
1.02
|
5
|
|
|
0.94
|
|
Net investment income
|
|
|
0.20
|
|
|
|
0.52
|
|
|
|
0.18
|
|
|
|
0.53
|
|
|
|
0.66
|
|
Portfolio turnover
rate
|
|
|
23
|
%
|
|
|
21
|
%
|
|
|
46
|
%
|
|
|
40
|
%
|
|
|
16
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
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.
|
3
|
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would both have been 0.91% for the year ended September 30, 2010.
|
4
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
5
|
As a result of an expense limitation arrangement, effective September 18, 2009, the ratio of expenses, other than interest, brokerage,
taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class I shares did not exceed 1.05%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of
Trustees consent.
|
6
|
Reflects fee waivers and/or expense reimbursements
|
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.
Legg Mason Funds Privacy and Security Notice contd
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.
[These pages are not
part of the Prospectus.]
ClearBridge
Small Cap Value 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. 811-06444)
FD02461ST [ ]/13
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Subject to Completion,
[ ], 2013
Prospectus
ClearBridge
Tactical
Dividend
Income
Fund
Class : Ticker
Symbol
|
|
|
A
|
|
: CFLGX
|
C
|
|
: SMDLX
|
FI
|
|
:
|
R
|
|
:
|
R1
|
|
:
|
I
|
|
: LADIX
|
IS
|
|
:
|
The Securities and Exchange Commission has not approved or disapproved these securities or
determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE
VALUE
|
|
|
2
|
|
ClearBridge Tactical Dividend Income Fund
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Investment objectives
The funds primary investment objective is to generate high current income, with capital appreciation as a secondary objective.
Fees and expenses of the fund
The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.
You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $25,000 in funds sold by Legg Mason Investor Services, LLC (LMIS),
the funds distributor. More information about these and other discounts is available from your financial intermediary, in this Prospectus on page 22 under the heading Sales charges and in the funds statement of additional
information (SAI) on page 65 under the heading Sales Charge Waivers and Reductions.
The fund no longer
offers Class R1 shares for purchase by new or existing investors.
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Shareholder fees
(fees paid directly from your investment)
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Class A
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Class C
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Class FI
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Class R
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Class R1
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Class I
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Class IS
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Maximum sales charge (load) imposed on purchases (as a % of offering price)
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5.75
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None
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None
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None
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None
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None
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None
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Maximum deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption) (may be reduced over
time)
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Generally,
none
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1.00
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None
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None
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None
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None
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None
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Small account fee
1
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$15
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$15
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None
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None
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None
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None
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None
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Annual fund operating expenses
(expenses that you pay each year as a percentage of the
value of
your investment) (%)
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Class A
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Class C
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Class FI
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Class R
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Class R1
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Class I
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Class IS
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Management fees
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0.75
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0.75
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0.75
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0.75
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0.75
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0.75
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0.75
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Distribution and service (12b-1) fees
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0.25
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1.00
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0.25
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0.50
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1.00
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None
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None
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Other expenses
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0.48
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0.44
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0.56
2
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0.56
2
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0.56
2
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0.44
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0.36
2
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Total annual fund operating expenses
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1.48
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2.19
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1.56
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1.81
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2.31
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1.19
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1.11
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Fees waived and/or expenses reimbursed
3
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(0.23)
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(0.19)
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(0.31)
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(0.31)
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(0.31)
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(0.19)
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(0.11)
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Total annual fund operating expenses after waiving fees and/or reimbursing expenses
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1.25
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2.00
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1.25
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1.50
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2.00
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1.00
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1.00
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1
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If your shares are held in a direct account and the value of your account is below $1,000 ($250 for retirement plans that are not
employer-sponsored), the fund may charge you a fee of $3.75 per account that is determined and assessed quarterly (with an annual maximum of $15.00 per account). Direct accounts generally include accounts held in the name of the individual investor
on the funds books and records.
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2
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Other expenses for Class FI, Class R, Class R1 and Class IS
shares are estimated for the current fiscal year. Actual expenses may differ from estimates.
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3
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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 1.25% for Class A shares,
2.00% for Class C shares, 1.25% for Class FI shares, 1.50% for Class R shares, 2.00% for Class R1 shares and 1.00% for Class I shares. In addition, total annual fund operating expenses for Class IS shares will not exceed total annual fund operating
expenses for Class I shares. These arrangements cannot be terminated prior to December 31, 2014 without the Board of Trustees consent. The manager is 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.
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Example
This example is intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds. The example assumes:
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You invest $10,000 in the fund for the time periods indicated
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Your investment has a 5% return each year and the funds operating expenses remain the same
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You reinvest all distributions and dividends without a sales charge
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ClearBridge Tactical Dividend Income Fund
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3
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Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Number of years you own your shares ($)
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1 year
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3 years
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5 years
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10 years
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Class A (with or without redemption at end of period)
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695
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994
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1,315
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2,222
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Class C (with redemption at end of period)
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303
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667
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1,158
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2,511
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Class C (without redemption at end of period)
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203
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667
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1,158
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2,511
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Class FI (with or without redemption at end of period)
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127
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462
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820
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1,830
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Class R (with or without redemption at end of period)
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153
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539
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951
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2,102
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Class R1 (with or without redemption at end of period)
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203
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692
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1,207
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2,621
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Class I (with or without redemption at end of period)
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102
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359
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636
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1,426
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Class IS (with or without redemption at end of period)
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102
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342
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601
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1,342
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Portfolio turnover.
The fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the funds performance. During the most recent fiscal year, the
funds portfolio turnover rate was 125% of the average value of its portfolio.
Principal investment
strategies
Under normal circumstances, the fund invests at least 80% of its net assets, plus the amount of borrowings for investment
purposes, if any, in equity and equity-related securities that provide investment income, dividend payments or other distributions or in other investments with similar economic characteristics. The fund may invest in equity and equity-related
securities of issuers with any market capitalization.
The fund invests in a diversified portfolio of equity and equity-related
securities, including common stocks, preferred stocks, convertible preferred stocks and other securities convertible into equity securities, master limited partnerships (MLPs), real estate investment trusts (REITs),
closed-end investment companies, including business development companies (BDCs), and royalty trusts. The fund may invest up to 50% of its net assets in foreign securities, including securities of issuers in emerging market countries.
The fund may also seek to generate current income from short-term gains earned through an option strategy which may consist of writing
(selling) call options on equity securities in its portfolio (covered calls) and on broader equity market indexes, or writing (selling) put options on such securities or indexes. The funds investments in options on equity
securities and equity market indexes are included in the 80% policy described above.
Certain risks
Risk is inherent in all investing. There is no assurance that the fund will meet its investment objectives. The value of your investment in the
fund, as well as the amount of return you receive on your investment, may fluctuate significantly. You may lose part or all of your investment in the fund or your investment may not perform as well as other similar investments. The following is a
summary description of certain risks of investing in the fund.
Stock
market and equity securities risk.
The securities markets are volatile and the market prices of the funds securities may decline generally. Securities fluctuate in price based
on changes in a companys financial condition and overall market and economic conditions. If the market prices of the securities owned by the fund fall, the value of your investment in the fund will decline. The financial crisis that began in
2008 has caused a significant decline in the value and liquidity of many securities of issuers worldwide. In response to the crisis, the U.S. and other governments and the
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4
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ClearBridge Tactical Dividend Income Fund
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Certain risks contd
Federal Reserve and certain foreign central banks have taken steps to
support financial markets. The withdrawal of this support, failure of efforts to respond to the crisis, or investor perception that such efforts are not succeeding could also negatively affect financial markets generally as well as the value and
liquidity of certain securities. In addition, policy and legislative changes in the United States and in other countries are changing 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.
Fixed
income securities risk.
Fixed income securities are subject to a number of risks, including credit, market and interest rate risks. Credit risk is the risk that the issuer or
obligor will not make timely payments of principal and interest. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the funds investment in that issuer.
Market risk is the risk that the fixed income markets may become volatile and less liquid, and the market value of an investment may move up or down, sometimes quickly or unpredictably. Interest rate risk is the risk that the value of a fixed income
security will fall when interest rates rise. In general, the longer the maturity and the lower the credit quality of a fixed income security, the more likely its value will decline.
Income-producing securities risk.
The funds emphasis on
equity and equity-related securities that produce income or other distributions involves the risk that such securities may fall out of favor with investors and underperform the market. Also, an issuer may reduce or eliminate its income payments or
other distributions. The distributions received by the fund may not qualify as income for fund investors.
Issuer risk.
The value of a security can go up or down more than the market as a whole and can perform differently from the
value of the market as a whole, often due to disappointing earnings reports by the issuer, unsuccessful products or services, loss of major customers, major litigation against the issuer or changes in government regulations affecting the issuer or
the competitive environment. The fund may experience a substantial or complete loss on an individual security. Historically, the prices of securities of small and medium capitalization companies have generally gone up or down more than those of
large capitalization companies, although even large capitalization companies may fall out of favor with investors.
Large capitalization company risk.
Large capitalization companies may fall out of favor with investors.
Small and medium capitalization company risk.
The fund will be exposed to additional risks as a result of its investments in the securities of small and medium capitalization companies. Small and medium capitalization companies may fall out of
favor with investors; may have limited product lines, operating histories, markets or financial resources; or may be dependent upon a limited management group. The prices of securities of small and medium capitalization companies generally are more
volatile than those of large capitalization companies and are more likely to be adversely affected than large capitalization companies by changes in earnings results and investor expectations or poor economic or market conditions, including those
experienced during a recession. Securities of small and medium capitalization companies may underperform large capitalization companies, may be harder to sell at times and at prices the portfolio managers believe appropriate and may offer greater
potential for losses.
MLP risk.
Holders of MLP units have limited control and voting rights on matters affecting the partnership. In addition, there are certain tax risks associated with an investment in MLP units and the
potential for conflicts of interest exist between common unit holders and the general partner, including those arising from incentive distribution payments. The benefit the fund derives from investment in MLP units is largely dependent on the MLPs
being treated as partnerships and not as corporations for federal income tax purposes. If an MLP were classified as a corporation for federal income tax purposes, there would be reduction in the after-tax return to the fund of distributions from the
MLP, likely causing a reduction in the value of the funds shares. MLP entities are typically focused in the energy, natural resources and real estate sectors of the economy. A downturn in the energy, natural resources or real estate sectors of
the economy could have an adverse impact on the fund. At times, the performance of securities of companies in the energy, natural resources and real estate sectors of the economy may lag the performance of other sectors or the broader market as a
whole.
Derivatives risk.
Using derivatives may have a leveraging effect, which may result in a disproportionate increase in fund losses on the investment, and reduce opportunities for gains when market prices, interest
rates or the derivative instruments themselves behave in a way not anticipated by the fund. Using derivatives also can increase fund volatility. Derivatives may be difficult to sell, unwind or value, and the counterparty may default on its
obligations
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ClearBridge Tactical Dividend Income Fund
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5
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to the fund. The fund may incur additional costs related to derivatives, such as transaction costs and custody expenses, which can adversely affect the funds performance. Recent legislation
calls for new regulation of the derivatives markets. The extent and impact of the regulation are not yet fully known and may not be for some time. New regulation of derivatives may make them more costly, may limit their availability, or may
otherwise adversely affect their value or performance.
Growth and
value investing risk.
Growth or value securities as a group may be out of favor and underperform the overall equity market while the market concentrates on other types of
securities. Growth securities typically are very sensitive to market movements because their market prices tend to reflect future expectations. When it appears those expectations will not be met, the prices of growth securities typically fall. The
value approach to investing involves the risk that stocks may remain undervalued. Although the fund will not concentrate its investments in any one industry or industry group, it may, like many growth or value funds, weight its investments toward
certain industries, thus increasing its exposure to factors adversely affecting issuers within those industries.
REITs risk.
Investments in REITs expose the fund to risks similar to investing directly in real estate, such as changes in the
value of the underlying real estate, the quality of the property management, the creditworthiness of the issuer of the investments, and changes in property taxes, interest rates and the real estate regulatory environment. REITs may be leveraged,
which increases risk. Certain REITS charge management fees, which may result in layering the management fee paid by the fund. REITS may be leveraged, which increases risk.
Foreign investments risk.
The funds investments in
securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which the fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets.
The value of the funds investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable government actions, and political or financial instability. Lack of
information may also affect the value of these securities.
The risks of foreign investments are heightened when investing in issuers in
emerging market countries.
Currency risk.
The value of investments in securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency conversion
costs and currency fluctuations could erase investment gains or add to investment losses. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or
central banks, the imposition of currency controls and speculation.
Liquidity
risk.
Some assets held by the fund may be difficult to sell, or illiquid, particularly during times of market turmoil. Illiquid assets may also be difficult to value. If the fund is
forced to sell an illiquid asset to meet redemption requests or other cash needs, the fund may be forced to sell at a loss.
Valuation risk.
The sales price the fund could receive for any particular portfolio investment may differ from the funds
valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. 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.
Market sector risk.
The fund may be significantly overweight or underweight certain companies, industries or market sectors, which may cause the funds performance to be more sensitive to developments affecting
those companies, industries or sectors.
Portfolio selection
risk.
The value of your investment may decrease if the subadvisers judgment about the attractiveness, value or market trends affecting a particular security, industry or
sector or about market movements is incorrect.
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.
These risks are discussed in more detail later in this Prospectus or in the SAI.
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6
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ClearBridge Tactical Dividend Income Fund
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Performance
The accompanying bar chart and table provide some indication of the risks of investing in the fund. The bar chart shows
changes in the funds performance from year to year for Class A shares. The table shows the average annual total returns of each class of the fund that has been in operation for at least one full calendar year and also compares the
funds performance with the average annual total returns of an index or other benchmark. Performance for classes other than those shown may vary from the performance shown to the extent the expenses for those classes differ. The fund makes
updated performance information available at the funds website, http://www.leggmason.com/individualinvestors/products/mutual-funds/annualized_performance (select share class), or by calling the fund at 1-877-721-1926.
The funds past performance (before
and after taxes) is not necessarily an indication of how the fund will perform in the future.
Sales charges are not reflected
in the accompanying bar chart, and if those charges were included, returns would be less than those shown.
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Total returns
(before
taxes)
(%)
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Best quarter
(06/30/2009): 18.47
Worst quarter
(12/31/2008): (23.18)
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Average annual total returns
(for periods ended December 31, 2012)
(%)
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1 year
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5 years
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10 years
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Since
inception
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Inception
date
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Class
A
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Return before taxes
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10.48
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(1.87)
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3.21
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Return after taxes on distributions
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8.64
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(2.21)
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2.95
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Return after taxes on distributions and sale of fund shares
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6.78
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(1.77)
2
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2.62
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Other Classes (Return
before taxes only)
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Class C
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15.49
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(1.44)
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3.04
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Class I
1
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17.54
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N/A
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N/A
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0.48
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05/16/2008
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Dow Jones U.S. Select Dividend Index (reflects no deduction for fees, expenses or taxes)
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10.84
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2.49
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7.42
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1
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For Class I shares, for the period from the class commencement of operations to December 31, 2012, the average annual total return of
the Dow Jones U.S. Select Dividend Index was 3.89%.
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2
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Returns after taxes on distributions and sale of fund shares are higher than returns before taxes for certain periods shown because they reflect
the tax benefit of capital losses realized on the redemption of fund shares.
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The after-tax returns are shown only for
Class A shares, are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investors tax situation and may differ
from those shown, and the after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns for classes other than
Class A will vary from returns shown for Class A.
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ClearBridge Tactical Dividend Income Fund
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7
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Management
Investment manager:
Legg Mason Partners Fund Advisor, LLC
Subadviser:
ClearBridge Investments, LLC (ClearBridge)
Portfolio managers:
Mark McAllister, CFA, and Peter Vanderlee,
CFA. Mr. McAllister (a Managing Director and Senior Portfolio Manager of ClearBridge) and Mr. Vanderlee (a Managing Director and Senior Portfolio Manager of ClearBridge) have been portfolio managers for the fund since January 2012.
Purchase 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 as follows:
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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 R
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Class R1
1
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Class I
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Class IS
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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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N/A
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N/A
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1 million/None*
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N/A
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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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N/A
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N/A
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1 million/None*
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N/A
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IRAs
|
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250/50
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250/50
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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SIMPLE IRAs
|
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None/None
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None/None
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N/A
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N/A
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N/A
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1 million/None*
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N/A
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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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N/A
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N/A
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1 million/None*
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N/A
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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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N/A
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N/A
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None/None
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N/A
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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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N/A
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None/None
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N/A
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Retirement Plans with omnibus accounts held on the books of the fund and certain rollover IRAs
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None/None
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None/None
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None/None
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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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Other Retirement Plans
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None/None
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None/None
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N/A
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|
N/A
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|
N/A
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1 million/None*
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N/A
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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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N/A
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N/A
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1 million/None
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1 million/None
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1
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Class R1 shares are closed to all new purchases and incoming exchanges.
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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 information
The funds distributions are taxable as ordinary income or capital gain, except when your investment is through
an IRA, 401(k) or other tax-advantaged account.
Payments to broker/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 and related services. 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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8
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ClearBridge Tactical Dividend Income Fund
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More on the funds investment strategies, investments and risks
The fund was named Legg Mason ClearBridge Tactical Dividend
Income Fund prior to January 1, 2013.
* * *
The funds primary investment objective is to generate high current income, with capital appreciation as a secondary objective.
Under normal circumstances, the fund invests at least 80% of its net assets, plus the amount of borrowings for investment purposes, if any, in
equity and equity-related securities that provide investment income, dividend payments or other distributions or in other investments with similar economic characteristics. The fund may invest in equity and equity-related securities of issuers with
any market capitalization.
The fund invests in a diversified portfolio of equity and equity-related securities, including common stocks,
preferred stocks, convertible preferred stocks and other securities convertible into equity securities, master limited partnerships (MLPs), real estate investment trusts (REITs), closed-end investment companies, including
business development companies (BDCs), and royalty trusts. The fund may invest up to 50% of its net assets in foreign securities, including securities of issuers in emerging market countries.
The fund may also seek to generate current income from short-term gains earned through an option strategy which may consist of writing (selling)
call options on equity securities in its portfolio (covered calls) and on broader equity market indexes, or writing (selling) put options on such securities or indexes. The funds investments in options on equity securities and
equity market indexes are included in the 80% policy described above.
The fund may invest up to 20% of its assets in fixed income
securities of any credit quality, including securities rated below investment grade or, if unrated, deemed by the subadviser to be of comparable quality (junk bonds). The funds investments in fixed income securities may include
structured notes.
The funds 80% investment policy may be changed by the Board of Trustees (the Board) upon 60
days prior notice to shareholders.
The funds investment strategies may be changed without shareholder approval. The
funds investment objectives may be changed by the Board without shareholder approval and on notice to shareholders.
Equity
investments
Equity and equity-related securities include common stocks, preferred stocks, convertible preferred stocks and other
securities convertible into equity securities, MLPs, REITs, closed-end investment companies, including BDCs, and royalty trusts.
Fixed
income investments
Fixed income securities represent obligations of corporations, governments and other entities to repay money
borrowed. Fixed income securities are commonly referred to as debt, debt obligations, bonds or notes. The issuer of the fixed income security usually pays a fixed, variable or floating rate of
interest, and repays the amount borrowed, usually at the maturity of the security. Some fixed income securities, however, do not pay current interest but are sold at a discount from their face values. Other fixed income securities may make periodic
payments of interest and/or principal. Some fixed income securities are partially or fully secured by collateral supporting the payment of interest and principal.
Foreign securities
The fund may invest up to 50% of its net assets in securities of
foreign issuers, either directly or through depositary receipts.
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Derivatives and hedging techniques
Derivatives are financial instruments whose value depends upon, or is derived from, the value of an asset, such as one or more underlying investments, indexes or currencies. The fund may engage in a
variety of transactions using derivatives, such as futures and options on U.S. and non-U.S. securities, securities indexes, interest rates or currencies, options on these futures and forward foreign currency contracts. 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 enhancing returns
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As a cash flow management technique
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A derivative contract will obligate or entitle the fund to deliver or receive an asset or cash payment based on the change in value of one or more underlying investments, indexes or currencies. When
the fund enters into derivatives transactions, it may be required to segregate assets or enter into offsetting positions, in accordance with applicable regulations. Such segregation is not a hedging technique and will not limit the funds
exposure to loss. The fund will, therefore, have investment risk with respect to both the derivative itself and the assets that have been segregated to offset the funds derivative exposure. If such segregated assets represent a large portion
of the funds portfolio, portfolio management may be affected as covered positions may have to be reduced if it becomes necessary for the fund to reduce the amount of segregated assets in order to meet redemptions or other obligations.
Real estate investment trusts (REITs)
The fund may invest up to 25% of its assets in REITs. REITs are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Unlike corporations, REITs are not taxed on income distributed to their shareholders, provided they comply with the applicable requirements of the
Internal Revenue Code of 1986, as amended (the Code). The fund will indirectly bear its proportionate share of any management and other expenses that may be charged by the REITs in which it invests, in addition to the expenses paid by
the fund.
Master limited partnerships (MLPs)
MLPs are limited partnerships whose interests (limited partnership units) are traded on securities exchanges like shares of corporate stock. Currently, most MLPs operate in the energy, natural
resources or real estate sectors. Due to their partnership structure, MLPs generally do not pay income taxes. Thus, unlike investors in corporate securities, direct MLP investors are generally not subject to double taxation (i.e., corporate level
tax and tax on corporate dividends). The amount of cash that any MLP has available to pay its unit holders in the form of distributions/dividends depends generally on the amount of cash flow generated from such companys operations.
Distributions from an MLP often exceed the MLPs taxable income, decreasing the tax basis of the MLPs units and increasing a holders taxable gain or decreasing a holders taxable loss at the time of disposal of such MLP units.
The fund will treat MLP units as equity securities, and will treat dividends and distributions received by the fund from any investments in MLP units, as complying with the funds policy of investing at least 80% of its net assets, plus the
amount of borrowings for investment purposes, if any, in equity and equity-related securities that provide investment income, dividend payments or other distributions or in other investments with similar economic characteristics.
The fund may not invest more than 25% of the value of its total assets in the securities of MLPs that are treated for U.S. federal income tax
purposes as qualified publicly traded partnerships (QPTPs) (the 25% Limitation). A QPTP means a partnership (i) whose interests are traded on an established securities market or readily tradable on a secondary market or
the substantial equivalent thereof; (ii) that derives at least 90% of its annual income from (a) dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not
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More on the funds investment strategies, investments and risks contd
limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies, (b) real property rents,
(c) gain from the sale or other disposition of real property, (d) the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing
of any mineral or natural resource (including fertilizer, geothermal energy, and timber), industrial source carbon dioxide, or the transportation or storage of certain fuels, and (e) in the case of a partnership a principal activity of which is
the buying and selling of commodities, income and gains from commodities or futures, forwards, and options with respect to commodities; and (iii) that derives less than 90% of its annual income from the items listed in (a) above. The 25%
Limitation generally does not apply to publicly traded partnerships that are not energy- or commodity-focused, such as, for instance, finance-related partnerships.
The fund may also invest in I-Shares issued by affiliates of MLPs, which represent an indirect ownership of MLP limited partnership interest. Although I-Shares have similar features to
MLP common units with respect to distributions, holders of I-Shares receive distributions in the form of additional I-Shares equal to the cash distributions received by the MLP common unit holders. To the extent the issuers of I-Shares have elected
to be treated as corporations for U.S. federal income tax purposes, the funds investments in I-Shares are not subject to the 25% Limitation.
Royalty trusts
Royalty trusts are publicly traded investment vehicles that gather
income on royalties and pay out almost all cash flows to stockholders as distributions. Royalty trusts typically have no physical operations and no management or employees. Typically royalty trusts own the rights to royalties on the production and
sales of a natural resource, including oil, gas, minerals and timber. As these deplete, production and cash flows steadily decline, which may decrease distribution rates. Royalty trusts are, in some respects, similar to certain MLPs and include
risks similar to those MLPs.
An investment in a royalty trust will be subject to the 25% Limitation if the royalty trust is treated for
tax purposes as a QPTP.
Closed-end investment companies and business development companies (BDCs)
The fund may invest up to 10% of its assets in closed-end investment companies, including BDCs. BDCs are a type of closed-end investment company
that typically invest in and lend to small- and medium-sized private and certain public companies that may not have access to public equity markets for capital raising. BDCs invest in such diverse industries as health care, chemical and
manufacturing, technology and service companies. BDCs are unique in that at least 70% of their investments must be made in private and certain public U.S. businesses, and BDCs are required to make available significant managerial assistance to their
portfolio companies. Closed-end investment companies and BDCs are not taxed on income distributed to their shareholders, provided they comply with the applicable requirements of the Code, and often offer a yield advantage over other types of
securities. The fund will indirectly bear its proportionate share of any management fees and other expenses, and of any performance based or incentive fees, charged by the closed-end investment companies and BDCs in which it invests, in addition to
the expenses paid by the fund.
Structured notes
Structured notes are specially-designed derivative debt instruments. The terms of the instrument may be structured by the purchaser and the issuer of the note. Payments of principal or
interest on these notes may be linked to the value of an index (such as a currency or securities index), an individual security or a commodity. The value of these notes will normally rise or fall in response to the changes in the performance of the
underlying security, index or commodity.
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Short sales
A short sale is a transaction in which the fund sells securities it does not own in anticipation of a decline in the market price of the securities. The fund may hold no more than 25% of its net
assets (taken at the then current market value) as required collateral for such sales at any one time.
Cash management
The fund may hold cash pending investment, and may invest in money market instruments for cash management purposes. The amount of assets the fund
may hold for cash management purposes will depend on market conditions and the need to meet expected redemption requests.
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 without limit in any type of money market instruments, short-term debt securities or 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.
Fund of funds
investments
The fund may be an investment option for other Legg Mason-managed mutual funds that are managed as a fund of
funds.
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.
Selection process
By conducting fundamental research and dividend analysis, the funds portfolio managers seek to identify companies that have the ability to pay
attractive dividends and have assets or earnings prospects that are either unrecognized or undervalued, have attractive valuations, or are expected to have positive changes in earnings prospects. They combine bottom-up stock selection with top-down
thematic overlay to construct a diversified portfolio with a focus on generating high current income.
More on risks of investing in the
fund
Stock market and equity securities risk.
Securities fluctuate in price based on changes in a companys financial condition and overall market and economic conditions. The value of a particular security may decline due to factors that
affect a particular industry or industries, such as an increase in production costs, competitive conditions or labor shortages; or due to general market conditions, such as real or perceived adverse economic conditions, changes in the general
outlook for corporate earnings, changes in interest or currency rates or generally adverse investor sentiment.
Fixed income securities risk.
Fixed income securities are subject to a number of risks, including credit, market and interest
rate risks. Credit risk is the risk that the issuer or obligor will not make timely payments of principal and interest. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect
the value of the funds investment in that issuer. Market risk is the risk that the fixed income markets may become volatile and less liquid, and the market value of an investment may move up or down, sometimes quickly or unpredictably.
Interest rate risk is the risk that the value of a fixed income security will fall when interest rates rise. In general, the longer the maturity and the lower the credit quality of a fixed income security, the more likely its value will decline.
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Income-producing securities risk.
The funds emphasis on equity and equity-related securities that produce income or other distributions involves the risk that such securities may fall out of favor with investors and
underperform the market. Also, an issuer may reduce or eliminate its income payments and distributions. The distributions received by the fund may not qualify as income for fund investors.
Large capitalization company risk.
Large capitalization
companies may fall out of favor with investors.
Small and medium
capitalization company risk.
The fund will be exposed to additional risks as a result of its investments in the securities of small and medium capitalization companies. Small and
medium capitalization companies may fall out of favor with investors; may have limited product lines, operating histories, markets or financial resources; or may be dependent upon a limited management group. The prices of securities of small and
medium capitalization companies generally are more volatile than those of large capitalization companies and are more likely to be adversely affected than large capitalization companies by changes in earnings results and investor expectations or
poor economic or market conditions, including those experienced during a recession. Securities of small and medium capitalization companies may underperform large capitalization companies, may be harder to sell at times and at prices the portfolio
managers believe appropriate and may offer greater potential for losses.
Issuer risk.
The value of a security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of a companys securities may deteriorate because of a variety of factors, including
disappointing earnings reports by the issuer, unsuccessful products or services, loss of major customers, major litigation against the issuer or changes in government regulations affecting the issuer or the competitive environment.
Liquidity
risk.
Liquidity risk exists when particular investments are difficult to sell. Although most of the funds investments must be liquid at the time of investment, investments may
become illiquid after purchase by the fund, particularly during periods of market turmoil. When the fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if the fund is forced to sell these
investments to meet 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.
Foreign
investments risk.
The funds investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in
which the fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of the funds investments may decline because of factors affecting the particular issuer as well as foreign markets
and issuers generally, such as unfavorable government actions, and political or financial instability. Lack of information may also affect the value of these securities.
The value of the funds foreign investments may also be affected by foreign tax laws, special U.S. tax considerations and restrictions on receiving the investment proceeds from a foreign
country. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S. withholding taxes.
In
some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. It may be difficult for the fund to pursue claims against a foreign issuer in the
courts of a foreign country. Some securities issued by non-U.S. governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of such governments. Even where a security is backed by the full faith
and credit of a government, it may be difficult for the fund to pursue its rights against the government. Some non-U.S. governments have defaulted on principal and interest payments, and more may do so.
The risks of foreign investments are heightened when investing in issuers in emerging market countries.
Currency
risk.
The value of investments in securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change.
Currency conversion costs and currency fluctuations could erase investment gains or add to investment losses. Currency
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exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency
controls and speculation.
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 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.
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 may 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. This may cause the funds share price to be more volatile.
Derivatives risk.
Using derivatives, especially for non-hedging
purposes, may involve greater risks to the fund than investing directly in securities, particularly as these instruments may be very complex and may not behave in the manner anticipated. Certain derivatives transactions may have a leveraging effect
on the fund. Even a small investment in derivative contracts can have a significant impact on the funds stock market, interest rate or currency exposure. Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when stock prices, interest rates or currency rates are changing. The fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond as anticipated to changes in the value of the
funds holdings. Using derivatives may increase the funds volatility, which is the degree to which the funds share price may fluctuate within a short time period. Holdings of derivatives also can make the fund less liquid and harder
to value, especially in declining markets. The fund may incur additional costs related to derivatives, such as transaction costs and custody expenses, which can adversely affect the funds performance.
Derivatives are subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation.
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Recent legislation calls for new regulation of the derivatives markets.
The extent and impact of the regulation are not yet fully known and may not be for some time. New regulation of derivatives may make them more costly, may limit their availability, or may otherwise adversely affect their value or performance.
Risks associated with the use of derivatives are magnified to the extent that a large portion of the funds assets are committed to
derivatives in general or are invested in just one or a few types of derivatives.
Structured notes risk.
Structured notes are subject to interest rate risk and are also subject to credit risk with respect both
to the borrower and to the issuer of the underlying investment. If the underlying investment or index does not perform as anticipated, the investment might pay less interest than the stated coupon payment or repay less principal upon maturity. The
terms of structured notes may provide that in certain circumstances no principal is due at maturity, which may result in a complete loss of invested capital. Structured notes may be more volatile, less liquid and more difficult to accurately price
than less complex securities and instruments or more traditional debt securities.
MLP risk.
An investment in MLP units involves certain risks which differ from an investment in the securities of a corporation.
Holders of MLP units have the rights typically afforded to limited partners in a limited partnership. Additionally, conflicts of interest may exist between common unit holders and the general partner of an MLP; for example, a conflict may arise as a
result of incentive distribution payments. The amount of cash that any MLP has available to pay its unit holders in the form of distributions/dividends depends on the amount of cash flow generated from such companys operations. Cash flow from
operations will vary from quarter to quarter and is largely dependent on factors affecting the MLPs operations and factors affecting the energy, natural resources or real estate sectors in general. MLPs may be adversely affected by
fluctuations in the prices of commodities and may be impacted by the levels of supply and demand for commodities. The performance of MLPs operating in the real estate sector may be linked to the performance of the real estate markets, including the
risk of falling property values and declining rents, and from changes in interest rates or inflation. Much of the benefit the fund derives from its investment in equity securities of MLPs is a result of MLPs generally being treated as partnerships
for U.S. federal income tax purposes. A change in current tax law, or a change in the business of a given MLP, could result in an MLP being treated as a corporation for U.S. federal income tax purposes and subject to corporate level tax on its
income, and could reduce the amount of cash available for distribution by the MLP to its unit holders, such as the fund.
Royalty trust risk.
Royalty trusts are exposed to many of the same risks as MLPs. In addition, the value of the equity
securities of the royalty trusts in which the fund invests may fluctuate in accordance with changes in the financial condition of those royalty trusts, the condition of equity markets generally, commodity prices and other factors. Distributions on
royalty trusts in which the fund may invest will depend upon the declaration of distributions from the constituent royalty trusts, but there can be no assurance that those royalty trusts will pay distributions on their securities. Typically royalty
trusts own the rights to royalties on the production and sales of a natural resource, including oil, gas, minerals and timber. As these deplete, production and cash flows steadily decline, which may decrease distributions. The declaration of such
distributions generally depends upon various factors, including the operating performance and financial condition of the royalty trust and general economic conditions.
REITs risk.
Investments in REITs expose the fund to
risks similar to investing directly in real estate. The value of these underlying investments may be affected by changes in the value of the underlying real estate, the quality of the property management, the creditworthiness of the issuer of the
investments, and changes in property taxes, interest rates and the real estate regulatory environment. Investments in REITs are also affected by general economic conditions. Certain REITs charge management fees, which may result in layering the
management fees paid by the fund. REITs may be leveraged which increases risk.
Closed-end investment company risk.
Investing in a closed-end investment company will give the fund exposure to the securities
comprising the closed-end investment company and will expose the fund to risks similar to those of investing directly in those securities. Shares of closed-end investment companies are
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traded on exchanges and may trade at either a premium or discount to net asset value. The fund will pay brokerage commissions in connection with the purchase and sale of shares of closed-end
investment companies.
BDC risk.
BDCs carry risks similar to those of a private equity or venture capital fund. BDCs are not redeemable at the option of the shareholder and they may trade in the market at a discount to their net
asset value. BDCs may employ the use of leverage in their portfolios through borrowings or the issuance of preferred stock. While leverage often serves to increase the yield of a BDC, this leverage also subjects a BDC to increased risks, including
the likelihood of increased volatility and the possibility that a BDCs common share income will fall if the dividend rate of the preferred shares or the interest rate on any borrowings rises.
Convertible securities risk.
Convertible securities are subject both to the stock market risk associated with equity securities and to the credit and interest rate risks associated with fixed income securities. As the market
price of the equity security underlying a convertible security falls, the convertible security tends to trade on the basis of its yield and other fixed income characteristics. As the market price of the equity security underlying a convertible
security rises, the convertible security tends to trade on the basis of its equity conversion features.
Growth and value investing risk.
Growth or value securities as a group may be out of favor and underperform the overall equity
market while the market concentrates on other types of securities. Growth securities typically are very sensitive to market movements because their market prices tend to reflect future expectations. When it appears those expectations will not be
met, the prices of growth securities typically fall. The value approach to investing involves the risk that value stocks may remain undervalued.
Although the fund will not concentrate its investments in any one industry or industry group, it may, like many growth or value funds, weight its investments toward certain industries, thus
increasing its exposure to factors adversely affecting issuers within those industries.
Portfolio selection risk.
The value of your investment may decrease if the subadvisers judgment about the attractiveness,
value or market trends affecting a particular security, industry or sector or about market movements is incorrect.
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 market on which they are valued, but before the fund determines its net asset value.
Short sales risk.
A short sale of a security involves the risk that instead of declining, the price of the security sold short will rise. If the price of the security sold short increases between the time of the
short sale and the time the fund replaces the borrowed security, the fund will realize a loss. The short sale of securities involves the possibility of a theoretically unlimited loss since there is a theoretically unlimited potential for the market
price of the security sold short to increase.
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. If a significant amount of the funds assets are used for cash management or defensive investing purposes, it may not achieve its investment objectives.
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Market sector risk.
The fund may be significantly overweight or underweight certain companies, industries or market sectors, which may cause the funds performance to be more sensitive to developments affecting
those companies, industries or sectors.
Real assets risk.
Investments by the fund in REITs, MLPs and royalty trusts that operate in the real estate, natural resources and commodities sectors involve a high degree of risk, including significant financial,
operating, and competitive risks. Investments in REITs, MLPs and royalty trusts expose the fund to adverse macroeconomic conditions, such as a rise in interest rates or a downturn in the economy in which the asset is located, elevating the risk of
loss.
Portfolio turnover risk.
Active and frequent trading may lead to the realization and distribution to shareholders of higher short-term capital gains, which would increase their tax liability. Frequent trading also
increases transaction costs, which could detract from the funds performance.
Fund of funds investments risk.
From time to time, the fund may experience relatively large redemptions or investments due to
rebalancings of a fund of funds portfolio. In the event of such redemptions or investments, the fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so.
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.
Recent market events risk.
The equity and debt capital markets in the United States and internationally have experienced unprecedented volatility. The financial crisis that began in 2008 has caused a significant decline in
the value and liquidity of many securities; in particular, the values of some sovereign debt and of securities of issuers that invest in sovereign debt and related investments have fallen, credit has become more scarce worldwide and there has been
significant uncertainty in the markets. This environment could make identifying investment risks and opportunities especially difficult for the subadviser. These market conditions may continue or get worse. In response to the crisis, the U.S. and
other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets. The withdrawal of this support, failure of efforts to respond to the crisis, or investor perception that such efforts are not
succeeding could also negatively affect financial markets generally as well as the value and liquidity of certain securities. In addition, policy and legislative changes in the United States and in other countries are changing 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.
Please note that there are other factors that could adversely affect your investment and that could prevent the fund from achieving its investment objectives. 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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More on fund management
Legg Mason Partners Fund Advisor, LLC (LMPFA or the
manager) 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, 2012, LMPFAs total assets under management were approximately $180.6 billion.
ClearBridge Investments, LLC (ClearBridge or the subadviser) provides the day-to-day portfolio management of the fund,
except for the management of cash and short-term instruments. ClearBridge has offices at 620 Eighth Avenue, New York, New York 10018 and is an investment adviser that was formed to succeed to the equity securities portfolio management business of
Citigroup Asset Management, which was acquired by Legg Mason in December 2005, but traces back its asset management expertise over 45 years to several prominent firms including Smith Barney Asset Management, Davis Skaggs Investment Management
and Salomon Brothers Asset Management. As of December 31, 2012, ClearBridges total assets under management were approximately $55.5 billion.
Western Asset Management Company (Western Asset) manages the funds cash and short-term instruments. 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, 2012, the
total assets under management of Western Asset and its supervised affiliates were approximately $461.9 billion.
LMPFA, ClearBridge 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, 2012, Legg Masons
asset management operations had aggregate assets under management of approximately $648.9 billion.
Portfolio managers
Mark McAllister, CFA, and Peter Vanderlee, CFA, have served as co-portfolio managers of the fund since January 2012. Messrs. McAllister and
Vanderlee are primarily responsible for overseeing the day-to-day operation of the fund and have the ultimate authority to make portfolio decisions.
Mr. McAllister is a Managing Director and Senior Portfolio Manager of ClearBridge specializing in REIT portfolios. He has 25 years of investment industry experience. Mr. McAllister joined
a predecessor firm of ClearBridge in 1999 and until 2007 was a Managing Director and Senior Portfolio Manager focusing on large cap value strategies. Most recently, he was a Partner at High Rise Capital Management. Previously, Mr. McAllister
worked for JLW Capital Management as a Portfolio Manager, for Cohen & Steers Capital Management as a Security Analyst and Investment Committee member and for Metropolitan Life as a Real Estate Analyst.
Mr. Vanderlee is a Managing Director and Senior Portfolio Manager of ClearBridge and has 13 years of investment industry experience and 11
years of related industry experience. He joined ClearBridge in 2005 in connection with the Legg Mason/Citigroup transaction. Previously, he was with Citigroup Global Markets Inc. since 1999.
The SAI provides information about the compensation of the portfolio managers, other accounts managed by the portfolio managers and any fund shares held by the portfolio managers.
Management fee
The fund pays a
management fee at an annual rate that decreases as assets increase, as follows: 0.750% of assets up to and including $1 billion, 0.725% of assets over $1 billion and up to and including $2 billion, 0.700% of assets over $2 billion and up to and
including $5 billion, 0.675% of assets over $5 billion and up to and including $10 billion and 0.650% of assets over $10 billion.
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ClearBridge Tactical Dividend Income Fund
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More on fund management contd
For the fiscal year ended October 31, 2012, the fund paid LMPFA an effective management fee of 0.52% 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 agreements is available in the funds Semi-Annual Report for the period ended April 30, 2012.
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 1.25% for Class A shares, 2.00% for Class C shares, 1.25%
for Class FI shares, 1.50% for Class R shares, 2.00% for Class R1 shares and 1.00% for Class I shares, subject to recapture as described below. In addition, total annual fund operating expenses for Class IS shares will not exceed total annual fund
operating expenses for Class I shares, subject to recapture as described below. These arrangements are expected to continue until December 31, 2014, 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.
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 0.25% for Class A shares; up to 1.00% for Class C shares; up to 0.25% for Class FI shares; up to 0.50% for Class R
shares; and up to 1.00% for Class R1 shares. These fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I shares and Class IS shares are not subject to
distribution and/or service fees under the plan.
In addition, 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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ClearBridge Tactical Dividend Income Fund
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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. Individual investors who held Class I shares prior to November 20, 2006 are permitted
to make additional investments in Class I shares.
Retirement Plan and Institutional Investors and Clients of Eligible Financial
Intermediaries should refer to Retirement and Institutional Investors eligible investors below for a description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose a class
that may be appropriate for you.
When choosing which class of shares to buy, you should consider:
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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, you should be aware 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.
Class R1 shares are closed to all new purchases and incoming exchanges.
Each class of shares, except Class IS 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 Class C shares and 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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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 or Class R shares. You may be required to provide appropriate documentation confirming your eligibility to invest in Class FI or Class R shares. 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 5.75%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or
more
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1.00% on purchases of $1 million or more if you redeem within 18 months of purchase (or within 12 months for shares purchased prior to
August 1, 2012); waived for certain investors
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0.25% 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 sales charge
Contingent deferred sales charge for only 1 year
Does not convert to Class
A
Generally higher annual
expenses than Class A
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None
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1.00% if you redeem within 1 year of purchase; waived for certain investors
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1.00% 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 and eligible Retirement
Plans
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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
R
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No initial or contingent deferred sales charge
Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund,
Clients of Eligible Financial Intermediaries and Eligible Investment Programs
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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 R shares of funds sold by the distributor
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Class
R1
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Closed to all new
purchases
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None
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None
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1.00% of average daily net assets
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N/A
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Class
I
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No initial or contingent deferred sales charge
Only offered to institutional and other eligible investors
Generally lower annual
expenses than all classes except Class IS
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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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ClearBridge Tactical Dividend Income Fund
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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
IS
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No initial or contingent deferred sales charge
Only offered to institutional 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 IS 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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Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate as the size of your investment increases to certain levels called
breakpoints. You do not pay a sales charge on the funds distributions or dividends that you reinvest in additional Class A shares.
The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you
buy shares from a Service Agent. For Class A shares sold by the distributor, the distributor will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales charge paid on redemptions) and will retain
the full amount of such sales charge. Service Agents will receive a distribution and/or service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A shares serviced by
them.
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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 $25,000
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5.75
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6.10
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5.00
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$25,000 but less than $50,000
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5.00
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5.26
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4.25
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$50,000 but less than $100,000
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4.50
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4.71
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3.75
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$100,000 but less than $250,000
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3.50
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3.63
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2.75
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$250,000 but less than $500,000
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2.50
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2.56
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2.00
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$500,000 but less than $750,000
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2.00
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2.04
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1.60
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$750,000 but less than $1 million
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1.50
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1.52
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1.20
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$1 million or more
1
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-0-
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-0-
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up to 1.00
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1
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The distributor may pay a commission of up to 1.00% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the
thirteenth month after purchase, the Service Agent will also receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month,
the distributor will retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution and/or service fee starting immediately after purchase. Please contact your
Service Agent for more information.
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Investments of $1,000,000 or more
You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares
within 18 months of purchase (or within 12 months for shares purchased prior to August 1, 2012), you will pay a contingent deferred sales charge of 1.00%.
Qualifying for a reduced Class A sales charge
There are several ways you can
combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you
purchase fund shares, you must inform your Service Agent 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:
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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.
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ClearBridge Tactical Dividend Income Fund
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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.
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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Investors investing through certain Retirement Plans
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Investors who rollover fund shares from a qualified retirement plan into an individual retirement account administered on the same retirement
plan platform
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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. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.
LMIS generally will pay Service Agents selling Class C shares a commission of up to 1.00% of the purchase price of the Class C shares they sell. LMIS will retain the contingent deferred sales
charges and an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C
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ClearBridge Tactical Dividend Income Fund
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Sales charges contd
shares serviced by these Service Agents until the thirteenth month after purchase. Starting in the thirteenth month after purchase, these Service Agents will receive an annual distribution and/or
service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.
Class FI, Class R and
Class R1 shares
You buy Class FI and Class R shares at net asset value with no initial sales charge and no contingent deferred sales
charge when redeemed. Class R1 shares are closed to all new purchases and incoming exchanges.
Service Agents receive an annual
distribution and/or service fee of up to 0.25% of the average daily net assets represented by Class FI shares serviced by them, up to 0.50% of the average daily net assets represented by Class R shares serviced by them and up to 1.00% of the average
daily net assets represented by Class R1 shares serviced by them.
Class I and Class IS shares
You buy Class I and Class IS shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed. Class I
and Class IS shares are not subject to any distribution and/or service fees.
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ClearBridge Tactical Dividend Income Fund
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More about contingent deferred sales charges
The contingent deferred sales charge is based on the net asset value at
the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.
In addition, you do not pay a contingent deferred sales charge:
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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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On certain distributions from a Retirement Plan
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For Retirement Plans with omnibus accounts held on the books of the fund
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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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ClearBridge Tactical Dividend Income Fund
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Retirement and Institutional Investors eligible investors
Retirement Plans
Retirement Plans include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred
compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual
403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs or similar accounts.
Retirement Plans with omnibus accounts
held on the books of the fund can generally invest in Class A, Class C, Class FI, Class R, Class I and Class IS shares.
Investors who rollover fund shares from a Retirement Plan into an individual retirement account administered on the same retirement plan platform
may hold, purchase and exchange shares of the fund to the same extent as the applicable Retirement Plan.
Although Retirement Plans with
omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary. The distributor may impose certain
additional requirements. Please contact your Service Agent for more information.
Other Retirement Plans
Other Retirement Plans include Retirement Plans investing through brokerage accounts and also include certain Retirement Plans with
direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Other Retirement Plans and individual retirement vehicles, such as IRAs, are treated like individual investors for purposes of
determining sales charges and any applicable sales charge reductions or waivers.
Other Retirement Plans do not include
arrangements whereby an investor would rollover fund shares from a Retirement Plan into an individual retirement account administered on the same retirement plan platform. Such arrangements are deemed to be Retirement Plans and are
subject to the rights and privileges described under Retirement and Institutional Investors eligible investors Retirement Plans.
Other Retirement Plan investors can generally invest in Class A, Class C and Class I shares. Individual retirement vehicles may also choose between these share classes.
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, Class R 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 (including IRA accounts on such platforms) 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, Class
R or Class I shares. Class I shares are available for exchange from Class A or Class C shares of the fund by participants in the Eligible Investment Programs.
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.
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ClearBridge Tactical Dividend Income Fund
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27
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Institutional Investors may invest in Class I or Class IS 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 A shares Retirement Plans
Retirement Plans may buy Class A
shares. Under certain programs for current and prospective Retirement Plan investors sponsored by financial intermediaries, the initial sales charge and contingent deferred sales charge for Class A shares are waived where:
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Such Retirement Plans recordkeeper offers only load-waived shares,
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Fund shares are held on the books of the fund through an omnibus account, and
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The Retirement Plan has more than 100 participants or has total assets exceeding $1 million.
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LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on
the purchase price of Class A shares sold by them. However, for certain Retirement Plans that are permitted to purchase shares at net asset value, LMIS may pay Service Agents commissions of up to 1.00% of the purchase price of the Class A
shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.
Class C
shares Retirement Plans
Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares at net asset
value without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to Retirement Plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by
them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.
Certain Retirement Plan programs with exchange features in effect prior to November 20, 2006, as approved by LMIS, will be eligible for
exchange from Class C shares to Class A shares in accordance with the program terms. Please see the SAI for more details.
Class FI
shares
Class FI shares are offered only to Clients of Eligible Financial Intermediaries and Retirement Plan programs.
Class R shares
Class R shares are
offered only to Retirement Plans with omnibus accounts held on the books of the fund (either at the plan level or at the level of the financial intermediary), to Clients of Eligible Financial Intermediaries and through Eligible Investment Programs.
Class R1 shares
Class
R1 shares are closed to all new purchases and incoming exchanges.
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, Retirement Plans with omnibus accounts held on the books of the fund and certain rollover IRAs, Clients of Eligible Financial Intermediaries and other investors authorized by LMIS. Individual investors who
held Class I shares prior to November 20, 2006 are permitted to make additional investments in Class I shares. Certain waivers of these requirements for individuals associated with the fund, Legg Mason or its affiliates are discussed in the SAI.
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Retirement and Institutional Investors eligible investors contd
Class IS shares
Class IS shares may be purchased only by Retirement Plans with omnibus accounts held on the books of the fund, certain rollover IRAs and
Institutional Investors, and other investors authorized by LMIS. In order to purchase Class IS shares, an investor must hold its shares in one account with the fund, which account is not subject to payment of recordkeeping or similar fees by the
fund to any intermediary.
Other considerations
Plan sponsors, plan fiduciaries and other 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 plan sponsor, plan fiduciary
or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.
Your Service Agent may not offer all share classes. Please contact your Service Agent for additional details.
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Buying shares
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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)
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Through a Service Agent
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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.
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Through the fund
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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).
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Through a systematic investment plan
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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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Exchanging shares
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Generally
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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 Retirement and 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, unless you are investing through an IRA, 401(k) or other tax-advantaged account. 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.
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Legg Mason offers a distinctive family of funds tailored to help meet the varying needs of large and small
investors
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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.
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Investment minimums, sales charges and other requirements
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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
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By telephone
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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.
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By mail
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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
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Through a systematic exchange plan
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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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Redeeming shares
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Generally
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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.
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Redemption proceeds
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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.
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By mail
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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)
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By telephone
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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
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Automatic cash withdrawal plans
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You may be permitted to schedule automatic redemptions of a portion of your shares. To qualify, you must own shares of the fund
with a value of at least $10,000 ($5,000 for Retirement Plan accounts) and each automatic redemption must be at least $50.
The following conditions apply:
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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Other things to know about transactions
When you buy, exchange or redeem shares, your request must be in good
order. This means you have provided the following information, without which your request may not be processed:
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In the case of a purchase (including a purchase as part of an exchange transaction), the class of shares being bought
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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)
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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:
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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
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Close your account after a period of inactivity, as determined by state law, and transfer your shares to the appropriate state
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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:
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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
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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.
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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.
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, Class R, Class R1, Class I and Class IS
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).
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.
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Other things to know about transactions contd
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 may 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 objectives. 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 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.
Because of the potential harm to funds sold
by the funds distributor and their long-term shareholders, the Board has approved policies and procedures that are intended to detect and discourage excessive trading and market timing abuses through the use of various surveillance techniques.
Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund or in other funds sold by the
distributor. In the event that an exchange or purchase request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as asset allocation, dollar cost
averaging, or similar activities that may nonetheless result in frequent trading of fund shares.
Under the funds policies and
procedures, the fund reserves the right to restrict or reject purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected in funds sold by the distributor. A committee
established by the manager administers the policy. The policy provides that the committee may take action, which may include using its best efforts to restrict a shareholders trading privileges in funds sold by the distributor, if that
shareholder has engaged in one or more Round Trips across all funds sold by the distributor. However, the committee has the discretion to determine that action is not necessary if it is determined that the pattern of trading is not
abusive or harmful. In making such a determination, the committee will consider, among other things, the nature of the shareholders account, the reason for the frequent trading, the amount of trading and the particular funds in which the
trading has occurred. Additionally, the committee has the discretion to make inquiries or to take any action against a shareholder whose trading appears inconsistent with the frequent trading policy, regardless of the number of Round Trips. Examples
of the types of actions the committee may take include heightened surveillance of a shareholder account, providing a written warning letter to an account holder, restricting the shareholder from purchasing additional shares in the fund altogether or
imposing other restrictions (such as requiring purchase orders to be submitted by mail) that would deter the shareholder from trading frequently in the fund. The committee will generally follow a system of progressive deterrence, although it is not
required to do so.
A Round Trip is defined as a purchase (including subscriptions and exchanges) into a fund sold by the
distributor followed by a sale (including redemptions and exchanges) of the same or a similar number of shares out of that fund within 30 days of such purchase. Purchases and sales of the funds shares pursuant to an automatic investment plan
or similar program for periodic transactions are not considered in determining Round Trips. These policies and procedures do not apply to money market funds sold by the distributor.
The policies apply to any account, whether a direct account or accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called
omnibus
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ClearBridge Tactical Dividend Income Fund
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accounts, where the intermediary holds fund shares for a number of its customers in one account. The funds ability to monitor trading in omnibus accounts may, however, be severely limited
due to the lack of access to an individual investors trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the funds service providers to
identify or terminate frequent trading activity within the various types of omnibus accounts. The distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading
activity and prohibit further purchases or exchanges by a shareholder identified as having engaged in frequent trading.
The fund has
also adopted policies and procedures to prevent the selective release of information about the funds holdings, as such information may be used for market-timing and similar abusive practices.
The policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to
modify these or adopt additional policies and restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be
effective, particularly where the trading takes place through certain types of omnibus accounts. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in
frequent trading while others will bear the costs and effects of that trading.
Although the fund will attempt to monitor shareholder
transactions for certain patterns of frequent trading activity, there can be no assurance that all such trading activity can be identified, prevented or terminated. Monitoring of shareholder transactions may only occur for shareholder transactions
that exceed a certain transaction amount threshold, which may change from time to time. The fund 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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Dividends, other distributions and taxes
Dividends and other distributions
The fund generally pays dividends quarterly from its net investment income, if any, and potentially from short-term capital gains. The fund
generally distributes long-term capital gain, if any, once in December and at such other times as are necessary. 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.
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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.
The fund may not invest more than 25% of the
value of its total assets in the securities of MLPs that are treated for U.S. federal income tax purposes as qualified publicly traded partnerships (QPTPs) (the 25% Limitation). A QPTP means a partnership (i) whose
interests are traded on an established securities market or readily tradable on a secondary market or the substantial equivalent thereof; (ii) that derives at least 90% of its annual income from (a) dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or foreign currencies, (b) real property rents, (c) gain from the sale or other disposition of real property, (d) the exploration, development, mining or production, processing,
refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber), industrial source carbon dioxide, or the
transportation or storage of certain fuels, and (e) in the case of a partnership a principal activity of which is the buying and selling of commodities, income and gains from commodities or futures, forwards, and options with respect to
commodities; and (iii) that derives less than 90% of its annual income from the items listed in (a) above. The 25% Limitation generally does not apply to publicly traded partnerships that are not energy- or commodity-focused, such as, for
instance, finance-related partnerships. An investment in a royalty trust will be subject to the 25% Limitation if the royalty trust is treated for tax purposes as a QPTP.
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In general, redeeming shares, exchanging shares and receiving dividends and distributions (whether
received in cash or reinvested in 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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Dividends of investment income and distributions of net short-term capital gain
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Ordinary income, or in certain cases qualified dividend income
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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 of investment income that the fund reports as qualified dividend income may be eligible to
be taxed to noncorporate shareholders at the reduced rates applicable to long-term capital gain if certain requirements are satisfied. 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 dividend or capital gain distribution because it will be taxable to you even though it may economically represent a return of
a portion of your investment.
Beginning in 2013, a Medicare contribution tax will be 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 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 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.
|
|
|
40
|
|
ClearBridge Tactical Dividend Income Fund
|
Share price
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, in turn, uses independent third party pricing services approved by the funds Board. Under the
procedures, assets are valued as follows:
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
For investments in exchange-traded funds, the market price is usually the closing sale or official closing price on that exchange.
|
|
|
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.
|
|
|
|
|
|
ClearBridge Tactical Dividend Income Fund
|
|
|
41
|
|
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.
|
|
|
42
|
|
ClearBridge Tactical Dividend Income Fund
|
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, Class R, Class R1 or Class IS shares because no Class FI, Class R, Class R1 or Class IS shares were outstanding
for the periods shown. The returns for Class FI, Class R, Class R1 and Class IS shares will differ from those of the other classes to the extent that their expenses differ. Certain information reflects financial results for a single share. Total
return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the funds financial statements,
which have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the funds financial statements, is included in the Annual Report (available upon request).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended October 31:
|
|
Class A Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Net asset value, beginning
of year
|
|
|
$14.56
|
|
|
|
$14.18
|
|
|
|
$12.75
|
|
|
|
$11.02
|
|
|
|
$17.76
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.42
|
|
|
|
(0.05)
|
|
|
|
(0.01)
|
|
|
|
0.01
|
|
|
|
(0.02)
|
|
Net realized and unrealized gain (loss)
|
|
|
1.34
|
|
|
|
0.44
|
|
|
|
1.42
|
|
|
|
1.72
|
|
|
|
(6.70)
|
|
Proceeds from settlement of a regulatory matter
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
Total income (loss) from operations
|
|
|
1.76
|
|
|
|
0.39
|
|
|
|
1.44
|
|
|
|
1.73
|
|
|
|
(6.72)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.54)
|
|
|
|
(0.01)
|
|
|
|
(0.01)
|
|
|
|
|
|
|
|
(0.02)
|
|
Total distributions
|
|
|
(0.54)
|
|
|
|
(0.01)
|
|
|
|
(0.01)
|
|
|
|
|
|
|
|
(0.02)
|
|
Net asset value, end of
year
|
|
|
$15.78
|
|
|
|
$14.56
|
|
|
|
$14.18
|
|
|
|
$12.75
|
|
|
|
$11.02
|
|
Total
return
2
|
|
|
12.23
|
%
|
|
|
2.76
|
%
|
|
|
11.33
|
%
3,4
|
|
|
15.70
|
%
|
|
|
(37.87)
|
%
|
Net assets, end of year
(000s)
|
|
|
$101,784
|
|
|
|
$83,693
|
|
|
|
$90,360
|
|
|
|
$89,299
|
|
|
|
$86,093
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.48
|
%
|
|
|
1.55
|
%
5
|
|
|
1.34
|
%
|
|
|
1.28
|
%
|
|
|
1.23
|
%
|
Net
expenses
6,7,8
|
|
|
1.25
|
|
|
|
1.32
|
5
|
|
|
1.23
|
|
|
|
1.05
|
|
|
|
1.05
|
|
Net investment income (loss)
|
|
|
2.78
|
|
|
|
(0.34)
|
|
|
|
(0.10)
|
|
|
|
0.11
|
|
|
|
(0.12)
|
|
Portfolio turnover
rate
|
|
|
125
|
%
|
|
|
29
|
%
|
|
|
84
|
%
|
|
|
34
|
%
|
|
|
39
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
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.
|
3
|
The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been
11.09%. Class A received $171,552 related to this distribution.
|
4
|
The total return includes gains from settlement of investment litigations. Without these gains, the total return would have been 10.86%.
|
5
|
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would have been 1.49% and 1.25% for the year ended October 31, 2011.
|
6
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage, taxes, extraordinary expenses and
acquired fund fees and expenses, to average net assets of Class A shares did not exceed 1.25%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Trustees consent. Prior to
December 1, 2009, the voluntary expense limitation was 1.05%.
|
7
|
Reflects fee waivers and/or expense reimbursements.
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
|
|
|
|
ClearBridge Tactical Dividend Income Fund
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended October 31:
|
|
Class C Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Net asset value, beginning
of year
|
|
|
$14.15
|
|
|
|
$13.88
|
|
|
|
$12.57
|
|
|
|
$10.95
|
|
|
|
$17.76
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.30
|
|
|
|
(0.16)
|
|
|
|
(0.11)
|
|
|
|
(0.07)
|
|
|
|
(0.13)
|
|
Net realized and unrealized gain (loss)
|
|
|
1.29
|
|
|
|
0.43
|
|
|
|
1.41
|
|
|
|
1.69
|
|
|
|
(6.68)
|
|
Proceeds from settlement of a regulatory matter
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Total income (loss) from operations
|
|
|
1.59
|
|
|
|
0.27
|
|
|
|
1.31
|
|
|
|
1.62
|
|
|
|
(6.81)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.51)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.51)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
year
|
|
|
$15.23
|
|
|
|
$14.15
|
|
|
|
$13.88
|
|
|
|
$12.57
|
|
|
|
$10.95
|
|
Total
return
2
|
|
|
11.40
|
%
|
|
|
1.95
|
%
|
|
|
10.42
|
%
3,4
|
|
|
14.79
|
%
|
|
|
(38.34)
|
%
|
Net assets, end of year
(000s)
|
|
|
$22,763
|
|
|
|
$328
|
|
|
|
$470
|
|
|
|
$537
|
|
|
|
$376
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
2.19
|
%
|
|
|
2.39
|
%
5
|
|
|
2.33
|
%
|
|
|
2.30
|
%
|
|
|
2.36
|
%
|
Net
expenses
6,7,8
|
|
|
2.00
|
|
|
|
2.07
|
5
|
|
|
1.98
|
|
|
|
1.80
|
|
|
|
1.80
|
|
Net investment income (loss)
|
|
|
2.02
|
|
|
|
(1.09)
|
|
|
|
(0.86)
|
|
|
|
(0.65)
|
|
|
|
(0.86)
|
|
Portfolio turnover
rate
|
|
|
125
|
%
|
|
|
29
|
%
|
|
|
84
|
%
|
|
|
34
|
%
|
|
|
39
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
Performance figures, exclusive of contingent deferred 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.
|
3
|
The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been
10.34%. Class C received $597 related to this distribution.
|
4
|
The total return includes gains from settlement of investment litigations. Without these gains, the total return would have been 9.86%.
|
5
|
Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would have been 2.31% and 2.00% for the year ended October 31, 2011.
|
6
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage, taxes, extraordinary expenses and
acquired fund fees and expenses, to average net assets of Class C shares did not exceed 2.00%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Trustees consent. Prior to
December 1, 2009, the voluntary expense limitation was 1.80%.
|
7
|
Reflects fee waivers and/or expense reimbursements.
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
|
|
44
|
|
ClearBridge Tactical Dividend Income Fund
|
Financial highlights contd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
|
|
Class I Shares
1
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
2
|
|
Net asset value, beginning
of year
|
|
|
$14.63
|
|
|
|
$14.21
|
|
|
|
$12.80
|
|
|
|
$11.04
|
|
|
|
$16.08
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
0.40
|
|
|
|
(0.02)
|
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
0.02
|
|
Net realized and unrealized gain (loss)
|
|
|
1.41
|
|
|
|
0.44
|
|
|
|
1.44
|
|
|
|
1.72
|
|
|
|
(5.06)
|
|
Total income (loss) from operations
|
|
|
1.81
|
|
|
|
0.42
|
|
|
|
1.46
|
|
|
|
1.76
|
|
|
|
(5.04)
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.58)
|
|
|
|
|
|
|
|
(0.05)
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.58)
|
|
|
|
|
|
|
|
(0.05)
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
year
|
|
|
$15.86
|
|
|
|
$14.63
|
|
|
|
$14.21
|
|
|
|
$12.80
|
|
|
|
$11.04
|
|
Total
return
3
|
|
|
12.53
|
%
|
|
|
2.96
|
%
|
|
|
11.41
|
%
4
|
|
|
15.94
|
%
|
|
|
(31.34)
|
%
|
Net assets, end of year
(000s)
|
|
|
$25,291
|
|
|
|
$159
|
|
|
|
$379
|
|
|
|
$225
|
|
|
|
$140
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.19
|
%
|
|
|
1.45
|
%
5
|
|
|
1.32
|
%
|
|
|
1.31
|
%
|
|
|
0.93
|
%
6
|
Net
expenses
7,8,9
|
|
|
1.00
|
|
|
|
1.07
|
5
|
|
|
0.99
|
|
|
|
0.80
|
|
|
|
0.80
|
6
|
Net investment income (loss)
|
|
|
2.65
|
|
|
|
(0.10)
|
|
|
|
0.15
|
|
|
|
0.35
|
|
|
|
0.25
|
6
|
Portfolio turnover
rate
|
|
|
125
|
%
|
|
|
29
|
%
|
|
|
84
|
%
|
|
|
34
|
%
|
|
|
39
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
For the period May 16, 2008 (inception date) to October 31, 2008.
|
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. Total returns for periods of less than one year are not annualized.
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The total return includes gains from settlement of investment litigations. Without these gains, the total return would have been 11.01%.
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Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the fund
during the period. Without these fees, the gross and net expense ratios would have been 1.38% and 1.00%, respectively.
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As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage, taxes, extraordinary expenses and
acquired fund fees and expenses, to average net assets of Class I shares did not exceed 1.00%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Trustees consent. Prior to
December 1, 2009, the voluntary expense limitation was 0.80%.
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Reflects fee waivers and/or expense reimbursements.
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9
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The impact of compensating balance arrangements, if any, was less than 0.01%.
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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:
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Personal information included on applications or other forms;
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Account balances, transactions, and mutual fund holdings and positions;
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Online account access user IDs, passwords, security challenge question responses; and
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individuals
total debt, payment history, etc.).
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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:
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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;
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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;
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The Funds representatives such as legal counsel, accountants and auditors; and
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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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.
Legg Mason Funds Privacy and Security Notice contd
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.
[These pages are not
part of the Prospectus.]
ClearBridge
Tactical Dividend 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. 811-06444)
FD02504ST [ ]/13
The information in this Statement of Additional Information is not complete and may be
changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
[ ], 2013
LEGG MASON PARTNERS EQUITY TRUST
CLEARBRIDGE SMALL CAP VALUE FUND
Class A (SBVAX), Class B (SBVBX),
Class C (SBVLX),
Class FI, Class R, Class R1, Class I (SMCYX) and Class IS
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 ClearBridge Small Cap Value Fund (the fund), dated [ ], 2013, 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 Equity Trust
(the Trust), a Maryland statutory trust. Prior to October 5, 2009, the fund was named Legg Mason Partners Small Cap Value Fund. Prior to January 1, 2013, the fund was named Legg Mason ClearBridge Small Cap
Value 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 Services5
th
Floor, Stamford, Connecticut 06902, by calling the telephone number set forth above, 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 MANAGEMENT POLICIES
The fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end, diversified
management investment company.
The funds Prospectus discusses the funds investment objective and policies. The
following discussion supplements the description of the funds investment policies in its Prospectus.
Investment Objective and
Principal Investment Strategies
The fund seeks long-term capital growth.
Under normal circumstances, the fund invests at least 80% of its net assets, plus borrowings for investment purposes, if any, in common
stocks and other equity securities of small capitalization U.S. companies or in other investments with similar economic characteristics. Small capitalization companies are those companies whose market capitalizations at the time of investment do not
exceed (i) $3 billion or (ii) the highest month-end market capitalization value of any stock in the Russell 2000 Index (the Index) for the previous 12 months, whichever is greater. Securities of companies whose market
capitalizations no longer meet this definition after purchase by the fund still will be considered to be securities of small capitalization companies for purposes of the funds 80% investment policy. The size of companies in the Index changes
with market conditions and the composition of the Index. The fund may invest up to 20% of its net assets in shares of companies with larger market capitalizations.
The funds 80% investment policy may be changed by the Board of Trustees (the Board) upon 60 days prior notice to shareholders.
There is no guarantee that the fund will achieve its investment objective.
INVESTMENT PRACTICES AND RISK FACTORS
The funds principal investment strategies are described above. The following provides additional information about these principal
strategies and describes other investment strategies and practices that may be used by the fund, which all involve risks of varying degrees.
Defensive Investing.
At times the funds 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 acceptances or other securities the subadviser considers consistent with such defensive strategies, such as, but not limited to, options, futures, warrants or swaps. As a result of
using these alternative strategies, the fund may not achieve its investment objective.
Value Investing.
The fund
invests in stocks and other equity securities that appear to be temporarily undervalued by various measures. Value investing seeks stocks having prices that are low in relation to their real worth or future prospects, with the expectation that the
fund will realize appreciation in the value of its holdings when other investors realize the intrinsic value of the stock.
Convertible Securities.
The fund may invest in convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or
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formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Before conversion or exchange, convertible securities ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower than the yield of nonconvertible
debt. Convertible securities are usually subordinated to comparable-tier nonconvertible securities, but rank senior to common stock in a corporations capital structure.
The value of a convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege and
(2) its worth, at market value, if converted or exchanged into the underlying common stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible securitys governing
instrument, which may be less than the ultimate conversion or exchange value.
Convertible securities are subject both to the
stock market risk associated with equity securities and to the credit and interest rate risks associated with fixed income securities. As the market price of the equity security underlying a convertible security falls, the convertible security tends
to trade on the basis of its yield and other fixed income characteristics. As the market price of such equity security rises, the convertible security tends to trade on the basis of its equity conversion features.
Foreign Securities.
The fund may invest up to 10% of its net assets (at the time of investment) in foreign securities, either
directly or through depositary receipts. The returns of the fund may be adversely affected by fluctuations in value of one or more currencies relative to the U.S. dollar. Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These include risks resulting from revaluation of currencies; future adverse political and economic developments; possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions; reduced availability of public information concerning issuers; differences in accounting, auditing and financial reporting standards; generally higher commission rates on foreign portfolio transactions;
possible expropriation, nationalization or confiscatory taxation; possible withholding taxes and limitations on the use or removal of funds or other assets, including the withholding of dividends; adverse changes in investment or exchange control
regulations; political instability, which could affect U.S. investments in foreign countries; and potential restrictions on the flow of international capital. Additionally, foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility and be less liquid. Foreign securities may not be registered with, nor the issuers thereof be subject to the reporting requirements of, the U.S. Securities and Exchange Commission (the
SEC). Accordingly, there may be less publicly available information about the securities and about the foreign company issuing them than is available about a U.S. company and its securities. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment positions. These risks are intensified when
investing in countries with developing economies and securities markets, also known as emerging markets.
The
costs associated with investment in the securities of foreign issuers, including withholding taxes, brokerage commissions and custodial fees, may be higher than those associated with investment in domestic issuers. In addition, foreign investment
transactions may be subject to difficulties associated with the settlement of such transactions. Transactions in securities of foreign issuers may be subject to less efficient settlement practices, including extended clearance and settlement
periods. Delays in settlement could result in temporary periods when assets of the fund are uninvested and no return can be earned on them. The inability of the fund to make intended investments due to settlement problems could cause the fund to
miss attractive investment opportunities. The inability to dispose of a portfolio security due to settlement problems could result in losses to the fund due to subsequent declines in value of the portfolio security or, if the fund has entered into a
contract to sell the security, could result in liability to the purchaser.
4
Since the fund may invest in securities denominated in currencies other than the U.S.
dollar, it may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rates between such currencies and the U.S. dollar. Changes in currency exchange rates may influence the value of the funds shares
and may also affect the value of dividends and interest earned by the fund and gains and losses realized by the fund. Exchange rates are determined by the forces of supply and demand in the foreign exchange markets. These forces are affected by the
international balance of payments, other economic and financial conditions, government intervention, speculation and other factors.
Generally, American Depositary Receipts (ADRs), in registered form, are denominated in U.S. dollars and are designed for use in the domestic market. Usually issued by a U.S. bank or trust
company, ADRs are receipts that demonstrate ownership of underlying foreign securities. For purposes of the funds investment policies and limitations, ADRs are considered to have the same characteristics as the securities underlying them. ADRs
may be sponsored or unsponsored; issuers of securities underlying unsponsored ADRs are not contractually obligated to disclose material information in the United States. Accordingly, there may be less information available about such issuers than
there is with respect to domestic companies and issuers of securities underlying sponsored ADRs. The fund may also invest in Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and other similar
instruments, which are receipts that are often denominated in U.S. dollars and are issued by either a U.S. or non-U.S. bank evidencing ownership of underlying foreign securities. Even where they are denominated in U.S. dollars, depositary receipts
are subject to currency risk if the underlying security is denominated in a foreign currency. EDRs are issued in bearer form and are designed for use in European securities markets. GDRs are tradable both in the United States and Europe and are
designed for use throughout the world.
Economic, Political and Social Factors.
Certain non-U.S. countries, including
emerging markets, may be subject to a greater degree of economic, political and social instability. Such instability may result from, among other things: (i) authoritarian governments or military involvement in political and economic decision
making; (ii) popular unrest associated with demands for improved economic, political and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial
disaffection and conflict. Such economic, political and social instability could significantly disrupt the financial markets in such countries and the ability of the issuers in such countries to repay their obligations. In addition, it may be
difficult for the fund to pursue claims against a foreign issuer in the courts of a foreign country. Investing in emerging countries also involves the risk of expropriation, nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation in any emerging country, the fund could lose its entire investment in that country. Certain
emerging market countries restrict or control foreign investment in their securities markets to varying degrees. These restrictions may limit the funds investment in those markets and may increase the expenses of the fund. In addition, the
repatriation of both investment income and capital from certain markets in the region is subject to restrictions such as the need for certain governmental consents. Even where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the funds operation. Economies in individual non-U.S. countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of
inflation, currency valuation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many non-U.S. countries have experienced substantial, and in some cases extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had, and may continue to have, very negative effects on the economies and securities markets of certain emerging countries. Economies in emerging countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been, and may continue to be, affected adversely and significantly by economic conditions in the countries with which they trade. Whether or not the fund invests in securities of issuers located in or
with significant exposure to countries experiencing economic, financial and other difficulties, the value and liquidity of the funds investments may be negatively affected by the conditions in the countries experiencing the difficulties.
5
Europe-Recent 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. Whether or not the fund invests in securities of issuers located in Europe or with significant exposure to European issuers
or countries, these events could negatively affect the value and liquidity of the funds investments.
Restricted and
Illiquid Securities.
Up to 15% of the net assets of the fund may be invested in illiquid securities. An illiquid security is any security which may not be sold or disposed of in the ordinary course of business within seven days at approximately
the value at which the fund has valued the security. Illiquid securities may include (a) repurchase agreements with maturities greater than seven days; (b) futures contracts and options thereon for which a liquid secondary market does not
exist; (c) time deposits (TDs) maturing in more than seven calendar days; (d) securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets; and (e) securities
of new and early stage companies whose securities are not publicly traded.
Under SEC regulations, certain securities acquired
through private placements can be traded freely among qualified purchasers. The SEC has stated that an investment companys board of directors, or its investment adviser acting under authority delegated by the board, may determine that a
security eligible for trading under these regulations is liquid. The fund intends to rely on these regulations, to the extent appropriate, to deem specific securities acquired through private placements as liquid. The Board
has delegated to the subadviser or Western Asset Management Company (Western Asset), as applicable, the responsibility for determining whether a particular security eligible for trading under these regulations is liquid.
Investing in these restricted securities could have the effect of increasing the funds illiquidity if qualified purchasers become, for a time, uninterested in buying these securities.
Restricted securities are securities subject to legal or contractual restrictions on their resale, such as private placements. Such
restrictions might prevent the sale of restricted securities at a time when the sale would otherwise be desirable. Restricted securities may be sold only (1) pursuant to Rule 144A under the Securities Act of 1933, as amended (the 1933
Act) (such securities are referred to herein as Rule 144A securities), or another exemption; (2) in privately negotiated transactions; or (3) in public offerings with respect to which a registration statement is in effect
under the 1933 Act. Rule 144A securities, although not registered in the United States, may be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act. As noted above, the subadviser or Western Asset, as applicable,
acting pursuant to guidelines established by the Board, may determine that some Rule 144A securities are liquid for purposes of limitations on the amount of illiquid investments the fund may own. Where registration is required, the fund may be
obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the fund is able to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the fund might obtain a less favorable price than expected when it decided to sell.
Illiquid securities may be difficult to value and the fund may have difficulty disposing of such securities promptly. Judgment plays a greater role in valuing illiquid investments than those securities
for which a more
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active market exists. The fund does not consider non-U.S. securities to be restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered
for sale in the United States.
To the extent required by applicable law and SEC guidance, no securities for which there is
not a readily available market will be acquired by the fund if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the funds net assets.
Real Estate Investment Trusts.
The fund may invest in shares of real estate investment trusts (REITs), which are
pooled investment vehicles that invest in real estate or real estate loans or interests. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage (hybrid) REITs. Equity REITs invest the majority of their
assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive income from the collection of interest payments. A mortgage REIT can make construction, development or long-term mortgage loans, which are sensitive to the credit quality of the borrower. Hybrid REITs combine the
characteristics of both equity and mortgage trusts, generally by holding both ownership interests and mortgage interests in real estate. REITs are not taxed on income distributed to shareholders provided they comply with the applicable requirements
of the Internal Revenue Code of 1986, as amended (the Code). Debt securities issued by REITs, for the most part, are general and unsecured obligations and are subject to risks associated with REITs. Like mutual funds, REITs have
expenses, including advisory and administration fees paid by REIT shareholders, and, as a result, an investor is subject to a duplicate level of fees if the fund invests in REITs.
Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in
general. An equity REIT may be affected by changes in the value of the underlying properties owned by the REIT. A mortgage REIT may be affected by changes in interest rates and the ability of the issuers of its portfolio mortgages to repay their
obligations. REITs are dependent upon the skills of their managers and are not diversified. REITs are generally dependent upon maintaining cash flows to repay borrowings and to make distributions to shareholders and are subject to the risk of
default by lessees and borrowers. REITs whose underlying assets are concentrated in properties used by a particular industry, such as health care, are also subject to industry related risks.
REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REITs
investment in fixed income obligations can be expected to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed rate obligations can be expected to decline. If the REIT invests in adjustable rate mortgage loans
(the interest rates on which are reset periodically), yields on a REITs investments in such loans will gradually align themselves to reflect changes in market interest rates. This causes the value of such investments to fluctuate less
dramatically in response to interest rate fluctuations than would investments in fixed rate obligations. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price
movements than larger company securities. Historically, REITs have been more volatile in price than the larger capitalization stocks included in the S&P 500 Index.
Debt and Fixed Income Securities.
Under certain circumstances, the fund may invest a portion of its assets in debt and fixed income securities. Debt securities in which the fund may invest include
corporate and government bonds, notes, bills, commercial paper, obligations issued or guaranteed by the U.S. government or any of its political subdivisions, agencies or instrumentalities and certificates of deposit. Debt securities represent money
borrowed that obligate the issuer (
e.g.,
a corporation, municipality, government, government agency) to repay the borrowed amount at maturity (when the obligation is due and payable) and usually to pay the holder interest at specific times.
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. When fixed income securities mature or are sold, they may be replaced by lower-yielding investments. Second, their values fluctuate with changes in
7
interest rates. 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
for a security whose duration or maturity is longer. Changes in the value of portfolio securities will not affect interest income from those securities, but will be reflected in the funds net asset value (NAV). The fund has no
restrictions with respect to the maturities or duration of the debt securities it holds. The funds investments in fixed income securities with longer terms to maturity or greater duration are subject to greater volatility than the funds
shorter-term securities. 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.
Money Market Instruments.
The fund may invest in any type of
money market instruments, short-term debt securities or cash for temporary defensive purposes, to pay expenses and/or meet redemption requests. Money market instruments in which the fund may invest include: U.S. government securities; certificates
of deposit (CDs), TDs and bankers acceptances issued by domestic banks (including their branches located outside the United States and subsidiaries located in Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade commercial paper; and repurchase agreements with respect to the foregoing types of instruments. The following is a more detailed description of such money market instruments.
CDs are short-term negotiable obligations of commercial banks. TDs are non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates. Bankers acceptances are time drafts drawn on commercial banks by borrowers usually in connection with international transactions.
Recently enacted legislation will affect virtually every area of banking and financial regulation. The impact of the regulation is not
yet known and may not be known for some time. In addition, new regulations to be promulgated pursuant to the legislation could adversely affect the funds investments in money market instruments.
Domestic commercial banks organized under federal law are supervised and examined by the Comptroller of the Currency (the
COTC) and are required to be members of the Federal Reserve System and to be insured by the Federal Deposit Insurance Corporation (the FDIC). Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they elect to join. Most state banks are insured by the FDIC (although such insurance may not be of material benefit to the fund, depending upon the principal amount of CDs of
each bank held by the fund) and are subject to federal examination and to a substantial body of federal law and regulation. As a result of governmental regulations, domestic branches of domestic banks are, among other things, generally required to
maintain specified levels of reserves, and are subject to other supervision and regulation.
Obligations of foreign branches
of domestic banks, such as CDs and TDs, may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and government regulation. Such obligations are subject to different
risks than are those of domestic banks or domestic branches of foreign banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes on interest income. Foreign branches of domestic banks are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and financial recordkeeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank than about a domestic bank.
Obligations of domestic branches of foreign banks may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by governmental regulation as
8
well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may or may not be subject to
reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, branches licensed by the COTC and branches licensed by certain states (State
Branches) may or may not be required to: (a) pledge to the regulator by depositing assets with a designated bank within the state, an amount of its assets equal to 5% of its total liabilities; and (b) maintain assets within the state
in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of State Branches may not necessarily be insured by the
FDIC. In addition, there may be less publicly available information about a domestic branch of a foreign bank than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks or by domestic branches of foreign banks, the subadviser or Western Asset, as
applicable, will carefully evaluate such investments on a case-by-case basis.
Commercial paper consists of short-term
(usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender, such as the fund, pursuant to which the lender may determine to invest varying amounts. Transfer of such
notes is usually restricted by the issuer, and there is no secondary trading market for such notes.
U.S. Government
Securities.
The fund may invest in U.S. government securities. 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 (as defined below) certificates); (b) the right of the issuer to borrow an amount limited to 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). 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 they issue. Therefore, the market value of such
securities will fluctuate in response to changes in interest rates.
The Government National Mortgage Association
(Ginnie Mae) is a wholly owned U.S. government corporation within the Department of Housing and Urban Development. The mortgage-backed securities guaranteed by Ginnie Mae are backed by the full faith and credit of the United States.
Fannie Mae and Freddie Mac are stockholder-owned companies chartered by Congress. Fannie Mae and Freddie Mac guarantee the securities they issue as to timely payment of principal and interest, but such guarantee is not backed by the full faith and
credit of the United States. In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by their regulator, the Federal Housing Finance Agency. It is unclear what effect this conservatorship will have on the securities issued or
guaranteed by Fannie Mae or Freddie Mac. Although the U.S. government has provided financial support to Fannie Mae and Freddie Mac, there can be no assurance that it will support these or other government-sponsored enterprises in the future.
The fund may also invest in zero coupon U.S. Treasury securities and in zero coupon securities issued by financial
institutions, which represent a proportionate interest in underlying U.S. Treasury securities. A zero coupon bond is a security that makes no fixed interest payments but instead is sold 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
9
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. An investment in zero coupon bonds generally accrues income on such securities 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. The market values of zero coupon securities generally are more volatile than
the market prices of securities that pay interest periodically.
When-Issued Securities and Delayed Delivery
Transactions.
In order to secure what the subadviser or Western Asset, as applicable, considers to be an advantageous price or yield, the fund may purchase U.S. government securities on a when-issued basis or purchase or sell U.S. government
securities for delayed delivery. The fund will enter into such purchase transactions for the purpose of acquiring portfolio securities and not for the purpose of leverage. Delivery of the securities in such cases occurs beyond the normal settlement
periods, but no payment or delivery is made by the fund prior to the reciprocal delivery or payment by the other party to the transaction. In entering into a when-issued or delayed-delivery transaction, the fund relies on the other party to
consummate the transaction and may be disadvantaged if the other party fails to do so.
U.S. government securities normally
are subject to changes in value based upon changes, real or anticipated, in the level of interest rates and, to a lesser extent, the publics perception of the creditworthiness of the issuers. In general, U.S. government securities tend to
appreciate when interest rates decline and depreciate when interest rates rise. Purchasing U.S. government securities on a when-issued or delayed-delivery basis, therefore, can involve the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained in the transaction itself. Similarly, the sale of U.S. government securities for delayed delivery can involve the risk that the prices available in the market when the delivery is made
may actually be higher than those obtained in the transaction itself.
The fund will at all times maintain in a segregated
account at its custodian cash or liquid securities equal to the amount of the funds when-issued or delayed-delivery commitments. For purposes of determining the adequacy of the securities in the account, the deposited securities will be valued
at market or fair value. If the market or fair value of such securities declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of such commitments by the fund.
Placing securities rather than cash in the account may have a leveraging effect on the funds assets. That is, to the extent that the fund remains substantially fully invested in securities at the time that it has committed to purchase
securities on a when-issued basis, there will be greater fluctuation in its NAV than if it had set aside cash to satisfy its purchase commitments. On the settlement date, the fund will meet its obligations from then -available cash flow, the sale of
securities held in the separate account, the sale of other securities or, although it normally would not expect to do so, from the sale of the when-issued or delayed-delivery securities themselves (which may have a greater or lesser value than the
funds payment obligations).
Repurchase Agreements.
The fund may agree to purchase securities from a bank or
recognized securities dealer and simultaneously commit to resell the securities to the bank or dealer at an agreed-upon date and price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities
(repurchase agreements). Under the terms of a typical repurchase agreement, the fund would acquire an underlying debt obligation for a relatively short period (usually not more than one week) subject to an obligation of the seller to
repurchase, and the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during the funds holding period. If the value of such securities were less than the repurchase price, plus interest, the other
party to the agreement would be required to provide additional collateral so that at all times the collateral is at least 102% of the repurchase price plus accrued interest. The financial institutions with which the fund may enter into repurchase
agreements will be banks and non-bank dealers of U.S. government securities that are on the Federal Reserve Bank of New Yorks list of reporting dealers, if such
10
banks and non-bank dealers are deemed creditworthy by Western Asset. 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. Western Asset, acting under the supervision of the Board, reviews on an ongoing basis the value of the collateral and
creditworthiness of those banks and dealers with which the fund enters into repurchase agreements to evaluate potential risks.
Pursuant to an exemptive order issued by the SEC, the fund, along with other affiliated entities managed by the manager or its
affiliates, may transfer uninvested cash balances into one or more joint repurchase accounts. These balances are invested in one or more repurchase agreements, secured by U.S. government securities. Each joint repurchase agreement requires that the
market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention or sale of the collateral may be subject to legal proceedings.
Reverse Repurchase Agreements.
The fund may enter into reverse repurchase agreements, which involve the sale
of fund securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowings. Since the proceeds of borrowings under reverse repurchase agreements are invested, this
would introduce the speculative factor known as leverage. The securities purchased with the funds obtained from the agreement and securities collateralizing the agreement will have maturity dates no later than the repayment date.
Generally the effect of such a transaction is that the fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while in many cases it will be able to keep some of
the interest income associated with those securities. Such transactions are advantageous only if the fund has an opportunity to earn a greater rate of interest on the cash derived from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or greater than the interest required to be paid may not always be available, and the fund intends to use the reverse repurchase technique only when Western Asset believes it
will be advantageous to the fund. The use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of the funds assets. The funds custodian bank will maintain a separate account for the fund with
securities having a value equal to or greater than such commitment of the fund. The fund currently intends to invest not more than
33
1
/
3
% of its total assets in reverse repurchase agreements.
Investment
Company Securities.
The fund may invest up to 10% of its assets in the securities of other investment companies, which can include open-end funds, closed-end funds and unregistered investment companies, subject to the limits set forth in the
1940 Act that apply to these types of investments. Investments in other investment companies are subject to the risks of the securities in which those investment companies invest. In addition, to the extent the fund invests in securities of other
investment companies, fund shareholders would indirectly pay a portion of the operating costs of such companies in addition to the expenses of the funds own operation. These costs include management, brokerage, shareholder servicing and other
operational expenses.
The fund may invest in shares of mutual funds or unit investment trusts that are traded on a stock
exchange, called exchange-traded funds (ETFs). Typically an ETF seeks to track the performance of an index, such as the S&P 500 Index, the NASDAQ-100 Index, the Barclays Capital Treasury Bond Index or more narrow sector or foreign
indexes, by holding in its portfolio either the same securities that comprise the index or a representative sample of the index. Investing in an ETF will give the fund exposure to the securities comprising the index on which the ETF is based.
Unlike shares of typical mutual funds or unit investment trusts, shares of ETFs are designed to be traded throughout the
trading day, bought and sold based on market prices rather than NAV. Shares can trade at either a premium or discount to NAV. However, the portfolios held by index-based ETFs are publicly disclosed on each trading day and an approximation of actual
NAV is disseminated throughout the trading day. Because of this
11
transparency, the trading prices of index-based ETFs tend to closely track the actual NAV 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. In the future, as new products become available, the fund may invest in ETFs that are actively managed.
Actively managed ETFs will likely not have the transparency of index-based ETFs and, therefore, may be more likely to trade at a larger discount or premium to actual NAVs.
The fund may invest in closed-end funds, which hold securities of U.S. and/or non-U.S. issuers. Because shares of closed-end funds trade on an exchange, investments in closed-end funds may entail the
additional risk that the discount from NAV could increase while the fund holds the shares.
Short Sales.
The fund may
sell securities short. A short sale is effected when it is believed that the price of a particular security will decline, and involves the sale of a security which the fund does not own in the hope of purchasing the same security at a later date at
a lower price. There can be no assurance that the fund will be able to close out a short position (
i.e.,
purchase the same security) at any particular time or at an acceptable or advantageous price. To make delivery to the buyer, the fund
must borrow the security from a broker/dealer through which the short sale is executed and the broker/dealer must deliver the security, on behalf of the fund, to the buyer. The broker/dealer is entitled to retain the proceeds from the short sale
until the fund delivers to such broker/dealer the security sold short. In addition, the fund is required to pay to the broker/dealer the amount of any dividends or interest paid on shares sold short.
The fund will realize a gain if the price of a security declines between the date of the short sale and the date on which the fund
purchases a security to replace the borrowed security. On the other hand, the fund will incur a loss if the price of the security increases between those dates. The amount of any gain will be decreased and the amount of any loss increased by any
premium or interest the fund may be required to pay in connection with a short sale. Short selling is a technique that may be considered speculative and involves risks beyond the initial capital necessary to secure each transaction. It should be
noted that possible losses from short sales differ from those losses that could arise from a cash investment in a security because losses from short sales may be limitless, while the losses from a cash investment in a security cannot exceed the
total amount of the investment in the security. Whenever the fund sells short, it must segregate assets held by its custodian as collateral to cover its obligation and maintain the collateral in an amount at least equal to the market value of the
short position. To the extent that the liquid securities segregated by the funds custodian are subject to gain or loss, and the securities sold short are subject to the possibility of gain or loss, leverage is created. The liquid securities
utilized by the fund in this respect will normally be primarily composed of equity securities that are subject to gains or losses and, accordingly, when the fund executes short sales, leverage will normally be created.
There is also a risk that a borrowed security will need to be returned to the broker/dealer on short notice. If the request for the
return of a security occurs at a time when other short sellers of the security are receiving similar requests, a short squeeze can occur, meaning that the fund might be compelled, at the most disadvantageous time, to replace the borrowed
security with a security purchased on the open market, possibly at prices significantly in excess of the proceeds received earlier.
The fund has a short position in the securities sold short until it delivers to the broker/dealer the securities sold, at which time the fund receives the proceeds of the sale. The fund will normally
close out a short position by purchasing on the open market and delivering to the broker/dealer an equal amount of the securities sold short.
As a hedging technique, the fund may purchase call options to buy securities sold short by the fund. Such options would lock in a future price and protect the fund in case of an unanticipated increase in
the price of a security sold short by the fund.
12
The fund may also make short sales against the box, meaning that at all times
when a short position is open the fund owns an equal amount of such securities or securities convertible into or exchangeable, without payment of further consideration, for securities of the same issues as, and in an amount equal to, the securities
sold short. Short sales against the box result in a constructive sale and require the fund to recognize any gain unless an exception to the constructive sale rule applies.
The fund may hold no more than 25% of the funds net assets (taken at the then-current market value) as required collateral for
short sales at any one time.
Securities Lending.
Consistent with applicable regulatory requirements, the fund may lend
portfolio securities to brokers, dealers and other financial organizations meeting capital and other credit requirements or other criteria established by the Board. The fund will not lend portfolio securities to affiliates of Legg Mason unless it
has applied for and received specific authority to do so from the SEC. From time to time, the fund may pay to the borrower and/or a third party which is unaffiliated with the fund or Legg Mason and is acting as a finder a part of the
interest earned from the investment of collateral received for securities loaned. Although the borrower will generally be required to make payments to the fund in lieu of any dividends the fund would have otherwise received had it not loaned the
shares to the borrower, such payments will not be treated as qualified dividend income for purposes of determining what portion of the funds regular dividends (as defined below) received by individuals may be taxed at the rates
generally applicable to long-term capital gains (see Taxes below).
Requirements of the SEC, which may be subject
to future modification, currently provide that the following conditions must be met whenever the fund lends its portfolio securities: (a) the fund must receive at least 100% cash collateral or equivalent securities from the borrower;
(b) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (c) the fund must be able to terminate the loan at any time; (d) the fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (e) the fund may pay only reasonable custodian fees in connection with the loan; and (f) voting
rights on the loaned securities may pass to the borrower. However, if a material event adversely affecting the investment in the loaned securities occurs, the fund must terminate the loan and regain the right to vote the securities.
The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. The fund could also lose money if its short-term investment of the cash collateral declines in value over the period
of the loan. Loans will be made to firms deemed by the subadviser to be of good standing and will not be made unless, in the judgment of the subadviser, the consideration to be earned from such loans would justify the risk.
Derivatives.
General.
The fund may invest in certain derivative instruments (also called Financial Instruments), discussed below, to attempt to hedge its investments, among other things, as
described in the Prospectus. The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the CFTC). In addition, the
funds ability to use Financial Instruments may be limited by tax considerations. In addition to the instruments, strategies and risks described below, the subadviser expects that additional opportunities in connection with Financial
Instruments and other similar or related techniques may become available. These new opportunities may become available as the 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 to the extent that they are consistent with the funds investment objective and are permitted by its investment limitations and applicable
regulatory authorities. The fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.
13
Recent legislation calls for new regulation of the derivatives markets. The extent and
impact of the regulations are not yet fully known and may not be for some time. Any new regulations could adversely affect the value, availability and performance of Financial Instruments, may make them more costly, and may limit or restrict their
use by the fund.
Each Financial Instrument purchased for the fund is reviewed and analyzed by the subadviser to assess the
risk and reward of each such instrument in relation to the funds investment strategy. The decision to invest in derivative instruments or conventional securities is made by measuring the respective instruments ability to provide value to
the fund.
Hedging strategies can be broadly categorized as short hedges and long hedges. A short
hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential declines in the value of one or more investments held in the funds portfolio. In a short hedge, the fund takes a position in a Financial
Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged.
Conversely,
a long hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that the fund intends to acquire. In a long hedge, the fund takes a position in
a Financial Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, the fund does
not own a corresponding security and, therefore, the transaction does not relate to a security the fund owns. Rather, it relates to a security that the fund intends to acquire. If the fund does not complete the hedge by purchasing the security as
anticipated, the effect on the funds portfolio is the same as if the transaction were entered into for speculative purposes.
Financial Instruments on securities may be used to attempt to hedge against price movements in one or more particular securities positions that the fund owns or intends to acquire. Financial Instruments
on indexes, in contrast, may be used to attempt to hedge against price movements in market sectors in which the fund has invested or expects to invest. Financial Instruments on debt securities may be used to hedge either individual securities or
broad debt market sectors.
Special Risks.
The use of Financial Instruments involves special considerations and risks,
certain of which are described below. In general, these techniques may increase the volatility of the fund and may involve a small investment of cash relative to the magnitude of the risk assumed.
(1)
|
Successful use of most Financial Instruments depends upon the subadvisers ability to predict movements of the overall securities, currency and interest rate
markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed, and use of Financial Instruments could result in a loss, regardless of
whether the intent was to enhance returns or manage risk.
|
(2)
|
When Financial Instruments are used for hedging purposes, the historical correlation between price movements of a Financial Instrument and price movements of the
investments being hedged might change so as to make the hedge less effective or unsuccessful. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a change in correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The
effectiveness of hedges using Financial Instruments on indexes will depend on the degree to which correlation between price movements in the index and price movements in the securities being hedged can be accurately predicted.
|
Because there are a limited number of types of exchange-traded options and futures contracts, it is likely that
the standardized contracts available will not match the funds current or anticipated investments exactly. The fund may invest in options and futures contracts based on securities with different issuers,
14
maturities or other characteristics from the securities in which it typically invests, which involves the risk that the options or futures position will not track the performance of the
funds other investments.
Options and futures prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments match the funds investments well. Options and futures prices are affected by factors which may not affect security prices the same way, such as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument and the time remaining until expiration of the contract.
Imperfect correlation may
also result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures are traded as compared to securities or from the imposition of daily price fluctuation
limits or trading halts. The fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all cases. If price changes in the funds options or futures positions have a low correlation with its other investments, the positions may fail to produce anticipated
gains or result in losses that are not offset by gains in other investments.
(3)
|
If successful, the hedging strategies discussed above can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements.
However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if the fund entered into a short hedge because its subadviser projected a decline in the price of a security
in the funds portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument
declined by more than the increase in the price of the security, the fund could suffer a loss. In either such case, the fund would have been in a better position had it not attempted to hedge at all.
|
(4)
|
The fund might be required to maintain segregated assets as cover or make margin payments when it takes positions in Financial Instruments involving
obligations to third parties (
i.e.
, Financial Instruments other than purchased options). If the fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or
make such payments until the position expired or matured. These requirements might impair the funds ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so or require that the fund
sell a portfolio security at a disadvantageous time.
|
(5)
|
The fund may be subject to the risk that the other party to a Financial Instrument (the counterparty) will not be able to honor its financial obligation to
the fund.
|
(6)
|
Many Financial Instruments are traded in institutional markets rather than on an exchange. Nevertheless, many Financial Instruments are actively traded and can be
priced with as much accuracy as conventional securities. Financial Instruments that are custom designed to meet the specialized investment needs of a relatively narrow group of institutional investors such as the fund are not readily marketable and
are subject to the funds restrictions on illiquid investments.
|
The funds ability to close out a
position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the fund.
Options, Futures and Currency Strategies.
The fund may use forward currency contracts and certain options and futures strategies to, among other things, attempt to hedge its portfolio,
i.e.
,
to reduce the overall level of investment risk normally associated with the fund. There can be no assurance that such efforts will succeed.
To attempt to hedge against adverse movements in exchange rates between currencies, the fund may enter into forward currency contracts for the purchase or sale of a specified currency at a specified
future date. Such contracts may involve the purchase or sale of a foreign currency against the U.S. dollar or may involve two
15
foreign currencies. The fund may enter into forward currency contracts either with respect to specific transactions or with respect to its portfolio positions. For example, when the subadviser
anticipates making a purchase or sale of a security, it may enter into a forward currency contract in order to set the rate (either relative to the U.S. dollar or another currency) at which the currency exchange transaction related to the purchase
or sale will be made (transaction hedging). Further, when the subadviser believes that a particular currency may decline compared to the U.S. dollar or another currency, the fund may enter into a forward currency contract to sell the
currency the subadviser expects to decline in an amount approximating the value of some or all of the funds securities denominated in that currency. When the subadviser believes that one currency may decline against a currency in which some or
all of the portfolio securities held by the fund are denominated, it may enter into a forward currency contract to buy the currency expected to appreciate for a fixed amount (position hedging). In this situation, the fund may, in the
alternative, enter into a forward currency contract to sell a different currency for a fixed amount of the currency expected to decline where the subadviser believes that the value of the currency to be sold pursuant to the forward contract will
fall whenever there is a decline in the value of the currency in which portfolio securities of the fund are denominated (cross hedging). The funds custodian places cash or other liquid assets in a separate account of the fund
having a value equal to the aggregate amount of the funds commitments under forward currency contracts entered into with respect to position hedges and cross-hedges. If the value of the securities placed in a separate account declines,
additional cash or securities are placed in the account on a daily basis so that the value of the account will equal the amount of the funds commitments with respect to such contracts.
The fund may write covered call options and purchase put and call options on currencies to hedge against movements in exchange rates and
on debt securities to hedge against the risk of fluctuations in the prices of securities held by the fund or which the subadviser intends to include in its portfolio. The fund also may use interest rate futures contracts and options thereon to hedge
against changes in the general level in interest rates.
The fund may write call options on securities and currencies only if
they are covered and such options must remain covered so long as the fund is obligated as a writer. A call option written by the fund is covered if the fund owns the securities or currency underlying the option or has an absolute and
immediate right to acquire that security or currency without additional cash consideration (or for additional cash consideration held in a segregated account by the funds custodian) upon conversion or exchange of other securities or currencies
held in its portfolio. A written call option is also covered if the fund holds on a share-for-share basis a purchased call on the same security or holds a call on the same currency as the call written where the exercise price of the call held is
equal to less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the fund in cash or other liquid assets.
The use of forward currency contracts, options and futures involves certain investment risks and transaction costs to which the fund
might not otherwise be subject. These risks include: dependence on the subadvisers ability to predict movements in the prices of individual debt securities, fluctuations in the general fixed income markets and movements in interest rates and
currency markets, imperfect correlation between movements in the price of currency, options, futures contracts or options thereon and movements in the price of the currency or security hedged or used for cover; the fact that skills and techniques
needed to trade options, futures contracts and options thereon or to use forward currency contracts are different from those needed to select the securities in which the fund invests; the lack of assurance that a liquid market will exist for any
particular option, futures contract or options thereon at any particular time; and the possible need to defer or accelerate closing out certain options, futures contracts and options thereon in order to continue to qualify for the beneficial tax
treatment afforded regulated investment companies under the Code.
Futures Contracts and Options on Futures Contracts.
The fund may invest in stock index futures contracts and options on futures contracts that are traded on a domestic exchange or board of trade.
The purpose of entering into a futures contract is to protect the fund from fluctuations in the value of securities without actually buying or selling the securities. For example, in the case of stock
index futures
16
contracts, if the fund anticipates an increase in the price of stocks that it intends to purchase at a later time, the fund could enter into contracts to purchase the stock index (known as taking
a long position) as a temporary substitute for the purchase of stocks. If an increase in the market occurs that influences the stock index as anticipated, the value of the futures contracts increases and thereby serves as a hedge against
the funds not participating in a market advance. The fund then may close out the futures contracts by entering into offsetting futures contracts to sell the stock index (known as taking a short position) as it purchases individual
stocks. The fund can accomplish similar results by buying securities with long maturities and selling securities with short maturities. But by using futures contracts as an investment tool to reduce risk, given the greater liquidity in the futures
market, it may be possible to accomplish the same result more easily and more quickly.
No consideration will be paid or
received by the fund upon the purchase or sale of a futures contract. Initially, the fund will be required to deposit with the broker an amount of cash or cash equivalents equal to approximately 1% to 10% of the contract amount (this amount is
subject to change by the exchange or board of trade on which the contract is traded and brokers or members of such board of trade may charge a higher amount). This amount is known as initial margin and is in the nature of a performance
bond or good faith deposit on the contract, which is returned to the fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. Subsequent payments, known as variation margin, to and from the
broker, will be made daily as the price of the index or securities underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as marking-to-market. In
addition, when the fund enters into a long position in a futures contract or an option on a futures contract, it must maintain an amount of cash or cash equivalents equal to the total market value of the underlying futures contract, less amounts
held in the funds commodity brokerage account at its broker. At any time prior to the expiration of a futures contract, the fund may elect to close the position by taking an opposite position, which will operate to terminate the funds
existing position in the contract.
Positions in futures contracts may be closed out only on the exchange on which they were
entered into (or through a linked exchange) and no secondary market exists for those contracts. In addition, although the fund intends to enter into futures contracts only if there is an active market for the contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that limit. It is possible that futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to substantial losses. In such event, and in the event of adverse price movements, the fund would be required to make daily cash payments of variation margin; in such
circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may partially or completely offset losses on the futures contract. As described above, however, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and thus provide an offset to losses on the futures contract.
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 with respect to the fund under the CEA. As a result, effective
December 31, 2012, the fund is limited in its ability to use commodity futures (which include futures on broad-based securities indexes and interest rate futures) or options on commodity futures, engage in certain swaps transactions or make
certain other investments (whether directly or indirectly through investments in other investment vehicles) for purposes other than bona fide hedging, as defined in the rules of the CFTC. With respect to transactions other than for bona
fide hedging purposes, either: (1) the aggregate initial margin and premiums required to establish the funds positions in such investments 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
17
unrealized losses on any such positions). 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 futures, options or swaps markets.
Interest Rate Futures Contracts.
An interest rate futures contract is an
agreement to take or make delivery of either: (i) an amount of cash equal to the difference between the value of a particular index of debt securities at the beginning and at the end of the contract period; or (ii) a specified amount of a
particular debt security at a future date at a price set at the time of the contract. For example, if the fund owns bonds and interest rates are expected to increase, the fund might sell futures contracts on debt securities having characteristics
similar to those held in the portfolio. Such a sale would have much the same effect as selling an equivalent value of the debt securities owned by the fund. If interest rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the futures contracts to the fund would increase at approximately the same rate, thereby keeping the NAV of the fund from declining as much as it otherwise would have. The fund could accomplish similar results by selling
bonds with longer maturities and investing in bonds with shorter maturities when interest rates are expected to increase. However, since the futures market may be more liquid than the cash market, the use of futures contracts as a risk management
technique allows the fund to maintain a defensive position without having to sell its portfolio securities.
Similarly when
the subadviser expects that interest rates may decline, the fund may purchase interest rate futures contracts in an attempt to hedge against having to make subsequently anticipated purchases of bonds at the higher prices subsequently expected to
prevail. Since the fluctuations in the value of appropriately selected futures contracts should be similar to that of the bonds that would be purchased, the fund could take advantage of the anticipated rise in the cost of the bonds without actually
buying them until the market had stabilized. At that time, the fund could make the intended purchase of the bonds in the cash market and the futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures contract, adjustments are made to recognize differences in
value arising from the delivery of securities with a different interest rate from that specified in the contract. In some (but not many) cases, securities called for by a futures contract may have a shorter term than the term of the futures contract
and, consequently, may not in fact have been issued when the futures contract was entered.
Options on Securities.
The
fund may engage in the writing of covered call options. The fund may also purchase put options and enter into closing transactions.
The principal reason for writing covered call options on securities is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. In return
for a premium, the writer of a covered call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline in the price of the underlying security. Similarly, the principal reason for writing covered put options is to realize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The size of the premiums the fund may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their
option-writing activities.
Options written by the fund will normally have expiration dates between one and six months from
the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities at the times the options are written. In the case of call options, these exercise prices are referred to as
in-the-money, at-the-money and out-of-the-money, respectively.
The fund may write
(a) in-the-money call options when the subadviser expects the price of the underlying security to remain flat or decline moderately during the option period, (b) at-the-money call options when the
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subadviser expects the price of the underlying security to remain flat or advance moderately during the option period and (c) out-of-the-money call options when the subadviser expects that
the price of the security may increase but not above a price equal to the sum of the exercise price plus the premiums received from writing the call option. In any of the preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Writing out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be utilized in the same market environments as such call options are used in equivalent transactions.
So long as the obligation of the fund as the writer of an option continues, the fund may be assigned an exercise notice by the broker/dealer through which the option was sold, requiring it to deliver, in
the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or the fund effects a closing purchase transaction. The fund can no
longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. To secure its obligation to deliver the underlying security when it writes a call option, or to pay for the underlying security when
it writes a put option, the fund will be required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (OCC) or similar clearing corporation and the securities
exchange on which the option is written.
An option position may be closed out only where there exists a secondary market for
an option of the same series on a recognized securities exchange or in the over-the-counter market. The fund expects to write options only on national securities exchanges or in the over-the-counter market. The fund may purchase put options issued
by the OCC or in the over-the-counter market.
The fund may realize a profit or loss upon entering into a closing transaction.
In cases in which the fund has written an option, it will realize a profit if the cost of the closing purchase transaction is less than the premium received upon writing the original option and will incur a loss if the cost of the closing purchase
transaction exceeds the premium received upon writing the original option. Similarly, when the fund has purchased an option and engages in a closing sale transaction, whether it recognizes a profit or loss will depend upon whether the amount
received in the closing sale transaction is more or less than the premium the fund initially paid for the original option plus the related transaction costs.
Although the fund generally will purchase or write only those options for which the subadviser believes there is an active secondary market so as to facilitate closing transactions, there is no assurance
that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist or may cease to exist. In the past,
for example, higher than anticipated trading activity or order flow, or other unforeseen events, have at times rendered certain of the facilities of the OCC and national securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of
customers orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer, the fund is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing the maximum number of calls and puts of each class which may be held or written, or exercised within certain periods, by an investor
or group of investors acting in concert (regardless of whether the options are written on the same or different securities exchanges or are held, written or exercised in one or more accounts or through one or more brokers). It is possible that the
fund and other clients of the manager or subadviser and certain of their affiliates may be considered to be such a group. A securities exchange may order the liquidation of positions found to be in violation of these limits, and it may impose
certain other sanctions.
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In the case of options written by the fund that are deemed covered by virtue of the
funds holding convertible or exchangeable preferred stock or debt securities, the time required to convert or exchange and obtain physical delivery of the underlying common stock with respect to which the fund has written options may exceed
the time within which the fund must make delivery in accordance with an exercise notice. In these instances, the fund may purchase or temporarily borrow the underlying securities for purposes of physical delivery. By so doing, the fund will not bear
any market risk because the fund will have the absolute right to receive from the issuer of the underlying security an equal number of shares to replace the borrowed stock, but the fund may incur additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
Although the subadviser will attempt to take appropriate measures to minimize
the risks relating to the funds writing of call options and purchasing of put and call options, there can be no assurance that the fund will succeed in its option-writing program.
Stock Index Options.
The fund may purchase put and call options and write call options on domestic stock indexes listed on
domestic exchanges. A stock index fluctuates with changes in the market values of the stocks included in the index. Some stock index options are based on a broad market index such as the New York Stock Exchange (NYSE) Composite Index or
the Canadian Market Portfolio Index, or a narrower market or industry index such as the S&P 100 Index, the NYSE Arca Oil Index or the NYSE Arca Computer Technology Index.
Options on stock indexes are generally similar to options on stock except for the delivery requirements. Instead of giving the right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash exercise settlement amount equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed index multiplier. Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option
expressed in dollars or a foreign currency, as the case may be, times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index
options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedging technique will depend upon the extent to which price
movements in the portion of the securities portfolio of the fund being hedged correlate with price movements of the stock index selected. Because the value of an index option depends upon movements in the level of the index rather than the price of
a particular stock, whether the fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry
or market segment, rather than movements in the price of a particular stock. Accordingly, successful use by the fund of options on stock indexes will be subject to the subadvisers ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual stocks.
Investments by Funds of Funds.
Certain investment companies, including those that are affiliated with the fund because they are managed by an affiliate of the manager, may invest in the fund as
part of an asset allocation strategy. These investment companies are referred to as funds of funds because they invest primarily in other investment companies.
From time to time, the fund may experience relatively large redemptions or investments due to rebalancings of the assets of a fund of funds invested in the fund. In the event of such redemptions or
investments, the fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so. If this were to
20
occur, the effects of the rebalancing trades could adversely affect the funds performance. Redemptions of fund shares due to rebalancings could also accelerate the realization of taxable
capital gains in the fund and might increase brokerage and/or other transaction costs.
The funds subadviser may be
subject to potential conflicts of interest in connection with investments by affiliated funds of funds. For example, the subadviser may have an incentive to permit an affiliated fund of funds to become a more significant shareholder (with the
potential to cause greater disruption to the fund) than would be permitted for an unaffiliated investor. The subadviser has committed to the Board that it will resolve any potential conflict in the best interests of the shareholders of the fund in
accordance with its fiduciary duty to the fund. As necessary, the subadviser will take such actions as it deems appropriate to minimize potential adverse impacts, including redemption of shares in-kind, rather than in cash. Similar issues may result
from investment in the fund by Section 529 plans.
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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 shares of the fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting power of the fund present at a shareholder
meeting, if the holders of more than 50% of the voting power of the fund are present in person or represented by proxy, or (b) more than 50% of the voting power of the fund. 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.
Fundamental Investment
Policies
The funds fundamental investment policies are as follows:
(1) The fund may not borrow money except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff
or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(2) The fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other
authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(3) The fund may lend money or other assets to the extent permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or
(ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(4) The fund may not issue
senior securities except as permitted by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff
or other authority.
(5) The fund may not purchase or sell real estate except as permitted by (i) the 1940 Act or
interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(6) The fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act or
interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(7) Except as permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate
jurisdiction, the fund may not make any investment if, as a result, the funds investments will be concentrated in any one industry.
With respect to the fundamental policy relating to borrowing money set forth in (1) above, the 1940 Act permits the 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 at all times an asset coverage of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of the funds total assets (including amounts
22
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 borrowings and thus subject to the 1940 Act restrictions. Borrowing money to increase portfolio holdings is known as leveraging. Borrowing, especially when used for leverage, may cause the value of the funds shares
to be more volatile than if the fund did not borrow. This is because borrowing tends to magnify the effect of any increase or decrease in the value of the funds portfolio holdings. Borrowed money thus creates an opportunity for greater gains,
but also greater losses. To repay borrowings, the fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with borrowing money, and these costs would offset and could eliminate the
funds net investment income in any given period. Currently, the fund 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 the fund from
engaging in the underwriting business or from underwriting the securities of other issuers; in fact, the 1940 Act permits the fund to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently
are that the amount of the funds underwriting commitments, when added to the value of the funds investments in issuers where the fund owns more than 10% of the outstanding voting securities of those issuers, cannot exceed the 25% cap. A
fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the 1933 Act. Under the 1933 Act, an underwriter may be liable for material omissions or misstatements in an
issuers registration statement or prospectus. Securities purchased from an issuer and not registered for sale under the 1933 Act are considered restricted securities. There may be a limited market for these securities. If these securities are
registered under the 1933 Act, they may then be eligible for sale but participating in the sale may subject the seller to underwriter liability. These risks could apply to a fund investing in restricted securities. Although it is not believed that
the application of the 1933 Act provisions described above would cause the fund to be engaged in the business of underwriting, the policy in (2) above will be interpreted not to prevent the fund from engaging in transactions involving the
acquisition or disposition of portfolio securities, regardless of whether the fund may be considered to be an underwriter under the 1933 Act.
With respect to the fundamental policy relating to lending set forth in (3) above, the 1940 Act does not prohibit the fund from making loans; however, SEC staff interpretations currently prohibit
funds from lending more than one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that
security back to the original seller on an agreed-upon date at a price that reflects current interest rates. The SEC frequently treats repurchase agreements as loans.) While lending securities may be a source of income to the fund, as with other
extensions of credit, there are risks of delay in recovery or even loss of rights in the underlying securities should the borrower fail financially. However, loans would be made only when the funds 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 the fund from issuing senior securities except that the fund may borrow money in amounts of up to one-third of the funds total assets from banks for
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any purpose. The fund may also borrow up to 5% of the funds total assets from banks or other lenders for temporary purposes, and these borrowings are not considered senior securities. The
issuance of senior securities by 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 the fund from owning real estate; however, the fund is limited in the amount of
illiquid assets it may purchase. Investing in real estate may involve risks, including that real estate is generally considered illiquid and may be difficult to value and sell. Owners of real estate may be subject to various liabilities, including
environmental liabilities. To the extent that investments in real estate are considered illiquid, the current SEC staff position generally limits the funds purchases of illiquid securities to 15% of net assets. The policy in (5) above
will be interpreted not to prevent the fund from investing in real estate-related companies, companies whose businesses consist in whole or in part of investing in real estate, instruments (like mortgages) that are secured by real estate or
interests therein, or real estate investment trust securities.
With respect to the fundamental policy relating to commodities
set forth in (6) above, the 1940 Act does not prohibit the fund from owning commodities, whether physical commodities and contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities
and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, the fund is limited in the amount of illiquid assets it may purchase. To the extent that investments in commodities are considered
illiquid, the current SEC staff position generally limits the funds purchases of illiquid securities to 15% of net assets. If the fund were to invest in a physical commodity or a physical commodity-related instrument, the fund would be subject
to the additional risks of the particular physical commodity and its related market. The value of commodities and commodity-related instruments may be extremely volatile and may be affected either directly or indirectly by a variety of factors.
There may also be storage charges and risks of loss associated with physical commodities. The policy in (6) above will be interpreted to permit investments in ETFs that invest in physical and/or financial commodities.
With respect to the fundamental policy relating to concentration set forth in (7) above, the 1940 Act does not define what
constitutes concentration in an industry. The SEC staff has taken the position that investment of 25% or more of a funds total assets in one or more issuers conducting their principal activities in the same industry or group of
industries constitutes concentration. It is possible that interpretations of concentration could change in the future. A fund that invests a significant percentage of its total assets in a single industry may be particularly susceptible to adverse
events affecting that industry and may be more risky than a fund that does not concentrate in an industry. The policy in (7) above will be interpreted to refer to concentration as that term may be interpreted from time to time. The policy also
will be interpreted to permit investment without limit in the following: securities of the U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies,
instrumentalities or political subdivisions; securities of foreign governments; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry.
There also will be no limit on investment in issuers domiciled in a single jurisdiction or country. The policy also will be interpreted to give broad authority to the fund as to how to classify issuers within or among industries.
The funds fundamental policies will be interpreted broadly. For example, the policies will be interpreted to refer to the 1940 Act
and the related rules as they are in effect from time to time, and to interpretations and modifications of or relating to the 1940 Act by the SEC and others as they are given from time to time. When a
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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 Policies
The funds non-fundamental investment policies are as follows:
1. The fund may not invest in other registered open-end management 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. The foregoing investment policy does not restrict the fund from (i) acquiring securities of other registered investment companies in connection
with a merger, consolidation, reorganization, or acquisition of assets, or (ii) purchasing the securities of registered investment companies, to the extent otherwise permissible under Section 12(d)(1) of the 1940 Act.
2. 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 that are illiquid.
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. Under the 1940 Act, the fund cannot change its classification from diversified to
non-diversified without shareholder approval.
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 net short-term capital gains, shareholders will be taxed on such gains at ordinary tax rates (except shareholders who invest through individual retirement accounts
(IRAs) and other retirement plans which are not taxed currently on accumulations in their accounts).
Portfolio
turnover will not be a limiting factor should the subadviser or Western Asset, as applicable, deem it advisable to purchase or sell securities.
For the fiscal years ended September 30, 2011 and September 30, 2012, the funds portfolio turnover rates were as follows:
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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 is c/o R. Jay Gerken, 620 Eighth Avenue, 49th Floor, New York, New York 10018. Information pertaining to the Trustees and officers of the fund is set forth below.
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Name and Year of Birth
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Position(s)
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Principal Occupation(s)
During Past 5
Years
|
|
Number of
Funds
in Fund
Complex
Overseen
by Trustee
|
|
|
Other
Board
Memberships
Held by Trustee
|
Independent Trustees#:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul R. Ades
Born 1940
|
|
Trustee
|
|
Since 1983
|
|
Paul R. Ades, PLLC (law firm) (since 2000)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Andrew L. Breech
Born 1952
|
|
Trustee
|
|
Since 1991
|
|
President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Dwight B. Crane
Born 1937
|
|
Trustee
|
|
Since 1981
|
|
Professor Emeritus, Harvard Business School (since 2007); formerly, Professor, Harvard Business School (1969 to 2007); Independent Consultant (since 1969)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Frank G. Hubbard
Born 1937
|
|
Trustee
|
|
Since 1993
|
|
President, Avatar International Inc. (business development) (since 1998)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Howard J. Johnson
Born 1938
|
|
Trustee
|
|
From 1981 to 1998 and since 2000
|
|
Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Jerome H. Miller
Born 1938
|
|
Trustee
|
|
Since 1995
|
|
Retired
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Ken Miller
Born 1942
|
|
Trustee
|
|
Since 1983
|
|
Retired; formerly, President, Young Stuff Apparel Group, Inc. (apparel manufacturer), division of
Li & Fung (1963 to 2012)
|
|
|
52
|
|
|
None
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
John J. Murphy
Born 1944
|
|
Trustee
|
|
Since 2002
|
|
Founder and Senior Principal, Murphy Capital Management (investment management) (since 1983)
|
|
|
52
|
|
|
Trustee, UBS Funds (52 funds) (since 2008); Trustee, Consulting Group Capital Markets Funds (11 funds) (since 2002); formerly, Director, Nicholas Applegate Institutional Funds
(12 funds) (2005 to 2010); formerly, Director, Atlantic Stewardship Bank (2004 to 2005); formerly, Director, Barclays International Funds Group Ltd. and affiliated companies (1983 to 2003)
|
|
|
|
|
|
|
Thomas F. Schlafly
Born 1948
|
|
Trustee
|
|
Since 1983
|
|
President, The Saint Louis Brewery, Inc. (brewery) (since 1989); Partner, Thompson Coburn LLP (law firm) (since 2009); formerly, Of Counsel, Husch Blackwell Sanders LLP (law firm)
and its predecessor firms (1984 to 2009)
|
|
|
52
|
|
|
Director, Citizens National Bank of Greater St. Louis (since 2006)
|
|
|
|
|
|
|
Jerry A. Viscione
Born 1944
|
|
Trustee
|
|
Since 1993
|
|
Retired
|
|
|
52
|
|
|
None
|
27
|
|
|
|
|
|
|
|
|
|
|
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
|
Interested Trustee and Officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jay Gerken
Born 1951
|
|
Trustee, President, Chairman and Chief Executive Officer
|
|
Since 2002
|
|
Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.) (since 2005); Officer and Trustee/Director of 162 funds associated with Legg Mason Partners Fund
Advisor, LLC (LMPFA) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (CEO) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management
LLC (SBFM) (formerly a registered investment adviser) (since 2002)
|
|
162
|
|
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 respective successor has been duly elected and qualified or until his earlier death, resignation, retirement or removal.
|
**
|
Indicates the earliest year in which the Trustee became a board member for a fund in the Legg Mason fund complex.
|
|
Mr. Gerken 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.
|
28
|
|
|
|
|
|
|
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
Legg Mason
620 Eighth Avenue
49th 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)
|
|
|
|
|
Vanessa Williams
Born 1979
Legg Mason
100 First Stamford Place
6th Floor
Stamford, CT 06902
|
|
Chief Anti-Money Laundering
Compliance Officer
Identity Theft
Prevention Officer
|
|
Since 2011
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);
Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); 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
Legg Mason
100 First Stamford Place
6th 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
Legg Mason
100 First Stamford Place
6th 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 SBFM (since
2002)
|
29
|
|
|
|
|
|
|
Name, Year of Birth and Address
|
|
Position(s)
with Trust
|
|
Term of Office*
and Length of
Time
Served**
|
|
Principal Occupation(s)
During Past 5 Years
|
Richard F. Sennett
Born 1970
Legg Mason
100 International Drive
5th Floor
Baltimore, MD 21202
|
|
Principal Financial Officer
|
|
Since 2011
|
|
Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); 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)
|
|
|
|
|
Albert Laskaj
Born 1977
Legg Mason
100 First Stamford Place
6th Floor
Stamford, CT 06902
|
|
Treasurer
|
|
Since 2010
|
|
Vice President of Legg Mason & Co. (since 2008); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of
certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010)
|
|
|
|
|
Jeanne M. Kelly
Born 1951
Legg Mason
620 Eighth Avenue
49th 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); 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 for a fund in the Legg Mason fund complex.
|
Each Trustee previously served as a trustee or director of certain predecessor funds in the fund complex, and each Trustee was thus
initially selected by the board of the applicable 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 equity
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 equity mutual funds, which
experience would be further developed and enhanced over time.
In connection with the restructuring, the Trustees were
selected to join the Board based upon the following as to each Trustee: character and integrity; service as a board member of predecessor funds; 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 the requirements of the Trusts retirement policies; as to each Trustee other than Mr. Gerken, the Trustees status as not being an interested person of
the fund, as defined in the 1940 Act; and, as to Mr. Gerken, his status as a representative of Legg Mason. Independent Trustees constitute more than 75% of the Board. Mr. Gerken serves as Chairman of the Board and is an interested person
of the fund.
30
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 attributes and skills. The Board believes that the Trustees ability to review critically, evaluate,
question and discuss information provided to them, to interact effectively with the manager, the subadviser and Western Asset, other service providers, counsel and the independent registered public accounting firm, and to exercise effective business
judgment in the performance of their duties support this conclusion. In addition, the following specific experience, qualifications, attributes and/or skills apply to each Trustee.
Each Trustee has served as a board member of the fund and other funds (or predecessor funds) in the fund complex for at least eight
years. Mr. Ades has substantial experience practicing law and advising clients with respect to various business transactions. Mr. Breech has substantial experience as the chief executive of a private corporation. Mr. Crane has
substantial experience as an economist, academic and business consultant. Mr. Hubbard has substantial experience in business development and was a senior executive of an operating company. Mr. Johnson has substantial experience as the
chief executive of an operating company and in the financial services industry, including as an actuary and pension consultant. Mr. Jerome Miller had substantial experience as an executive in the asset management group of a major broker/dealer.
Mr. Ken Miller has substantial experience as a senior executive of an operating company. Mr. Murphy has substantial experience in the asset management business and has current and prior service on the boards of other mutual funds and
corporations. Mr. Schlafly has substantial experience practicing law and also serves as the president of a private corporation and as director of a bank. Mr. Viscione has substantial experience as an academic and senior executive of a
major university. Mr. Gerken has been the Chairman and Chief Executive Officer of the Trust and other funds in the fund complex since 2002 and has substantial experience as an executive and portfolio manager and in leadership roles with Legg
Mason and affiliated entities. References to the experience, qualifications, attributes and skills of Trustees are pursuant to requirements of the SEC, do not constitute holding out of the Board or any Trustee as having any special expertise, and
shall not impose any greater responsibility or liability on any such person or on the Board.
The Board has five standing
Committees: the Audit Committee, the Contract Committee, the Performance Committee, the Governance Committee, and the Compensation and Nominating Committee (which is a sub-committee of the Governance Committee). Each Committee is chaired by an
Independent Trustee. The Audit Committee and the Governance Committee are composed of all of the Independent Trustees. The Contract Committee is composed of four Independent Trustees. The Performance Committee is composed of three Independent
Trustees and the Chairman of the Board. The Compensation and Nominating Committee is composed of four Independent Trustees. The Lead Independent Trustee (the Lead Trustee) serves as the Chair of the Governance Committee. Where deemed
appropriate, the Board may constitute ad hoc committees.
The Lead Trustee and the chairs of the Audit and Performance
Committees work with the Chairman of the Board to set the agendas for Board and committee meetings. The Lead Trustee also serves as a key point person for interaction between management and the Independent Trustees. 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 is appropriate,
given Legg Masons sponsorship of the fund and that investors have selected Legg Mason to provide overall management to the fund. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information
between the Independent Trustees and management, including the funds subadviser and Western Asset.
The Audit Committee
oversees the scope of the funds audit, the funds accounting and financial reporting policies and practices and its internal controls. The Audit Committee assists the Board in fulfilling its responsibility for oversight of the integrity
of the funds accounting, auditing and financial reporting practices, the qualifications and independence of the funds independent registered public accounting firm and the funds
31
compliance with legal and regulatory requirements. The Audit Committee approves, and recommends to the Board for ratification, the selection, appointment, retention or termination of the
funds independent registered public accounting firm and approves the compensation of the independent registered public accounting firm. The Audit Committee also approves all audit and permissible non-audit services provided to the fund by the
independent registered public accounting firm and all permissible non-audit services provided by the funds independent registered public accounting firm to its manager and any affiliated service providers if the engagement relates directly to
the funds operations and financial reporting. The Audit Committee also assists the Board in fulfilling its responsibility for the review and negotiation of the funds investment management and subadvisory arrangements.
The Contract Committee is charged with assisting the Board in requesting and evaluating such information from the manager, the subadviser
and Western Asset as may reasonably be necessary to evaluate the terms of the funds investment management agreement, subadvisory arrangements and distribution arrangements.
The Performance Committee is charged with assisting the Board in carrying out its oversight responsibilities over the fund and fund
management with respect to investment management, objectives, strategies, policies and procedures, performance and performance benchmarks, and the applicable risk management process.
The Governance Committee is charged with overseeing Board governance and related Trustee practices, including selecting and nominating
persons for election or appointment by the Board as Trustees of the Trust. The Governance Committee has formed the Compensation and Nominating Committee, the function of which is to recommend to the Board the appropriate compensation for serving as
a Trustee on the Board. In addition, the Compensation and Nominating Committee is responsible for, among other things, selecting and recommending candidates to fill vacancies on the Board. The Committee may consider nominees recommended by a
shareholder. In evaluating potential nominees, including any nominees recommended by shareholders, the Committee takes into consideration various factors, including, among any others it may deem relevant, character and integrity, business and
professional experience, and whether the committee believes the person has the ability to apply sound and independent business judgment and would act in the interest of the fund and its shareholders. 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.
Service providers to the fund, primarily the funds manager, the subadviser and Western Asset and, as appropriate, their affiliates,
have responsibility for the day-to-day management of the fund, which includes responsibility for risk management. As an integral part of its responsibility for oversight of the fund, the Board oversees risk management of the funds investment
program and business affairs. Oversight of the risk management process is part of the Boards general oversight of the fund and its service providers. The Board has emphasized to the funds manager, the subadviser and Western Asset the
importance of maintaining vigorous risk management. The Board exercises oversight of the risk management process primarily through the Audit Committee and the Performance Committee, and through oversight by the Board itself.
The fund is subject to a number of risks, including 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. The funds manager, the subadviser and Western Asset, the affiliates of the manager, the subadviser and Western Asset, or various 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 Chief Compliance Officer and the managers chief risk officer, as well as
personnel of the subadviser and
32
Western Asset and other service providers, such as the funds independent registered public accounting firm, make periodic reports to the Audit Committee, the Performance Committee or to the
Board 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 inherent limitations.
The Board met 4 times during the fiscal year ended
September 30, 2012. The Audit Committee, the Contract Committee, the Performance Committee, the Governance Committee and the Compensation and Nominating Committee met 4, 1, 4, 4 and 1 time(s), respectively, during the fiscal year ended
September 30, 2012.
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, 2012.
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of Equity Securities in
the Fund ($)
|
|
Aggregate Dollar Range of
Equity
Securities in
Registered Investment
Companies Overseen by
Trustee ($)
|
Independent Trustees
|
|
|
|
|
Paul R. Ades
|
|
10,001-50,000
|
|
Over 100,000
|
Andrew L. Breech
|
|
None
|
|
Over 100,000
|
Dwight B. Crane
|
|
50,001-100,000
|
|
Over 100,000
|
Frank G. Hubbard
|
|
None
|
|
Over 100,000
|
Howard J. Johnson
|
|
None
|
|
Over 100,000
|
Jerome H. Miller
|
|
None
|
|
Over 100,000
|
Ken Miller
|
|
None
|
|
Over 100,000
|
John J. Murphy
|
|
None
|
|
Over 100,000
|
Thomas F. Schlafly
|
|
None
|
|
Over 100,000
|
Jerry A. Viscione
|
|
None
|
|
Over 100,000
|
|
|
|
Interested Trustee
|
|
|
|
|
R. Jay Gerken
|
|
10,001-50,000
|
|
Over 100,000
|
As of December 31, 2012, none of the Independent Trustees or their immediate family members owned
beneficially or of record any securities of the manager, subadviser, Western Asset or distributor of the fund, or of a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with
the manager, subadviser, Western Asset or distributor of the fund.
The Independent Trustees receive a fee for each meeting of
the Board and committee meetings attended and are reimbursed for all out-of-pocket expenses relating to attendance at such meetings. Mr. Gerken, an interested person of the fund, as defined in the 1940 Act, does not receive
compensation from the fund for his service as Trustee, but may be reimbursed for all out-of-pocket expenses relating to attendance at such meetings.
The fund pays a pro rata share of the Trustees fees based upon asset size. The fund currently pays each of the Independent Trustees its pro rata share of: an annual fee of $120,000, plus $20,000 for
each regularly scheduled Board meeting attended in person, and $1,000 for each telephonic Board meeting in which that Trustee participates. The Lead Trustee receives an additional $25,000 per year, the Chair of the Audit Committee receives an
additional $15,000 per year and the Chairs of the Contract Committee, the Performance Committee, and the Compensation and Nominating Committee receive an additional $12,500 per year. Other members of the Contract Committee, the Performance
Committee, and the Compensation and Nominating Committee receive an
33
additional $10,000 per year. Effective January 1, 2013, the Trustee designated as the funds audit committee financial expert (as defined in the instructions to Item 3 of Form N-CSR)
receives an additional $10,000 per year.
Officers of the Trust receive no compensation from the fund, although they may
be reimbursed by the fund for reasonable out-of-pocket travel expenses for attending Board meetings.
Information regarding
compensation paid to the Trustees is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation
from the Fund
(2)
($)
|
|
|
Total Pension or
Retirement Benefits
Paid as part of
Fund
Expenses
(4)
($)
|
|
|
Total Compensation
from Fund Complex
Paid to Trustee
(3)
($)
|
|
|
Number of Portfolios
in Fund Complex
Overseen by Trustee
(2)
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul R. Ades
|
|
|
1,887
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
52
|
|
Andrew L. Breech
|
|
|
1,904
|
|
|
|
None
|
|
|
|
212,500
|
|
|
|
52
|
|
Dwight B. Crane
|
|
|
2,112
|
|
|
|
None
|
|
|
|
235,000
|
|
|
|
52
|
|
Frank G. Hubbard
|
|
|
1,887
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
52
|
|
Howard J. Johnson
|
|
|
2,022
|
|
|
|
None
|
|
|
|
225,000
|
|
|
|
52
|
|
Jerome H. Miller
|
|
|
1,700
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
52
|
|
Ken Miller
|
|
|
1,887
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
52
|
|
John J. Murphy
|
|
|
1,893
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
52
|
|
Thomas F. Schlafly
|
|
|
1,910
|
|
|
|
None
|
|
|
|
212,500
|
|
|
|
52
|
|
Jerry A. Viscione
|
|
|
1,904
|
|
|
|
None
|
|
|
|
212,500
|
|
|
|
52
|
|
Interested Trustee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jay Gerken
(1)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
162
|
|
(1)
|
Mr. Gerken was not compensated for his services as a Trustee because of his affiliation with the manager.
|
(2)
|
Information is for the fiscal year ended September 30, 2012.
|
(3)
|
Information is for the calendar year ended December 31, 2012.
|
(4)
|
Pursuant to prior retirement plans, the fund made payments of $1,644 to former Trustees for the fiscal year ended September 30, 2012.
|
As of January 3, 2013, the Trustees and officers of the Trust, as a group, owned less than 1% of the outstanding shares of the fund.
To the knowledge of the fund, as of January 3, 2013, the following shareholders owned or held of record 5% or more, as
indicated, of the outstanding shares of the following classes of the fund:
|
|
|
|
|
Class
|
|
Name and Address
|
|
Percentage of Ownership
(%)
|
A
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
35.00
|
|
|
|
A
|
|
BNY MELLON INVESTMENT SERVICING (US) INC
FBO PRIMERICA FINANCIAL SERVICES
760 MOORE RD
KING OF PRUSSIA PA 19406-1212
|
|
13.76
|
|
|
|
A
|
|
ING
K-CHOICE
TRUSTEE: RELIANCE TRUST COMPANY
400 ATRIUM
DRIVE
SOMERSET NJ 08873-4162
|
|
7.49
|
34
|
|
|
|
|
Class
|
|
Name and Address
|
|
Percentage of Ownership
(%)
|
A
|
|
HARTFORD LIFE INS CO
SEPARATE ACCOUNT
ATTN: UIT OPERATIONS
PO BOX 2999
HARTFORD CT
06104-2999
|
|
6.64
|
|
|
|
B
|
|
BNY MELLON INVESTMENT SERVICING
(US) INC
FBO PRIMERICA FINANCIAL SERVICES
760 MOORE RD
KING OF PRUSSIA PA 19406-1212
|
|
34.77
|
|
|
|
B
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
18.52
|
|
|
|
B
|
|
FIRST CLEARING, LLC
SPECIAL
CUSTODY ACCT FOR THE
EXCLUSIVE BENEFIT OF CUSTOMER
2801 MARKET STREET
ST LOUIS MO 63103-2523
|
|
12.44
|
|
|
|
B
|
|
PERSHING LLC
1 PERSHING
PLZ
JERSEY CITY NJ 07399-0001
|
|
10.33
|
|
|
|
C
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
51.62
|
|
|
|
I
|
|
JPMORGAN CHASE BANK TTEE TIAA-CREF
AS AGENT FOR
JPMORGAN CHASE BANK RETIREMENT
PLAN PROGRAM TR
3 METROTECH CENTER- 5TH
FLR
BROOKLYN NY 11201-8401
|
|
43.44
|
|
|
|
I
|
|
MLPF&S FOR THE SOLE BENEFIT OF ITS
CUSTOMERS
ATTN: FUND ADMINISTRATION
4800 DEER LAKE DRIVE EAST 3RD FLOOR
JACKSONVILLE FL 32246-6484
|
|
33.43
|
|
|
|
I
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
12.90
|
35
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager
LMPFA serves as
investment manager to the fund, pursuant to an investment management agreement (the Management Agreement). LMPFA provides administrative and certain oversight services to the fund. LMPFA, with offices at 620 Eighth Avenue, New York, New
York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. As of September 30, 2012, LMPFAs total assets under management were approximately $185.8 billion. LMPFA is a wholly-owned subsidiary 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 September 30, 2012, Legg Masons asset management operations had aggregate assets under
management of approximately $650.7 billion.
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 objective, 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 arrangements, as described below.
The manager 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 the 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 and qualification of the funds shares under federal and state laws.
The Management Agreement will
continue in effect for its initial term and thereafter from year to year, provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the fund (as defined in the
1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose.
The Management Agreement provides that the manager may render services to others. The Management Agreement is terminable without penalty on not more than 60 days nor less than 30 days written
notice by the fund when authorized either by a vote of holders of shares representing a majority of the voting power of the outstanding voting securities of the fund (as defined in the 1940 Act) or by a vote of a majority of the Trustees, or by the
manager on not less than 90 days written notice, and will automatically terminate in the event of its assignment (as defined in the 1940 Act). The Management Agreement is not assignable by the Trust except with the consent of the manager. The
Management Agreement provides that neither the manager nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions
for the fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties.
For its services under the Management Agreement, LMPFA receives an investment management fee that is calculated daily and payable monthly at the annual rate of 0.75% of the fund's average daily net
assets.
36
For the fiscal years ended September 30, 2012, 2011 and 2010, the fund paid management
fees to LMPFA as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended September 30
|
|
Gross
Management
Fees ($)
|
|
|
Management Fees
Waived/Expense
Reimbursements ($)
|
|
|
Net Management
Fees (After
Waivers/Expense
Reimbursements) ($)
|
|
2012
|
|
|
1,723,425
|
|
|
|
17,272
|
|
|
|
1,706,153
|
|
2011
|
|
|
2,293,119
|
|
|
|
17,806
|
|
|
|
2,275,313
|
|
2010
|
|
|
2,012,932
|
|
|
|
0
|
|
|
|
2,012,932
|
|
Subadvisory Arrangements
ClearBridge Investments, LLC (ClearBridge or the subadviser) serves as the subadviser to the fund pursuant to a subadvisory agreement between the manager and ClearBridge (the
Subadvisory Agreement). ClearBridge has offices at 620 Eighth Avenue, New York, New York 10018. As of September 30, 2012, ClearBridges total assets under management were approximately $57.1 billion.
Western Asset manages the funds cash and short-term instruments pursuant to an agreement between the manager and Western Asset (the
Western Asset Agreement). 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 September 30, 2012, the total assets under management of Western Asset and its supervised affiliates were approximately $459.7 billion.
ClearBridge 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 September 30, 2012, Legg Masons asset management operations had aggregate assets under management of approximately $650.7 billion.
Under the Subadvisory Agreement and the Western Asset Agreement, subject to the supervision and direction of the Board and the manager,
the subadviser and Western Asset will manage the funds portfolio in accordance with the funds stated investment objective and policies, assist in supervising all aspects of the funds operations, make investment decisions for the
fund, place orders to purchase and sell securities and employ professional portfolio managers and securities analysts who provide research services to the fund.
Each of the Subadvisory Agreement and the Western Asset Agreement will continue in effect for its initial term and thereafter from year to year provided such continuance is specifically approved at least
annually (a) by the Board or by a majority of the outstanding voting securities of the fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in
person at a meeting called for such purpose. The Board or a majority of the outstanding voting securities of the fund (as defined in the 1940 Act) may terminate the Subadvisory Agreement or the Western Asset Agreement without penalty, in each case
on not more than 60 days nor less than 30 days written notice to the subadviser or Western Asset. Each of the subadviser and Western Asset may terminate the Subadvisory Agreement or the Western Asset Agreement, as applicable, on 90
days written notice to the fund and the manager. Each of the Subadvisory Agreement and the Western Asset Agreement may be terminated upon the mutual written consent of the manager and the subadviser or Western Asset, as applicable. Each of the
Subadvisory Agreement and the Western Asset Agreement will terminate automatically in the event of assignment (as defined in the 1940 Act) by the subadviser or Western Asset, as applicable, and shall not be assignable by the manager without the
consent of the subadviser or Western Asset, as applicable.
As compensation for their subadvisory services, the manager pays
the subadviser and Western Asset an aggregate fee equal to 70% of the management fee paid to LMPFA, net of fee waivers and expense reimbursements.
37
Portfolio Managers
The following tables set forth certain additional information with respect to the portfolio managers for the fund. Unless noted otherwise, all information is provided as of September 30, 2012.
Other Accounts Managed by the Portfolio Managers
The table below identifies the portfolio managers, the number of accounts (other than the fund) for which each portfolio manager has day-to-day management responsibilities and the total assets in such
accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, other accounts and, if applicable, the number of accounts and total assets in the accounts where fees are based on performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ($)
|
Peter J. Hable
|
|
Registered investment companies
|
|
5
|
|
2.61 billion
|
|
0
|
|
0
|
|
Other pooled investment vehicles
|
|
1
|
|
98 million
|
|
0
|
|
0
|
|
Other accounts
|
|
14,704
|
|
3.72 billion
|
|
0
|
|
0
|
Mark Bourguignon
|
|
Registered investment companies
|
|
3
|
|
345 million
|
|
0
|
|
0
|
|
Other pooled investment vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other accounts
|
|
46
|
|
13 million
|
|
0
|
|
0
|
Mark Feasey
|
|
Registered investment companies
|
|
3
|
|
345 million
|
|
0
|
|
0
|
|
Other pooled investment vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other accounts
|
|
46
|
|
13 million
|
|
0
|
|
0
|
Marina Chinn
|
|
Registered investment companies
|
|
3
|
|
345 million
|
|
0
|
|
0
|
|
Other pooled investment vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other accounts
|
|
46
|
|
13 million
|
|
0
|
|
0
|
Michael Kang
|
|
Registered investment companies
|
|
3
|
|
345 million
|
|
0
|
|
0
|
|
Other pooled investment vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other accounts
|
|
46
|
|
13 million
|
|
0
|
|
0
|
38
Portfolio Manager Compensation Structure
ClearBridges portfolio managers participate in a competitive compensation program that is designed to attract and retain outstanding
investment professionals and closely align the interests of its investment professionals with those of its clients and overall firm results. The total compensation program includes a significant incentive component that rewards high performance
standards, integrity, and collaboration consistent with the firms values. Portfolio manager compensation is reviewed and modified each year as appropriate to reflect changes in the market and to ensure the continued alignment with the goals
stated above. ClearBridges portfolio managers and other investment professionals receive a combination of base compensation and discretionary compensation, comprising a cash incentive award and deferred incentive plans described below.
Base salary compensation.
Base salary is fixed and primarily determined based on market factors and the experience and
responsibilities of the investment professional within the firm.
Discretionary compensation.
In addition to base compensation managers
may receive discretionary compensation.
Discretionary compensation can include:
|
|
|
ClearBridges Deferred Incentive Plan (CDIP)a mandatory program that typically defers 15% of discretionary year-end compensation into
ClearBridge managed products. For portfolio managers, one-third of this deferral tracks the performance of their primary managed product, one-third tracks the performance of a composite portfolio of the firms new products and one-third can be
elected to track the performance of one or more of ClearBridge managed funds. Consequently, portfolio managers can have two-thirds of their CDIP award tracking the performance of their primary managed product.
|
For centralized research analysts, two-thirds of their deferral is elected to track the performance of one of more of ClearBridge managed
funds, while one-third tracks the performance of the new product composite.
ClearBridge then makes a company investment in the
proprietary managed funds equal to the deferral amounts by fund. This investment is a company asset held on the balance sheet and paid out to the employees in shares subject to vesting requirements.
|
|
|
Legg Mason Restricted Stock Deferrala mandatory program that typically defers 5% of discretionary year-end compensation into Legg Mason
restricted stock. The award is paid out to employees in shares subject to vesting requirements.
|
|
|
|
Legg Mason Restricted Stock and Stock Option Grantsa discretionary program that may be utilized as part of the total compensation program. These
special grants reward and recognize significant contributions to our clients, shareholders and the firm and aid in retaining key talent.
|
Several factors are considered by ClearBridge Senior Management when determining discretionary compensation for portfolio managers. These include but are not limited to:
|
|
|
Investment performance.
A portfolio managers compensation is linked to the pre-tax investment performance of the fund/accounts managed by
the portfolio manager. Investment performance is calculated for 1-, 3-, and 5-year periods measured against the applicable product benchmark (
e.g.
, a securities index and, with respect to a fund, the benchmark set forth in the funds
Prospectus) and relative to applicable industry peer groups. The greatest weight is generally placed on 3- and 5-year performance.
|
|
|
|
Appropriate risk positioning that is consistent with ClearBridges investment philosophy and the Investment Committee/CIO approach to generation
of alpha;
|
|
|
|
Overall firm profitability and performance;
|
39
|
|
|
Amount and nature of assets managed by the portfolio manager;
|
|
|
|
Contributions for asset retention, gathering and client satisfaction;
|
|
|
|
Contribution to mentoring, coaching and/or supervising;
|
|
|
|
Contribution and communication of investment ideas in ClearBridges Investment Committee meetings and on a day to day basis;
|
|
|
|
Market compensation survey research by independent third parties
|
Potential Conflicts of Interest
Potential conflicts of interest may arise
when the funds portfolio managers also have day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the funds portfolio managers.
The subadviser and the fund have adopted compliance policies and procedures that are designed to address various conflicts of interest
that may arise for the subadviser and the individuals that each employs. For example, the subadviser seeks to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage
funds and accounts that share a similar investment style. The subadviser has also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is
no guarantee, however, that the policies and procedures adopted by the subadviser and the fund will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:
Allocation of Limited Time and Attention
. A portfolio manager who is responsible for managing multiple funds and/or accounts may
devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those
accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
Allocation of Limited Investment Opportunities
. If a portfolio manager
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 a funds ability to take full advantage of the
investment opportunity.
Pursuit of Differing Strategies
. At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a
particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit
of one or more other funds and/or accounts.
Selection of Broker/Dealers
. Portfolio managers may be able to select or
influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide brokerage and research services
(as those terms are defined in Section 28(e) of the 1934 Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others.
Although the payment of brokerage commissions is subject to the requirement that the subadviser determines in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the fund, a
decision as to the selection of brokers and dealers could yield
40
disproportionate costs and benefits among the funds and/or accounts managed. For this reason, the subadviser has formed a brokerage committee that reviews, among other things, the allocation of
brokerage to broker/dealers, best execution and soft dollar usage.
Variation in Compensation
. A conflict of interest
may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the managers management fee (and the percentage paid to the subadviser)
and/or the portfolio managers compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain
funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the manager and/or its affiliates have interests. Similarly, the desire to maintain assets
under management or to enhance the portfolio managers performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could
most significantly benefit the portfolio manager.
Related Business Opportunities
. The manager or its affiliates may
provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the
management of funds and/or accounts that provide greater overall returns to the manager and its affiliates.
Portfolio Manager Securities
Ownership
The table below identifies ownership of the funds securities by the portfolio managers as of
September 30, 2012. These holdings are in addition to the shares held for the portfolio managers benefit under the subadvisers incentive compensation program.
|
|
|
Portfolio Manager
|
|
Dollar Range of
Ownership of Securities ($)
|
Peter Hable
|
|
100,001-500,000
|
Mark Bourguignon
|
|
10,001-50,000
|
Mark Feasey
|
|
1-10,000
|
Marina Chinn
|
|
1-10,000
|
Michael Kang
|
|
None
|
Expenses
In addition to amounts payable under the Management Agreement and the 12b-1 Plan (as discussed below), the fund is responsible for its own expenses, including, among other things: interest; taxes;
governmental fees; voluntary assessments and other expenses incurred in connection with membership in investment company organizations; organization costs of the fund; the cost (including brokerage commissions, transaction fees or charges, if any)
in connection with the purchase or sale of the funds securities and other investments and any losses in connection therewith; fees and expenses of custodians, transfer agents, registrars, independent pricing vendors or other agents; legal
expenses; loan commitment fees; expenses relating to the issuance and redemption or repurchase of the funds shares and servicing shareholder accounts; expenses of registering and qualifying the funds shares for sale under applicable
federal and state law; expenses of preparing, setting in print, printing and distributing prospectuses and statements of additional information and any supplements thereto, reports, proxy statements, notices and dividends to the funds
shareholders; costs of stationery; website costs; costs of meetings of the Board or any committee thereof, meetings of shareholders and other meetings of the fund; Board fees; audit fees; travel expenses of officers, Trustees and employees of the
fund, if any; the funds pro rata portion of premiums on any fidelity bond and other insurance covering the fund and its officers, Trustees and employees; and litigation expenses and any non-recurring or extraordinary expenses as may arise,
including, without limitation, those relating to actions, suits or proceedings to which the fund is a party and any legal obligation which the fund may have to indemnify the funds Trustees and officers with respect thereto.
41
Management may agree to implement an expense cap, waive fees and/or reimburse operating
expenses for one or more classes of shares. Any such waived fees and/or reimbursed expenses are described in the funds Prospectus. The expense caps and waived fees and/or reimbursed expenses do not cover extraordinary expenses, such as
(a) any expenses or charges related to litigation, derivative actions, demand related to litigation, regulatory or other government investigations and proceedings, for cause regulatory inspections and indemnification or advancement
of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage
commissions and dealer and underwriter spreads) and taxes; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing,
extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the fund
or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of the fund or class (except to the extent relating to routine items
such as the election of Trustees or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses
are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time.
In order to implement an expense cap, the manager will, as necessary, waive management fees or reimburse operating expenses. However, the manager is permitted to recapture amounts previously waived or
reimbursed by the manager to the fund during the same fiscal year if the funds total annual operating expenses have fallen to a level below the expense cap shown in the funds Prospectus. In no case will the manager recapture any amount
that would result, on any particular fund business day, in the funds total annual operating expenses exceeding the expense cap.
Distributor
LMIS, a
wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 International Drive, Baltimore, Maryland 21202, serves as the funds sole and exclusive distributor pursuant to a written agreement dated August 5, 2010 (the
distribution agreement).
LMIS may be deemed to be an underwriter for purposes of the 1933 Act. The
distributors obligation is an agency or best efforts arrangement under which the distributor is required to take and pay only for such shares of the fund as may be sold to the public. The distributor is not obligated to sell any
stated number of shares.
The distribution agreement is renewable from year to year if approved (a) by the Trustees or by
a vote of a majority of the funds outstanding voting securities, and (b) by the affirmative vote of a majority of Independent Trustees who are not parties to such agreement or interested persons of any such party by votes cast in person
at a meeting called for such purpose. The distribution agreement provides that it will terminate if assigned, and that it may be terminated without penalty by either party on 60 days written notice.
Initial Sales Charge
The aggregate dollar amounts of initial sales charge on Class A shares received by LMIS were as follows:
Class A Shares
|
|
|
|
|
For the fiscal year ended September 30
|
|
LMIS ($)
|
|
2012
|
|
|
20,878
|
|
2011
|
|
|
28,139
|
|
2010
|
|
|
17,056
|
|
42
Contingent Deferred Sales Charges
The aggregate dollar amounts of contingent deferred sales charges on Class A, Class B and Class C shares received by LMIS were as
follows:
Class A Shares
|
|
|
|
|
For the fiscal year ended September 30
|
|
LMIS ($)
|
|
2012
|
|
|
94
|
|
2011
|
|
|
98
|
|
2010
|
|
|
375
|
|
Class B Shares
|
|
|
|
|
For the fiscal year ended September 30
|
|
LMIS ($)
|
|
2012
|
|
|
7,376
|
|
2011
|
|
|
9,880
|
|
2010
|
|
|
15,136
|
|
Class C Shares
|
|
|
|
|
For the fiscal year ended September 30
|
|
LMIS ($)
|
|
2012
|
|
|
768
|
|
2011
|
|
|
697
|
|
2010
|
|
|
1,992
|
|
Shareholder Services and Distribution Plan
The Trust, on behalf of the fund, has adopted an amended shareholder services and distribution plan (the 12b-1 Plan) pursuant
to Rule l2b-1 under the 1940 Act with respect to its Class A, Class B, Class C, Class FI, Class R and Class R1 shares. Under the 12b-1 Plan, the fund pays distribution fees to LMIS for the services it provides and expenses it bears with respect
to the distribution of Class B, Class C, Class R and Class R1 shares and service fees for Class A, Class B, Class C, Class FI, Class R and Class R1 shares. The distributor will provide the Board with periodic reports of amounts expended under
the 12b-1 Plan and the purposes for which such expenditures were made. The fund pays service fees, accrued daily and payable monthly, calculated at the annual rate of 0.25% of the value of the funds average daily net assets attributable to the
funds Class A, Class B, Class C, Class FI, Class R and Class R1 shares. In addition, the fund pays distribution fees with respect to the Class B, Class C and Class R1 shares at the annual rate of 0.75% of the funds average
daily net assets attributable to each such class and with respect to the Class R shares at the annual rate of 0.25% of the funds average daily net assets attributable to such class.
Fees under the 12b-1 Plan may be used to make payments to the distributor for distribution services, Service Agents and other parties in
respect of the sale of shares of the fund, and to make payments for advertising, marketing or other promotional activity, and payments for preparation, printing and distribution of prospectuses, statements of additional information and reports for
recipients other than regulators and existing shareholders. The fund may also make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient
may vary based upon certain factors, including, among other things, the levels of sales of fund shares and/or shareholder services provided.
The 12b-1 Plan also provides that the distributor and Service Agents may receive all or a portion of the sales charges paid by Class A, Class B and Class C investors.
The 12b-1 Plan permits the fund to pay fees to the distributor, Service Agents and others as compensation for their services, not as
reimbursement for specific expenses incurred. Thus, even if their expenses exceed the fees provided for by the 12b-1 Plan, the fund will not be obligated to pay more than those fees and, if their expenses are less than the fees paid to them, they
will realize a profit. The fund may pay the fees to the
43
distributor and others until the 12b-1 Plan or distribution agreement is terminated or not renewed. In that event, the distributors or other recipients expenses in excess of fees
received or accrued through the termination date will be the distributors or other recipients sole responsibility and not obligations of the fund. In their annual consideration of the continuation of the 12b-1 Plan for the fund, the
Trustees will review the 12b-1 Plan and the expenses for each class within the fund separately.
The 12b-1 Plan also
recognizes that various service providers to the fund, such as the manager, may make payments for distribution-related expenses out of their own resources, including past profits, or payments received from the fund for other purposes, such as
management fees, and that the funds distributor or Service Agents may from time to time use their own resources for distribution-related services, in addition to the fees paid under the 12b-1 Plan. The 12b-1 Plan specifically provides that, to
the extent that such payments might be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the fund within the context of Rule 12b-1, then the payments are deemed to be authorized by the 12b-1 Plan,
if permitted under applicable law.
The 12b-1 Plan continues in effect if such continuance is specifically approved at least
annually by a vote of both a majority of the Trustees and a majority of the Independent Trustees of the Trust who have no direct or indirect financial interest in the operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (for
purposes of this paragraph Qualified Trustees). The Qualified Trustees, in the exercise of their business judgment in the best interests of the shareholders of the fund and each class, have approved the continuation of the 12b-1 Plan.
The 12b-1 Plan requires that the fund and the distributor provide to the Board and the Board review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the 12b-1 Plan. The 12b-1 Plan further provides that
the selection and nomination of the Qualified Trustees is committed to the discretion of the Qualified Trustees then in office. The 12b-1 Plan may be terminated with respect to any class of the fund at any time by a vote of a majority of the
funds Qualified Trustees or by a vote of a majority of the outstanding voting securities of that class. The 12b-1 Plan may not be amended to increase materially the amount of permitted expenses of the class thereunder without the approval of a
majority of the outstanding securities of that class and may not be materially amended in any case without a vote of a majority of both the Trustees and Qualified Trustees. The fund will preserve copies of any plan, agreement or report made pursuant
to the 12b-1 Plan for a period of not less than six years, and for the first two years the fund will preserve such copies in an easily accessible place.
As contemplated by the 12b-1 Plan, the distributor acts as an agent of the fund in connection with the offering of shares of the fund pursuant to the distribution agreement. Dealer reallowances, if any,
are described in the funds Prospectus.
The following service and distribution fees were incurred by the fund pursuant
to the 12b-1 Plan during the fiscal year ended September 30, 2012:
|
|
|
|
|
Service and Distribution Fees Incurred ($)
|
|
|
|
Class A
|
|
|
298,928
|
|
Class B
|
|
|
75,291
|
|
Class C
|
|
|
824,483
|
|
Distribution expenses incurred by LMIS during the fiscal year ended September 30, 2012 for
compensation to Service Agents, printing costs of prospectuses and marketing materials are expressed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party Fees ($)
|
|
|
Financial
Consultant
Compensation
(Amortized) ($)
|
|
|
Marketing ($)
|
|
|
Printing ($)
|
|
|
Total Current
Expenses ($)
|
|
Class A
|
|
|
298,928
|
|
|
|
0
|
|
|
|
90,723
|
|
|
|
1,857
|
|
|
|
391,508
|
|
Class B
|
|
|
33,620
|
|
|
|
2,793
|
|
|
|
1,684
|
|
|
|
139
|
|
|
|
38,236
|
|
Class C
|
|
|
685,276
|
|
|
|
57,399
|
|
|
|
37,943
|
|
|
|
1,406
|
|
|
|
782,024
|
|
44
No information is presented for Class FI, Class R and Class R1 shares because no shares of
those classes were outstanding during the fiscal year ended September 30, 2012.
Custodian and Transfer Agent
State Street Bank and Trust Company (State Street), One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian
of the fund. State Street, among other things, maintains a custody account or accounts in the name of the fund, receives and delivers all assets for the fund upon purchase and upon sale or maturity, collects and receives all income and other
payments and distributions on account of the assets of the fund and makes disbursements on behalf of the fund. State Street neither determines the funds investment policies nor decides which securities the fund will buy or sell. For its
services, State Street receives a monthly fee based upon the daily average market value of securities held in custody and also receives securities transaction charges, including out-of-pocket expenses. The fund may also periodically enter into
arrangements with other qualified custodians with respect to certain types of securities or other transactions such as repurchase agreements or derivatives transactions. State Street may also act as the funds securities lending agent and in
that case would receive a share of the income generated by such activities.
Boston Financial Data Services, Inc.
(BFDS ), located at 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.
BNY Mellon Investment Servicing (US) Inc.
(BNY), located at 4400 Computer Drive, Westborough, Massachusetts 01581, serves as co-transfer agent with BFDS with respect to shares purchased by clients of certain service providers. Under the co-transfer agency agreement with BNY, BNY
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, BNY receives a monthly fee computed on the
basis of the number of shareholder accounts it maintains for the fund during the month and is reimbursed for out-of-pocket expenses.
Counsel
Willkie
Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019, serves as counsel to the Trust and the fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, serves as counsel to the Independent
Trustees.
Independent Registered Public Accounting Firm
KPMG LLP, an independent registered public accounting firm, located at 345 Park Avenue, New York, New York 10154, has been selected to audit and report upon the funds financial statements and
financial highlights for the fiscal year ending September 30, 2013.
Code of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, the fund, the manager, the subadviser and Western Asset, and the distributor have adopted codes
of ethics that permit personnel to invest in securities for their own accounts, including securities that may be purchased or held by the fund. All personnel must place the interests of clients first and avoid activities, interests and relationships
that might interfere with the duty to make decisions in the
45
best interests of the clients. All personal securities transactions by employees must adhere to the requirements of the codes and must be conducted in such a manner as to avoid any actual or
potential conflict of interest, the appearance of such a conflict or the abuse of an employees position of trust and responsibility. Copies of the codes of ethics of the fund, the manager, the subadviser and Western Asset, and the distributor
are on file with the SEC.
Proxy Voting Guidelines and Procedures
Although individual Trustees may not agree with particular policies or votes by the manager, the Board has delegated proxy voting
discretion to the manager, believing that the manager should be responsible for voting because it is a matter relating to the investment decision making process.
LMPFA 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, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA
shall 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 LMPFA (or its affiliates if such conflict is known to
persons responsible for voting at LMPFA) and the fund, the Board of Directors of LMPFA shall consider how to address the conflict and/or how to vote the proxies. LMPFA shall maintain records of all proxy votes in accordance with applicable
securities laws and regulations, to the extent that LMPFA votes proxies. LMPFA shall 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 subadviser's proxy voting policies and procedures govern in determining
how proxies relating to the funds portfolio securities are voted, a copy of which is attached as Appendix A to this SAI. Information regarding how the fund voted proxies (if any) relating to portfolio securities during the most recent 12-month
period ended June 30 is available without charge (1) by calling 1-877-721-1926, (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, including retirement plans purchasing through certain Service Agents, may purchase shares directly from the fund. When purchasing shares of the fund, investors must specify
whether the purchase is for Class A, Class C, Class FI, Class R, Class I or Class IS shares. Service Agents may charge their customers an annual account maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at the transfer agent are not subject to a maintenance fee.
There are
minimum investment requirements of $1,000 for initial investments and $50 for subsequent investments for purchases of Class A shares by: (i) current and retired board members of Legg Mason, (ii) current and retired board members of
any fund advised by LMPFA or its affiliates (such board members, together with board members of Legg Mason, are referred to herein as Board Members), (iii) current employees of Legg Mason and its affiliates, (iv) the
immediate families of such persons (immediate families are such persons spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21) and (v) a pension, profit-sharing or
other benefit plan for the benefit of such persons. The fund
46
reserves the right to waive or change minimums, to decline any order to purchase its shares and to suspend the offering of shares from time to time.
Purchase orders received by the fund prior to the close of regular trading on the NYSE on any day the fund calculates its NAV are priced
according to the NAV determined on that day (the trade date). Orders received by a Service Agent prior to the close of regular trading on the NYSE on any day the fund calculates its NAV are priced according to the NAV determined on that
day, provided the order is transmitted by the Service Agent to the funds transfer agent in accordance with their agreed-upon procedures. Payment must be made with the purchase order.
Class B Shares.
The fund no longer offers Class B shares for new purchases by new and existing investors. Individual investors who
owned Class B shares, may continue to hold those shares, but they may not add to their Class B share positions except through dividend reinvestment. Class B shares are available for incoming exchanges and for reinvestment of dividends and capital
gain distributions.
Class I Shares.
The following persons are eligible to purchase Class I shares of a fund: (i)
current employees of the funds manager and its affiliates; (ii) current and former board members of investment companies managed by affiliates of Legg Mason; (iii) current and former board members of Legg Mason; and (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. 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.
Under certain circumstances, an investor who purchases fund shares pursuant to a fee-based advisory account program of an Eligible Financial Intermediary as authorized by LMIS may be afforded an
opportunity to make a conversion between one or more share classes owned by the investor in the same fund to Class I shares of that fund. Such a conversion in these particular circumstances does not cause the investor to realize taxable gain or
loss.
Class R1 Shares.
Class R1 shares are closed to all new purchases and incoming exchanges.
Systematic Investment Plan.
Shareholders may make additions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan, the distributor or the transfer agent is authorized through preauthorized transfers of at least $50 on a monthly, quarterly, every alternate month, semi-annual or annual
basis to charge the shareholders account held with a bank or other financial institution as indicated by the shareholder, to provide for systematic additions to the shareholders fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by the distributor or the transfer agent. The Systematic Investment Plan authorizes the distributor to apply cash held in the shareholders brokerage account to make additions to the
account. Additional information is available from the fund or a Service Agent.
For additional information regarding
applicable investment minimums and eligibility requirements for purchases of fund shares, please see the funds Prospectus.
Sales Charge Alternatives
The following classes of shares are available
for purchase. See the Prospectus for a discussion of who is eligible to purchase certain classes and of factors to consider in selecting which class of shares to purchase.
Class A Shares.
Class A shares are sold to investors at the public offering price, which is the NAV plus an initial sales charge, as described in the funds Prospectus.
Members of the selling group may receive a portion of the sales charge as described in the Prospectus and may be deemed to be
underwriters of the fund as defined in the 1933 Act. Sales charges are calculated based on
47
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.
You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A
shares within 18 months of purchase (or within 12 months for shares purchased prior to August 1, 2012), you will pay a contingent deferred sales charge of 1.00%.
The contingent deferred sales charge is waived in the same circumstances in which the contingent deferred sales charge applicable to Class B and C shares is waived. See Contingent Deferred Sales
Charge Provisions and Waivers of Contingent Deferred Sales Charge below.
Class C Shares.
Class C
shares are sold without an initial sales charge but are subject to a contingent deferred sales charge payable upon certain redemptions. See Contingent Deferred Sales Charge Provisions below.
Class FI, Class R, Class I and Class IS Shares.
Class FI, Class R, Class I and Class IS shares are sold at NAV with no initial
sales charge and no contingent deferred sales charge upon redemption.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers.
Purchases of Class A shares may be made at NAV without an initial sales charge
in the following circumstances:
(a) sales to (i) current and retired Board Members, (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;
(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.
48
In order to obtain such discounts, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the elimination of the sales charge.
All existing
retirement plan shareholders who purchased Class A shares at NAV prior to November 20, 2006, are permitted to purchase additional Class A shares at NAV. Certain existing programs for current and prospective retirement plan investors
sponsored by financial intermediaries approved by LMIS prior to November 20, 2006 will also remain eligible to purchase Class A shares at NAV.
There are several ways you can combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take
advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent 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 seven Asset Level Goal amounts, as follows:
(1) $25,000
(2)
$50,000
(3) $100,000
(4) $250,000
(5) $500,000
(6) $750,000
(7) $1,000,000
Each time you make a Class A purchase under a Letter of Intent, you will be entitled to pay the sales charge that is applicable to
the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you are investing in for purchases of
$100,000. Sales charges and breakpoints vary among the funds sold by the distributor.
49
When you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a
thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this purpose, shares are valued at the public offering price (including any sales charge
paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases, which are valued at current value as of the date of calculation. Your commitment will
be met if at any time during the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested dividends and distributions on shares acquired under the Letter will be credited towards
your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a Letter of Intent will not entitle you to a reduction in the sales charge payable on any
shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred sales charge with respect to those shares. You must make reference to the Letter of
Intent each time you make a purchase under the Letter.
Eligible Fund Purchases.
Generally, any shares of a fund sold
by the distributor may be credited towards your Asset Level Goal. Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your Asset Level Goal.
The eligible funds may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.
Eligible Accounts.
Purchases may be made through any account in your name, or in the name of your spouse or your
children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset
Level Goal.
Eligible Prior Purchases.
You may also credit towards your Asset Level Goal any Eligible Fund Purchases
made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.
Increasing the Amount of the Letter of Intent.
You may at any time increase your Asset Level Goal. You must, however, contact your
Service Agent, or if you purchase your shares directly through the transfer agent, contact the transfer agent, prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way
of additional shares at the then-current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter of Intent and (b) the aggregate applicable sales charges for
the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.
Sales and Exchanges.
Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed
or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to
meeting the Asset Level Goal will result in the cancellation of the Letter. See Failure to Meet Asset Level Goal below. Exchanges in accordance with the funds Prospectus are permitted, and shares so exchanged will continue to count
towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.
Cancellation of Letter of
Intent.
You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through the transfer agent, by notifying the transfer agent in writing. The Letter will be automatically cancelled if
all shares are sold or redeemed as set forth above. See Failure to Meet Asset Level Goal below.
Escrowed
Shares.
Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted will be held in escrow during
50
the term of your Letter. The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the
Escrowed Shares will be credited to your account and counted towards your Asset Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter are met.
Failure to Meet Asset Level Goal.
If the total assets under your Letter of Intent within its 13-month term are less than your
Asset Level Goal whether because you made insufficient Eligible Fund Purchases, redeemed all of your holdings or cancelled the Letter before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge
actually paid and (b) the sales charge that would have applied if you had not entered into the Letter. You may, however, be entitled to any breakpoints that would have been available to you under the accumulation privilege. An appropriate
number of shares in your account will be redeemed to realize the amount due. For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through the transfer agent, the
transfer agent, as your attorney-in-fact for the purposes of holding the Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed
Shares remaining after such redemption will be released to your account.
Contingent Deferred Sales Charge Provisions
Contingent deferred sales charge shares are: (a) Class B shares, (b) Class C shares and
(c) Class A shares that were purchased without an initial sales charge but are subject to a contingent deferred sales charge. A contingent deferred sales charge may be imposed on certain redemptions of these shares.
Any applicable contingent deferred sales charge will be assessed on the NAV at the time of purchase or redemption, whichever is less.
Class A shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge
if redeemed within 18 months of purchase (or within 12 months for shares purchased prior to August 1, 2012). Class C shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge if redeemed
within 12 months of purchase.
In circumstances in which the contingent deferred sales charge is imposed on Class B shares,
the amount of the charge will depend on the number of years since the shareholder made the purchase payment from which the amount is being redeemed, as further described in the Prospectus. Solely for purposes of determining the number of years since
a purchase payment, all purchase payments made during a month will be aggregated and deemed to have been made on the last day of the preceding statement month. The following table sets forth the rates of the charge for redemptions of Class B shares
by shareholders.
|
|
|
|
|
Year Since Purchase Was Made
|
|
Contingent Deferred
Sales Charge (%)
|
|
First
|
|
|
5.00
|
|
Second
|
|
|
4.00
|
|
Third
|
|
|
3.00
|
|
Fourth
|
|
|
2.00
|
|
Fifth
|
|
|
1.00
|
|
Sixth and thereafter
|
|
|
0.00
|
|
Class B shares will convert automatically to Class A shares approximately eight years after the date
on which they were purchased and thereafter will no longer be subject to any distribution fees. There will also be converted at that time such proportion of Class B dividend shares (Class B shares that were acquired through the reinvestment of
dividends and distributions) owned by the shareholder as the total number of his or her Class B shares converting at the time bears to the total number of outstanding Class B shares (other than Class B dividend shares) owned by the shareholder.
51
In determining the applicability of any contingent deferred sales charge, it will be assumed
that a redemption is made first of shares representing capital appreciation, next of shares representing the reinvestment of dividends and capital gain distributions, next of shares that are not subject to the contingent deferred sales charge and
finally of other shares held by the shareholder for the longest period of time. The length of time that contingent deferred sales charge shares acquired through an exchange have been held will be calculated from the date the shares exchanged were
initially acquired in one of the other funds sold by the distributor. For federal income tax purposes, the amount of the contingent deferred sales charge will reduce the gain or increase the loss, as the case may be, on the amount realized on
redemption. The funds distributor receives contingent deferred sales charges in partial consideration for its expenses in selling shares.
Waivers of Contingent Deferred Sales Charge
The
contingent deferred sales charge will be waived on: (a) exchanges (see Exchange Privilege); (b) automatic cash withdrawals in amounts equal to or less than 2.00% per month of the shareholders account balance at the
time the withdrawals commence, up to a maximum of 12.00% in one year (see Automatic Cash Withdrawal Plan); (c) redemptions of shares within 12 months following the death or disability (as defined in the Code) of the shareholder;
(d) mandatory post-retirement distributions from retirement plans or IRAs commencing on or after attainment of age 70
1
/
2
(except that shareholders who purchased shares subject to a contingent deferred sales charge prior to
May 23, 2005 will be grandfathered and will be eligible to obtain the waiver at age 59
1
/
2
by demonstrating such eligibility at the time of redemption); (e) involuntary redemptions; (f) redemptions of
shares to effect a combination of the fund with any investment company by merger, acquisition of assets or otherwise; (g) tax-free returns of an excess contribution to any retirement plan; and (h) certain redemptions of shares of the fund
in connection with lump-sum or other distributions made by eligible retirement plans or redemption of shares by participants in certain wrap fee or asset allocation programs sponsored by broker/dealers and other financial institutions
that have entered into agreements with the distributor or the manager.
The contingent deferred sales charge is
waived on Class C shares purchased by retirement plan omnibus accounts held on the books of the fund.
A shareholder who has
redeemed shares from other funds sold by the distributor may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior
redemption.
Contingent deferred sales charge waivers will be granted subject to confirmation by the distributor or the
transfer agent of the shareholders status or holdings, as the case may be.
Grandfathered Retirement Program with
Exchange Features
Certain retirement plan programs with exchange features in effect prior to November 20, 2006
(collectively, the Grandfathered Retirement Program), that are authorized by the distributor to offer eligible retirement plan investors the opportunity to exchange all of their Class C shares for Class A shares of an applicable
fund sold by the distributor, are permitted to maintain such share class exchange feature for current and prospective retirement plan investors.
Under the Grandfathered Retirement Program, Class C shares of the fund may be purchased by plans investing less than $3 million. Class C shares are eligible for exchange into Class A shares not later
than eight years after the plan joins the program. They are eligible for exchange in the following circumstances:
If a
participating plans total Class C holdings in all non-money market funds sold by the distributor equal at least $3,000,000 at the end of the fifth year after the date the participating plan enrolled in the Grandfathered Retirement Program, the
participating plan will be offered the opportunity to exchange all of its Class C shares
52
for Class A shares of the fund. Such participating plans will be notified of the pending exchange in writing within 30 days after the fifth anniversary of the enrollment date and, unless the
exchange offer has been rejected in writing, the exchange will occur on or about the 90th day after the fifth anniversary date. If the participating plan does not qualify for the five-year exchange to Class A shares, a review of the
participating plans holdings will be performed each quarter until either the participating plan qualifies or the end of the eighth year.
Any participating plan that has not previously qualified for an exchange into Class A shares will be offered the opportunity to exchange all of its Class C shares for Class A shares of the same
fund regardless of asset size at the end of the eighth year after the date the participating plan enrolled in the Grandfathered Retirement Program. Such plans will be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been rejected in writing, the exchange will occur on or about the eighth anniversary date. Once an exchange has occurred, a participating plan will not be eligible to acquire
additional Class C shares, but instead may acquire Class A shares of the same fund. Any Class C shares not converted will continue to be subject to the distribution fee.
For further information regarding this Program, contact your Service Agent or the transfer agent. Participating plans that enrolled in the Grandfathered Retirement Program prior to June 2, 2003
should contact the transfer agent for information regarding Class C exchange privileges applicable to their plan.
Determination of Public
Offering Price
The fund offers its shares on a continuous basis. The public offering price for each class of shares of
the fund is equal to the NAV per share at the time of purchase, plus for Class A shares an initial sales charge based on the aggregate amount of the investment. The public offering price for Class C, Class FI, Class R, Class I and Class IS
shares (and Class A share purchases, including applicable rights of accumulation, equaling or exceeding $1,000,000) is equal to the NAV per share at the time of purchase and no sales charge is imposed at the time of purchase. A contingent
deferred sales charge, however, is imposed on certain redemptions of Class C shares and on Class A shares when purchased in amounts equaling or exceeding $1,000,000.
Set forth below is an example of the method of computing the offering price of the Class A shares of the fund based on the NAV of a share of the fund as of September 30, 2012.
|
|
|
|
|
Class A (based on a NAV of $18.81 and a maximum initial sales charge of 5.75%)
|
|
$
|
19.96
|
|
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a) for any period during which the NYSE is closed (other
than for customary weekend and holiday closings), (b) when trading in the markets the fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the funds investments or determination of
NAV is not reasonably practicable or (c) for such other periods as the SEC by order may permit for protection of the funds shareholders.
Redemption proceeds will be mailed to an investors address of record. The transfer agent may require additional supporting documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received until the transfer agent receives all required documents in proper form.
If a shareholder holds shares in more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer
shares of the class than specified, the redemption request will be delayed until the transfer agent receives further instructions. The redemption proceeds will be remitted on or before the seventh business day following receipt of proper tender,
53
except on any days on which the NYSE is closed or as permitted under the 1940 Act, in extraordinary circumstances. Redemption proceeds for shares purchased by check, other than a certified or
official bank check, will be remitted upon clearance of the check, which may take up to ten days. Each Service Agent is responsible for transmitting promptly orders for its customers.
The Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and disclosed
to its customers by each Service Agent.
Additional Information Regarding Telephone Redemption and Exchange Program.
Neither the fund nor its agents will be liable for following instructions communicated by telephone that are reasonably believed to be genuine. The fund and its agents will employ procedures designed to verify the identity of the caller and
legitimacy of instructions (for example, a shareholders name and account number will be required and phone calls may be recorded). The fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or
to impose a charge for this service at any time following at least seven (7) days prior notice to shareholders.
Automatic Cash
Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan) is available to shareholders as
described in the Prospectus. To the extent withdrawals under the Withdrawal Plan exceed dividends, distributions and appreciation of a shareholders investment in the fund, there will be a reduction in the value of the shareholders
investment, and continued withdrawal payments may reduce the shareholders investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in the fund. The Withdrawal Plan will be carried over on
exchanges between funds sold by the distributor or classes of the fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at NAV in additional shares of the fund.
For additional information, shareholders should contact their Service Agent. A shareholder who purchases shares directly through the
transfer agent may continue to do so and applications for participation in the Withdrawal Plan should be sent to the transfer agent. Withdrawals may be scheduled on any day of the month; however, if the shareholder does not specify a day, the
transfer agent will schedule the withdrawal on the 25th day (or the next business day if the 25th day is a weekend or holiday) of the month.
Legg Mason Institutional Funds Systematic Withdrawal Plan
Certain
shareholders of Class FI, Class I or Class IS 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.
Redemptions in Kind
If the funds manager determines that it would not be in the best interests of the funds remaining shareholders to make a
redemption payment wholly in cash, the fund may honor a redemption request by delivering portfolio securities to a shareholder to pay all or a portion of the redemption proceeds. However, the fund will not use securities to satisfy any request for
redemption, or combination of requests from the same shareholder in any 90-day period, if the total redemption amount does not exceed $250,000 or 1% of the net
54
assets of the fund, whichever is less. When a redemption is paid in kind, the securities distributed to the redeeming shareholder will be valued in accordance with the procedures
described under Share price in the funds Prospectus. Because a redemption in-kind may be used during times when the markets experience increased illiquidity, these valuation methods may include fair value estimations and a
shareholder may have difficulty selling those securities at the valuation price. A shareholder receiving securities from the fund may incur costs in holding and when subsequently selling those securities, and the market price of those securities
will be subject to fluctuation until they are sold. The fund will not use securities to pay redemptions by LMIS or other affiliated persons of the fund, except as permitted by law, SEC rules or orders, or interpretive guidance from the SEC staff or
other proper authorities.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to acquire shares of the same class in another fund sold by the distributor. This privilege
is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Prior to any exchange, the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is
being considered. Prospectuses may be obtained from a Service Agent.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed at the then-current NAV, and the proceeds are immediately invested in shares of the fund being acquired at that funds then current NAV. The distributor reserves the right to
reject any exchange request. The exchange privilege may be modified or terminated at any time after written notice to shareholders.
Class A, Class FI, Class R, Class I and Class IS Exchanges.
Class A, Class FI, Class R, Class I and Class IS shareholders of the fund who wish to exchange all or a portion of their shares
for shares of the respective class in another fund may do so without imposition of any charge.
Class B Exchanges.
Funds that offered Class B shares prior to July 1, 2011 continue to make them available for incoming exchanges. Class B shares of the fund may be exchanged for Class B shares of other funds without a contingent deferred sales charge at the time
of exchange. Upon an exchange, the new Class B shares will be deemed to have been purchased on the same date as the Class B shares of the fund that have been exchanged.
Class C Exchanges.
Class C shares of the fund may be exchanged for other Class C shares without a contingent deferred sales charge. Upon an exchange, the new Class C shares will be deemed to have
been purchased on the same date as the Class C shares of the fund that have been exchanged.
Class R1 Exchanges.
Class
R1 shares are closed to all new purchases and incoming exchanges.
Certain retirement plan programs with exchange features in
effect prior to November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. See Grandfathered Retirement Programs with Exchange Features
for additional information.
Additional Information Regarding the Exchange Privilege
The fund is not designed to provide investors with a means of speculation on short-term market movements. A pattern of frequent exchanges
by investors can be disruptive to efficient portfolio management and, consequently, can be detrimental to the fund and its shareholders. See Frequent trading of fund shares in the Prospectus.
During times of drastic economic or market conditions, the fund may suspend the exchange privilege temporarily without notice and treat
exchange requests based on their separate componentsredemption orders with
55
a simultaneous request to purchase the other funds shares. In such a case, the redemption request would be processed at the funds next determined NAV but the purchase order would be
effective only at the NAV next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.
Certain shareholders may be able to exchange shares by telephone. See the funds Prospectus for additional information. Exchanges will be processed at the NAV next determined. Redemption procedures
discussed above are also applicable for exchanging shares, and exchanges will be made upon receipt of all supporting documents in proper form. If the account registration of the shares of the fund being acquired is identical to the registration of
the shares of the fund exchanged, no signature guarantee is required.
This exchange privilege may be modified or terminated
at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should contact the transfer agent or, if they hold fund shares through a Service Agent, their Service Agent,
to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares exchanged and could result in taxable gain or loss to the shareholder making the exchange.
VALUATION OF SHARES
The NAV per share of each class is calculated on each day, Monday through Friday, except days on which the NYSE is closed. As of the date of this SAI, the NYSE is normally open for trading every weekday
except in the event of an emergency or for the following holidays (or the days on which they are observed): New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. Because of the differences in distribution fees and class-specific expenses, the per share NAV of each class will differ. Please see the 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 and Western Asset manages the cash and short-term instruments of the fund.
The cost of securities purchased from underwriters includes an underwriting commission, concession or a net price. 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 selling the security 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 agents. The fund will pay a spread or
commission in connection with such transactions. Commissions are negotiated with brokers on such transactions. The aggregate brokerage commissions paid by the fund for the three most recent fiscal years are set forth below under Aggregate
Brokerage Commissions Paid.
Pursuant to the 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.
56
In connection with the selection of such brokers or dealers and the placing of such orders,
subject to applicable law, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act) to the fund and/or the other accounts over which the subadviser or its
affiliates exercise investment discretion. The subadviser is authorized to pay a broker or dealer that provides such brokerage and research services a commission for executing a portfolio transaction for the fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting that transaction if the 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. Investment research services include information and analysis on particular companies and industries as well as market or economic trends and portfolio strategy, market quotations for portfolio evaluations, analytical software
and similar products and services. If a research service also assists the subadviser in a non-research capacity (such as bookkeeping or other administrative functions), then only the percentage or component that provides assistance to the subadviser
in the investment decision making process may be paid in commission dollars. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the 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 reduces its expenses as subadviser.
Arrangements for the receipt of research services from brokers may create conflicts of interest.
Research services furnished
to the subadviser by brokers that effect securities transactions for the fund may be used by the subadviser in servicing other investment companies and accounts which the subadviser manages. Similarly, research services furnished to the subadviser
by brokers that 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.
For the fiscal year ended September 30, 2012, the fund paid commissions to
brokers that provided research services as follows:
|
|
|
Total Dollar Amount of
Brokerage Transactions
Related to Research Services
($)
|
|
Total Dollar Amount of
Brokerage Commissions Paid
on
Transactions Related to
Research Services ($)
|
84,571,860
|
|
101,779
|
The fund contemplates that, consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through affiliated broker/dealers, as defined in the 1940 Act. The funds Board has adopted procedures in accordance with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
such affiliates are reasonable and fair in the context of the market in which such affiliates operate.
Aggregate Brokerage Commissions
Paid
For the fiscal years ended September 30, 2012, 2011 and 2010, the fund paid aggregate brokerage commissions as
set forth in the table below.
|
|
|
Fiscal Year Ended September 30,
|
|
Aggregate Brokerage Commissions Paid ($)
|
2012
|
|
180,329
|
2011
|
|
207,714
|
2010
|
|
378,882
|
For the fiscal years ended September 30, 2012, 2011 and 2010, the fund did not pay any brokerage
commissions to LMIS or its affiliates.
57
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 other clients of the subadviser. 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. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two
or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for the fund. When purchases or sales of the same security for the fund and for other portfolios managed by the subadviser occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large volume purchases or sales.
At September 30, 2012,
the fund held no equity or debt 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
58
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, 2012, 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 frequency of the release under such arrangements, and the length of the lag, if any, between the date of the
information and the date on which the information is disclosed. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay Before Dissemination
|
State Street Bank and Trust Company (Fund Custodian and Accounting Agent)
|
|
Daily
|
|
None
|
|
|
|
A.S.A.P. Advisor Services, Inc.
|
|
Quarterly
|
|
8-10 Days after Quarter-End
|
|
|
|
Bloomberg L.P.
|
|
Quarterly
|
|
Sent 6 Business Days after Quarter-End
|
|
|
|
Lipper Analytical Services Corp.
|
|
Quarterly
|
|
Sent 6 Business Days after Quarter-End
|
|
|
|
Morningstar
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Institutional Shareholder Services (Proxy Voting Services)
|
|
As necessary
|
|
None
|
|
|
|
Thomson/Vestek
|
|
Daily
|
|
None
|
|
|
|
FactSet
|
|
Daily
|
|
None
|
|
|
|
The Bank of New York Mellon
|
|
Daily
|
|
None
|
|
|
|
Thomson
|
|
Semi-annually
|
|
None
|
|
|
|
SunGard/Protegent (formerly Dataware)
|
|
Daily
|
|
None
|
|
|
|
ITG
|
|
Daily
|
|
None
|
|
|
|
The Northern Trust Company
|
|
Daily
|
|
None
|
|
|
|
Middle Office Solutions, LLC
|
|
Daily
|
|
None
|
|
|
|
NaviSite, Inc.
|
|
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
|
Baseline
|
|
Daily
|
|
None
|
|
|
|
Frank Russell
|
|
Monthly
|
|
1 Day
|
|
|
|
Callan Associates
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Mercer LLC
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
eVestment Alliance
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
59
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay Before Dissemination
|
Rogerscasey
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Cambridge Associates LLC
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Wilshire Associates Inc.
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Informa Investment Solutions
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Prima Capital
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Investor Tools
|
|
Daily
|
|
None
|
|
|
|
Advent
|
|
Daily
|
|
None
|
|
|
|
BARRA
|
|
Daily
|
|
None
|
|
|
|
Plexus
|
|
Quarterly (Calendar)
|
|
Sent 1-3 Business Days after Quarter-End
|
|
|
|
Elkins/McSherry
|
|
Quarterly (Calendar)
|
|
Sent 1-3 Business Days after Quarter-End
|
|
|
|
Quantitative Services Group
|
|
Daily
|
|
None
|
|
|
|
Deutsche Bank
|
|
Monthly
|
|
6-8 Business Days
|
|
|
|
Fitch
|
|
Monthly
|
|
6-8 Business Days
|
|
|
|
Liberty Hampshire
|
|
Weekly and Month End
|
|
None
|
|
|
|
SunTrust
|
|
Weekly and Month End
|
|
None
|
|
|
|
S&P (Rating Agency)
|
|
Weekly Tuesday Night
|
|
1 Business Day
|
|
|
|
Electra Information Systems
|
|
Daily
|
|
None
|
|
|
|
Cabot Research
|
|
Weekly
|
|
None
|
|
|
|
Goldman Sachs
|
|
Daily
|
|
None
|
|
|
|
Chicago Mercantile Exchange
|
|
Daily
|
|
None
|
|
|
|
Canterbury Consulting
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
|
|
|
Broadridge
|
|
Daily
|
|
None
|
|
|
|
DST Global Solutions Limited
|
|
Monthly
|
|
Sent 6 Business Days after Month-End
|
|
|
|
Interactive Data Corp
|
|
Daily
|
|
None
|
|
|
|
Citigroup Global Markets Inc.
|
|
Daily
|
|
None
|
|
|
|
Glass Lewis & Co.
|
|
Daily
|
|
None
|
|
|
|
Fidelity
|
|
Quarterly
|
|
5 Business Days
|
60
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 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:
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1.
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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.
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2.
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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.
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3.
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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.
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4.
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A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (
i.e
., brokers and custodians).
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5.
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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.
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6.
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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.
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7.
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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.
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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.
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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 a 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 a subadviser may be able to infer the portfolio
holdings of the fund from the portfolio holdings in that investors account.
THE TRUST
The Trust.
The fund is a series of Legg Mason Partners Equity Trust (referred to in this section as the trust), a Maryland statutory trust. The certificate of trust to establish the trust was filed with
the State of Maryland on October 4, 2006. The fund was redomiciled as a series of the trust on April 16, 2007. Prior thereto, the fund was a series of Legg Mason Partners Investment Trust, a Massachusetts business trust. Prior to the
reorganization of the fund as a series of Legg Mason Partners Investment Trust, the fund was a series of Legg Mason Partners Investment Funds, Inc., a Maryland corporation.
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 Board (referred to in this section as the trustees) and shareholders of a 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 (referred to in this section as the declaration). Some of the more significant provisions of 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
62
holding two-thirds of the voting power of the trust, or by a vote of two-thirds of the remaining trustees. The provisions of the declaration relating to the election and removal of trustees may
not be amended without the approval of two-thirds of the trustees.
Amendments to the Declaration.
The trustees are authorized to amend the declaration without the vote of shareholders, but no amendment may be made that impairs the
exemption from personal liability granted in the declaration to persons who are or have been shareholders, trustees, officers or employees of the trust, or that limits the rights to indemnification or insurance provided in the declaration with
respect to actions or omissions of persons entitled to indemnification under the declaration prior to the amendment.
Issuance and
Redemption of Shares.
The fund may issue an unlimited number of shares for such consideration and on such terms as the
trustees may determine. Shareholders are not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the trustees may determine. The fund may involuntarily redeem a shareholders shares upon certain conditions
as may be determined by the trustees, including, for example, if the shareholder fails to provide the fund with identification required by law, or if the fund is unable to verify the information received from the shareholder. Additionally, as
discussed below, shares may be redeemed in connection with the closing of small accounts.
Disclosure of Shareholder Holdings.
The declaration specifically requires shareholders, upon demand, to disclose to the fund information with respect to the
direct and indirect ownership of shares in order to comply with various laws or regulations, and the fund may disclose such ownership if required by law or regulation, 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
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will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. The declaration further provides that a trustee acting in his or her capacity
of trustee is not personally liable to any person, other than the trust or its shareholders, 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 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 or of a committee of the Board, lead independent trustee or
audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.
Derivative Actions.
The declaration provides a detailed process for the
bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction and other harm that can be caused to the fund or its shareholders as a result of spurious shareholder
demands and derivative actions. Prior to bringing a derivative action, a demand by three unrelated shareholders must 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
64
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.
TAXES
The following is a summary of certain material U.S. federal income tax considerations regarding the purchase, ownership and disposition
of shares of the fund by U.S. persons. This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the fund or to all categories of investors, some of which may be subject to special tax rules.
Current and prospective shareholders are urged to consult their own tax 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 intends to continue to qualify to be
treated as a regulated investment company under the Code each taxable year. To so qualify, the fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies 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, any two or more issuers of which 20% or more of the voting stock is held by the fund and that are determined to be engaged in
the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships.
Although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to 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). Fund investments in partnerships, including in qualified publicly traded partnerships, may result in the fund being subject to state, local or foreign income, franchise or
withholding tax liabilities.
As a regulated investment company, the fund will not be subject to U.S. federal income tax on
its net investment income (
i.e.
, income other than its net realized long-term and short-term capital gains) and its net realized long-term and short-term capital gains, if any, that it distributes to its shareholders, provided an amount equal
to at least (i) 90% of the sum of its investment company taxable income (
i.e.
, its taxable income minus the excess, if any, of its net realized long-term capital gains over its net realized short-term capital losses (including any
capital loss carryovers), plus or minus certain other adjustments as specified in the Code) and (ii) 90% of its net tax-exempt income for the taxable year is distributed to its shareholders in compliance with the Codes timing and other
requirements. However, any taxable income or gain the fund does not distribute will be subject to tax at regular corporate rates.
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On September 30, 2012, the unused capital loss carryforward of the fund was
$12,484,757. For federal income tax purposes, this amount is available to be applied against the funds future realized capital gains that are realized prior to the expiration of the carryforward, if any.
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Year of Expiration
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Amount ($)
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9/30/2017
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10,970,075
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9/30/2018
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1,514,682
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For taxable years beginning in 2011 or after, capital losses will not be subject to expiration.
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 98% of its ordinary income for that year and at least 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 retained by the fund that is subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. The fund anticipates that it will pay such dividends and will make such distributions as are necessary in
order to avoid the application of this excise tax.
If, in any taxable year, the fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be deductible by the fund in computing its taxable income.
In addition, in the event of a failure to qualify, the funds distributions, to the extent derived from the funds current or accumulated earnings and profits, will constitute dividends that are taxable to shareholders as ordinary income,
even though those distributions might otherwise (at least in part) have been treated in the shareholders hands as long-term capital gains. However, such dividends will be eligible (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 fails to qualify as a regulated investment company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again as a regulated investment company. If the fund fails to qualify as a regulated investment company for a period greater than two taxable years, the fund may be required to recognize any net
built-in gains with respect to certain of its assets (
i.e
., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the fund had been liquidated) in
order to qualify as a regulated investment company in a subsequent year.
The funds transactions in foreign currencies,
forward contracts, options and futures contracts (including options and futures contracts on foreign currencies) will be subject to special provisions of the Code (including provisions relating to hedging transactions and
straddles) that, among other things, may affect the character of gains and losses realized by the fund (
i.e
., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the fund and defer fund
losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the fund to mark-to-market certain types of the positions in its portfolio (
i.e
., treat
them as if they were closed out at the end of each year) and (b) may cause the fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. The fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, 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 indexes, are subject to special tax rules. All section 1256 contracts held by the fund at the end of its taxable year are required to be
66
marked to their market value, and any unrealized gain or loss on those positions will be included in the funds income as if each position had been sold for its fair market value at the end
of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the fund from positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not
part of a hedging transaction nor part of a straddle, 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or
loss, regardless of the period of time the positions were actually held by the fund.
As a result of entering into swap
contracts, the fund may make or receive periodic net payments. The fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will
generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the fund has been a party to the swap for more than one year). With
respect to certain types of swaps, the fund may be required to currently recognize income or loss with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as
ordinary income or loss. The tax treatment of many types of credit default swaps is uncertain.
The fund may be required to
treat amounts as taxable income or gain, subject to the distribution requirements referred to above, even though no corresponding amounts of cash are received concurrently, as a result of (a) mark-to-market, constructive sale or rules
applicable to PFICs (as defined below) or partnerships or trusts in which the fund invests or to certain options, futures or forward contracts, or appreciated financial positions or (b) 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 (c) tax rules applicable to
debt obligations acquired with original issue discount, including zero-coupon or deferred payment bonds and pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. The fund may
therefore be required to obtain cash to be used to satisfy these distribution requirements by selling securities at times that it might not otherwise be desirable to do so or borrowing the necessary cash, thereby incurring interest expenses.
In certain situations, the fund may, for a taxable year, defer all or a portion of its capital losses and currency losses
realized after October and certain ordinary losses realized after December until the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals
and other rules regarding gains and losses realized after October (or December) may affect the tax character of shareholder distributions.
In general, gain or loss on a short sale is recognized when the fund closes the sale by delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or loss from a short
sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital asset in the funds hands. Except with respect to certain situations where the property used by the fund to
close a short sale has a long-term holding period on the date of the short sale, special rules would generally treat the gains on short sales as short-term capital gains. These rules may also terminate the running of the holding period of
substantially identical property held by the fund. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, substantially identical property has been held by the fund for
more than one year. In general, the fund will not be permitted to deduct payments made to reimburse the lender of securities for dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the short sale is entered
into.
Foreign Investments
. Dividends or other income (including, in some cases, capital gains) received by the fund
from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases. The fund will not be
eligible to elect to treat any foreign taxes it pays as paid by its shareholders, who therefore will not be entitled to credits for such taxes on their own tax returns. Foreign taxes paid by the fund will reduce the return from the funds
investments.
67
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange
rates between the time the fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the fund actually collects such income or pays such liabilities are generally treated as ordinary income or
ordinary loss. In general, gains (and losses) realized on debt instruments will be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the U.S. dollar and the currencies in which the instruments
are denominated. Similarly, gains or losses on foreign currency, foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt securities denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss unless the fund were to elect otherwise.
Passive Foreign Investment Companies
. If the fund purchases shares in certain foreign investment entities, called passive
foreign investment companies (PFICs), it may be subject to U.S. federal income tax on a portion of any excess distribution or gain from the disposition of such shares even if such income is distributed as a taxable
dividend by the fund to its shareholders. Additional charges in the nature of interest may be imposed on the fund in respect of deferred taxes arising from such distributions or gains.
If the fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing fund under the Code, in lieu of the
foregoing requirements, the fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the fund, and such amounts would be subject to the
90% and excise tax distribution requirements described above. In order to make this election, the fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.
Alternatively, the fund may make a mark-to-market election that will result in the fund being treated as if it had sold and
repurchased its PFIC stock at the end of each year. In such case, the fund would report any such gains as ordinary income and would deduct any such losses as ordinary losses to the extent of previously recognized gains. The election must be made
separately for each PFIC owned by the fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the Internal Revenue Service (the IRS). By making the election, the fund could potentially
ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of
PFIC stock. The fund may have to distribute this phantom income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax.
The fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules.
Taxation of U.S. Shareholders
Dividends and Distributions.
Dividends and other distributions by the fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is made.
However, any dividend declared by the fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed to have been received by each shareholder on December 31
of such calendar year and to have been paid by the fund not later than such December 31, provided such dividend is actually paid by the fund during January of the following calendar year. The fund intends to distribute annually to its
shareholders substantially all of its investment company taxable income, and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if the fund retains for
investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (at a maximum rate of 35%) on the amount
retained. In that event, the fund will designate such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital
gains, their proportionate shares of the
68
undistributed amount, (b) will be entitled to credit their proportionate shares of the 35% tax paid by the fund on the undistributed amount against their U.S. federal income tax liabilities,
if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholders income. Organizations or persons not subject to federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the fund upon filing
appropriate returns or claims for refund with the IRS.
Dividends of net investment income and distributions of 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 gains dividends are taxable as
long-term capital gains, whether paid in cash or in shares and regardless of how long a shareholder has held shares of the fund. Such dividends will not be eligible for the dividends received deduction. Dividends and distributions paid by the fund
attributable to dividends on stock of U.S. corporations received by the fund, with respect to which the fund meets certain holding period requirements, will be eligible for the deduction for dividends received by corporations. Special rules apply,
however, to regular dividends paid to individuals. Such a dividend, may be subject to tax at the rates generally applicable to long-term capital gains for individuals (15% for individuals with incomes below $400,000 ($450,000 if married filing
jointly, 20% for individuals with any income above those amounts that is long-term capital gain and 0% at certain income levels), provided that the individual receiving the dividend satisfies certain holding period and other requirements. Dividends
subject to these special rules are not actually treated as capital gains, however, and thus are not included in the computation of an individuals net capital gain and generally cannot be used to offset capital losses. The long-term capital
gains rates will apply to: (a) 100% of the regular dividends paid by the fund to an individual in a particular taxable year if 95% or more of the funds gross income (ignoring gains attributable to the sale of stocks and securities except to
the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) in that taxable year is attributable to qualified dividend income received by the fund; or (b) the portion of the regular dividends paid by
the fund to an individual in a particular taxable year that is attributable to qualified dividend income received by the fund in that taxable year if such qualified dividend income accounts for less than 95% of the funds gross income (ignoring
gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) for that taxable year. For this purpose, qualified dividend
income generally means income from dividends received by the fund from U.S. corporations and qualified foreign corporations, provided that the fund satisfies certain holding period requirements in respect of the stock of such corporations and
has not hedged its position in the stock in certain ways. Also, dividends received by the fund from a REIT or another regulated investment company generally are qualified dividend income only to the extent the dividend distributions are made out of
qualified dividend income received by such REIT or other regulated investment company. In the case of securities lending transactions, payments in lieu of dividends are not qualified dividend income. If a shareholder elects to treat fund dividends
as investment income for purposes of the limitation on the deductibility of investment interest, such dividends would not be qualified dividend income.
We will send you information after the end of each year setting forth the amount of dividends paid by us that are eligible for the reduced rates.
If an individual receives a regular dividend qualifying for the long-term capital gains rates and such dividend constitutes an
extraordinary dividend, and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such
extraordinary dividend. An extraordinary dividend on common stock for this purpose is generally a dividend (a) in an amount greater than or equal to 10% of the taxpayers tax basis (or trading value) in a share of stock, aggregating
dividends with ex-dividend dates within an 85-day period or (b) in an amount greater than 20% of the taxpayers tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period.
Distributions in excess of the funds current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of a
69
shareholders basis in his shares of the fund, and as a capital gain thereafter (if the shareholder holds his shares of the fund as capital assets). Shareholders receiving dividends or
distributions in the form of additional shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to
the record date for a taxable dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless
be taxable to them. If the fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends are included in the funds gross income not as of the date received but as of the later
of (a) the date such stock became ex-dividend with respect to such dividends (
i.e.
, the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the fund acquired such
stock. Accordingly, in order to satisfy its income distribution requirements, the fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
Under current law, the fund serves to block unrelated business taxable income (UBTI) from being realized by its
tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the fund if shares in the fund constitute debt-financed property in the hands of the tax-exempt shareholder within the
meaning of Code Section 514(b). Certain types of income received by the fund from REITs, real estate mortgage investment conduits, taxable mortgage pools or other investments may cause the fund to designate some or all of its distributions as
excess inclusion income. To fund shareholders such excess inclusion income may (a) constitute taxable income, as UBTI for those shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts,
Keogh plans, pension plans and certain charitable entities; (b) not be offset by otherwise allowable deductions for tax purposes; (c) not be eligible for reduced U.S. withholding for non-U.S. shareholders even from tax treaty countries;
and (d) cause the fund to be subject to tax if certain disqualified organizations as defined by the Code are fund shareholders.
If a charitable remainder annuity trust or charitable remainder unitrust (each as defined in Code Section 664) has UBTI for a tax year, a 100% excise tax on the UBTI is imposed on the trust.
Sales of Shares.
Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss equal to
the difference between the amount realized and his or her basis in the shares. A redemption of shares by the fund will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss if the shares are capital assets
in the shareholders hands, and will be long-term capital gain or loss if the shares are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. Any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the fund, within a 61-day period beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss. Any loss realized by a shareholder on the sale of a fund share held by the shareholder for six months or less will be
treated for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the shareholder with respect to such share during such six month period. If a
shareholder incurs a sales charge in acquiring shares of the fund, disposes of those shares within 90 days and then by January 31 of the calendar year following the year of disposition acquires shares in a mutual fund for which the otherwise
applicable sales charge is reduced by reason of a reinvestment right (
e.g.,
an exchange privilege), the original sales charge will not be taken into account in computing gain or loss on the original shares to the extent the subsequent sales
charge is reduced. Instead, the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired shares. Furthermore, the same rule also applies to a disposition of the newly acquired shares made within 90 days
of the second acquisition. This provision prevents a shareholder from immediately deducting the sales charge by shifting his or her investment in a family of mutual funds.
70
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 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 account.
Backup
Withholding
. The fund may be required to withhold, for U.S. federal income tax purposes, 28% of the dividends, distributions and redemption proceeds payable to shareholders who fail to provide the fund with their correct taxpayer identification
number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Certain shareholders are exempt from backup withholding. Backup withholding is not an additional tax and any amount withheld
may be credited against a shareholders U.S. federal income tax liability.
Notices
. Shareholders will be notified
annually by the fund as to the U.S. federal income tax status of the dividends, distributions and deemed distributions attributable to undistributed capital gains (discussed above in Taxes-Taxation of U.S. Shareholders-Dividends and
Distributions) made by the fund to its shareholders. Furthermore, shareholders will also receive, if appropriate, various written notices after the close of the funds taxable year regarding the U.S. federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that are treated as having been paid) by the fund to its shareholders during the preceding taxable year.
If the fund is held through a qualified retirement plan entitled to tax exempt treatment for federal income tax purposes, distributions will generally not be taxable currently. Special tax rules apply to
such retirement plans. You should consult your tax adviser regarding the tax treatment of distributions (which may include amounts attributable to fund distributions) which may be taxable when distributed from the retirement plan.
Other Taxes
Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign taxes depending on each shareholders particular situation.
If a shareholder recognizes a loss with respect to the funds shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current
guidance, shareholders of a regulated investment company are not
71
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.
Taxation of Non-U.S. Shareholders
Dividends paid by the fund to non-U.S. shareholders are generally subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from
investment income and short-term capital gains. In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The withholding tax does
not apply to regular dividends paid to a non-U.S. shareholder who provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholders conduct of a trade or business within the United States. Instead,
the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional branch
profits tax imposed at a rate of 30% (or lower treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate.
In general, U.S. federal withholding tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any
distributions of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of the fund.
For taxable years beginning before January 1, 2014, properly reported dividends are generally exempt from U.S. federal withholding tax where they (a) are paid in respect of the funds
qualified net interest income (generally, the funds U.S. source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the fund is at least a 10% shareholder,
reduced by expenses that are allocable to such income) or (b) are paid in respect of the funds qualified short-term capital gains (generally, the excess of the funds net short-term capital gain over the funds
long-term capital loss for such taxable year). However, depending on its circumstances, the fund may designate all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains
and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a non-U.S. shareholder will need to comply with applicable certification requirements
relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute Form). In the case of shares held through an intermediary, the intermediary may withhold even if the fund designates the payment as qualified net
interest income or qualified short-term capital gain. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their accounts.
For taxable years beginning before January 1, 2014, distributions that the fund reports as short-term capital gain
dividends or long-term capital gain dividends will not be treated as such to a recipient non-U.S. shareholder if the distribution is attributable to gain received from the sale or exchange of U.S. real property or an interest in a
U.S. real property holding corporation and the funds direct or indirect interests in U.S. real property exceeded certain levels. Instead, if the non-U.S. shareholder has not owned more than 5% of the outstanding shares of the fund at any time
during the one year period ending on the date of distribution, such distributions will be subject to 30% withholding by the fund and will be treated as ordinary dividends to the non-U.S. shareholder; if the non-U.S. shareholder owned more than 5% of
the outstanding shares of the fund at any time during the one year period ending on the date of the distribution, such distribution will be treated as real property gain subject to 35% withholding tax and could subject the non-U.S. shareholder to
U.S. filing requirements. Additionally, if the funds direct or indirect interests in U.S. real property were to exceed certain levels, a non-U.S. shareholder realizing gains upon redemption from the fund on or before December 31, 2013
could be subject to the 35% withholding tax and U.S. filing requirements unless more than 50% of the funds shares were owned by U.S. persons at such time or unless the non-U.S. person had not held more than 5% of the funds outstanding
shares throughout either such persons holding period for the redeemed shares or, if shorter, the previous five years.
72
In addition, the same rules apply with respect to distributions to a non-U.S. shareholder
from the fund and redemptions of a non-U.S. shareholders interest in the fund attributable to a REITs distribution to the fund of gain from the sale or exchange of U.S. real property or an interest in a U.S. real property holding
corporation, if the funds direct or indirect interests in U.S. real property were to exceed certain levels. The rule with respect to distributions and redemptions attributable to a REITs distribution to the fund will not expire for
taxable years beginning on or after January 1, 2012.
The rules laid out in the previous two paragraphs, other than the
withholding rules, will apply notwithstanding the funds participation in a wash sale transaction or its payment of a substitute dividend.
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 December 31, 2013, 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.
A non-U.S. entity that invests in the fund will need to provide the fund with documentation properly certifying the entity's 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 tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described here. Foreign shareholders should consult their own
tax advisers with respect to the particular tax consequences to them of an investment in the fund, including the applicability of non-U.S. taxes.
Shares of the fund held by a non-U.S. shareholder at death will be considered situated in the United States and subject to the U.S. estate tax.
The foregoing is only a summary of certain material U.S. federal income tax consequences affecting the fund and its shareholders.
Current and prospective shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the fund.
FINANCIAL STATEMENTS
The audited financial
statements of the fund (Statement of Assets and Liabilities, including the Schedule of Investments as of September 30, 2012, Statement of Operations for the year ended September 30, 2012, Statements of Changes in Net Assets for each of the
years in the two-year period ended September 30, 2012, Financial Highlights for each of the years in the five-year period ended September 30, 2012, 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 November 23, 2012; Accession Number 0001193125-12-479092).
73
A
PPENDIX
A
C
LEAR
B
RIDGE
I
NVESTMENTS
, LLC
P
ROXY
V
OTING
P
OLICIES
AND
P
ROCEDURES
A
MENDED
AS
OF
M
ARCH
6, 2012
I.
|
Types of Accounts for Which ClearBridge Votes Proxies
|
III.
|
How ClearBridge Votes
|
IV.
|
Conflicts of Interest
|
|
A.
|
Procedures for Identifying Conflicts of Interest
|
|
B.
|
Procedures for Assessing Materiality of Conflicts of Interest and for Addressing Material Conflicts of Interest
|
|
C.
|
Third Party Proxy Voting FirmConflicts of Interest
|
|
D.
|
Proxy Contest Defenses
|
|
F.
|
Miscellaneous Governance Provisions
|
|
H.
|
Executive and Director Compensation
|
|
I.
|
State of Incorporation
|
|
J.
|
Mergers and Corporate Restructuring
|
|
K.
|
Social and Environmental Issues
|
VII.
|
Disclosure of Proxy Voting
|
VIII.
|
Recordkeeping and Oversight
|
A-1
CLEARBRIDGE INVESTMENTS, LLC
Proxy Voting Policies and Procedures
I.
|
TYPES OF ACCOUNTS FOR WHICH CLEARBRIDGE VOTES PROXIES
|
ClearBridge votes proxies for each client that has specifically authorized us to vote them in the investment management contract or otherwise and votes proxies for each ERISA account unless the plan
document or investment advisory agreement specifically reserves the responsibility to vote proxies to the plan trustees or other named fiduciary. These policies and procedures are intended to fulfill applicable requirements imposed on ClearBridge by
the Investment Advisers Act of 1940, as amended, the Investment Company Act of 1940, as amended, and the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations adopted under these laws.
In voting proxies, we
are guided by general fiduciary principles. Our goal is to act prudently, solely in the best interest of the beneficial owners of the accounts we manage and, in the case of ERISA accounts, for the exclusive purpose of providing economic benefits to
such persons. We attempt to provide for the consideration of all factors that could affect the value of the investment and will vote proxies in the manner that we believe will be consistent with efforts to maximize shareholder values.
III.
|
HOW CLEARBRIDGE VOTES
|
Section V of these
policies and procedures sets forth certain stated positions. In the case of a proxy issue for which there is a stated position, we generally vote in accordance with the stated position. In the case of a proxy issue for which there is a list of
factors set forth in Section V that we consider in voting on such issue, we consider those factors and vote on a case-by-case basis in accordance with the general principles set forth above. In the case of a proxy issue for which there is no stated
position or list of factors that we consider in voting on such issue, we vote on a case-by-case basis in accordance with the general principles set forth above.
We may utilize an external service provider to provide us with information and/or
a recommendation with regard to proxy votes but we are not required to follow any such recommendations. The use of an external service provider does not relieve us of our responsibility for the proxy vote.
For routine matters, we usually vote according to our policy or the external service providers recommendation, although we are not obligated to do
so and an individual portfolio manager may vote contrary to our policy or the recommendation of the external service provider. If a matter is non-routine,
e.g.
, managements recommendation is different than that of the external service
provider and ClearBridge is a significant holder or it is a significant holding for ClearBridge, the issues will be highlighted to the appropriate investment teams and their views solicited by members of the Proxy Committee. Different investment
teams may vote differently on the same issue, depending upon their assessment of clients best interests.
ClearBridges proxy
voting process is overseen and coordinated by its Proxy Committee.
IV.
|
CONFLICTS OF INTEREST
|
In furtherance of
ClearBridges goal to vote proxies in the best interests of clients, ClearBridge follows procedures designed to identify and address material conflicts that may arise between ClearBridges interests and those of its clients before voting
proxies on behalf of such clients.
|
A.
|
Procedures for Identifying Conflicts of Interest
|
ClearBridge relies on the following to seek to identify conflicts of interest with respect to proxy voting:
|
1.
|
ClearBridges employees are periodically reminded of their obligation (i) to be aware of the potential for conflicts of interest on the part
of ClearBridge with respect to voting proxies on
|
A-2
|
behalf of client accounts both as a result of their personal relationships or personal or business relationships relating to another Legg Mason business unit, and (ii) to bring conflicts of
interest of which they become aware to the attention of ClearBridges General Counsel/Chief Compliance Officer.
|
|
2.
|
ClearBridges finance area maintains and provides to ClearBridge Compliance and proxy voting personnel an up- to-date list of all client relationships that have
historically accounted for or are projected to account for greater than 1% of ClearBridges net revenues.
|
|
3.
|
As a general matter, ClearBridge takes the position that relationships between a non-ClearBridge Legg Mason unit and an issuer (
e.g.
, investment management
relationship between an issuer and a non-ClearBridge Legg Mason affiliate) do not present a conflict of interest for ClearBridge in voting proxies with respect to such issuer because ClearBridge operates as an independent business unit from other
Legg Mason business units and because of the existence of informational barriers between ClearBridge and certain other Legg Mason business units. As noted above, ClearBridge employees are under an obligation to bring such conflicts of interest,
including conflicts of interest which may arise because of an attempt by another Legg Mason business unit or non-ClearBridge Legg Mason officer or employee to influence proxy voting by ClearBridge to the attention of ClearBridge Compliance.
|
|
4.
|
A list of issuers with respect to which ClearBridge has a potential conflict of interest in voting proxies on behalf of client accounts will be maintained by
ClearBridge proxy voting personnel. ClearBridge will not vote proxies relating to such issuers until it has been determined that the conflict of interest is not material or a method for resolving the conflict of interest has been agreed upon and
implemented, as described in Section IV below.
|
|
B.
|
Procedures for Assessing Materiality of Conflicts of Interest and for Addressing Material Conflicts of Interest
|
|
1.
|
ClearBridge maintains a Proxy Committee which, among other things, reviews and addresses conflicts of interest brought to its attention. The Proxy Committee is
comprised of such ClearBridge personnel (and others, at ClearBridges request), as are designated from time to time. The current members of the Proxy Committee are set forth in the Proxy Committees Terms of Reference.
|
|
2.
|
All conflicts of interest identified pursuant to the procedures outlined in Section IV. A. must be brought to the attention of the Proxy Committee for resolution. A
proxy issue that will be voted in accordance with a stated ClearBridge position on such issue or in accordance with the recommendation of an independent third party generally is not brought to the attention of the Proxy Committee for a conflict of
interest review because ClearBridges position is that any conflict of interest issues are resolved by voting in accordance with a pre-determined policy or in accordance with the recommendation of an independent third party.
|
|
3.
|
The Proxy Committee will determine whether a conflict of interest is material. A conflict of interest will be considered material to the extent that it is determined
that such conflict is likely to influence, or appear to influence, ClearBridges decision-making in voting the proxy. All materiality determinations will be based on an assessment of the particular facts and circumstances. A written record of
all materiality determinations made by the Proxy Committee will be maintained.
|
|
4.
|
If it is determined by the Proxy Committee that a conflict of interest is not material, ClearBridge may vote proxies notwithstanding the existence of the conflict.
|
|
5.
|
If it is determined by the Proxy Committee that a conflict of interest is material, the Proxy Committee will determine an appropriate method to resolve
such conflict of interest before the
|
A-3
|
proxy affected by the conflict of interest is voted. Such determination shall be based on the particular facts and circumstances, including the importance of the proxy issue, the nature of the
conflict of interest, etc. Such methods may include:
|
|
|
|
disclosing the conflict to clients and obtaining their consent before voting;
|
|
|
|
suggesting to clients that they engage another party to vote the proxy on their behalf;
|
|
|
|
in the case of a conflict of interest resulting from a particular employees personal relationships, removing such employee from the
decision-making process with respect to such proxy vote; or
|
|
|
|
such other method as is deemed appropriate given the particular facts and circumstances, including the importance of the proxy issue, the nature
of the conflict of interest, etc.*
|
A written record of the method used to resolve a material conflict of
interest shall be maintained.
|
C.
|
Third Party Proxy Voting FirmConflicts of Interest
|
With respect to a third party proxy voting firm described herein, the Proxy Committee will periodically review and assess such firms policies, procedures and practices with respect to the disclosure
and handling of conflicts of interest.
These are policy
guidelines that can always be superseded, subject to the duty to act solely in the best interest of the beneficial owners of accounts, by the investment management professionals responsible for the account holding the shares being voted. There may
be occasions when different investment teams vote differently on the same issue. A ClearBridge investment team (
e.g.
, ClearBridges Social Awareness Investment team) may adopt proxy voting policies that supplement these policies and
procedures. In addition, in the case of Taft-Hartley clients, ClearBridge will comply with a client direction to vote proxies in accordance with Institutional Shareholder Services (ISS) PVS Proxy Voting Guidelines, which ISS represents to be
fully consistent with AFL-CIO guidelines.
|
1.
|
Voting on Director Nominees in Uncontested Elections.
|
|
a.
|
We withhold our vote from a director nominee who:
|
|
|
|
attended less than 75 percent of the companys board and committee meetings without a valid excuse (illness, service to the nation/local
government, work on behalf of the company);
|
|
|
|
were members of the companys board when such board failed to act on a shareholder proposal that received approval of a majority of shares
cast for the previous two consecutive years;
|
|
|
|
received more than 50 percent withheld votes of the shares cast at the previous board election, and the company has failed to address the issue
as to why;
|
*
|
Especially in the case of an apparent, as opposed to actual, conflict of interest, the Proxy Committee may resolve such conflict of interest by satisfying itself that
ClearBridges proposed vote on a proxy issue is in the best interest of client accounts and is not being influenced by the conflict of interest.
|
A-4
|
|
|
is an insider where: (1) such person serves on any of the audit, compensation or nominating committees of the companys board,
(2) the companys board performs the functions typically performed by a companys audit, compensation and nominating committees, or (3) the full board is less than a majority independent (unless the director nominee is also the
company CEO, in which case we will vote FOR);
|
|
|
|
is a member of the companys audit committee, when excessive non-audit fees were paid to the auditor, or there are chronic control issues
and an absence of established effective control mechanisms.
|
|
b.
|
We vote for all other director nominees.
|
|
2.
|
Chairman and CEO is the Same Person.
|
We vote on a case-by-case basis on shareholder proposals that would require the positions of the Chairman and CEO to be held by different persons. We would generally vote FOR such a proposal unless there
are compelling reasons to vote against the proposal, including:
|
|
|
Designation of a lead director
|
|
|
|
Majority of independent directors (supermajority)
|
|
|
|
All independent key committees
|
|
|
|
Size of the company (based on market capitalization)
|
|
|
|
Established governance guidelines
|
|
3.
|
Majority of Independent Directors
|
|
a.
|
We vote for shareholder proposals that request that the board be comprised of a majority of independent directors. Generally that would require that the director have
no connection to the company other than the board seat. In determining whether an independent director is truly independent (e.g. when voting on a slate of director candidates), we consider certain factors including, but not necessarily limited to,
the following: whether the director or his/her company provided professional services to the company or its affiliates either currently or in the past year; whether the director has any transactional relationship with the company; whether the
director is a significant customer or supplier of the company; whether the director is employed by a foundation or university that received significant grants or endowments from the company or its affiliates; and whether there are interlocking
directorships.
|
|
b.
|
We vote for shareholder proposals that request that the board audit, compensation and/or nominating committees include independent directors exclusively.
|
|
4.
|
Stock Ownership Requirements
|
We
vote against shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a director, or to remain on the board.
We vote against
shareholder proposals to limit the tenure of independent directors.
|
6.
|
Director and Officer Indemnification and Liability Protection
|
|
a.
|
Subject to subparagraphs 2, 3, and 4 below, we vote for proposals concerning director and officer indemnification and liability protection.
|
|
b.
|
We vote for proposals to limit and against proposals to eliminate entirely director and officer liability for monetary damages for violating the duty of care.
|
A-5
|
c.
|
We vote against indemnification proposals that would expand coverage beyond just legal expenses to acts, such as negligence, that are more serious violations of
fiduciary obligations than mere carelessness.
|
|
d.
|
We vote for only those proposals that provide such expanded coverage noted in subparagraph 3 above in cases when a directors or officers legal defense was
unsuccessful if: (1) the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company,
and
(2) if only the directors legal expenses would be covered.
|
|
7.
|
Director Qualifications
|
|
a.
|
We vote case-by-case on proposals that establish or amend director qualifications. Considerations include how reasonable the criteria are and to what degree they may
preclude dissident nominees from joining the board.
|
|
b.
|
We vote against shareholder proposals requiring two candidates per board seat.
|
|
1.
|
Voting for Director Nominees in Contested Elections
|
We vote on a case-by-case basis in contested elections of directors. Considerations include: chronology of events leading up to the proxy contest; qualifications of director nominees (incumbents and
dissidents); for incumbents, whether the board is comprised of a majority of outside directors; whether key committees (i.e.: nominating, audit, compensation) comprise solely of independent outsiders; discussion with the respective portfolio
manager(s).
|
2.
|
Reimburse Proxy Solicitation Expenses
|
We vote on a case-by-case basis on proposals to provide full reimbursement for dissidents waging a proxy contest. Considerations include: identity of persons who will pay solicitation expenses; cost of
solicitation; percentage that will be paid to proxy solicitation firms.
We vote for
proposals to ratify auditors, unless an auditor has a financial interest in or association with the company, and is therefore not independent; or there is reason to believe that the independent auditor has rendered an opinion that is neither
accurate nor indicative of the companys financial position or there is reason to believe the independent auditor has not followed the highest level of ethical conduct. Specifically, we will vote to ratify auditors if the auditors only provide
the company audit services and such other audit-related and non-audit services the provision of which will not cause such auditors to lose their independence under applicable laws, rules and regulations.
|
2.
|
Financial Statements and Director and Auditor Reports
|
We generally vote for management proposals seeking approval of financial accounts and reports and the discharge of management and supervisory board members, unless there is concern about the past actions
of the companys auditors or directors.
|
3.
|
Remuneration of Auditors
|
We vote for proposals to authorize the board or an audit committee of the board to determine the remuneration of auditors, unless there is evidence of excessive compensation relative to the size and
nature of the company.
A-6
|
4.
|
Indemnification of Auditors
|
We vote against proposals to indemnify auditors.
|
D.
|
Proxy Contest Defenses
|
|
1.
|
Board Structure: Staggered vs. Annual Elections
|
|
a.
|
We vote against proposals to classify the board.
|
|
b.
|
We vote for proposals to repeal classified boards and to elect all directors annually.
|
|
2.
|
Shareholder Ability to Remove Directors
|
|
a.
|
We vote against proposals that provide that directors may be removed
only
for cause.
|
|
b.
|
We vote for proposals to restore shareholder ability to remove directors with or without cause.
|
|
c.
|
We vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
|
|
d.
|
We vote for proposals that permit shareholders to elect directors to fill board vacancies.
|
|
a.
|
If plurality voting is in place for uncontested director elections, we vote for proposals to permit or restore cumulative voting.
|
|
b.
|
If majority voting is in place for uncontested director elections, we vote against cumulative voting.
|
|
c.
|
If plurality voting is in place for uncontested director elections, and proposals to adopt both cumulative voting and majority voting are on the same slate, we vote for
majority voting and against cumulative voting.
|
We vote for
non-binding and/or binding resolutions requesting that the board amend a companys by-laws to stipulate that directors need to be elected with an affirmative majority of the votes cast, provided that it does not conflict with the state law
where the company is incorporated. In addition, all resolutions need to provide for a carve-out for a plurality vote standard when there are more nominees than board seats (i.e. contested election). In addition, ClearBridge strongly encourages
companies to adopt a post-election director resignation policy setting guidelines for the company to follow to promptly address situations involving holdover directors.
|
5.
|
Shareholder Ability to Call Special Meetings
|
|
a.
|
We vote against proposals to restrict or prohibit shareholder ability to call special meetings.
|
|
b.
|
We vote for proposals that provide shareholders with the ability to call special meetings, taking into account a minimum ownership threshold of 10 percent (and investor
ownership structure, depending on bylaws).
|
|
6.
|
Shareholder Ability to Act by Written Consent
|
|
a.
|
We vote against proposals to restrict or prohibit shareholder ability to take action by written consent.
|
|
b.
|
We vote for proposals to allow or make easier shareholder action by written consent.
|
|
7.
|
Shareholder Ability to Alter the Size of the Board
|
|
a.
|
We vote for proposals that seek to fix the size of the board.
|
A-7
|
b.
|
We vote against proposals that give management the ability to alter the size of the board without shareholder approval.
|
|
8.
|
Advance Notice Proposals
|
We
vote on advance notice proposals on a case-by-case basis, giving support to those proposals which allow shareholders to submit proposals as close to the meeting date as reasonably possible and within the broadest window possible.
|
a.
|
We vote against proposals giving the board exclusive authority to amend the by-laws.
|
|
b.
|
We vote for proposals giving the board the ability to amend the by-laws in addition to shareholders.
|
|
10.
|
Article Amendments (not otherwise covered by ClearBridge Proxy Voting Policies and Procedures).
|
We review on a case-by-case basis all proposals seeking amendments to the articles of association.
We vote for article amendments if:
|
|
|
shareholder rights are protected;
|
|
|
|
there is negligible or positive impact on shareholder value;
|
|
|
|
management provides adequate reasons for the amendments; and
|
|
|
|
the company is required to do so by law (if applicable).
|
|
a.
|
We vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification.
|
|
b.
|
We vote on a case-by-case basis on shareholder proposals to redeem a companys poison pill. Considerations include: when the plan was originally adopted; financial
condition of the company; terms of the poison pill.
|
|
c.
|
We vote on a case-by-case basis on management proposals to ratify a poison pill. Considerations include: sunset provisionpoison pill is submitted to shareholders
for ratification or rejection every 2 to 3 years; shareholder redemption feature -10% of the shares may call a special meeting or seek a written consent to vote on rescinding the rights plan.
|
|
a.
|
We vote for fair price proposals, as long as the shareholder vote requirement embedded in the provision is no more than a majority of disinterested shares.
|
|
b.
|
We vote for shareholder proposals to lower the shareholder vote requirement in existing fair price provisions.
|
|
a.
|
We vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a companys ability to make greenmail payments.
|
|
b.
|
We vote on a case-by-case basis on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
|
A-8
|
a.
|
We vote against dual class exchange offers.
|
|
b.
|
We vote against dual class re-capitalization.
|
|
5.
|
Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws
|
|
a.
|
We vote against management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments.
|
|
b.
|
We vote for shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments.
|
|
6.
|
Supermajority Shareholder Vote Requirement to Approve Mergers
|
|
a.
|
We vote against management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations.
|
|
b.
|
We vote for shareholder proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations.
|
|
7.
|
White Squire Placements
|
We vote
for shareholder proposals to require approval of blank check preferred stock issues.
|
F.
|
Miscellaneous Governance Provisions
|
|
a.
|
We vote for shareholder proposals that request corporations to adopt confidential voting, use independent tabulators and use independent inspectors of election as long
as the proposals include clauses for proxy contests as follows: in the case of a contested election, management is permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in
place. If the dissidents do not agree, the confidential voting policy is waived.
|
|
b.
|
We vote for management proposals to adopt confidential voting subject to the proviso for contested elections set forth in sub-paragraph A.1 above.
|
We vote for
shareholder proposals that would allow significant company shareholders equal access to managements proxy material in order to evaluate and propose voting recommendations on proxy proposals and director nominees, and in order to nominate their
own candidates to the board.
We vote on a
case-by-case basis on bundled or conditioned proxy proposals. In the case of items that are conditioned upon each other, we examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items
is not in shareholders best interests and therefore not in the best interests of the beneficial owners of accounts, we vote against the proposals. If the combined effect is positive, we support such proposals.
|
4.
|
Shareholder Advisory Committees
|
We vote on a case-by-case basis on proposals to establish a shareholder advisory committee. Considerations include: rationale and cost to
the firm to form such a committee. We generally vote against such proposals if the board and key nominating committees are comprised solely of independent/outside directors.
We vote for
proposals that seek to bring forth other business matters.
A-9
We vote on a
case-by-case basis on proposals that seek to adjourn a shareholder meeting in order to solicit additional votes.
We vote
against proposals if a company fails to provide shareholders with adequate information upon which to base their voting decision.
|
1.
|
Common Stock Authorization
|
|
a.
|
We vote on a case-by-case basis on proposals to increase the number of shares of common stock authorized for issue, except as described in paragraph 2 below.
|
|
b.
|
Subject to paragraph 3, below we vote for the approval requesting increases in authorized shares if the company meets certain criteria:
|
|
|
|
Company has already issued a certain percentage (i.e. greater than 50%) of the companys allotment.
|
|
|
|
The proposed increase is reasonable (i.e. less than 150% of current inventory) based on an analysis of the companys historical stock
management or future growth outlook of the company.
|
|
c.
|
We vote on a case-by-case basis, based on the input of affected portfolio managers, if holding is greater than 1% of an account.
|
|
2.
|
Stock Distributions: Splits and Dividends
|
We vote on a case-by-case basis on management proposals to increase common share authorization for a stock split, provided that the split does not result in an increase of authorized but unissued shares
of more than 100% after giving effect to the shares needed for the split.
We vote
for management proposals to implement a reverse stock split, provided that the reverse split does not result in an increase of authorized but unissued shares of more than 100% after giving effect to the shares needed for the reverse split.
|
4.
|
Blank Check Preferred Stock
|
|
a.
|
We vote against proposals to create, authorize or increase the number of shares with regard to blank check preferred stock with unspecified voting, conversion, dividend
distribution and other rights.
|
|
b.
|
We vote for proposals to create declawed blank check preferred stock (stock that cannot be used as a takeover defense).
|
|
c.
|
We vote for proposals to authorize preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and the terms
of the preferred stock appear reasonable.
|
|
d.
|
We vote for proposals requiring a shareholder vote for blank check preferred stock issues.
|
|
5.
|
Adjust Par Value of Common Stock
|
We vote for management proposals to reduce the par value of common stock.
A-10
|
a.
|
We vote on a case-by-case basis for shareholder proposals seeking to establish them and consider the following factors:
|
|
|
|
Characteristics of the size of the holding (holder owning more than 1% of the outstanding shares).
|
|
|
|
Percentage of the rights offering (rule of thumb less than 5%).
|
|
b.
|
We vote on a case-by-case basis for shareholder proposals seeking the elimination of pre-emptive rights.
|
We vote on a
case-by-case basis for proposals to increase common and/or preferred shares and to issue shares as part of a debt-restructuring plan. Generally, we approve proposals that facilitate debt restructuring.
|
8.
|
Share Repurchase Programs
|
We
vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
We vote for
proposals to create a new class of nonvoting or sub voting common stock if:
|
|
|
It is intended for financing purposes with minimal or no dilution to current shareholders
|
|
|
|
It is not designed to preserve the voting power of an insider or significant shareholder
|
|
10.
|
Issue Stock for Use with Rights Plan
|
We vote
against proposals that increase authorized common stock for the explicit purpose of implementing a shareholder rights plan (poison pill).
|
11.
|
Debt Issuance Requests
|
When
evaluating a debt issuance request, the issuing companys present financial situation is examined. The main factor for analysis is the companys current debt-to-equity ratio, or gearing level. A high gearing level may incline markets and
financial analysts to downgrade the companys bond rating, increasing its investment risk factor in the process. A gearing level up to 100 percent is considered acceptable.
We vote for debt issuances for companies when the gearing level is between zero and 100 percent.
We view on a case-by-case basis proposals where the issuance of debt will result in the gearing level being greater than 100 percent. Any
proposed debt issuance is compared to industry and market standards.
We generally
vote for the adopting of financing plans if we believe they are in the best economic interests of shareholders.
|
H.
|
Executive and Director Compensation
|
In general, we vote for executive and director compensation plans, with the view that viable compensation programs reward the creation of stockholder wealth by having high payout sensitivity to increases
in
A-11
shareholder value. Certain factors, however, such as repricing underwater stock options without shareholder approval, would cause us to vote against a plan. Additionally, in some cases we would
vote against a plan deemed unnecessary.
|
1.
|
OBRA-Related Compensation Proposals
|
|
a.
|
Amendments that Place a Cap on Annual Grant or Amend Administrative Features
|
We vote for plans that simply amend shareholder-approved plans to include administrative features or place a cap on the annual grants any one participant may receive to comply with the provisions of
Section 162(m) of the Internal Revenue Code.
|
b.
|
Amendments to Added Performance-Based Goals
|
We vote for amendments to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) of the Internal Revenue Code.
|
c.
|
Amendments to Increase Shares and Retain Tax Deductions Under OBRA
|
We vote for amendments to existing plans to increase shares reserved and to qualify the plan for favorable tax treatment under the provisions of Section 162(m) the Internal Revenue Code.
|
d.
|
Approval of Cash or Cash-and-Stock Bonus Plans
|
We vote for cash or cash-and-stock bonus plans to exempt the compensation from taxes under the provisions of Section 162(m) of the Internal Revenue Code.
We vote
for proposals to expense stock options on financial statements.
We vote on
a case by case basis with respect to proposals seeking to index stock options. Considerations include whether the issuer expenses stock options on its financial statements and whether the issuers compensation committee is comprised solely of
independent directors.
|
4.
|
Shareholder Proposals to Limit Executive and Director Pay
|
|
a.
|
We vote on a case-by-case basis on all shareholder proposals that seek additional disclosure of executive and director pay information. Considerations include: cost and
form of disclosure. We vote for such proposals if additional disclosure is relevant to shareholders needs and would not put the company at a competitive disadvantage relative to its industry.
|
|
b.
|
We vote on a case-by-case basis on all other shareholder proposals that seek to limit executive and director pay.
|
We have a policy of voting to reasonably limit the level of options and other equity-based compensation arrangements available to
management to reasonably limit shareholder dilution and management compensation. For options and equity-based compensation arrangements, we vote FOR proposals or amendments that would result in the available awards being less than 10% of fully
diluted outstanding shares (i.e. if the combined total of shares, common share equivalents and options available to be awarded under all current and proposed compensation plans is less than 10% of fully diluted shares). In the event the available
awards exceed the 10% threshold, we would also consider the % relative to the common practice of its specific industry (e.g. technology firms). Other considerations would include, without limitation, the following:
|
|
|
Compensation committee comprised of independent outside directors
|
|
|
|
Repricing without shareholder approval prohibited
|
A-12
|
|
|
3-year average burn rate for company
|
|
|
|
Plan administrator has authority to accelerate the vesting of awards
|
|
|
|
Shares under the plan subject to performance criteria
|
|
a.
|
We vote for shareholder proposals to have golden parachutes submitted for shareholder ratification.
|
|
b.
|
We vote on a case-by-case basis on all proposals to ratify or cancel golden parachutes. Considerations include: the amount should not exceed 3 times average base salary
plus guaranteed benefits; golden parachute should be less attractive than an ongoing employment opportunity with the firm.
|
|
a.
|
We vote for shareholder proposals that request a company not to make any death benefit payments to senior executives estates or beneficiaries, or pay premiums in
respect to any life insurance policy covering a senior executives life (golden coffin). We carve out benefits provided under a plan, policy or arrangement applicable to a broader group of employees, such as offering group universal
life insurance.
|
|
b.
|
We vote for shareholder proposals that request shareholder approval of survivor benefits for future agreements that, following the death of a senior executive, would
obligate the company to make payments or awards not earned.
|
|
7.
|
Anti Tax Gross-up Policy
|
|
a.
|
We vote for proposals that ask a company to adopt a policy whereby it will not make, or promise to make, any tax gross-up payment to its senior executives, except for
tax gross-ups provided pursuant to a plan, policy, or arrangement applicable to management employees of the company generally, such as relocation or expatriate tax equalization policy; we also vote for proposals that ask management to put gross-up
payments to a shareholder vote.
|
|
b.
|
We vote against proposals where a company will make, or promise to make, any tax gross-up payment to its senior executives without a shareholder vote, except for tax
gross-ups provided pursuant to a plan, policy, or arrangement applicable to management employees of the company generally, such as relocation or expatriate tax equalization policy.
|
|
8.
|
Employee Stock Ownership Plans (ESOPs)
|
We vote for proposals that request shareholder approval in order to implement an ESOP or to increase authorized shares for existing ESOPs, except in cases when the number of shares allocated to the ESOP
is excessive (
i.e.
, generally greater than five percent of outstanding shares).
|
9.
|
Employee Stock Purchase Plans
|
|
a.
|
We vote for qualified plans where all of the following apply:
|
|
|
|
The purchase price is at least 85 percent of fair market value
|
|
|
|
The offering period is 27 months or less
|
|
|
|
The number of shares allocated to the plan is five percent or less of outstanding shares
|
If the above do not apply, we vote on a case-by-case basis.
|
b.
|
We vote for non-qualified plans where all of the following apply:
|
|
|
|
All employees of the company are eligible to participate (excluding 5 percent or more beneficial owners)
|
|
|
|
There are limits on employee contribution (ex: fixed dollar amount)
|
A-13
|
|
|
There is a company matching contribution with a maximum of 25 percent of an employees contribution
|
|
|
|
There is no discount on the stock price on purchase date (since there is a company match)
|
If the above do not apply, we vote against the non-qualified employee stock purchase plan.
|
10.
|
401(k) Employee Benefit Plans
|
We vote for proposals to implement a 401(k) savings plan for employees.
|
11.
|
Stock Compensation Plans
|
|
a.
|
We vote for stock compensation plans which provide a dollar-for-dollar cash for stock exchange.
|
|
b.
|
We vote on a case-by-case basis for stock compensation plans which do not provide a dollar-for-dollar cash for stock exchange using a quantitative model.
|
|
12.
|
Directors Retirement Plans
|
|
a.
|
We vote against retirement plans for non-employee directors.
|
|
b.
|
We vote for shareholder proposals to eliminate retirement plans for non-employee directors.
|
|
13.
|
Management Proposals to Reprice Options
|
We vote on a case-by-case basis on management proposals seeking approval to reprice options. Considerations include the following:
|
|
|
Historic trading patterns
|
|
|
|
Rationale for the repricing
|
|
|
|
Value-for-value exchange
|
|
14.
|
Shareholder Proposals Recording Executive and Director Pay
|
|
a.
|
We vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation.
|
|
b.
|
We vote against shareholder proposals requiring director fees be paid in stock only.
|
|
c.
|
We vote for shareholder proposals to put option repricing to a shareholder vote.
|
|
d.
|
We vote for shareholder proposals that call for a non-binding advisory vote on executive pay (say-on-pay). Company boards would adopt a policy giving
shareholders the opportunity at each annual meeting to vote on an advisory resolution to ratify the compensation of the named executive officers set forth in the proxy statements summary compensation table.
|
|
e.
|
We vote annual for the frequency of say-on-pay proposals rather than once every two or three years.
|
|
f.
|
We vote on a case-by-case basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus
peers, pay level versus industry, and long term corporate outlook.
|
A-14
|
15.
|
Management Proposals On Executive Compensation
|
|
a.
|
For non-binding advisory votes on executive officer compensation, when management and the external service provider agree, we vote for the proposal. When management and
the external service provider disagree, the proposal becomes a refer item. In the case of a Refer item, the factors under consideration will include the following:
|
|
|
|
Company performance over the last 1-, 3- and 5-year periods on a total shareholder return basis
|
|
|
|
Performance metrics for short- and long-term incentive programs
|
|
|
|
CEO pay relative to company performance (is there a misalignment)
|
|
|
|
Tax gross-ups to senior executives
|
|
|
|
Change-in-control arrangements
|
|
|
|
Presence of a clawback provision, ownership guidelines, or stock holding requirements for senior executives
|
|
b.
|
We vote annual for the frequency of say-on-pay proposals rather than once every two or three years.
|
|
16.
|
Stock Retention / Holding Period of Equity Awards
|
We vote on a case-by-case basis on shareholder proposals asking companies to adopt policies requiring senior executives to retain all or a significant (>50 percent) portion of their shares acquired
through equity compensation plans, either:
|
|
|
While employed and/or for one to two years following the termination of their employment; or
|
|
|
|
For a substantial period following the lapse of all other vesting requirements for the award, with ratable release of a portion of the shares
annually during the lock-up period
|
The following factors will be taken into consideration:
|
|
|
Whether the company has any holding period, retention ratio, or named executive officer ownership requirements currently in place
|
|
|
|
Actual stock ownership of the companys named executive officers
|
|
|
|
Policies aimed at mitigating risk taking by senior executives
|
|
|
|
Pay practices at the company that we deem problematic
|
|
I.
|
State/Country of Incorporation
|
|
1.
|
Voting on State Takeover Statutes
|
|
a.
|
We vote for proposals to opt out of state freeze-out provisions.
|
|
b.
|
We vote for proposals to opt out of state disgorgement provisions.
|
|
2.
|
Voting on Re-incorporation Proposals
|
We vote on a case-by-case basis on proposals to change a companys state or country of incorporation. Considerations include: reasons for re-incorporation (i.e. financial, restructuring, etc);
advantages/benefits for change (i.e. lower taxes); compare the differences in state/country laws governing the corporation.
A-15
|
3.
|
Control Share Acquisition Provisions
|
|
a.
|
We vote against proposals to amend the charter to include control share acquisition provisions.
|
|
b.
|
We vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to
shareholders.
|
|
c.
|
We vote for proposals to restore voting rights to the control shares.
|
|
d.
|
We vote for proposals to opt out of control share cashout statutes.
|
|
J.
|
Mergers and Corporate Restructuring
|
|
1.
|
Mergers and Acquisitions
|
We
vote on a case-by-case basis on mergers and acquisitions. Considerations include: benefits/advantages of the combined companies (i.e. economies of scale, operating synergies, increase in market power/share, etc
); offer price (premium or
discount); change in the capital structure; impact on shareholder rights.
|
2.
|
Corporate Restructuring
|
We vote
on a case-by-case basis on corporate restructuring proposals involving minority squeeze outs and leveraged buyouts. Considerations include: offer price, other alternatives/offers considered and review of fairness opinions.
We vote on a
case-by-case basis on spin-offs. Considerations include the tax and regulatory advantages, planned use of sale proceeds, market focus, and managerial incentives.
We vote on a
case-by-case basis on asset sales. Considerations include the impact on the balance sheet/working capital, value received for the asset, and potential elimination of diseconomies.
We vote on a
case-by-case basis on liquidations after reviewing managements efforts to pursue other alternatives, appraisal value of assets, and the compensation plan for executives managing the liquidation.
We vote for
proposals to restore, or provide shareholders with, rights of appraisal.
|
7.
|
Changing Corporate Name
|
We vote
for proposals to change the corporate name, unless the proposed name change bears a negative connotation.
|
8.
|
Conversion of Securities
|
We
vote on a case-by-case basis on proposals regarding conversion of securities. Considerations include the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and
conflicts of interest.
|
9.
|
Stakeholder Provisions
|
We vote
against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
A-16
|
K.
|
Social and Environmental Issues
|
|
1.
|
In general we vote on a case-by-case basis on shareholder social and environmental proposals, on the basis that their impact on share value may be difficult to
quantify. In most cases, however, we vote for disclosure reports that seek additional information, particularly when it appears the company has not adequately addressed shareholders social and environmental concerns. In determining our vote on
shareholder social and environmental proposals, we also analyze the following factors:
|
|
a.
|
whether adoption of the proposal would have either a positive or negative impact on the companys short-term or long-term share value;
|
|
b.
|
the percentage of sales, assets and earnings affected;
|
|
c.
|
the degree to which the companys stated position on the issues could affect its reputation or sales, or leave it vulnerable to boycott or selective purchasing;
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d.
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whether the issues presented should be dealt with through government or company-specific action;
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e.
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whether the company has already responded in some appropriate manner to the request embodied in a proposal;
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f.
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whether the companys analysis and voting recommendation to shareholders is persuasive;
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g.
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what other companies have done in response to the issue;
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h.
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whether the proposal itself is well framed and reasonable;
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i.
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whether implementation of the proposal would achieve the objectives sought in the proposal; and
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j.
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whether the subject of the proposal is best left to the discretion of the board.
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2.
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Among the social and environmental issues to which we apply this analysis are the following:
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a.
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Energy Efficiency and Resource Utilization
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b.
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Environmental Impact and Climate Change
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c.
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Human Rights and Impact on Communities of Corporate Activities
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d.
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Equal Employment Opportunity and Non Discrimination
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e.
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ILO Standards and Child/Slave Labor
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f.
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Product Integrity and Marketing
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g.
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Sustainability Reporting
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1.
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Charitable Contributions
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We
vote against proposals to eliminate, direct or otherwise restrict charitable contributions.
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2.
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Political Contributions
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In
general, we vote on a case-by-case basis on shareholder proposals pertaining to political contributions. In determining our vote on political contribution proposals we consider, among other things, the following:
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Does the company have a political contributions policy publicly available
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How extensive is the disclosure on these documents
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A-17
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What oversight mechanisms the company has in place for approving/reviewing political contributions and expenditures
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Does the company provide information on its trade association expenditures
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Total amount of political expenditure by the company in recent history
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a.
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We vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
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b.
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We vote against proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to
support the proposal.
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c.
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We vote for by-law or charter changes that are of a housekeeping nature (updates or corrections).
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d.
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We vote for management proposals to change the date/time/location of the annual meeting unless the proposed change is unreasonable.
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e.
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We vote against shareholder proposals to change the date/time/location of the annual meeting unless the current scheduling or location is unreasonable.
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f.
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We vote against proposals to approve other business when it appears as voting item.
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In some
markets, shareholders are routinely asked to approve:
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the opening of the shareholder meeting
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that the meeting has been convened under local regulatory requirements
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the presence of a quorum
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the agenda for the shareholder meeting
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the election of the chair of the meeting
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the allowance of questions
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the publication of minutes
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the closing of the shareholder meeting
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We generally vote for these and similar routine management proposals.
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5.
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Allocation of Income and Dividends
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We generally vote for management proposals concerning allocation of income and the distribution of dividends, unless the amount of the distribution is consistently and unusually small or large.
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6.
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Stock (Scrip) Dividend Alternatives
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a.
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We vote for most stock (scrip) dividend proposals.
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b.
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We vote against proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value.
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ClearBridge has determined that registered investment companies, particularly closed end investment companies,
raise special policy issues making specific voting guidelines frequently inapplicable. To the extent that ClearBridge has proxy voting authority with respect to shares of registered investment
A-18
companies, ClearBridge shall vote such shares in the best interest of client accounts and subject to the general fiduciary principles set forth herein without regard to the specific voting
guidelines set forth in Section V. A. through L.
The voting policy guidelines set forth in Section V may be changed from time
to time by ClearBridge in its sole discretion.
In certain
situations, ClearBridge may determine not to vote proxies on behalf of a client because ClearBridge believes that the expected benefit to the client of voting shares is outweighed by countervailing considerations. Examples of situations in which
ClearBridge may determine not to vote proxies on behalf of a client include:
Proxy
voting in certain countries requires share blocking. This means that shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting (e.g. one week) with a designated depositary. During the
blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares have been returned to client accounts by the designated depositary. In deciding whether to vote shares subject to share
blocking, ClearBridge will consider and weigh, based on the particular facts and circumstances, the expected benefit to clients of voting in relation to the detriment to clients of not being able to sell such shares during the applicable period.
Certain clients of ClearBridge, such as an institutional client or a mutual fund for which ClearBridge acts as a sub-adviser, may engage
in securities lending with respect to the securities in their accounts. ClearBridge typically does not direct or oversee such securities lending activities. To the extent feasible and practical under the circumstances, ClearBridge will request that
the client recall shares that are on loan so that such shares can be voted if ClearBridge believes that the expected benefit to the client of voting such shares outweighs the detriment to the client of recalling such shares (
e.g.
, foregone
income). The ability to timely recall shares for proxy voting purposes typically is not entirely within the control of ClearBridge and requires the cooperation of the client and its other service providers. Under certain circumstances, the recall of
shares in time for such shares to be voted may not be possible due to applicable proxy voting record dates and administrative considerations.
VII.
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DISCLOSURE OF PROXY VOTING
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ClearBridge
employees may not disclose to others outside of ClearBridge (including employees of other Legg Mason business units) how ClearBridge intends to vote a proxy absent prior approval from ClearBridges General Counsel/Chief Compliance Officer,
except that a ClearBridge investment professional may disclose to a third party (other than an employee of another Legg Mason business unit) how s/he intends to vote without obtaining prior approval from ClearBridges General Counsel/Chief
Compliance Officer if (1) the disclosure is intended to facilitate a discussion of publicly available information by ClearBridge personnel with a representative of a company whose securities are the subject of the proxy, (2) the
companys market capitalization exceeds $1 billion and (3) ClearBridge has voting power with respect to less than 5% of the outstanding common stock of the company.
If a ClearBridge employee receives a request to disclose ClearBridges proxy voting intentions to, or is otherwise contacted by, another person outside of ClearBridge (including an employee of
another Legg Mason business unit) in connection with an upcoming proxy voting matter, he/she should immediately notify ClearBridges General Counsel/Chief Compliance Officer.
A-19
If a portfolio manager wants to take a public stance with regards to a proxy, s/he must consult with
ClearBridges General Counsel/Chief Compliance Officer before making or issuing a public statement.
VIII.
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RECORDKEEPING AND OVERSIGHT
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ClearBridge
shall maintain the following records relating to proxy voting:
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a copy of these policies and procedures;
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a copy of each proxy form (as voted);
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a copy of each proxy solicitation (including proxy statements) and related materials with regard to each vote;
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documentation relating to the identification and resolution of conflicts of interest;
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any documents created by ClearBridge that were material to a proxy voting decision or that memorialized the basis for that decision; and
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a copy of each written client request for information on how ClearBridge voted proxies on behalf of the client, and a copy of any written response by
ClearBridge to any (written or oral) client request for information on how ClearBridge voted proxies on behalf of the requesting client.
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Such records shall be maintained and preserved in an easily accessible place for a period of not less than six years from the end of the fiscal year during which the last entry was made on such record,
the first two years in an appropriate office of the ClearBridge adviser.
To the extent that ClearBridge is authorized to vote proxies for a
United States Registered Investment Company, ClearBridge shall maintain such records as are necessary to allow such fund to comply with its recordkeeping, reporting and disclosure obligations under applicable laws, rules and regulations.
In lieu of keeping copies of proxy statements, ClearBridge may rely on proxy statements filed on the EDGAR system as well as on third party records of
proxy statements and votes cast if the third party provides an undertaking to provide the documents promptly upon request.
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The information in this Statement of Additional Information is not complete and may be
changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
[ ], 2013
LEGG MASON PARTNERS EQUITY TRUST
CLEARBRIDGE TACTICAL DIVIDEND INCOME FUND
Class A (CFLGX), Class C
(SMDLX)
Class FI, Class R, Class R1, Class I (LADIX) and Class IS
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 ClearBridge Tactical Dividend Income Fund (the
fund), dated [ ], 2013, 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 Equity Trust (the Trust), a Maryland statutory trust. Prior to October 5,
2009, the fund was named Legg Mason Partners Diversified Large Cap Growth Fund. Prior to January 17, 2012, the fund was named Legg Mason ClearBridge Diversified Large Cap Growth Fund and had different investment
objectives and investment strategies. Prior to January 1, 2013, the fund was named Legg Mason ClearBridge Tactical Dividend 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 Services5
th
Floor, Stamford, Connecticut 06902, by calling the telephone number set forth above, 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 OBJECTIVES AND MANAGEMENT POLICIES
The fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end, diversified
management investment company.
The funds Prospectus discusses the funds investment objectives and policies. The
following discussion supplements the description of the funds investment policies in its Prospectus.
Investment Objectives and
Principal Investment Strategies
The funds primary investment objective is to generate high current income, with
capital appreciation as a secondary objective.
Under normal circumstances, the fund invests at least 80% of its net assets,
plus the amount of borrowings for investment purposes, if any, in equity and equity-related securities that provide investment income, dividend payments or other distributions or in other investments with similar economic characteristics. The fund
may invest in equity and equity-related securities of issuers with any market capitalization.
The fund invests in a
diversified portfolio of equity and equity-related securities, including common stocks, preferred stocks, convertible preferred stocks and other securities convertible into equity securities, master limited partnerships (MLPs), real
estate investment trusts (REITs), closed-end investment companies, including business development companies (BDCs), and royalty trusts. The fund may invest up to 50% of its net assets in foreign securities, including
securities of issuers in emerging market countries.
The fund may also seek to generate current income from short-term gains
earned through an option strategy which may consist of writing (selling) call options on equity securities in its portfolio (covered calls) and on broader equity market indexes, or writing (selling) put options on such securities or
indexes. The funds investments in options on equity securities and equity market indexes are included in the 80% policy described above.
The fund may invest up to 20% of its assets in fixed income securities of any credit quality, including securities rated below investment grade or, if unrated, deemed by the subadviser to be of comparable
quality (junk bonds). The funds investments in fixed income securities may include structured notes.
The
funds 80% investment policy may be changed by the Board of Trustees (the Board) upon 60 days prior notice to shareholders.
There is no guarantee that the fund will achieve its investment objectives.
INVESTMENT PRACTICES AND RISK FACTORS
The funds principal investment strategies are described above. The
following provides additional information about these principal strategies and describes other investment strategies and practices that may be used by the fund, which all involve risks of varying degrees.
Master Limited Partnerships.
The fund may invest in MLPs, which are limited partnerships or limited liability companies usually
taxable as partnerships. MLPs may derive income and gains from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral
or natural resources. The value of an investment in an MLP may be directly affected by the prices of natural resources commodity prices. The volatility and interrelationships of commodity prices can also indirectly affect certain MLPs due to the
potential impact on the volume of
3
commodities transported, processed, stored or distributed. The funds investment in an MLP may be adversely affected by market perceptions that the performance and distributions or dividends
of MLPs are directly tied to commodity prices.
MLPs generally have two classes of owners, the general partner and limited
partners. When investing in an MLP, the fund intends to purchase publicly traded common units issued to limited partners of the MLP. The general partner is typically owned by a major energy company, an investment fund, the direct management of the
MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an
equity interest of up to 2% in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership, through ownership of common units, and have a limited role in the partnerships
operations and management.
MLPs are typically structured such that common units and general partner interests have first
priority to receive quarterly cash distributions up to an established minimum amount (minimum quarterly distributions or MQD). Common and general partner interests also accrue arrearages in distributions to the extent the MQD
is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and
subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in
distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions.
A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs,
increase capital expenditures and acquire assets in order to increase the partnerships cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
MLP common units represent a limited partnership interest in the MLP. Common units are listed and traded on U.S. securities exchanges,
with their value fluctuating predominantly based on prevailing market conditions and the success of the MLP. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually to elect
directors. In the event of liquidation, common units have preference over subordinated units, but not over debt or preferred units, to the remaining assets of the MLP.
The fund may not invest more than 25% of the value of its total assets in the securities of MLPs that are treated for U.S. federal income tax purposes as qualified publicly traded partnerships
(QPTPs) (the 25% Limitation). A QPTP means a partnership (i) whose interests are traded on an established securities market or readily tradable on a secondary market or the substantial equivalent thereof; (ii) that
derives at least 90% of its annual income from (a) dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not
limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies, (b) real property rents, (c) gain from the sale or other disposition of real
property, (d) the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer,
geothermal energy, and timber), industrial source carbon dioxide, or the transportation or storage of certain fuels, and (e) in the case of a partnership a principal activity of which is the buying and selling of commodities, income and gains
from commodities or futures, forwards, and options with respect to commodities; and (iii) that derives less than 90% of its annual income from the items listed in (a) above. The 25% Limitation generally does not apply to publicly traded
partnerships that are not energy- or commodity-focused, such as, for instance, finance-related partnerships.
Royalty
Trusts.
The fund may invest in royalty trusts. Royalty trusts are publicly traded investment vehicles that control an underlying company whose business is the acquisition, exploitation, production and sale of oil and
4
natural gas. Royalty trusts typically have no physical operations and no management or employees. Royalty trusts generally pay out to unit holders the majority of the cash flow that they receive
from the production and sale of underlying oil and natural gas reserves. The amount of distributions paid on royalty income trust units will vary from time to time based on production levels, commodity prices, royalty rates and certain expenses,
deductions and costs, as well as on the distribution payout ratio policies adopted. As a result of distributing the bulk of their cash flow to unit holders, the ability of a royalty trust to finance internal growth through exploration is limited.
Royalty trusts generally grow through acquisition of additional oil and gas properties or producing companies with proven reserves of oil and gas, funded through the issuance of additional equity or, where the trust is able, additional debt. Royalty
trusts are exposed to many of the same risks as energy and natural resources companies, such as commodity pricing risk, supply and demand risk and depletion and exploration risk. Royalty trusts are, in some respects, similar to certain MLPs and
include risks similar to those MLPs.
An investment in a royalty trust will be subject to the 25% Limitation if the royalty
trust is treated for tax purposes as a QPTP.
Real Estate Investment Trusts.
The fund may invest in pooled investment
vehicles that invest primarily in income-producing real estate or real estate-related loans or interests, called REITs. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest
the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of interest payments. REITs are not taxed on income distributed to shareholders provided they comply with the applicable requirements of the Internal Revenue Code of 1986,
as amended (the Code). Debt securities issued by REITs, for the most part, are general and unsecured obligations and are subject to risks associated with REITs. Like mutual funds, REITs have expenses, including advisory and
administration fees paid by certain REITs and, as a result, the fund is subject to a duplicate level of fees if the fund invests in REITs.
While the fund will not invest in real estate directly, to the extent it invests in equity or hybrid REITs it may be subject to risks similar to those associated with the direct ownership of real estate.
These risks include declines in the value of real estate, risks related to general and local economic conditions, dependency on management skill, heavy cash flow dependency, possible lack of availability of mortgage funds, overbuilding, extended
vacancies of properties, increased competition, increases in property taxes and operating expenses, changes in zoning laws, losses due to costs resulting from the clean-up of environmental problems, liability to third parties for damages resulting
from environmental problems, casualty or condemnation losses, limitations on rents, changes in neighborhood values and in the appeal of properties to tenants and changes in interest rates. Equity REITs may also be subject to property and casualty
risks as their insurance policies may not completely recover repair or replacement of assets damaged by fires, floods, earthquakes or other natural disasters.
Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. An equity REIT may be affected by changes in the value of the
underlying properties owned by the REIT. A mortgage REIT may be affected by changes in interest rates and the ability of the issuers of its portfolio mortgages to repay their obligations. Mortgage REITs are subject to the risks of accelerated
prepayments of mortgage pools or pass-through securities, reliance on short-term financing and more highly leveraged capital structures. REITs are dependent upon the skills of their managers and are not diversified. REITs are generally dependent
upon maintaining cash flows to repay borrowings and to make distributions to shareholders and are subject to the risk of default by lessees and borrowers. REITs whose underlying assets are concentrated in properties used by a particular industry,
such as health care, are also subject to industry related risks. Certain special purpose REITs may invest their assets in specific real estate sectors, such as hotels, nursing homes or warehouses, and are therefore subject to the risks
associated with adverse developments in any such sectors.
REITs (especially mortgage REITs) are subject to interest rate
risks. When interest rates decline, the value of a REITs investment in fixed income obligations can be expected to rise. Conversely, when interest rates rise,
5
the value of a REITs investment in fixed rate obligations can be expected to decline. If the REIT invests in adjustable rate mortgage loans the interest rates on which are reset
periodically, yields on a REITs investments in such loans will gradually align themselves to reflect changes in market interest rates. This causes the value of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities.
In addition to these risks, REITs may be affected by changes in the value of the underlying property owned by the trusts or
by the quality of any credit they extend. Further, REITs are dependent upon management skills and generally may not be diversified. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs
could possibly fail to qualify for tax-free pass-through of net income and gains under the Code or to maintain their exemptions from registration as an investment company under the 1940 Act. The above factors may also adversely affect a
borrowers or a lessees ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs
associated with protecting its investments.
It is not uncommon for REITs, after the end of their taxable years, to change the
characterization of the net income and gains they have distributed during the preceding year. If this happens, the fund could be required to issue revised notices to its shareholders changing the character of the funds distributions.
Business Development Companies.
Consistent with its investment objectives and policies and subject to the limitations
of the 1940 Act, the fund may invest in BDCs. BDCs are a type of closed-end investment company regulated by the 1940 Act and typically invest in and lend to small- and medium-sized private companies that may not have access to public equity markets
for capital raising. BDCs invest in such diverse industries as healthcare, chemical and manufacturing, technology and service companies. BDCs must invest at least 70% of the value of their total assets in certain asset types, which are typically the
securities of private U.S. businesses, and must make available significant managerial assistance to the issuers of such securities. BDCs, which are required to distribute substantially all of their income to investors in order to not be subject to
entity-level taxation, often offer a yield advantage over other types of securities. Managers of BDCs may be entitled to compensation based on the BDCs performance, which may result in a manager of a BDC making riskier or more speculative
investments in an effort to maximize incentive compensation and higher fees.
Because BDCs typically invest in small and
medium-sized companies, a BDCs portfolio is subject to the risks inherent in investing in smaller companies, including that portfolio companies may be dependent on a small number of products or services and may be more adversely affected by
poor economic or market conditions. Some BDCs invest substantially, or even exclusively, in one sector or industry group and therefore the BDC may be susceptible to adverse conditions and economic or regulatory occurrences affecting the sector or
industry group, which tends to increase the BDCs volatility and risk. Investments made by BDCs are generally subject to legal and other restrictions on resale and are otherwise less liquid than publicly traded securities. The illiquidity of
these investments may make it difficult to sell such investments if the need arises, and if there is a need for a BDC in which the fund invests to liquidate its portfolio quickly, it may realize a loss on its investment. BDCs also may have
relatively concentrated investment portfolios, consisting of a relatively small number of holdings. A consequence of this limited number of investments is that the aggregate returns realized may be disproportionately impacted by the poor performance
of a small number of investments, or even a single investment, particularly if a BDC experiences the need to write down the value of an investment, which tends to increase the BDCs volatility and risk.
Investments in BDCs are subject to management risk, including the ability of the BDCs management to meet the BDCs investment
objective, and the ability of the BDCs management to manage the BDCs portfolio when the underlying securities are redeemed or sold, during periods of market turmoil and as investors perceptions regarding a BDC or its underlying
investments change. BDC shares are not redeemable at the option
6
of the BDC shareholder and, as with shares of other closed-end funds, they may trade in the secondary market at a discount to their net asset value. Like an investment in other investment
companies, the fund will indirectly bear its proportionate share of any management fees and other expenses charged by the BDCs in which it invests.
BDCs may employ the use of leverage through borrowings or the issuance of preferred stock. While leverage often serves to increase the yield of a BDC, this leverage also subjects a BDC to increased risks,
including the likelihood of increased volatility of the BDC and the possibility that the BDCs common share income will fall if the dividend rate of the preferred shares or the interest rate on any borrowings rises.
Debt Securities.
Debt securities, such as bonds, involve credit risk. This is the risk that the issuer will not make timely
payments of principal and interest. The degree of credit risk depends on the issuers financial condition and on the terms of the debt securities. Changes in an issuers credit rating or the markets perception of an issuers
creditworthiness may also affect the value of the funds investment in that issuer.
All debt securities are subject to
interest rate risk. This is the risk that the value of the security may fall when interest rates rise. If interest rates move sharply in a manner not anticipated by the subadviser, the funds investments in debt securities could be adversely
affected and the fund could lose money. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than will the market price of shorter-term debt securities.
During periods of rising interest rates, the average life of certain fixed income securities is extended because of slower than expected
principal payments. This may lock in a below-market interest rate and extend the duration of these fixed-income securities, especially mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of
rising interest rates, these securities may exhibit additional volatility and lose value. This is known as extension risk.
The value of fixed income securities in the fund can be expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The fund is not restricted to any maximum or minimum
time to maturity in purchasing individual portfolio securities, and the average maturity of the funds assets will vary.
Junk Bonds.
Non-investment grade or high yield fixed income or convertible securities commonly known to investors as
junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that the subadviser believes are of comparable quality. While generally providing greater income and opportunity
for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate over time. High yield securities will generally be in
the lower rating categories of recognized rating agencies (rated Ba or lower by Moodys Investors Service, Inc. (Moodys) or BB or lower by Standard & Poors Corporation
(S&P)) or will be unrated. The credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the
issuers financial condition. High yield securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have
more credit risk than higher rated securities. A description of ratings is attached as Appendix A to this SAI.
The major
risks in junk bond investments include the following:
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Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuers industry and to
general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.
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The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the
issuer experiences financial stress, it may be unable to meet its debt obligations. The issuers ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Issuers of
high yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover.
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Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are
generally paid off before the junior obligations, which will potentially limit the funds ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a
lower degree of protection with respect to principal and interest payments then do investors in higher rated securities.
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Junk bonds frequently have redemption features that permit an issuer to repurchase the security from the fund before it matures. If an issuer
redeems the junk bonds, the fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk
bonds than on those of other higher rated fixed income securities.
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The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets
for high yield securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the
trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a
particular issuer. Under certain economic and/or market conditions, the fund may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may
adversely affect the market price of the high yield security, which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when valuing the funds assets. Market quotations on high
yield securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale. When the secondary market for high yield securities becomes more illiquid, or in the absence of
readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value the funds securities, and judgment plays a more important role in determining such valuations.
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The fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The junk bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news,
whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect the funds net asset value and investment
practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal
legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the
market in the past.
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The rating assigned by a rating agency evaluates the issuing agencys assessment of the safety of a non-investment grade securitys
principal and interest payments, but does not address market
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value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the subadviser
performs its own analysis of the issuers whose non-investment grade securities the fund holds. Because of this, the funds performance may depend more on the subadvisers own credit analysis than in the case of mutual funds investing in
higher-rated securities.
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In selecting non-investment grade securities, the subadviser considers factors
such as those relating to the creditworthiness of issuers, the ratings and performance of the securities, the protections afforded the securities and the diversity of the fund. The subadviser monitors the issuers of non-investment grade securities
held by the fund for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the fund.
The costs attributable to investing in the junk bond markets are usually higher for several reasons, such as higher investment research costs and higher commission costs.
Certain Risk Factors Affecting Utility Companies.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations that may render existing plants, equipment or products obsolete, the potential
impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasional reduced availability and high costs of natural gas for resale, the effects of energy conservation, the effects of a national
energy policy and lengthy delays and greatly increased costs and other problems associated with the design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the
problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences among the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major
shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common stocks issued by a utility company.
Additionally, existing and possible future regulatory legislation may make it even more difficult for utilities to obtain adequate relief. Certain of the issuers of securities held in the funds portfolio may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing policies and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Prolonged changes in climatic conditions can also
have a significant impact on both the revenues of an electric and gas utility as well as the expenses of a utility, particularly a hydro-based electric utility.
Utility companies in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such
regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while
ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of the utility industries continues to evolve both in the United States and
in foreign countries. In recent years, changes in regulation in the United States increasingly have allowed utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of
competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of
telecommunications, non-regulated providers of utility services have become a significant part of their respective industries.
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Foreign utility companies are also subject to regulation, although such regulations may or
may not be comparable to those in the United States. Foreign utility companies may be more heavily regulated by their respective governments than utilities in the United States and, as in the United States, generally are required to seek government
approval for rate increases. In addition, many foreign utilities use fuels that may cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution
restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation in the United States.
The rapid growth of certain foreign economies will necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently are government-owned,
thereby limiting current investment opportunities, foreign governments are likely to seek global investors through the privatization of their utility industries in order to attract significant capital for growth. Privatization, which refers to the
trend toward investor ownership of assets rather than government ownership, is expected to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that such favorable developments will occur or that
investment opportunities in foreign markets will increase.
Electric.
The electric utility industry consists of
companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. In the past, electric utility companies, in general, have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies have generated cash flows in excess of current operating expenses and construction expenditures, permitting some degree of
diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory
climate. As interest rates declined, many utilities refinanced high cost debt and in doing so improved their fixed charges coverage. Regulators, however, lowered allowed rates of return as interest rates declined and thereby caused the benefits of
the rate declines to be shared wholly or in part with customers. In a period of rising interest rates, the allowed rates of return may not keep pace with the utilities increased costs. The construction and operation of nuclear power facilities
are subject to strict scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies which have comparable jurisdiction. Strict scrutiny might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to
significant costs for disposal of nuclear fuel and for decommissioning such plants.
A number of states are considering or
have enacted deregulation proposals. The introduction of competition into the industry as a result of such deregulation has at times resulted in lower revenue, lower credit ratings, increased default risk, and lower electric utility security prices.
Such increased competition may also cause long-term contracts, which electric utilities previously entered into to buy power, to become stranded assets which have no economic value. Any loss associated with such contracts must be
absorbed by ratepayers and investors. In addition, some electric utilities have acquired electric utilities overseas to diversify, enhance earnings and gain experience in operating in a deregulated environment. In some instances, such acquisitions
have involved significant borrowings, which have burdened the acquirers balance sheet. There is no assurance that current deregulation proposals will be adopted. However, deregulation in any form could significantly impact the electric
utilities industry.
Telecommunications.
The telecommunications industry today includes both traditional telephone
companies, with a history of broad market coverage and highly regulated businesses, and cable companies, which began as small, lightly regulated businesses focused on limited markets. These two historically different businesses are converging in an
industry that is trending toward larger, competitive national and international markets with an emphasis on deregulation. Companies that distribute telephone services and provide access to the telephone
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networks still comprise the greatest portion of this segment, but non-regulated activities such as wireless telephone services, paging, data transmission and processing, equipment retailing,
computer software and hardware and internet services are becoming increasingly significant components as well. In particular, wireless and internet telephone services continue to gain market share at the expense of traditional telephone companies.
The presence of unregulated companies in this industry and the entry of traditional telephone companies into unregulated or less regulated businesses provide significant investment opportunities with companies that may increase their earnings at
faster rates than had been allowed in traditional regulated businesses. Still, increasing competition, technological innovations and other structural changes could adversely affect the profitability of such utilities and the growth rate of their
dividends. Given mergers and proposed legislation and enforcement changes, it is likely that both traditional telephone companies and cable companies will continue to provide an expanding range of utility services to both residential, corporate and
governmental customers.
Gas.
Gas transmission companies and gas distribution companies are undergoing significant
changes. In the United States, interstate transmission companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and
development, making returns more sensitive to energy prices. In the recent decade, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. Natural
gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal, even for electricity generation. However, technological or regulatory changes within the
industry may delay or prevent this result.
Water.
Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world the industry is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per
capita volume growth. As with other utilities, however, increased regulation, increased costs and potential disruptions in supply may adversely affect investments in water supply utilities.
Utility Industries Generally.
There can be no assurance that the positive developments noted above, including those relating to
privatization and changing regulation, will occur or that risk factors other than those noted above will not develop in the future.
Repurchase Agreements.
The fund may agree to purchase securities from a bank or recognized securities dealer and simultaneously commit to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities (repurchase agreements). Under the terms of a typical repurchase agreement, the fund would acquire an
underlying debt obligation for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase, and the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield
during the funds holding period. If the value of such securities were less than the repurchase price, plus interest, the other party to the agreement would be required to provide additional collateral so that at all times the collateral is at
least 102% of the repurchase price plus accrued interest. The financial institutions with which the fund may enter into repurchase agreements will be banks and non-bank dealers of U.S. government securities that are on the Federal Reserve Bank of
New Yorks list of reporting dealers, if such banks and non-bank dealers are deemed creditworthy by Western Asset Management Company (Western Asset). 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. Western Asset, acting under the supervision of the Board, reviews on
an ongoing basis the value of the collateral and creditworthiness of those banks and dealers with which the fund enters into repurchase agreements to evaluate potential risks.
Pursuant to an exemptive order issued by the U.S. Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities managed by the manager or its affiliates, may
transfer uninvested cash
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balances into one or more joint repurchase accounts. These balances are invested in one or more repurchase agreements, secured by U.S. government securities. Each joint repurchase arrangement
requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention or sale of the collateral may be subject to legal
proceedings.
Reverse Repurchase Agreements.
The fund may enter into reverse repurchase agreements, which involve the
sale of fund securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowings. Since the proceeds of borrowings under reverse repurchase agreements are invested,
this would introduce the speculative factor known as leverage. The securities purchased with the funds obtained from the agreement and securities collateralizing the agreement will have maturity dates no later than the repayment date.
Generally the effect of such a transaction is that the fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while in many cases it will be able to keep some of
the interest income associated with those securities. Such transactions are advantageous only if the fund has an opportunity to earn a greater rate of interest on the cash derived from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or greater than the interest required to be paid may not always be available, and the fund intends to use the reverse repurchase technique only when Western Asset believes it
will be advantageous to the fund. The use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of the funds assets. The funds custodian bank will maintain a separate account for the fund with
securities having a value equal to or greater than such commitment of the fund.
Small and Medium Capitalization
Stocks.
The fund may also invest in securities of smaller capitalization companies when the portfolio managers believe those companies offer more attractive value opportunities. Investments in securities of companies with smaller market
capitalizations are generally considered to offer greater opportunity for appreciation but involve special risks. The securities of those companies may be subject to more abrupt fluctuations in market price than larger, more established companies.
Small to medium capitalization companies may have limited product lines, markets or financial resources, or they may be dependent upon a limited management group. In addition to exhibiting greater volatility, small and medium company stocks may, to
a degree, fluctuate independently of larger company stocks,
i.e
., small and medium company stocks may decline in price as the prices of large company stocks rise or vice versa.
Some of the portfolio securities of the fund may not be widely traded, and that the funds position in such securities may be
substantial in relation to the market for such securities. Accordingly, it may be difficult for the fund to dispose of such securities at prevailing market prices in order to meet redemptions.
Investment in Other Investment Companies.
The fund may invest in the securities of other investment companies, which can include
open-end funds, closed-end funds, and unregistered investment companies, subject to the limits set forth in the 1940 Act that apply to these types of investments. Investments in other investment companies are subject to the risks of the securities
in which those investment companies invest. In addition, to the extent the fund invests in securities of other investment companies, fund shareholders would indirectly pay a portion of the operating costs of such companies in addition to the
expenses of the funds own operation. These costs include management, brokerage, shareholder servicing and other operational expenses.
The fund may invest in shares of mutual funds or unit investment trusts that are traded on a stock exchange, called exchange-traded funds (ETFs). Typically an ETF seeks to track the
performance of an index, such as the S&P 500 Index, the NASDAQ-100 Index, the Barclays Bond Index or more narrow sector or foreign indexes, by holding in its portfolio either the same securities that comprise the index or a representative sample
of the index. Investing in an ETF will give the fund exposure to the securities comprising the index on which the ETF is based.
Unlike shares of typical mutual funds or unit investment trusts, shares of ETFs are designed to be traded throughout the trading day,
bought and sold based on market prices rather than net asset value (NAV). Shares can trade at either a premium or discount to NAV. However, the portfolios held by index-based ETFs are
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publicly disclosed on each trading day and an approximation of actual NAV is disseminated throughout the trading day. Because of this transparency, the trading prices of index-based ETFs tend to
closely track the actual NAV of the underlying portfolios and the fund will generally gain or lose value depending on the performance of the index. However, gains or losses on the funds investment in ETFs will ultimately depend on the purchase
and sale price of the ETF. In the future, as new products become available, the fund may invest in ETFs that are actively managed. Actively managed ETFs will likely not have the transparency of index-based ETFs and, therefore, may be more likely to
trade at a larger discount or premium to actual NAVs.
The fund may invest in closed-end funds, which hold securities of U. S.
and/or non-U.S. issuers. Because shares of closed-end funds trade on an exchange, investments in closed-end funds may entail the additional risk that the discount from NAV could increase while the fund holds the shares.
Foreign Securities.
The fund may invest up to 50% of its net assets in foreign securities, either directly or through depositary
receipts.
The returns of the fund may be adversely affected by fluctuations in value of one or more currencies relative to
the U.S. dollar. Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These include risks resulting from revaluation of currencies; future adverse
political and economic developments; possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign portfolio transactions; possible expropriation, nationalization or confiscatory taxation; possible withholding taxes and limitations on the use or removal of funds or other
assets, including the withholding of dividends; adverse changes in investment or exchange control regulations; political instability, which could affect U.S. investments in foreign countries; and potential restrictions on the flow of international
capital. Additionally, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility and be less liquid. Foreign securities may not be registered with, nor the issuers
thereof be subject to the reporting requirements of, the SEC. Accordingly, there may be less publicly available information about the securities and about the foreign company issuing them than is available about a U.S. company and its securities.
Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment
positions. These risks are intensified when investing in countries with developing economies and securities markets, also known as emerging markets.
The costs associated with investment in the securities of foreign issuers, including withholding taxes, brokerage commissions and custodial fees, may be higher than those associated with investment in
domestic issuers. In addition, foreign investment transactions may be subject to difficulties associated with the settlement of such transactions. Transactions in securities of foreign issuers may be subject to less efficient settlement practices,
including extended clearance and settlement periods. Delays in settlement could result in temporary periods when assets of the fund are uninvested and no return can be earned on them. The inability of the fund to make intended investments due to
settlement problems could cause the fund to miss attractive investment opportunities. The inability to dispose of a portfolio security due to settlement problems could result in losses to the fund due to subsequent declines in value of the portfolio
security or, if the fund has entered into a contract to sell the security, could result in liability to the purchaser.
Since
the fund may invest in securities denominated in currencies other than the U.S. dollar, it may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rates between such currencies and the U.S. dollar. Changes
in currency exchange rates may influence the value of the funds shares and may also affect the value of dividends and interest earned by the fund and gains and losses realized by the fund. Exchange rates are determined by the forces of supply
and demand in the foreign exchange markets. These forces are affected by the international balance of payments, other economic and financial conditions, government intervention, speculation and other factors.
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Generally, American Depositary Receipts (ADRs), in registered form, are
denominated in U.S. dollars and are designed for use in the domestic market. Usually issued by a U.S. bank or trust company, ADRs are receipts that demonstrate ownership of underlying foreign securities. For purposes of the funds investment
policies and limitations, ADRs are considered to have the same characteristics as the securities underlying them. ADRs may be sponsored or unsponsored; issuers of securities underlying unsponsored ADRs are not contractually obligated to disclose
material information in the United States. Accordingly, there may be less information available about such issuers than there is with respect to domestic companies and issuers of securities underlying sponsored ADRs. The fund may also invest in
Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and other similar instruments, which are receipts that are often denominated in U.S. dollars and are issued by either a U.S. or non-U.S. bank evidencing
ownership of underlying foreign securities. Even where they are denominated in U.S. dollars, depositary receipts are subject to currency risk if the underlying security is denominated in a foreign currency. EDRs are issued in bearer form and are
designed for use in European securities markets. GDRs are tradable both in the United States and Europe and are designed for use throughout the world.
The fund may invest in securities of non-U.S. issuers that impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than securities of non-U.S. issuers of the same class that are not subject to such restrictions.
Economic, Political and Social Factors.
Certain non-U.S. countries, including emerging markets, may be subject to a greater degree of economic, political and social instability. Such instability
may result from, among other things: (i) authoritarian governments or military involvement in political and economic decision making; (ii) popular unrest associated with demands for improved economic, political and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection and conflict. Such economic, political and social instability could significantly disrupt the financial
markets in such countries and the ability of the issuers in such countries to repay their obligations. In addition, it may be difficult for the fund to pursue claims against a foreign issuer in the courts of a foreign country. Investing in emerging
countries also involves the risk of expropriation, nationalization, confiscation of assets and property or the imposition of restrictions on foreign investments and on repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation in any emerging country, the fund could lose its entire investment in that country. Certain emerging market countries restrict or control foreign investment in their securities markets to varying degrees. These
restrictions may limit the funds investment in those markets and may increase the expenses of the fund. In addition, the repatriation of both investment income and capital from certain markets in the region is subject to restrictions such as
the need for certain governmental consents. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the funds operation. Economies in individual non-U.S. countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, currency valuation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many non-U.S.
countries have experienced substantial, and in some cases extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, very negative effects on the economies and
securities markets of certain emerging countries. Economies in emerging countries generally are dependent heavily upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, affected adversely and significantly by economic
conditions in the countries with which they trade. Whether or not the fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, financial and other difficulties, the value and liquidity of the
funds investments may be negatively affected by the conditions in the countries experiencing the difficulties.
Sovereign Government and Supranational Debt.
The fund may invest in all types of debt securities of governmental issuers in all
countries, including emerging markets. These sovereign debt securities may include: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political
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subdivisions located in emerging market countries; debt securities issued by government owned, controlled or sponsored entities located in emerging market countries; interests in entities
organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor
nations to restructure their outstanding external indebtedness; participations in loans between emerging market governments and financial institutions; or debt securities issued by supranational entities such as the World Bank or the European
Economic Community. A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development.
Sovereign debt is subject to risks in addition to those relating to non-U.S. investments generally. As a sovereign entity, the issuing
government may be immune from lawsuits in the event of its failure or refusal to pay the obligations when due. The debtors willingness or ability to repay in a timely manner may be affected by, among other factors, its cash flow situation, the
extent of its non-U.S. reserves, the availability of sufficient non-U.S. exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtors policy toward principal international
lenders and the political constraints to which the sovereign debtor may be subject. Sovereign debtors may also be dependent on disbursements or assistance from foreign governments or multinational agencies, the countrys access to trade and
other international credits, and the countrys balance of trade. Assistance may be dependent on a countrys implementation of austerity measures and reforms, which measures may limit or be perceived to limit economic growth and recovery.
Some sovereign debtors have rescheduled their debt payments, declared moratoria on payments or restructured their debt to effectively eliminate portions of it, and similar occurrences may happen in the future. There is no bankruptcy proceeding by
which sovereign debt on which governmental entities have defaulted may be collected in whole or in part.
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. Whether or not the fund invests in securities of issuers located in Europe or with significant exposure to European issuers or countries, these events could
negatively affect the value and liquidity of the funds investments.
Securities of Emerging Markets Issuers.
Investors are strongly advised to consider carefully the special risks involved in emerging markets, which are in addition to the usual risks of investing in developed foreign markets around the world.
The risks of investing in securities in emerging countries include: (i) less social, political and economic stability; (ii) the
smaller size of the markets for such securities and lower volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) certain national policies that may restrict the funds investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; and (v) the absence of developed structures governing private or foreign investment or allowing for judicial
redress for injury to private property.
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Investors should note that upon the accession to power of authoritarian regimes, the
governments of a number of emerging market countries previously expropriated large quantities of real and personal property similar to the property which may be represented by the securities purchased by the fund. The claims of property owners
against those governments were never finally settled. There can be no assurance that any property represented by securities purchased by the fund will not also be expropriated, nationalized, or otherwise confiscated at some time in the future. If
such confiscation were to occur, the fund could lose a substantial portion or all of its investments in such countries. The funds investments would similarly be adversely affected by exchange control regulation in any of those countries.
Certain countries in which the fund may invest may have vocal minorities that advocate radical religious or revolutionary
philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for widespread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause
the loss of the funds investment in those countries.
Settlement mechanisms in emerging market securities may be less
efficient and reliable than in more developed markets. In such emerging securities markets there may be delays and failures in share registration and delivery.
Investing in emerging markets involves risks relating to potential political and economic instability within such markets and the risks of expropriation, nationalization, confiscation of assets and
property, the imposition of restrictions on foreign investments and the repatriation of capital invested.
Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very negative effects on the economies and securities markets of certain emerging markets. Economies in emerging markets generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be affected adversely by economic conditions, trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries
with which they trade.
While some emerging market countries have sought to develop a number of corrective mechanisms to
reduce inflation or mitigate its effects, inflation may continue to have significant effects both on emerging market economies and their securities markets. In addition, many of the currencies of emerging market countries have experienced steady
devaluations relative to the U.S. dollar and major devaluations have occurred in certain countries.
Because of the high
levels of foreign-denominated debt owed by many emerging market countries, fluctuating exchange rates can significantly affect the debt service obligations of those countries. This could, in turn, affect local interest rates, profit margins and
exports, which are a major source of foreign exchange earnings.
To the extent an emerging market country faces a liquidity
crisis with respect to its foreign exchange reserves, it may increase restrictions on the outflow of any foreign exchange. Repatriation is ultimately dependent on the ability of the fund to liquidate its investments and convert the local currency
proceeds obtained from such liquidation into U.S. dollars. Where this conversion must be done through official channels (usually the central bank or certain authorized commercial banks), the ability to obtain U.S. dollars is dependent on the
availability of such U.S. dollars through those channels and, if available, upon the willingness of those channels to allocate those U.S. dollars to the fund. The funds ability to obtain U.S. dollars may be adversely affected by any increased
restrictions imposed on the outflow of foreign exchange. If the fund is unable to repatriate any amounts due to exchange controls, it may be required to accept an obligation payable at some future date by the central bank or other governmental
entity of the jurisdiction involved. If such conversion can legally be done outside official channels either directly or indirectly, the funds ability to obtain U.S. dollars may not be affected as much by any increased restrictions except to
the extent of the price which may be required to be paid for in U.S. dollars.
16
Many emerging market countries have little experience with the corporate form of business
organization and may not have well-developed corporation and business laws or concepts of fiduciary duty in the business context.
The securities markets of emerging markets are substantially smaller, less developed, less liquid and more volatile than the securities markets of the United States and other more developed countries.
Disclosure and regulatory standards in many respects are less stringent than in the United States and other major markets. There also may be a lower level of monitoring and regulation of emerging markets and the activities of investors in such
markets; enforcement of existing regulations has been extremely limited. Investing in the securities of companies in emerging markets may entail special risks relating to the potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment, convertibility of currencies into U.S. dollars and on repatriation of capital invested. In the event of such expropriation, nationalization or
other confiscation by any country, the fund could lose its entire investment in any such country.
Some emerging markets have
different settlement and clearance procedures. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. The inability of the
fund to make intended securities purchases due to settlement problems could cause the fund to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result either in losses to the
fund due to subsequent declines in the value of the portfolio security or, if the fund has entered into a contract to sell the security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more emerging markets as a result of which trading of securities may
cease or may be substantially curtailed and prices for the funds portfolio securities in such markets may not be readily available. Section 22(e) of the 1940 Act permits a registered investment company to suspend redemption of its shares
for any period during which an emergency exists, as determined by the SEC. Accordingly, if the fund believes that appropriate circumstances warrant, it will promptly apply to the SEC for a determination that an emergency exists within the meaning of
Section 22(a) of the 1940 Act. During the period commencing from the funds identification of such conditions until the date of SEC action, the portfolio securities in the affected markets will be valued at fair value as determined in good
faith by or under the direction of the Board.
Although it might be theoretically possible to hedge for anticipated income and
gains, the ongoing and indeterminate nature of the risks associated with emerging market investing (and the costs associated with hedging transactions) makes it very difficult to hedge effectively against such risks.
Securities Lending.
Consistent with applicable regulatory requirements, the fund may lend portfolio securities to brokers, dealers
and other financial organizations meeting capital and other credit requirements or other criteria established by the Board. The fund will not lend portfolio securities to affiliates of Legg Mason unless it has applied for and received specific
authority to do so from the SEC. From time to time, the fund may pay to the borrower and/or a third party which is unaffiliated with the fund or Legg Mason and is acting as a finder a part of the interest earned from the investment of
collateral received for securities loaned. Although the borrower will generally be required to make payments to the fund in lieu of any dividends the fund would have otherwise received had it not loaned the shares to the borrower, such payments will
not be treated as qualified dividend income for purposes of determining what portion of the funds regular dividends (as defined below) received by individuals may be taxed at the rates generally applicable to long-term capital
gains (see Taxes below).
Requirements of the SEC, which may be subject to future modification, currently provide
that the following conditions must be met whenever the fund lends its portfolio securities: (a) the fund must receive at least 100% cash collateral or equivalent securities from the borrower; (b) the borrower must increase such collateral
whenever the market value of the securities rises above the level of such collateral; (c) the fund must be able to
17
terminate the loan at any time; (d) the fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any
increase in market value; (e) the fund may pay only reasonable custodian fees in connection with the loan; and (f) voting rights on the loaned securities may pass to the borrower. However, if a material event adversely affecting the
investment in the loaned securities occurs, the fund must terminate the loan and regain the right to vote the securities.
The
risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower
fail financially. The fund could also lose money if its short-term investment of the cash collateral declines in value over the period of the loan. Loans will be made to firms deemed by the subadviser to be of good standing and will not be made
unless, in the judgment of the subadviser, the consideration to be earned from such loans would justify the risk.
When-Issued Securities.
The fund may purchase securities on a when-issued or on a forward delivery basis,
meaning that delivery of the securities will occur beyond customary settlement time. It is expected that, under normal circumstances, the fund would take delivery of such securities, but the fund may sell them before the settlement date. In general,
the fund does not pay for the securities until received and does not start earning interest until the contractual settlement date. It is expected that, under normal circumstances, the fund would take delivery of such securities, but the fund may
sell them before the settlement date. When the fund commits to purchase a security on a when-issued or on a forward delivery basis, it sets up procedures consistent with SEC policies. Since those policies currently require
that an amount of the funds assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, the fund expects always to have cash or liquid securities sufficient to cover any commitments or to limit
any potential risk. However, even though the fund intends to adhere to the provisions of SEC policies, purchases of securities on such bases may involve more risk than other types of purchases. The when-issued securities are subject to market
fluctuation, and no interest accrues on the security to the purchaser during this period. The payment obligation and the interest rate that will be received on the securities are each fixed at the time the purchaser enters into the commitment.
Purchasing obligations on a when-issued basis is a form of leveraging and can involve a risk that the yields available in the market when the delivery takes place may actually be higher than those obtained in the transaction itself. In that case,
there could be an unrealized loss at the time of delivery. 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 NAV.
Convertible Securities.
The fund may invest in convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles
the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion or exchange, convertible securities ordinarily provide a
stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower than the yield of nonconvertible debt. Convertible securities are usually subordinated to comparable-tier nonconvertible securities,
but rank senior to common stock in a corporations capital structure.
The value of a convertible security is a function
of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege and (2) its worth, at market value, if converted or exchanged into the underlying common stock. A
convertible security may be subject to redemption at the option of the issuer at a price established in the convertible securitys governing instrument, which may be less than the ultimate conversion or exchange value.
Convertible securities are subject both to the stock market risk associated with equity securities and to the credit and interest rate
risks associated with fixed income securities. As the market price of the equity security underlying a convertible security falls, the convertible security tends to trade on the basis of its yield and other fixed income characteristics. As the
market price of such equity security rises, the convertible security tends to trade on the basis of its equity conversion features.
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Short Sales.
The fund may sell securities short. A short sale is effected when it is
believed that the price of a particular security will decline, and involves the sale of a security which the fund does not own in the hope of purchasing the same security at a later date at a lower price. There can be no assurance that the fund will
be able to close out a short position (
i.e.
, purchase the same security) at any particular time or at an acceptable or advantageous price. To make delivery to the buyer, the fund must borrow the security from a broker/dealer through which the
short sale is executed, and the broker/dealer must deliver the security, on behalf of the fund, to the buyer. The broker/dealer is entitled to retain the proceeds from the short sale until the fund delivers to such broker/dealer the security sold
short. In addition, the fund is required to pay to the broker/dealer the amount of any dividends or interest paid on shares sold short.
The fund will realize a gain if the price of a security declines between the date of the short sale and the date on which the fund purchases a security to replace the borrowed security. On the other hand,
the fund will incur a loss if the price of the security increases between those dates. The amount of any gain will be decreased and the amount of any loss increased by any premium or interest that the fund may be required to pay in connection with a
short sale. Short selling is a technique that may be considered speculative and involves risks beyond the initial capital necessary to secure each transaction. It should be noted that possible losses from short sales differ from those losses that
could arise from a cash investment in a security because losses from a short sale may be limitless, while the losses from a cash investment in a security cannot exceed the total amount of the investment in the security. Whenever the fund sells
short, it must segregate assets held by its custodian as collateral to cover its obligation, and maintain the collateral in an amount at least equal to the market value of the short position. To the extent that the liquid securities segregated by
the funds custodian are subject to gain or loss, and the securities sold short are subject to the possibility of gain or loss, leverage is created. The liquid securities utilized by the fund in this respect will normally be primarily composed
of equity portfolio securities that are subject to gains or losses and, accordingly, when the fund executes short sales leverage will normally be created.
There is also a risk that a borrowed security will need to be returned to the broker/dealer on short notice. If the request for the return of a security occurs at a time when other short sellers of the
security are receiving similar requests, a short squeeze can occur, meaning that the fund might be compelled, at the most disadvantageous time, to replace the borrowed security with a security purchased on the open market, possibly at
prices significantly in excess of the proceeds received earlier.
The fund has a short position in the securities sold short
until it delivers to the broker/dealer the securities sold, at which time the fund receives the proceeds of the sale. The fund will normally close out a short position by purchasing on the open market and delivering to the broker/dealer an equal
amount of the securities sold short.
As a hedging technique, the fund may purchase call options to buy securities sold short
by the fund. Such options would lock in a future price and protect the fund in case of an unanticipated increase in the price of a security sold short by the fund.
The fund may hold no more than 25% of the funds net assets (taken at the then-current market value) as required collateral for short sales at any one time.
Short Sales Against the Box.
The fund may also make short sales against the box, meaning that at all times when a
short position is open, the fund owns an equal amount of such securities or securities convertible into or exchangeable, without payment of further consideration, for securities of the same issues as, and in an amount equal to, the securities sold
short. Short sales against the box result in a constructive sale and require the fund to recognize any gain unless an exception to the constructive sale rule applies.
Restricted and Illiquid Securities.
Up to 15% of the net assets of the fund may be invested in illiquid securities. An illiquid
security is any security which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the fund has valued the security. Illiquid
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securities may include (a) repurchase agreements with maturities greater than seven days; (b) futures contracts and options thereon for which a liquid secondary market does not exist;
(c) time deposits (TDs) maturing in more than seven calendar days; (d) securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets; and (e) securities of new
and early stage companies whose securities are not publicly traded.
Under SEC regulations, certain securities acquired
through private placements can be traded freely among qualified purchasers. The SEC has stated that an investment companys board of directors, or its investment adviser acting under authority delegated by the board, may determine that a
security eligible for trading under these regulations is liquid. The fund intends to rely on these regulations, to the extent appropriate, to deem specific securities acquired through private placements as liquid. The Board
has delegated to the subadviser or Western Asset, as applicable, the responsibility for determining whether a particular security eligible for trading under these regulations is liquid. Investing in these restricted securities could have
the effect of increasing the funds illiquidity if qualified purchasers become, for a time, uninterested in buying these securities.
Restricted securities are securities subject to legal or contractual restrictions on their resale, such as private placements. Such restrictions might prevent the sale of restricted securities at a time
when the sale would otherwise be desirable. Restricted securities may be sold only (1) pursuant to Rule 144A under the Securities Act of 1933, as amended (the 1933 Act) (such securities are referred to herein as Rule 144A
securities), or another exemption; (2) in privately negotiated transactions; or (3) in public offerings with respect to which a registration statement is in effect under the 1933 Act. Rule 144A securities, although not registered in
the United States, may be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act. As noted above, the subadviser or Western Asset, as applicable, acting pursuant to guidelines established by the Board, may determine
that some Rule 144A securities are liquid for purposes of limitations on the amount of illiquid investments the fund may own. Where registration is required, the fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the time the fund is able to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the fund might
obtain a less favorable price than expected when it decided to sell.
Illiquid securities may be difficult to value and the
fund may have difficulty disposing of such securities promptly. Judgment plays a greater role in valuing illiquid investments than those securities for which a more active market exists. The fund does not consider non-U.S. securities to be
restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered for sale in the United States.
To the extent required by applicable law and SEC guidance, no securities for which there is not a readily available market will be acquired by the fund if such acquisition would cause the aggregate value
of illiquid securities to exceed 15% of the funds net assets.
Investments by Funds of Funds.
Certain investment
companies, including those that are affiliated with the fund because they are managed by an affiliate of the manager, may invest in the fund as part of an asset allocation strategy. These investment companies are referred to as funds of
funds because they invest primarily in other investment companies.
From time to time, the fund may experience
relatively large redemptions or investments due to rebalancings of the assets of a fund of funds invested in the fund. In the event of such redemptions or investments, the fund could be required to sell securities or to invest cash at a time when it
is not advantageous to do so. If this were to occur, the effects of the rebalancing trades could adversely affect the funds performance. Redemptions of fund shares due to rebalancings could also accelerate the realization of taxable capital
gains in the fund and might increase brokerage and/or other transaction costs.
The funds subadviser may be subject to
potential conflicts of interest in connection with investments by affiliated funds of funds. For example, the subadviser may have an incentive to permit an affiliated fund of funds
20
to become a more significant shareholder (with the potential to cause greater disruption to the funds) than would be permitted for an unaffiliated investor. The subadviser has committed to the
Board that it will resolve any potential conflict in the best interests of the shareholders of the fund in accordance with its fiduciary duty to the fund. As necessary, the subadviser will take such actions as it deems appropriate to minimize
potential adverse impacts, including redemption of shares in-kind, rather than in cash. Similar issues may result from investment in the fund by Section 529 plans.
Bank Obligations.
The fund may invest in bank obligations,
e.g.
, certificates of deposit (CDs), TDs including Eurodollar time deposits, bankers acceptances and other
short-term debt obligations issued by domestic banks, foreign subsidiaries or foreign branches of domestic banks, domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. A bankers
acceptance is a bill of exchange or time draft drawn on and accepted by a commercial bank. It is used by corporations to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less. A
certificate of deposit is a negotiable interest-bearing instrument with a specific maturity. CDs are short-term negotiable obligations of commercial banks. TDs are non-negotiable deposits maintained in banking institutions for specified periods of
time at stated interest rates. Bankers acceptances are time drafts drawn on commercial banks by borrowers usually in connection with international transactions.
Recently enacted legislation will affect virtually every area of banking and financial regulation. The impact of the regulations is not yet fully known and may not be known for some time. In addition, new
regulations to be promulgated pursuant to the legislation could adversely affect the funds investments in money market instruments.
Domestic commercial banks organized under federal law are supervised and examined by the Comptroller of the Currency (the COTC) and are required to be members of the Federal Reserve System and
to be insured by the Federal Deposit Insurance Corporation (the FDIC). Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to
join. Most state banks are insured by the FDIC (although such insurance may not be of material benefit to the fund, depending upon the principal amount of CDs of each bank held by the fund) and are subject to federal examination and to a substantial
body of federal law and regulation. As a result of governmental regulations, domestic branches of domestic banks are, among other things, generally required to maintain specified levels of reserves, and are subject to other supervision and
regulation.
Obligations of foreign branches of domestic banks, such as CDs and TDs, may be general obligations of the parent
bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and government regulation. Such obligations are subject to different risks than are those of domestic banks or domestic branches of foreign banks. These
risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on
interest income. Foreign branches of domestic banks are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank than about a domestic bank.
Obligations of domestic branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and by
governmental regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may or may not be subject to reserve requirements imposed by
the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, branches licensed by the COTC and branches licensed by certain states (State Branches) may or may not be
required to: (a) pledge to the regulator by depositing assets with a designated bank within the state, an amount of its assets equal to 5% of its total liabilities; and (b) maintain assets within the state in an amount equal
21
to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less publicly available information about a domestic branch of a foreign bank than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks or by domestic branches of foreign banks, Western Asset will carefully evaluate
such investments on a case-by-case basis.
Commercial Paper.
The fund may invest in commercial paper, which is
unsecured debt of corporations usually maturing in 270 days or less from its date of issuance. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an
institutional lender, such as the fund, pursuant to which the lender may determine to invest varying amounts. Transfer of such notes is usually restricted by the issuer, and there is no secondary trading market for such notes.
Securities Rated Baa or BBB or above.
The fund may purchase securities rated at least Baa by Moodys or BBB by S&P and
securities of comparable quality, which may have poor protection of payment of principal and interest. These securities are often considered to be speculative and involve greater risk of default or price changes than securities assigned a higher
quality rating. The market prices of these securities may fluctuate more than higher-rated securities and may decline significantly in periods of general economic difficulty which may follow periods of rising interest rates.
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. In addition, it is possible that Moodys, S&P and other rating agencies might not timely change their ratings of a particular issue to reflect subsequent events.
Additional Information.
At times, a substantial portion of the funds assets may be invested in securities as to which the
fund, by itself or together with other funds and accounts managed by the subadviser and its affiliates, holds all or a major portion. Although the subadviser generally considers such securities to be liquid because of the availability of an
institutional market for such securities, it is possible that, under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the fund could find it more difficult to sell these securities
when it believes it advisable to do so or may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for
purposes of computing the funds NAV. In order to enforce its rights in the event of a default under such securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the
issuers obligations on such securities. This could increase the funds operating expenses and adversely affect the funds NAV. In addition, the funds intention to qualify as a regulated investment company under the
Code, may limit the extent to which the fund may exercise its rights by taking possession of such assets.
Defensive
Strategies.
The fund may, from time to time, take temporary defensive positions that are inconsistent with the funds principal investment strategies in attempting to respond to adverse market, political or other conditions. When doing so,
the fund may invest without limit in high quality money market and other short-term instruments, and may not be pursuing its investment objectives.
Derivatives.
General.
The fund may invest in certain derivative
instruments (also called Financial Instruments), discussed below, to attempt to hedge its investments, among other things, as described in the Prospectus. The use
22
of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the CFTC). In
addition, the funds ability to use Financial Instruments may be limited by tax considerations. In addition to the instruments, strategies and risks described below, the subadviser expects that additional opportunities in connection with
Financial Instruments and other similar or related techniques may become available. These new opportunities may become available as the 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 to the extent that they are consistent with the funds investment objective and are permitted by its investment limitations and
applicable regulatory authorities. The fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.
Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulations are not yet fully known and may not be known for some time. Any new regulations could
adversely affect the value, availability and performance of Financial Instruments, may make them more costly, and may limit or restrict their use by the fund.
Each Financial Instrument purchased for the fund is reviewed and analyzed by the subadviser to assess the risk and reward of each such instrument in relation to the funds investment strategy. The
decision to invest in derivative instruments or conventional securities is made by measuring the respective instruments ability to provide value to the fund.
Hedging strategies can be broadly categorized as short hedges and long hedges. A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset
potential declines in the value of one or more investments held in the funds portfolio. In a short hedge, the fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the
investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully
to offset potential increases in the acquisition cost of one or more investments that the fund intends to acquire. In a long hedge, the fund takes a position in a Financial Instrument whose price is expected to move in the same direction as the
price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, the fund does not own a corresponding security and, therefore, the transaction does not relate to
a security the fund owns. Rather, it relates to a security that the fund intends to acquire. If the fund does not complete the hedge by purchasing the security as anticipated, the effect on the funds portfolio is the same as if the transaction
were entered into for speculative purposes.
Financial Instruments on securities may be used to attempt to hedge against price
movements in one or more particular securities positions that the fund owns or intends to acquire. Financial Instruments on indexes, in contrast, may be used to attempt to hedge against price movements in market sectors in which the fund has
invested or expects to invest. Financial Instruments on debt securities may be used to hedge either individual securities or broad debt market sectors.
Special Risks.
The use of Financial Instruments involves special considerations and risks, certain of which are described below. In general, these techniques may increase the volatility of the fund
and may involve a small investment of cash relative to the magnitude of the risk assumed.
(1) Successful use
of most Financial Instruments depends upon the subadvisers ability to predict movements of the overall securities, currency and interest rate markets, which requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed, and use of Financial Instruments could result in a loss, regardless of whether the intent was to enhance returns or manage risk.
(2) When Financial Instruments are used for hedging purposes, the historical correlation between price movements of a
Financial Instrument and price movements of the investments being hedged might change
23
so as to make the hedge less effective or unsuccessful. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a change in correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Financial Instruments
are traded. The effectiveness of hedges using Financial Instruments on indexes will depend on the degree to which correlation between price movements in the index and price movements in the securities being hedged can be accurately predicted.
Because there are a limited number of types of exchange-traded options and futures contracts, it is likely
that the standardized contracts available will not match the funds current or anticipated investments exactly. The fund may invest in options and futures contracts based on securities with different issuers, maturities or other characteristics
from the securities in which it typically invests, which involves the risk that the options or futures position will not track the performance of the funds other investments.
Options and futures prices can also diverge from the prices of their underlying instruments, even if the underlying
instruments match the funds investments well. Options and futures prices are affected by factors that may not affect security prices the same way, such as current and anticipated short-term interest rates, changes in volatility of the
underlying instrument and the time remaining until expiration of the contract.
Imperfect correlation may also
result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures are traded as compared to securities or from the imposition of daily price fluctuation
limits or trading halts. The fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all cases. If price changes in the funds options or futures positions have a low correlation with its other investments, the positions may fail to produce anticipated
gains or result in losses that are not offset by gains in other investments.
(3) If successful, the hedging
strategies discussed above can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable
price movements. For example, if the fund entered into a short hedge because its subadviser projected a decline in the price of a security in the funds portfolio, and the price of that security increased instead, the gain from that increase
might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if the price of the Financial Instrument declined by more than the increase in the price of the security, the fund could suffer a loss. In either
such case, the fund would have been in a better position had it not attempted to hedge at all.
(4) The fund
might be required to maintain segregated assets as cover or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
i.e.
, Financial Instruments other than purchased options).
If the fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the
funds ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the fund sell a portfolio security at a disadvantageous time.
(5) The fund may be subject to the risk that the other party to a Financial Instrument (the counterparty) will
not be able to honor its financial obligation to the fund.
(6) Many Financial Instruments are traded in
institutional markets rather than on an exchange. Nevertheless, many Financial Instruments are actively traded and can be priced with as much accuracy as conventional securities. Financial Instruments that are custom designed to meet the specialized
investment needs of a relatively narrow group of institutional investors such as the fund are not readily marketable and are subject to the funds restrictions on illiquid investments.
The funds ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a market, the ability and willingness of the
24
counterparty to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the fund.
Options.
The fund may write covered call and put options and purchase call and put options on securities for hedging
and non-hedging purposes. Call and put options written by the fund may be covered in the manner set forth below, or the fund will segregate cash or liquid assets equal to the value of the securities underlying the option.
A call option written by the fund is covered if the fund owns the securities or currency underlying the option or has an
absolute and immediate right to acquire that security or currency without additional cash consideration (or for additional cash consideration held in a segregated account by the funds custodian) upon conversion or exchange of other securities
or currencies held in its portfolio. A written call option is also covered if the fund holds on a share-for-share basis a purchased call on the same security or holds a call on the same currency as the call written where the exercise price of the
call held is equal to less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the fund in cash or other liquid assets. A put option written by the fund is
covered if the fund maintains cash or liquid assets with a value equal to the exercise price in a segregated account, or else holds a put on the same security and in the same principal amount as the put written where the exercise price
of the put held is equal to or greater than the exercise price of the put written or where the exercise price of the put held is less than the exercise price of the put written if the difference is maintained by the fund in cash or liquid securities
in a segregated account. Put and call options written by the fund may also be covered in such other manner as may be in accordance with the requirements of the exchange on which, or the counterparty with which, the option is traded, and applicable
laws and regulations. Even if the funds obligation is covered, it is subject to the risk of the full change in value of the underlying security from the time the option is written until exercise. Covering an option does not protect the fund
from risk of loss.
The principal reason for writing call options on securities is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities alone. In return for a premium, the writer of a call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of
the option (or until a closing purchase transaction can be effected). Nevertheless, the call writer retains the risk of a decline in the price of the underlying security. Similarly, the principal reason for writing put options is to realize income
in the form of premiums. The writer of a put option accepts the risk of a decline in the price of the underlying security. The size of the premiums the fund may receive may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities at the times the options are written. In the case
of call options, these exercise prices are referred to as in-the-money, at-the-money and out-of-the-money, respectively.
The fund may write (a) in-the-money call options when the subadviser expects the price of the underlying security to remain flat or decline moderately during the option period, (b) at-the-money
call options when the subadviser expects the price of the underlying security to remain flat or advance moderately during the option period and (c) out-of-the-money call options when the subadviser expects that the price of the security may
increase but not above a price equal to the sum of the exercise price plus the premiums received from writing the call option. In any of the preceding situations, if the market price of the underlying security declines and the security is sold at
this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Writing out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to
market price) may be utilized in the same market environments as such call options are used in equivalent transactions.
So
long as the obligation of the fund as the writer of an option continues, the fund may be assigned an exercise notice by the broker/dealer through which the option was sold, requiring it to deliver, in the case of a call, or take delivery of, in the
case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or the fund effects a closing purchase transaction. The fund can no
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longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. To secure its obligation to deliver the underlying security when it writes a
call option, or to pay for the underlying security when it writes a put option, the fund will be required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (OCC)
or similar clearing corporation and the securities exchange on which the option is written.
An option position may be closed
out only where there exists a secondary market for an option of the same series on a recognized securities exchange or in the over-the-counter (OTC) market. The fund expects to write options only on national securities exchanges or in
the OTC market. The fund may purchase put options issued by the OCC or in the OTC market.
The fund may realize a profit or
loss upon entering into a closing transaction. In cases in which the fund has written an option, it will realize a profit if the cost of the closing purchase transaction is less than the premium received upon writing the original option and will
incur a loss if the cost of the closing purchase transaction exceeds the premium received upon writing the original option. Similarly, when the fund has purchased an option and engages in a closing sale transaction, whether it recognizes a profit or
loss will depend upon whether the amount received in the closing sale transaction is more or less than the premium the fund initially paid for the original option plus the related transaction costs.
Although the fund generally will purchase or write only those options for which the subadviser believes there is an active secondary
market so as to facilitate closing transactions, there is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options
no such secondary market may exist or may cease to exist. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, have at times rendered certain of the facilities of the OCC and national
securities exchanges inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of customers orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer,
the fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing the maximum number of calls and puts of each class which may be
held or written, or exercised within certain periods, by an investor or group of investors acting in concert (regardless of whether the options are written on the same or different securities exchanges or are held, written or exercised in one or
more accounts or through one or more brokers). It is possible that the fund and other clients of the manager or subadviser and certain of their affiliates may be considered to be such a group. A securities exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain other sanctions.
In the case of options written
by the fund that are deemed covered by virtue of the funds holding convertible or exchangeable preferred stock or debt securities, the time required to convert or exchange and obtain physical delivery of the underlying common stock with
respect to which the fund has written options may exceed the time within which the fund must make delivery in accordance with an exercise notice. In these instances, the fund may purchase or temporarily borrow the underlying securities for purposes
of physical delivery. By so doing, the fund will not bear any market risk because the fund will have the absolute right to receive from the issuer of the underlying security an equal number of shares to replace the borrowed stock, but the fund may
incur additional transaction costs or interest expenses in connection with any such purchase or borrowing.
Although the
subadviser will attempt to take appropriate measures to minimize the risks relating to the funds writing of call options and purchasing of put and call options, there can be no assurance that the fund will succeed in its option-writing
program.
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The fund may write put options in an attempt to enhance its current return. Such option
transactions may also be used as a limited form of hedging against an increase in the price of securities that the fund plans to purchase.
In addition to the receipt of premiums and the potential gains from terminating such options in closing purchase transactions, the fund may also receive a return on the cash and liquid assets maintained
to cover the exercise price of the option. By writing a put option, the fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a loss to the
fund, unless the security later appreciates in value. The fund may terminate a put option it has written before it expires by a closing purchase transaction. Any loss from this transaction may be partially or entirely offset by the premium received
on the terminated option.
The fund may purchase options for hedging purposes or to increase the funds return. When put
options are purchased as a hedge against a decline in the value of portfolio securities, the put options may be purchased at or about the same time that the fund purchases the underlying security or at a later time. If such decline occurs, the put
options will permit the fund to sell the securities at the exercise price, or to close out the options at a profit. By using put options in this way, the fund will reduce any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs. Similarly, when put options are used for non-hedging purposes, the fund may make a profit when the price of the underlying security or instrument falls below the strike price.
If the price of the underlying security or instrument does not fall sufficiently, the options may expire unexercised and the fund would lose the premiums it paid for the option. If the price of the underlying security or instrument falls
sufficiently and the option is exercised, the amount of any resulting profit will be offset by the amount of premium paid.
The fund may purchase call options to hedge against an increase in the price of securities that the fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the fund to purchase the securities at the exercise price, or to close out the options at a profit. The premium paid for the call option plus any transaction costs will reduce the benefit,
if any, realized by the fund upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the fund and the premium would be lost.
Call options may also be purchased in order to increase the funds return at a time when the call is expected to increase in value
due to anticipated appreciation of the underlying security. Prior to its expiration, a call option may be sold by the fund in closing sale transactions, which are sales by the fund, prior to the exercise of options that it has purchased, of options
of the same series. Profit or loss from the sale will depend upon whether the amount received is more or less than the premium paid for the option plus the related transaction costs. The purchase of call options on securities that the fund owns,
when the fund is substantially fully invested, is a form of leverage, up to the amount of the premium and related transaction costs, and involves risks of loss and of increased volatility.
The fund may write (sell) call and put options and purchase call and put options on securities indexes. Options on stock indexes are
generally similar to options on stock except for the delivery requirements. Instead of giving the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive a cash exercise
settlement amount equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed index multiplier. Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars or a foreign currency, as the case may be, times a
specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on
an exchange or it may let the option expire unexercised.
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The effectiveness of purchasing or writing stock index options as a hedging technique will
depend upon the extent to which price movements in the portion of the securities portfolio of the fund being hedged correlate with price movements of the stock index selected. Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Accordingly, successful use by the fund of options on stock indexes will be subject to the subadvisers ability to predict
correctly movements in the direction of the stock market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual stocks.
The fund may cover call options on securities indexes by owning securities whose price changes, in the opinion of the subadviser, are
expected to be similar to those of the underlying index, or by having an absolute and immediate right to acquire such securities without additional cash consideration (or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities in its portfolio. Where the fund covers a call option on a securities index through ownership of securities, such securities may not match the composition of the index and, in that event,
the fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. The fund may also cover call options on securities indexes by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is
maintained by the fund in cash or liquid securities in a segregated account. The fund may cover put options on securities indexes by maintaining cash or liquid assets with a value equal to the exercise price in a segregated account; by holding a put
on the same securities index and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written; or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the fund in cash or liquid assets in a segregated account. Put and call options on securities indexes may also be covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option is traded, and applicable laws and regulations. Investors should be aware that although the fund will only write covered call or put options on securities indexes, covering
an option does not protect the fund from risk of loss.
The fund will receive a premium from writing a put or call option,
which increases the funds gross income in the event the option expires unexercised or is closed out at a profit. If the value of an index on which the fund has written a call option falls or remains the same, the fund will realize a profit in
the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the securities it owns. If the value of the index rises, however, the fund will realize a loss in its call option position,
which will reduce the benefit of any unrealized appreciation in the funds stock investments. By writing a put option, the fund assumes the risk of a decline in the index. To the extent that the price changes of securities owned by the fund
correlate with changes in the value of the index, writing covered put options on indexes will increase the funds losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the
option.
The fund may purchase put options on securities indexes when the subadviser believes that there may be a decline in
the prices of the securities covered by the index. The fund will realize a gain if the put option appreciates in excess of the premium paid for the option. If the option does not increase in value, the funds loss will be limited to the premium
paid for the option plus related transaction costs.
The fund may purchase call options on securities indexes to take
advantage of an anticipated broad market advance, or an advance in an industry or market segment. The fund will bear the risk of losing all or a portion of the premium paid if the value of the index does not rise. The purchase of call options on
securities indexes when the fund is substantially fully invested is a form of leverage, up to the amount of the premium and related transaction costs, and involves risks of loss and of increased volatility.
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Securities index options are subject to position and exercise limits and other regulations
imposed by the exchange on which they are traded. The ability of the fund to engage in closing purchase transactions with respect to securities index options depends on the existence of a liquid secondary market. However, no such secondary market
may exist, or the market may cease to exist at some future date, for some options. No assurance can be given that a closing purchase transaction can be effected when the subadviser desires that the fund engage in such a transaction.
Because the value of an index option depends upon movements in the level of the index rather than the price of a particular security,
whether the fund realizes a gain or loss from purchasing or writing options on an index depends upon movements in the level of prices in the market generally or, in the case of certain indexes, in an industry or market segment, rather than movements
in the price of a particular security. As a result, successful use by the fund of options on securities indexes is subject to the subadvisers ability to predict correctly movements in the direction of the market generally or of a particular
industry. This ability contemplates different skills and techniques from those used in predicting changes in the price of individual securities. When the fund purchases or writes securities index options as a hedging technique, the funds
success will depend upon the extent to which price movements in the portion of a securities portfolio being hedged correlate with price movements of the securities index selected.
The funds purchase or sale of securities index options in an attempt to enhance performance involves speculation, may be risky and
cause losses, which, in the case of written call options, are potentially unlimited.
The fund may purchase OTC or dealer
options or sell covered OTC options. Unlike exchange-listed options where an intermediary or clearing corporation assures that all transactions are properly executed, the responsibility for performing all transactions with respect to OTC options
rests solely with the writer and the holder of those options. A listed call option writer, for example, is obligated to deliver the underlying stock to the clearing organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If the fund were to purchase a dealer option, however, it would rely on the dealer from which it purchased the option to perform if the option were exercised. If the dealer fails to honor
the exercise of the option by the fund, the fund would lose the premium it paid for the option and the expected benefit of the transaction.
Listed options may have a liquid market while dealer options have none. Consequently, the fund will generally be able to realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer that issued it. Similarly, when the fund writes a dealer option, it generally will be able to close out the option prior to the expiration only by entering into a closing purchase transaction with the dealer to which the
fund originally sold the option. Although the fund will seek to enter into dealer options only with dealers that will agree to and are expected to be capable of entering into closing transactions with the fund, there can be no assurance that the
fund will be able to liquidate a dealer option at a favorable price at any time prior to expiration. The inability to enter into a closing transaction may result in material losses to the fund. Until the fund, as an OTC call option writer, is able
to effect a closing purchase transaction, it will not be able to liquidate assets used to cover the written option until the option expires or is exercised. This requirement may impair the funds ability to sell portfolio securities or, with
respect to currency options, currencies at a time when such sale might be advantageous. In the event of insolvency of the other party, the fund may be unable to liquidate a dealer option.
The use of options by the fund may involve leveraging. Leveraging adds increased risks to the fund, because the funds losses may be
out of proportion to the amount invested in the instrumenta relatively small investment may lead to much greater losses.
Futures Contracts.
The fund may enter into stock index futures contracts for hedging purposes and for non-hedging purposes.
A futures contract is an agreement between two parties for the purchase or sale for future delivery of securities or for the
payment or acceptance of a cash settlement based upon changes in the value of the securities
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or of an index of securities. A sale of a futures contract means the acquisition of a contractual obligation to deliver the securities called for by the contract at a specified price,
or to make or accept the cash settlement called for by the contract, on a specified date. A purchase of a futures contract means the acquisition of a contractual obligation to acquire the securities called for by the contract at a
specified price, or to make or accept the cash settlement called for by the contract, on a specified date. Futures contracts in the United States have been designed by exchanges which have been designated contract markets by the CFTC and
must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Futures contracts trade on these markets, and the exchanges, through their clearing organizations, guarantee that the
contracts will be performed as between the clearing members of the exchange. Futures contracts may also be traded on markets outside the United States.
The fund may buy and sell stock index futures contracts to attempt to increase investment return, to gain stock market exposure while holding cash available for investments and redemptions, or to protect
against a decline in the stock market. A stock index futures contract is a contract to buy or sell units of a stock index at a specified future date at the price agreed upon when the contract is made. A unit is the current value of the stock index.
The purpose of entering into a futures contract is to protect the fund from fluctuations in the value of securities without
actually buying or selling the securities. For example, in the case of stock index futures contracts, if the fund anticipates an increase in the price of stocks that it intends to purchase at a later time, the fund could enter into contracts to
purchase the stock index (known as taking a long position) as a temporary substitute for the purchase of stocks. If an increase in the market occurs that influences the stock index as anticipated, the value of the futures contracts
increases and thereby serves as a hedge against the funds not participating in a market advance. The fund then may close out the futures contracts by entering into offsetting futures contracts to sell the stock index (known as taking a
short position) as it purchases individual stocks. The fund can accomplish similar results by buying securities with long maturities and selling securities with short maturities. But by using futures contracts as an investment tool to
reduce risk, given the greater liquidity in the futures market, it may be possible to accomplish the same result more easily and more quickly.
No consideration will be paid or received by the fund upon the purchase or sale of a futures contract. Initially, the fund will be required to deposit with the broker an amount of cash or cash equivalents
equal to approximately 1% to 10% of the contract amount (this amount is subject to change by the exchange or board of trade on which the contract is traded and brokers or members of such board of trade may charge a higher amount). This amount is
known as initial margin and is in the nature of a performance bond or good faith deposit on the contract, which is returned to the fund upon termination of the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, known as variation margin, to and from the broker, will be made daily as the price of the index or securities underlying the futures contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as marking-to-market. In addition, when the fund enters into a long position in a futures contract or an option on a futures contract, it must maintain an amount of cash or cash equivalents equal to
the total market value of the underlying futures contract, less amounts held in the funds commodity brokerage account at its broker. At any time prior to the expiration of a futures contract, the fund may elect to close the position by taking
an opposite position, which will operate to terminate the funds existing position in the contract.
Positions in futures
contracts may be closed out only on the exchange on which they were entered into (or through a linked exchange) and no secondary market exists for those contracts. In addition, although the fund intends to enter into futures contracts only if there
is an active market for the contracts, there is no assurance that an active market will exist for the contracts at any particular time. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit. It is possible that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to
30
substantial losses. In such event, and in the event of adverse price movements, the fund would be required to make daily cash payments of variation margin; in such circumstances, an increase in
the value of the portion of the portfolio being hedged, if any, may partially or completely offset losses on the futures contract. No assurance can be given that the price of the securities being hedged will correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures contract.
The ordinary spreads between prices in the
cash and futures markets, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional
variation margin requirements, investors may close out futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be terminated only by entering into a closing purchase or sale transaction, which requires a secondary market on the contract market on which the futures contract was
originally entered into. There can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. In that event, it may not be possible to close out a position held by the fund, which could
require the fund to purchase or sell the instrument underlying the futures contract or to meet ongoing variation margin requirements. The inability to close out futures positions also could have an adverse impact on the ability effectively to use
futures transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be
adversely affected by daily price fluctuation limits established by the exchanges, which limit the amount of fluctuation in the price of a futures contract during a single trading day and prohibit trading beyond such limits once they
have been reached. Each contract market on which futures contracts are traded has established a number of limitations governing the maximum number of positions which may be held by a trader, whether acting alone or in concert with others. The
trading of futures contracts also is subject to the risk of trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments.
Investments in futures contracts also entail the risk that if the subadvisers judgment about the general direction of interest rates, equity markets or other economic factors is incorrect, the
funds overall performance may be poorer than if any such contract had not been entered into. For example, if the fund entered into a stock index futures contract in the belief that the prices of the stocks comprising the index would increase,
and instead prices decreased, the fund would have both losses in its portfolio securities as well as in its futures positions.
In addition, an amount of cash or liquid assets will be maintained by the fund in a segregated account so that the amount so segregated,
plus the applicable margin held on deposit, will be approximately equal to the amount necessary to satisfy the funds obligations under the futures contract, or the fund will otherwise cover its positions in accordance with
applicable policies and regulations.
The use of futures contracts potentially exposes the fund to the effects of leveraging,
which occurs when futures are used so that the funds exposure to the market is greater than it would have been if the fund had invested directly in the underlying securities. Leveraging increases the funds potential for both gain and
loss.
Commodity Exchange Act Regulation.
Effective December 31, 2012, the fund is limited in its ability to use
commodity futures (which include futures on broad-based securities indexes and interest rate futures) (collectively, commodity interests) or options on commodity futures, engage in certain swaps transactions or make certain other
investments (whether directly or indirectly through investments in other investment vehicles) for purposes other than bona fide hedging, as defined in the rules of the CFTC. With respect to transactions other than for bona fide hedging
purposes, either: (1) the aggregate initial margin and premiums required to establish the funds positions in such investments 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,
31
may not exceed 100% of the liquidation value of the funds portfolio (after accounting for unrealized profits and unrealized losses on any such positions). 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 futures, options or swaps markets.
As noted above, the fund may be exposed to commodity interests indirectly in excess of the limits described in the prior paragraph. Such exposure may result from the funds investment in other
investment vehicles, including investment companies that are not managed by the funds manager or one of its affiliates, certain securitized vehicles that may invest in commodity interests and/or non-equity REITs that may invest in commodity
interests. These investment vehicles are referred to collectively as underlying funds. The manager may have limited or no information as to what an underlying fund may be invested in at any given time, because they are not managed by the
manager or persons affiliated with the manager and their holdings will likely change over time. To address this lack of transparency, the CFTC staff has issued a no-action letter permitting the manager of a fund that invests in such underlying funds
to register as a commodity pool operator (a CPO) or to claim the exclusion from the CPO definition until the later of June 30, 2013 or six months from the date on which the CFTC issues additional guidance on the application of de
minimis thresholds in the context of the CFTC exemptive rules. In order to rely on this no-action relief, the manager must meet certain conditions (including certain compliance measures), and otherwise be able to rely on a claim of exclusion from
the CPO definition. The funds manager has filed the required notice to claim this no-action relief.
Single Stock
Futures.
The fund may trade standardized futures contracts on individual equity securities, such as common stocks, ETFs and ADRs, as well as narrow-based securities indexes, generally called security futures contracts or SFCs, on
U.S. and foreign exchanges. As with other futures contracts, an SFC involves an agreement to purchase or sell in the future a specific quantity of shares of a security or the component securities of the index. The initial margin requirements
(typically 20%) are generally higher than with other futures contracts. Trading SFCs involves many of the same risks as trading other futures contracts, including the risks involved with leverage, and losses are potentially unlimited. Under certain
market conditions, for example if trading is halted due to unusual trading activity in either the SFC or the underlying security, it may be difficult or impossible for the fund to liquidate its position or manage risk by entering into an offsetting
position. In addition, the prices of SFCs may not correlate as anticipated with the prices of the underlying security. Unlike options on securities in which the fund may invest, where the fund has the right, but not the obligation, to buy or sell a
security prior to the expiration date, if the fund has a position in an SFC, the fund has both the right and the obligation to buy or sell the security at a future date, or otherwise offset its position.
Options on Futures Contracts.
The fund may purchase and write options to buy or sell futures contracts in which the fund may
invest. These investment strategies may be used for hedging purposes and for non-hedging purposes, subject to applicable law.
An option on a futures contract provides the holder with the right to enter into a long position in the underlying futures
contract, in the case of a call option, or a short position in the underlying futures contract, in the case of a put option, at a fixed exercise price up to a stated expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position in the case of a put option. In the event
that an option is exercised, the parties will be subject to all the risks associated with the trading of futures contracts, such as payment of initial and variation margin deposits. In addition, the writer of an option on a futures contract, unlike
the holder, is subject to initial and variation margin requirements on the option position.
A position in an option on a
futures contract may be terminated by the purchaser or seller prior to expiration by effecting a closing purchase or sale transaction, subject to the availability of a liquid secondary market, which is the purchase or sale of an option of the same
series (
i.e.
, the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the traders profits or loss on the transaction.
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Options on futures contracts that are written or purchased by the fund on U.S. exchanges
are traded on the same contract market as the underlying futures contract, and, like futures contracts, are subject to regulation by the CFTC and the performance guarantee of the exchange clearinghouse. In addition, options on futures contracts may
be traded on foreign exchanges.
The fund may cover the writing of call options on futures contracts (a) through
purchases of the underlying futures contract, (b) through ownership of the instrument or instruments included in the index underlying the futures contract or (c) through the holding of a call on the same futures contract and in the same
principal amount as the call written where the exercise price of the call held (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written if the difference is
maintained by the fund in cash or liquid assets in a segregated account. The fund may cover the writing of put options on futures contracts (a) through sales of the underlying futures contract, (b) through segregation of cash or liquid
assets in an amount equal to the value of the security or index underlying the futures contract or (c) through the holding of a put on the same futures contract and in the same principal amount as the put written where the exercise price of the
put held (i) is equal to or greater than the exercise price of the put written or (ii) where the exercise price of the put held is less than the exercise price of the put written if the difference is maintained by the fund in cash or
liquid assets in a segregated account. Put and call options on futures contracts may also be covered in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Upon
the exercise of a call option on a futures contract written by the fund, the fund will be required to sell the underlying futures contract which, if the fund has covered its obligation through the purchase of such contract, will serve to liquidate
its futures position. Similarly, where a put option on a futures contract written by the fund is exercised, the fund will be required to purchase the underlying futures contract which, if the fund has covered its obligation through the sale of such
contract, will close out its futures position.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the securities deliverable on exercise of the futures contract. The fund will receive an option premium when it writes the call, and, if the price of the futures contract at expiration of the option is below the option
exercise price, the fund will retain the full amount of this option premium, which provides a partial hedge against any decline that may have occurred in the funds security holdings. Similarly, the writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities deliverable upon exercise of the futures contract. If the fund writes an option on a futures contract and that option is exercised, the fund may incur a loss, which loss will be
reduced by the amount of the option premium received, less related transaction costs. The funds ability to hedge effectively through transactions in options on futures contracts depends on, among other factors, the degree of correlation
between changes in the value of securities held by the fund and changes in the value of its futures positions. This correlation cannot be expected to be exact, and the fund bears a risk that the value of the futures contract being hedged will not
move in the same amount, or even in the same direction, as the hedging instrument. Thus it may be possible for the fund to incur a loss on both the hedging instrument and the futures contract being hedged.
The fund may purchase options on futures contracts for hedging purposes instead of purchasing or selling the underlying futures
contracts. For example, where a decrease in the value of portfolio securities is anticipated as a result of a projected market-wide decline or changes in interest or exchange rates, the fund could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in whole or part, by a profit on the option. Conversely, where it is projected that the value of securities to be acquired by the fund will increase prior to acquisition, due
to a market advance or changes in interest or exchange rates, the fund could purchase call options on futures contracts, rather than purchasing the underlying futures contracts.
The fund may also purchase options on futures contracts for non-hedging purposes, in order to take advantage of projected market advances
or declines or changes in interest rates or exchange rates. For example, the fund can buy a call option on a futures contract when the subadviser believes that the underlying futures contract will rise. If prices do rise, the fund could exercise the
option and acquire the underlying futures contract
33
at the strike price or the fund could offset the long call position with a sale and realize a profit. Or, the fund can sell a call option if the subadviser believes that futures prices will
decline. If prices decline, the call will likely not be exercised and the fund would profit. However, if the underlying futures contract should rise, the buyer of the option would likely exercise the call against the fund and acquire the underlying
futures position at the strike price; the funds loss in this case could be unlimited.
The funds use of options on
futures contracts may involve leveraging. Leveraging adds increased risks to the fund, because the funds losses may be out of proportion to the amount invested in the instrumenta relatively small investment may lead to much greater
losses.
Foreign Currency Exchange Transactions.
Because the fund may buy and sell securities denominated in currencies
other than the U.S. dollar, and receive interest, dividends and sales proceeds in currencies other than the U.S. dollar, the fund may engage in foreign currency exchange transactions as an attempt to protect against uncertainty in the level of
future foreign currency exchange rates or as an attempt to enhance performance.
The fund may enter into foreign currency
exchange transactions to convert U.S. currency to non-U.S. currency and non-U.S. currency to U.S. currency, as well as convert one non-U.S. currency to another non-U.S. currency. The fund either enters into these transactions on a spot (
i.e.
,
cash) basis at the spot rate prevailing in the currency exchange markets, or uses forward contracts to purchase or sell non-U.S. currencies.
The fund may convert currency on a spot basis from time to time, and investors should be aware of the costs of currency conversion. Although currency exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a currency at one rate, while offering a lesser rate of exchange
should the fund desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from the date of the contract, agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no fees or commissions are charged at any stage for trades. The fund may enter into forward contracts for
hedging and non-hedging purposes, including transactions entered into for the purposes of profiting from anticipated changes in foreign currency exchange rates. Such contracts may involve the purchase or sale of a foreign currency against the U.S.
dollar or may involve two foreign currencies. The fund may enter into forward currency contracts either with respect to specific transactions or with respect to its portfolio positions. For example, when the subadviser anticipates making a purchase
or sale of a security, it may enter into a forward currency contract in order to set the rate (either relative to the U.S. dollar or another currency) at which the currency exchange transaction related to the purchase or sale will be made
(transaction hedging). Further, when the subadviser believes that a particular currency may decline compared to the U.S. dollar or another currency, the fund may enter into a forward contract to sell the currency the subadviser expects
to decline in an amount approximating the value of some or all of the funds securities denominated in that currency. When the subadviser believes that one currency may decline against a currency in which some or all of the portfolio securities
held by the fund are denominated, it may enter into a forward contract to buy the currency expected to appreciate for a fixed amount (position hedging). In this situation, the fund may, in the alternative, enter into a forward contract
to sell a different currency for a fixed amount of the currency expected to decline where the subadviser believes that the value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the value of the
currency in which portfolio securities of the fund are denominated (cross hedging). In a proxy hedge, the fund, having purchased a security, would sell a currency whose value is believed to be closely linked to the currency in which the
security is denominated. Interest rates prevailing in the country whose currency was sold might be expected to be closer to those in the United States and lower than those of securities denominated in the currency of the original holding. This type
of hedging entails greater risk than a direct hedge because it is dependent on a stable relationship between the two currencies paired as proxies
34
and the relationships can be very unstable at times. The funds custodian places cash or other liquid assets in a separate account of the fund having a value equal to the aggregate amount of
the funds commitments under forward currency contracts entered into with respect to position hedges and cross-hedges. If the value of the securities placed in a separate account declines, additional cash or assets are placed in the account on
a daily basis so that the value of the amount will equal the amount of the funds commitments with respect to such contracts.
Forward contracts are traded over-the-counter and not on organized commodities or securities exchanges. As a result, such contracts operate in a manner distinct from exchange-traded instruments, and their
use involves certain risks beyond those associated with transactions in the futures and options contracts described herein.
When the fund enters into a contract for the purchase or sale of a security denominated in a non-U.S. currency, it may desire to
lock in the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of non-U.S. currency involved in the underlying security transaction, the fund
may be able to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the non-U.S. currency during the period between the date the security is purchased or sold and the date on which payment
is made or received.
When the subadviser believes that the currency of a particular country may suffer a substantial decline
against the U.S. dollar, the fund may enter into a forward contract to sell the non-U.S. currency for a fixed amount of U.S. dollars. If the fund owns securities in that currency, the subadviser may enter into a contract to sell the non-U.S.
currency in an amount approximating the value of some or all of the funds securities denominated in such non-U.S. currency. The precise matching of the forward contract amounts and the value of the securities involved is not generally possible
since the future value of such securities in non-U.S. currencies changes as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures.
At the maturity of a forward contract, the fund will either deliver the non-U.S. currency or terminate its contractual obligation to
deliver the non-U.S. currency by purchasing an offsetting contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the non-U.S. currency. If the fund engages in an offsetting
transaction, the fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the non-U.S.
currency. Should forward prices decline during the period between the date the fund enters into a forward contract for the sale of the non-U.S. currency and the date it enters into an offsetting contract for the purchase of such currency, the fund
will realize a gain to the extent the selling price of the currency exceeds the purchase price of the currency. Should forward prices increase, the fund will suffer a loss to the extent that the purchase price of the currency exceeds the selling
price of the currency.
Where the fund enters into a forward contract with respect to securities it holds denominated in the
non-U.S. currency, it is impossible to forecast with precision the market value of the funds securities at the expiration of a forward contract. Accordingly, it may be necessary for the fund to purchase additional non-U.S. currency on the spot
market if the market value of the security is less than the amount of non-U.S. currency the fund is obligated to deliver and if a decision is made to sell the security and make delivery of such currency. Conversely, it may be necessary to sell on
the spot market some of the non-U.S. currency received upon the sale of the security if its market value exceeds the amount of such currency the fund is obligated to deliver.
When the fund enters into a forward contract for non-hedging purposes, there is a greater potential for profit but also a greater potential for loss. For example, the fund may purchase a given foreign
currency through a forward contract if the value of such currency is expected to rise relative to the U.S. dollar or another foreign currency. Conversely, the fund may sell the currency through a forward contract if the value of the currency is
expected to decline against the dollar or another foreign currency. The fund will profit if the anticipated movements in foreign currency exchange rates occur, which will increase gross income. Where exchange rates
35
do not move in the direction or the extent anticipated, however, the fund may sustain losses, which will reduce its gross income. Such transactions should be considered speculative and could
involve significant risk of loss.
When entering into forward contracts, the fund intends to comply with policies of the SEC
concerning forward contracts. Those policies currently require that an amount of the funds liquid assets equal to the amount of the purchase be segregated to be used to pay for the commitment or that the fund otherwise covers its position in
accordance with applicable regulations and policies.
The fund may purchase put options on a currency in an attempt to protect
against currency rate fluctuations or to seek to enhance gains. When the fund purchases a put option on a currency, the fund will have the right to sell the currency for a fixed amount in U.S. dollars or another currency. Conversely, where a rise in
the value of one currency is projected against another, the fund may purchase call options on the currency, giving it the right to purchase the currency for a fixed amount of U.S. dollars or another currency. The fund may purchase put or call
options on currencies, even if the fund does not currently hold or intend to purchase securities denominated in such currencies.
The benefit to the fund from purchases of currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the fund could sustain losses on transactions in foreign currency options.
The fund
may write options on currencies for hedging purposes or otherwise in an attempt to achieve its investment objective. For example, where the fund anticipates a decline in the value of the U.S. dollar value of a foreign security due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised, and the diminution in value of the security held
by the fund may be offset by the amount of the premium received. If the expected decline does not occur, the fund may be required to sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The fund could also write call
options on a currency, even if it does not own any securities denominated in that currency, in an attempt to enhance gains. In that case, if the expected decline does not occur, the fund would be required to purchase the currency and sell it at a
loss, which may not be offset by the premium received. The losses in this case could be unlimited.
Similarly, instead of
purchasing a call option to hedge against an anticipated increase in the cost of a foreign security to be acquired because of an increase in the U.S. dollar value of the currency in which the underlying security is primarily traded, the fund could
write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the fund to hedge such increased cost up to the amount of the premium. However, the writing of a currency option will
constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the fund would be required to purchase or sell the underlying currency at a
loss, which may not be offset by the amount of the premium. Through the writing of options on currencies, the fund also may be required to forgo all or a portion of the benefits which might otherwise have been obtained from favorable movements in
exchange rates. The fund could also write put options on a currency, even if it does not own or intend to purchase any securities denominated in that currency. In that case, if the expected increase does not occur, the fund would be required to
purchase the currency at a price that is greater than the current exchange rate for the currency. The losses in this case could exceed the amount of premium received for writing the options and could be unlimited.
Options on foreign currencies are traded on U.S. or foreign exchanges or in the OTC market. The fund may enter into transactions in
options on foreign currencies that are traded in the OTC market. These transactions are not afforded the protections provided to traders on organized exchanges or those regulated by the CFTC. In particular, OTC options are not cleared and guaranteed
by a clearing corporation, thereby increasing the risk of counterparty default. In addition, there may not be a liquid market on these options, which may prevent the fund from liquidating open positions at a profit prior to exercise or expiration,
or to limit losses in the event of adverse market conditions.
36
The purchase and sale of foreign currency options are subject to the risks of the
availability of a liquid secondary market and counterparty risk, as well as risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible interventions by governmental authorities and the
effects of other political and economic events. In addition, the value of the funds positions in foreign currency options could be adversely affected by (1) other complex foreign political and economic factors, (2) lesser
availability of data on which to make trading decisions than in the United States, (3) delays in the funds ability to act upon economic events occurring in foreign markets during non-business hours in the United States and
(4) imposition of different exercise and settlement terms and procedures and margin requirements than in the United States.
In addition, because foreign currency transactions occurring in the interbank market generally involve substantially larger amounts than those that may be involved in the use of foreign currency options,
the fund may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign currencies and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options markets or other markets used by the fund are closed while
the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that may not be reflected in the U.S. or other markets used by the fund.
Put and call options on non-U.S. currencies written by the fund will be covered by segregation of cash and liquid assets in an amount
sufficient to discharge the funds obligations with respect to the option, by acquisition of the non-U.S. currency or of a right to acquire such currency (in the case of a call option) or the acquisition of a right to dispose of the currency
(in the case of a put option), or in such other manner as may be in accordance with the requirements of any exchange on which, or the counterparty with which, the option is traded, and applicable laws and regulations.
Investing in ADRs and other depositary receipts presents many of the same risks regarding currency exchange rates as investing directly
in securities traded in currencies other than the U.S. dollar. Because the securities underlying ADRs are traded primarily in non-U.S. currencies, changes in currency exchange rates will affect the value of these receipts. For example, a decline in
the U.S. dollar value of another currency in which securities are primarily traded will reduce the U.S. dollar value of such securities, even if their value in the other non-U.S. currency remains constant, and thus will reduce the value of the
receipts covering such securities. The fund may employ any of the above described foreign currency hedging techniques to protect the value of its assets invested in depositary receipts.
Of course, the fund is not required to enter into the transactions described above and does not do so unless deemed appropriate by the
subadviser. It should be realized that under certain circumstances, the fund may not be able to hedge against a decline in the value of a currency, even if the subadviser deems it appropriate to try to do so, because doing so would be too costly.
Transactions entered into to protect the value of the funds securities against a decline in the value of a currency (even when successful) do not eliminate fluctuations in the underlying prices of the securities. Additionally, although hedging
transactions may tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase.
Investors should also be aware of the increased risk to the fund and its investors when it enters into foreign currency exchange
transactions for non-hedging purposes. Non-hedging transactions in such instruments involve greater risks and may result in losses which are not offset by increases in the value of the funds other assets.
37
Although the fund is required to segregate assets or otherwise cover certain types of transactions, this does not protect the fund against risk of loss. Furthermore, the funds use of
foreign currency exchange transactions may involve leveraging. Leveraging adds increased risks to the fund, because the funds losses may be out of proportion to the amount invested in the instrumenta relatively small investment may lead
to much greater losses.
Additional Disclosure Regarding Derivatives.
Transactions in options may be entered into on
U.S. exchanges regulated by the SEC, in the OTC market and on foreign exchanges, while forward contracts may be entered into only in the OTC market. Futures contracts and options on futures contracts may be entered into on U.S. exchanges regulated
by the CFTC and on foreign exchanges. The securities underlying options and futures contracts traded by the fund may include domestic as well as foreign securities. Investors should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve considerations and risks not typically associated with investing in U.S. markets.
Transactions in options, futures contracts, options on futures contracts and forward contracts entered into for non-hedging purposes involve greater risk and could result in losses which are not offset by
gains on other portfolio assets. For example, the fund may sell futures contracts on an index of securities in order to profit from any anticipated decline in the value of the securities comprising the underlying index. In such instances, any losses
on the futures transactions will not be offset by gains on any portfolio securities comprising such index, as might occur in connection with a hedging transaction.
The use of certain derivatives, such as futures, forward contracts, and written options, may involve leverage for the fund because they create an obligation or indebtedness to someone other than the
funds investors and enable the fund to participate in gains and losses on an amount that exceeds its initial investment.
If the fund writes a stock put option, for example, it makes no initial investment, but instead receives a premium in an amount equal to
a fraction of the price of the underlying stock. In return, the fund is obligated to purchase the underlying stock at a fixed price, thereby being subject to losses on the full stock price.
Likewise, if the fund purchases a futures contract, it makes an initial margin payment that is typically a small percentage of the
contracts price. However, because of the purchase, the fund will participate in gains or losses on the full contract price.
Other types of derivatives provide the economic equivalent of leverage because they display heightened price sensitivity to market fluctuations, such as changes in stock prices or interest rates. These
derivatives magnify the funds gain or loss from an investment in much the same way that incurring indebtedness does. For example, if the fund purchases call option on a stock, the fund pays a premium in an amount equal to a fraction of the
stock price, and in return, the fund participates in gains on the full stock price. If there were no gains, the fund generally would lose the entire initial premium.
Options, futures contracts, options on futures contracts and forward contracts may be used alone or in combinations in order to create synthetic exposure to securities in which the fund otherwise invests.
The use of derivatives may increase the amount of taxable income of the fund and may affect the amount, timing and character
of the funds income for tax purposes.
38
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 shares of the fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting power of the fund present at a shareholder
meeting, if the holders of more than 50% of the voting power of the fund are present in person or represented by proxy, or (b) more than 50% of the voting power of the fund. 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.
Fundamental Investment
Policies
The funds fundamental investment policies are as follows:
(1) The fund may not borrow money except as permitted by (i) the 1940 Act or interpretations or modifications by the
SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(2) The fund may not engage in the business of underwriting the securities of other issuers except as permitted by
(i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(3) The fund may lend money or other assets to the extent permitted by (i) the 1940 Act or interpretations or
modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(4) The fund may not issue senior securities except as permitted by (i) the 1940 Act or interpretations or
modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(5) The fund may not purchase or sell real estate except as permitted by (i) the 1940 Act or interpretations or
modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(6) The fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the
1940 Act or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.
(7) Except as permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with
appropriate jurisdiction, the fund may not make any investment if, as a result, the funds investments will be concentrated in any one industry.
With respect to the fundamental policy relating to borrowing money set forth in (1) above, the 1940 Act permits the 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 at all times an asset coverage of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of the funds total assets (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 borrowings
39
and thus subject to the 1940 Act restrictions. Borrowing money to increase portfolio holdings is known as leveraging. Borrowing, especially when used for leverage, may cause the value
of the funds shares to be more volatile than if the fund did not borrow. This is because borrowing tends to magnify the effect of any increase or decrease in the value of the funds portfolio holdings. Borrowed money thus creates an
opportunity for greater gains, but also greater losses. To repay borrowings, the fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with borrowing money, and these costs would
offset and could eliminate the funds net investment income in any given period. Currently, the fund 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
the fund from engaging in the underwriting business or from underwriting the securities of other issuers; in fact, the 1940 Act permits the fund to have underwriting commitments of up to 25% of its assets under certain circumstances. Those
circumstances currently are that the amount of the funds underwriting commitments, when added to the value of the funds investments in issuers where the fund owns more than 10% of the outstanding voting securities of those issuers,
cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the 1933 Act. Under the 1933 Act, an underwriter may be liable for material
omissions or misstatements in an issuers registration statement or prospectus. Securities purchased from an issuer and not registered for sale under the 1933 Act are considered restricted securities. There may be a limited market for these
securities. If these securities are registered under the 1933 Act, they may then be eligible for sale but participating in the sale may subject the seller to underwriter liability. These risks could apply to a fund investing in restricted
securities. Although it is not believed that the application of the 1933 Act provisions described above would cause the fund to be engaged in the business of underwriting, the policy in (2) above will be interpreted not to prevent the fund from
engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether the fund may be considered to be an underwriter under the 1933 Act.
With respect to the fundamental policy relating to lending set forth in (3) above, the 1940 Act does not prohibit the fund from
making loans; however, SEC staff interpretations currently prohibit funds from lending more than one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an
agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that reflects current interest rates. The SEC frequently treats repurchase agreements as loans.) While
lending securities may be a source of income to the fund, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in the underlying securities should the borrower fail financially. However, loans would be made
only when the funds 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 the fund from issuing senior securities except that the fund may borrow money in amounts of up to one-third of the funds
total assets from banks for any purpose. The fund may also borrow up to 5% of the funds total assets from banks or other lenders for temporary purposes, and these borrowings are not considered senior securities. The issuance of senior
securities
40
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 the fund from
owning real estate; however, the fund is limited in the amount of illiquid assets it may purchase. Investing in real estate may involve risks, including that real estate is generally considered illiquid and may be difficult to value and sell. Owners
of real estate may be subject to various liabilities, including environmental liabilities. To the extent that investments in real estate are considered illiquid, the current SEC staff position generally limits the funds purchases of illiquid
securities to 15% of net assets. The policy in (5) above will be interpreted not to prevent the fund from investing in real estate-related companies, companies whose businesses consist in whole or in part of investing in real estate,
instruments (like mortgages) that are secured by real estate or interests therein, or real estate investment trust securities.
With respect to the fundamental policy relating to commodities set forth in (6) above, the 1940 Act does not prohibit the fund from
owning commodities, whether physical commodities and contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and,
possibly, currency futures). However, the fund is limited in the amount of illiquid assets it may purchase. To the extent that investments in commodities are considered illiquid, the current SEC staff position generally limits the funds
purchases of illiquid securities to 15% of net assets. If the fund were to invest in a physical commodity or a physical commodity-related instrument, the fund would be subject to the additional risks of the particular physical commodity and its
related market. The value of commodities and commodity-related instruments may be extremely volatile and may be affected either directly or indirectly by a variety of factors. There may also be storage charges and risks of loss associated with
physical commodities. The policy in (6) above will be interpreted to permit investments in ETFs that invest in physical and/or financial commodities.
With respect to the fundamental policy relating to concentration set forth in (7) above, the 1940 Act does not define what constitutes concentration in an industry. The SEC staff has
taken the position that investment of 25% or more of a funds total assets in one or more issuers conducting their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations
of concentration could change in the future. A fund that invests a significant percentage of its total assets in a single industry may be particularly susceptible to adverse events affecting that industry and may be more risky than a fund that does
not concentrate in an industry. The policy in (7) above will be interpreted to refer to concentration as that term may be interpreted from time to time. The policy also will be interpreted to permit investment without limit in the following:
securities of the U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; securities of foreign
governments; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry. There also will be no limit on investment in issuers domiciled in a
single jurisdiction or country. The policy also will be interpreted to give broad authority to the fund as to how to classify issuers within or among industries.
The funds fundamental policies will be interpreted broadly. For example, the policies will be interpreted to refer to the 1940 Act and the related rules as they are in effect from time to time, and
to interpretations and modifications of or relating to the 1940 Act by the SEC and others as they are given from time to time. When a policy provides that an investment practice may be conducted as permitted by the 1940 Act, the policy will be
interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.
41
Non-Fundamental Investment Policies
The funds non-fundamental investment policies are as follows:
|
1.
|
The fund may not invest in other registered open-end management 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. The foregoing investment policy does not restrict the fund from (i) acquiring securities of other registered investment companies in connection with a merger,
consolidation, reorganization, or acquisition of assets, or (ii) purchasing the securities of registered investment companies, to the extent otherwise permissible under Section 12(d)(1) of the 1940 Act.
|
|
2.
|
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 that are illiquid.
|
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. Under the 1940 Act, the fund cannot change its classification from diversified to
non-diversified without shareholder approval.
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 net short-term capital gains, shareholders will be taxed on such gains at ordinary tax rates (except shareholders who invest through individual retirement accounts
(IRAs) and other retirement plans which are not taxed currently on accumulations in their accounts).
Portfolio
turnover will not be a limiting factor should the subadviser or Western Asset, as applicable, deem it advisable to purchase or sell securities.
For the fiscal years ended October 31, 2011 and October 31, 2012, the funds portfolio turnover rates were as follows:
The increase in the funds portfolio turnover rate was due to the adoption of new investment
objectives and policies in January 2012.
42
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 is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018. 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
|
Independent Trustees#:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul R. Ades
Born 1940
|
|
Trustee
|
|
Since 1983
|
|
Paul R. Ades, PLLC (law firm) (since 2000)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Andrew L. Breech
Born 1952
|
|
Trustee
|
|
Since 1991
|
|
President, Dealer Operating Control Service, Inc. (automotive retail management)
(since 1985)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Dwight B. Crane
Born 1937
|
|
Trustee
|
|
Since 1981
|
|
Professor Emeritus, Harvard Business School (since 2007); formerly, Professor, Harvard Business School
(1969 to 2007); Independent
Consultant (since 1969)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Frank G. Hubbard
Born 1937
|
|
Trustee
|
|
Since 1993
|
|
President, Avatar International Inc. (business development) (since 1998)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Howard J. Johnson
Born 1938
|
|
Trustee
|
|
From 1981 to 1998 and since 2000
|
|
Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003)
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Jerome H. Miller
Born 1938
|
|
Trustee
|
|
Since 1995
|
|
Retired
|
|
|
52
|
|
|
None
|
|
|
|
|
|
|
Ken Miller
Born 1942
|
|
Trustee
|
|
Since 1983
|
|
Retired; formerly, President, Young Stuff Apparel Group, Inc. (apparel manufacturer), division of Li & Fung (1963 to
2012)
|
|
|
52
|
|
|
None
|
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
|
John J. Murphy
Born 1944
|
|
Trustee
|
|
Since 2002
|
|
Founder and Senior Principal, Murphy Capital Management (investment management)
(since 1983)
|
|
|
52
|
|
|
Trustee, UBS Funds (52 funds) (since 2008); Trustee, Consulting Group Capital Markets Funds (11 funds) (since 2002); formerly, Director,
Nicholas Applegate Institutional Funds (12 funds) (2005 to 2010); formerly, Director, Atlantic Stewardship Bank (2004 to 2005); formerly, Director, Barclays International Funds Group Ltd. and affiliated companies (1983 to 2003)
|
|
|
|
|
|
|
Thomas F. Schlafly
Born 1948
|
|
Trustee
|
|
Since 1983
|
|
President, The Saint Louis Brewery, Inc. (brewery) (since 1989); Partner, Thompson Coburn LLP (law firm) (since 2009); formerly, Of
Counsel, Husch Blackwell Sanders LLP (law firm) and its predecessor firms
(1984 to 2009)
|
|
|
52
|
|
|
Director, Citizens National Bank of Greater St. Louis
(since 2006)
|
|
|
|
|
|
|
Jerry A. Viscione
Born 1944
|
|
Trustee
|
|
Since 1993
|
|
Retired
|
|
|
52
|
|
|
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
|
Interested Trustee and Officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jay Gerken
Born 1951
|
|
Trustee, President, Chairman and Chief Executive Officer
|
|
Since 2002
|
|
Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.) (since 2005); Officer and Trustee/Director of 162
funds associated with Legg Mason Partners Fund Advisor, LLC (LMPFA) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (CEO) of LMPFA (since 2006);
President and CEO of Smith Barney Fund Management LLC (SBFM) (formerly a registered investment adviser) (since 2002)
|
|
|
162
|
|
|
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 respective successor has been duly elected and qualified or until his earlier death, resignation, retirement or removal.
|
**
|
Indicates the earliest year in which the Trustee became a board member for a fund in the Legg Mason fund complex.
|
|
Mr. Gerken 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.
|
|
|
|
|
|
|
|
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
Legg Mason
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)
|
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
|
Vanessa Williams
Born 1979
Legg Mason
100 First Stamford Place
6
th
Floor
Stamford, CT 06902
|
|
Chief Anti-Money Laundering Compliance
Officer
Identity Theft Prevention Officer
|
|
Since 2011
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); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); 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
Legg Mason
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
Legg Mason
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 SBFM (since
2002)
|
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
Legg Mason
100 International Drive
5
th
Floor
Baltimore, MD 21202
|
|
Principal Financial Officer
|
|
Since 2011
|
|
Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); 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)
|
|
|
|
|
Albert Laskaj
Born 1977
Legg Mason
100 First Stamford Place
6
th
Floor
Stamford, CT 06902
|
|
Treasurer
|
|
Since 2010
|
|
Vice President of Legg Mason & Co. (since 2008); Treasurer of certain mutual funds associated with Legg Mason & Co. or its
affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010)
|
|
|
|
|
Jeanne M. Kelly
Born 1951
Legg Mason
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); 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 for a fund in the Legg Mason fund complex.
|
Each Trustee previously served as a trustee or director of certain predecessor funds in the fund complex, and each Trustee was thus
initially selected by the board of the applicable 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 equity
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 equity mutual funds, which
experience would be further developed and enhanced over time.
In connection with the restructuring, the Trustees were
selected to join the Board based upon the following as to each Trustee: character and integrity; service as a board member of predecessor funds; 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 the requirements of the Trusts retirement policies; as to each Trustee other
47
than Mr. Gerken, the Trustees status as not being an interested person of the fund, as defined in the 1940 Act; and, as to Mr. Gerken, his status as a representative
of Legg Mason. Independent Trustees constitute more than 75% of the Board. Mr. Gerken serves as Chairman of the Board and is an interested person of the fund.
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 attributes and skills. The Board believes that the Trustees ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the manager, the subadviser and
Western Asset, other service providers, counsel and the independent registered public accounting firm, and to exercise effective business judgment in the performance of their duties support this conclusion. In addition, the following specific
experience, qualifications, attributes and/or skills apply to each Trustee.
Each Trustee has served as a board member of the
fund and other funds (or predecessor funds) in the fund complex for at least eight years. Mr. Ades has substantial experience practicing law and advising clients with respect to various business transactions. Mr. Breech has substantial
experience as the chief executive of a private corporation. Mr. Crane has substantial experience as an economist, academic and business consultant. Mr. Hubbard has substantial experience in business development and was a senior executive
of an operating company. Mr. Johnson has substantial experience as the chief executive of an operating company and in the financial services industry, including as an actuary and pension consultant. Mr. Jerome Miller had substantial
experience as an executive in the asset management group of a major broker/dealer. Mr. Ken Miller has substantial experience as a senior executive of an operating company. Mr. Murphy has substantial experience in the asset management
business and has current and prior service on the boards of other mutual funds and corporations. Mr. Schlafly has substantial experience practicing law and also serves as the president of a private corporation and as director of a bank.
Mr. Viscione has substantial experience as an academic and senior executive of a major university. Mr. Gerken has been the Chairman and Chief Executive Officer of the Trust and other funds in the fund complex since 2002 and has substantial
experience as an executive and portfolio manager and in leadership roles with Legg Mason and affiliated entities. References to the experience, qualifications, attributes and skills of Trustees are pursuant to requirements of the SEC, do not
constitute holding out of the Board or any Trustee as having any special expertise, and shall not impose any greater responsibility or liability on any such person or on the Board.
The Board has five standing Committees: the Audit Committee, the Contract Committee, the Performance Committee, the Governance Committee,
and the Compensation and Nominating Committee (which is a sub-committee of the Governance Committee). Each Committee is chaired by an Independent Trustee. The Audit Committee and the Governance Committee are composed of all of the Independent
Trustees. The Contract Committee is composed of four Independent Trustees. The Performance Committee is composed of three Independent Trustees and the Chairman of the Board. The Compensation and Nominating Committee is composed of four Independent
Trustees. The Lead Independent Trustee (the Lead Trustee) serves as the Chair of the Governance Committee. Where deemed appropriate, the Board may constitute ad hoc committees.
The Lead Trustee and the chairs of the Audit and Performance Committees work with the Chairman of the Board to set the agendas for Board
and committee meetings. The Lead Trustee also serves as a key point person for interaction between management and the Independent Trustees. 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 is appropriate, given Legg Masons sponsorship of the fund and that investors have selected
Legg Mason to provide overall management to the fund. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information between the Independent Trustees and management, including the funds
subadviser and Western Asset.
48
The Audit Committee oversees the scope of the funds audit, the funds accounting
and financial reporting policies and practices and its internal controls. The Audit Committee assists the Board in fulfilling its responsibility for oversight of the integrity of the funds accounting, auditing and financial reporting
practices, the qualifications and independence of the funds independent registered public accounting firm and the funds compliance with legal and regulatory requirements. The Audit Committee approves, and recommends to the Board for
ratification, the selection, appointment, retention or termination of the funds independent registered public accounting firm and approves the compensation of the independent registered public accounting firm. The Audit Committee also approves
all audit and permissible non-audit services provided to the fund by the independent registered public accounting firm and all permissible non-audit services provided by the funds independent registered public accounting firm to its manager
and any affiliated service providers if the engagement relates directly to the funds operations and financial reporting. The Audit Committee also assists the Board in fulfilling its responsibility for the review and negotiation of the
funds investment management and subadvisory arrangements.
The Contract Committee is charged with assisting the Board in
requesting and evaluating such information from the manager, the subadviser and Western Asset as may reasonably be necessary to evaluate the terms of the funds investment management agreement, subadvisory arrangements and distribution
arrangements.
The Performance Committee is charged with assisting the Board in carrying out its oversight responsibilities
over the fund and fund management with respect to investment management, objectives, strategies, policies and procedures, performance and performance benchmarks, and the applicable risk management process.
The Governance Committee is charged with overseeing Board governance and related Trustee practices, including selecting and nominating
persons for election or appointment by the Board as Trustees of the Trust. The Governance Committee has formed the Compensation and Nominating Committee, the function of which is to recommend to the Board the appropriate compensation for serving as
a Trustee on the Board. In addition, the Compensation and Nominating Committee is responsible for, among other things, selecting and recommending candidates to fill vacancies on the Board. The Committee may consider nominees recommended by a
shareholder. In evaluating potential nominees, including any nominees recommended by shareholders, the Committee takes into consideration various factors, including, among any others it may deem relevant, character and integrity, business and
professional experience, and whether the committee believes the person has the ability to apply sound and independent business judgment and would act in the interest of the fund and its shareholders. 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.
Service providers to the fund, primarily the funds manager, the subadviser and Western Asset and, as appropriate, their affiliates,
have responsibility for the day-to-day management of the fund, which includes responsibility for risk management. As an integral part of its responsibility for oversight of the fund, the Board oversees risk management of the funds investment
program and business affairs. Oversight of the risk management process is part of the Boards general oversight of the fund and its service providers. The Board has emphasized to the funds manager, the subadviser and Western Asset the
importance of maintaining vigorous risk management. The Board exercises oversight of the risk management process primarily through the Audit Committee and the Performance Committee, and through oversight by the Board itself.
The fund is subject to a number of risks, including 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. The funds manager, the subadviser and Western Asset, the affiliates of the manager, the subadviser and Western Asset, or various service providers to the fund
employ a variety of processes, procedures and controls to
49
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 Chief Compliance Officer and the managers chief risk officer, as well as
personnel of the subadviser and Western Asset and other service providers, such as the funds independent registered public accounting firm, make periodic reports to the Audit Committee, the Performance Committee or to the Board 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 inherent limitations.
The Board met 4 times during the fiscal year ended October 31, 2012. The Audit
Committee, the Contract Committee, the Performance Committee, the Governance Committee and the Compensation and Nominating Committee met 4, 1, 4, 4 and 1 time(s), respectively, during the fiscal year ended October 31, 2012.
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, 2012.
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of
Equity Securities in
the Fund ($)
|
|
Aggregate Dollar Range
of Equity Securities in
Registered Investment
Companies
Overseen
by Trustee ($)
|
Independent Trustees
|
|
|
|
|
Paul R. Ades
|
|
None
|
|
Over 100,000
|
Andrew L. Breech
|
|
None
|
|
Over 100,000
|
Dwight B. Crane
|
|
None
|
|
Over 100,000
|
Frank G. Hubbard
|
|
None
|
|
Over 100,000
|
Howard J. Johnson
|
|
None
|
|
Over 100,000
|
Jerome H. Miller
|
|
None
|
|
Over 100,000
|
Ken Miller
|
|
None
|
|
Over 100,000
|
John J. Murphy
|
|
None
|
|
Over 100,000
|
Thomas F. Schlafly
|
|
None
|
|
Over 100,000
|
Jerry A. Viscione
|
|
None
|
|
Over 100,000
|
|
|
|
Interested Trustee
|
|
|
|
|
R. Jay Gerken
|
|
None
|
|
Over 100,000
|
As of December 31, 2012, none of the Independent Trustees or their immediate family members owned
beneficially or of record any securities of the manager, subadviser, Western Asset or distributor of the fund, or of a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with
the manager, subadviser, Western Asset or distributor of the fund.
The Independent Trustees receive a fee for each meeting of
the Board and committee meetings attended and are reimbursed for all out-of-pocket expenses relating to attendance at such meetings. Mr. Gerken, an interested person of the fund, as defined in the 1940 Act, does not receive
compensation from the fund for his service as Trustee, but may be reimbursed for all out-of-pocket expenses relating to attendance at such meetings.
The fund pays a pro rata share of the Trustees fees based upon asset size. The fund currently pays each of the Independent Trustees its
pro rata
share of: an annual fee of $120,000, plus
$20,000 for each regularly scheduled Board meeting attended in person, and $1,000 for each telephonic Board meeting in which that Trustee
50
participates. The Lead Trustee receives an additional $25,000 per year, the Chair of the Audit Committee receives an additional $15,000 per year and the Chairs of the Contract Committee, the
Performance Committee, and the Compensation and Nominating Committee receive an additional $12,500 per year. Other members of the Contract Committee, the Performance Committee, and the Compensation and Nominating Committee receive an additional
$10,000 per year. Effective January 1, 2013, the Trustee designated as the funds audit committee financial expert (as defined in the instructions to Item 3 of Form N-CSR) receives an additional $10,000 per year.
Officers of the Trust receive no compensation from the fund, although they may be reimbursed by the fund for reasonable out-of-pocket
travel expenses for attending Board meetings.
Information regarding compensation paid to the Trustees is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation from the
Fund
(2)
($)
|
|
|
Total Pension or
Retirement
Benefits Paid as Part
of Fund
Expenses
(4)
($)
|
|
|
Total
Compensation from
Fund Complex
Paid
to Trustee
(3)
($)
|
|
|
Number of Portfolios
in Fund Complex
Overseen by Trustee
(2)
|
|
Independent Trustees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul R. Ades
|
|
|
738
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
49
|
|
Andrew L. Breech
|
|
|
747
|
|
|
|
None
|
|
|
|
212,500
|
|
|
|
49
|
|
Dwight B. Crane
|
|
|
828
|
|
|
|
None
|
|
|
|
235,000
|
|
|
|
49
|
|
Frank G. Hubbard
|
|
|
738
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
49
|
|
Howard J. Johnson
|
|
|
792
|
|
|
|
None
|
|
|
|
225,000
|
|
|
|
49
|
|
Jerome H. Miller
|
|
|
671
|
|
|
|
None
|
|
|
|
210,500
|
|
|
|
49
|
|
Ken Miller
|
|
|
738
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
49
|
|
John J. Murphy
|
|
|
738
|
|
|
|
None
|
|
|
|
210,000
|
|
|
|
49
|
|
Thomas F. Schlafly
|
|
|
747
|
|
|
|
None
|
|
|
|
212,500
|
|
|
|
49
|
|
Jerry A. Viscione
|
|
|
747
|
|
|
|
None
|
|
|
|
212,500
|
|
|
|
49
|
|
|
|
|
|
|
Interested Trustee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jay Gerken
(1)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
154
|
|
(1)
|
Mr. Gerken was not compensated for his services as a Trustee because of his affiliation with the manager.
|
(2)
|
Information is for the fiscal year ended October 31, 2012.
|
(3)
|
Information is for the calendar year ended December 31, 2012.
|
(4)
|
Pursuant to prior retirement plans, the fund made payments of $67 to former Trustees for the fiscal year ended October 31, 2012.
|
As of February 4, 2013, the Trustees and officers of the Trust, as a group, owned less than 1% of the
outstanding shares of the fund.
To the knowledge of the fund, as of February 4, 2013, the following shareholders owned
or held of record 5% or more, as indicated, of the outstanding shares of the following classes of the fund:
|
|
|
|
|
|
|
Class
|
|
Name and Address
|
|
Percent of
Ownership (%)
|
|
A
|
|
PERSHING LLC
1 PERSHING
PLZ
JERSEY CITY NJ 07399-0001
|
|
|
62.15
|
|
|
|
|
A
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
|
11.75
|
|
51
|
|
|
|
|
|
|
Class
|
|
Name and Address
|
|
Percent of
Ownership (%)
|
|
A
|
|
AMERICAN ENTERPRISE INVESTMENT SVC
707 2ND AVE S
MINNEAPOLIS MN 55402-2405
|
|
|
6.18
|
|
|
|
|
C
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
|
43.99
|
|
|
|
|
C
|
|
RAYMOND JAMES
OMNIBUS FOR
MUTUAL FUNDS
HOUSE ACCT FIRM
ATTN
COURTNEY WALLER
880 CARILLON PKWY
ST
PETERSBURG FL 33716-1100
|
|
|
19.47
|
|
|
|
|
C
|
|
UBS WM USA
OMNI ACCOUNT
M/F
ATTN: DEPARTMENT MANAGER
499
WASHINGTON BLVD FL 9
JERSEY CITY NJ 07310-2055
|
|
|
8.93
|
|
|
|
|
C
|
|
FIRST CLEARING, LLC
SPECIAL
CUSTODY ACCT FOR THE
EXCLUSIVE BENEFIT OF CUSTOMER
2801 MARKET STREET
ST LOUIS MO 63103-2523
|
|
|
6.65
|
|
|
|
|
C
|
|
MLPF&S FOR THE SOLE BENEFIT OF ITS CUSTOMERS
ATTN FUND ADMINISTRATION
4800 DEER LAKE DRIVE EAST 3RD FLOOR
JACKSONVILLE FL 32246-6484
|
|
|
5.95
|
|
|
|
|
I
|
|
MORGAN STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311
|
|
|
52.85
|
|
|
|
|
I
|
|
RAYMOND JAMES
OMNIBUS FOR
MUTUAL FUNDS
HOUSE ACCT FIRM
ATTN
COURTNEY WALLER
880 CARILLON PKWY
ST
PETERSBURG FL 33716-1100
|
|
|
10.43
|
|
|
|
|
I
|
|
FIRST CLEARING, LLC
SPECIAL
CUSTODY ACCT FOR THE
EXCLUSIVE BENEFIT OF CUSTOMER
2801 MARKET STREET
ST LOUIS MO 63103-2523
|
|
|
9.34
|
|
52
|
|
|
|
|
|
|
Class
|
|
Name and Address
|
|
Percent of
Ownership (%)
|
|
I
|
|
MLPF&S FOR THE SOLE BENEFIT OF ITS CUSTOMERS
ATTN FUND ADMINISTRATION
4800 DEER LAKE DRIVE EAST 3RD FLOOR
JACKSONVILLE FL 32246-6484
|
|
|
8.81
|
|
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager
LMPFA serves
as investment manager to the fund, pursuant to an investment management agreement (the Management Agreement). LMPFA provides administrative and certain oversight services to the fund. LMPFA, with offices at 620 Eighth Avenue, New York,
New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. As of December 31, 2012, LMPFAs total assets under management were approximately $180.6 billion. LMPFA is a wholly-owned subsidiary 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, 2012, Legg Masons asset management operations had aggregate assets under
management of approximately $648.9 billion.
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 arrangements, as described below.
The manager 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 the 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 and qualification of the funds shares under federal and state laws.
The Management Agreement will
continue in effect for its initial term and thereafter from year to year, provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the fund (as defined in the
1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose.
The Management Agreement provides that the manager may render services to others. The Management Agreement is terminable without penalty on not more than 60 days nor less than 30 days written
notice by the fund when authorized either by a vote of holders of shares representing a majority of the voting power of the outstanding voting securities of the fund (as defined in the 1940 Act) or by a vote of a majority of the Trustees, or by the
manager on not less than 90 days written notice, and will automatically terminate in the event of its assignment (as defined in the 1940 Act). The Management Agreement is not assignable by the Trust except with the consent of the manager. The
Management Agreement provides that neither the manager nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any
53
act or omission in the execution of security transactions for the fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties.
For its services under the Management Agreement, LMPFA receives an investment management fee that is calculated daily and
payable monthly according to the following schedule:
|
|
|
|
|
Average Daily Net Assets
|
|
Investment Management
Fee Rate (%)
|
|
First $1 billion
|
|
|
0.750
|
|
Next $1 billion
|
|
|
0.725
|
|
Next $3 billion
|
|
|
0.700
|
|
Next $5 billion
|
|
|
0.675
|
|
Over $10 billion
|
|
|
0.650
|
|
For the fiscal years ended October 31, 2012, October 31, 2011 and October 31, 2010,
the fund paid management fees to LMPFA as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended October 31
|
|
Gross
Management
Fees ($)
|
|
|
Management Fees
Waived/Expense
Reimbursements ($)
|
|
|
Net Management Fees
(After Waivers/Expense
Reimbursements) ($)
|
|
2012
|
|
|
687,057
|
|
|
|
206,691
|
|
|
|
480,366
|
|
2011
|
|
|
688,428
|
|
|
|
220,902
|
|
|
|
467,526
|
|
2010
|
|
|
693,621
|
|
|
|
105,424
|
|
|
|
588,197
|
|
Subadvisory Arrangements
ClearBridge Investments, LLC (ClearBridge or the subadviser) serves as the subadviser to the fund pursuant to a subadvisory agreement between the manager and ClearBridge (the
Subadvisory Agreement). ClearBridge has offices at 620 Eighth Avenue, New York, New York 10018. As of December 31, 2012, ClearBridges total assets under management were approximately $55.5 billion.
Western Asset manages the funds cash and short-term instruments pursuant to an agreement between the manager and Western Asset (the
Western Asset Agreement). 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, 2012, the total assets under management of Western Asset and its supervised affiliates were approximately $461.9 billion.
ClearBridge 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, 2012, Legg Masons asset management operations had aggregate assets under management of approximately $648.9 billion.
Under the Subadvisory Agreement and the Western Asset Agreement, subject to the supervision and direction of the Board and the manager,
the subadviser and Western Asset will manage the funds portfolio in accordance with the funds stated investment objectives and policies, assist in supervising all aspects of the funds operations, make investment decisions for the
fund, place orders to purchase and sell securities and employ professional portfolio managers and securities analysts who provide research services to the fund.
Each of the Subadvisory Agreement and the Western Asset Agreement will continue in effect for its initial term and thereafter from year to year provided such continuance is specifically approved at least
annually (a) by the Board or by a majority of the outstanding voting securities of the fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in
person at
54
a meeting called for such purpose. The Board or a majority of the outstanding voting securities of the fund (as defined in the 1940 Act) may terminate the Subadvisory Agreement or the Western
Asset Agreement without penalty, in each case on not more than 60 days nor less than 30 days written notice to the subadviser or Western Asset. Each of the subadviser and Western Asset may terminate the Subadvisory Agreement or the
Western Asset Agreement, as applicable, on 90 days written notice to the fund and the manager. Each of the Subadvisory Agreement and the Western Asset Agreement may be terminated upon the mutual written consent of the manager and the
subadviser or Western Asset, as applicable. Each of the Subadvisory Agreement and the Western Asset Agreement will terminate automatically in the event of assignment (as defined in the 1940 Act) by the subadviser or Western Asset, as applicable, and
shall not be assignable by the manager without the consent of the subadviser or Western Asset, as applicable.
As compensation
for their subadvisory services, the manager pays the subadviser and Western Asset an aggregate fee equal to 70% of the management fee paid to LMPFA, net of fee waivers and expense reimbursements.
Portfolio Managers
The
following tables set forth certain additional information with respect to the portfolio managers for the fund. Unless noted otherwise, all information is provided as of October 31, 2012.
Other Accounts Managed by the Portfolio Managers
The table below
identifies the portfolio managers, the number of accounts (other than the fund) for which each portfolio manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered
investment companies, other pooled investment vehicles, other accounts and, if applicable, the number of accounts and total assets in the accounts where fees are based on performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
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
($)
|
Mark McAllister, CFA
|
|
Registered investment companies
|
|
2
|
|
514 million
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
Other pooled investment vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
Other accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
Peter Vanderlee, CFA
|
|
Registered investment companies
|
|
6
|
|
8.77 billion
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
Other pooled investment vehicles
|
|
1
|
|
66 million
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
Other accounts
|
|
21,448
|
|
2.84 billion
|
|
0
|
|
0
|
Portfolio Manager Compensation Structure
ClearBridges portfolio managers participate in a competitive compensation program that is designed to attract and retain outstanding investment professionals and closely align the interests of its
investment professionals with those of its clients and overall firm results. The total compensation program includes a significant incentive component that rewards high performance standards, integrity, and collaboration consistent with the
firms values. Portfolio manager compensation is reviewed and modified each year as appropriate to
55
reflect changes in the market and to ensure the continued alignment with the goals stated above. ClearBridges portfolio managers and other investment professionals receive a combination of
base compensation and discretionary compensation, comprising a cash incentive award and deferred incentive plans described below.
Base salary compensation.
Base salary is fixed and primarily determined based on market factors and the experience and responsibilities of the investment professional within the firm.
Discretionary compensation.
In addition to base compensation managers may receive discretionary compensation.
Discretionary compensation can include:
|
|
|
ClearBridges Deferred Incentive Plan (CDIP)a mandatory program that typically defers 15% of discretionary year-end compensation into
ClearBridge managed products. For portfolio managers, one-third of this deferral tracks the performance of their primary managed product, one-third tracks the performance of a composite portfolio of the firms new products and one-third can be
elected to track the performance of one or more of ClearBridge managed funds. Consequently, portfolio managers can have two-thirds of their CDIP award tracking the performance of their primary managed product.
|
For centralized research analysts, two-thirds of their deferral is elected to track the performance of one of more of ClearBridge managed
funds, while one-third tracks the performance of the new product composite.
ClearBridge then makes a company investment in the
proprietary managed funds equal to the deferral amounts by fund. This investment is a company asset held on the balance sheet and paid out to the employees in shares subject to vesting requirements.
|
|
|
Legg Mason Restricted Stock Deferrala mandatory program that typically defers 5% of discretionary year-end compensation into Legg Mason
restricted stock. The award is paid out to employees in shares subject to vesting requirements.
|
|
|
|
Legg Mason Restricted Stock and Stock Option Grantsa discretionary program that may be utilized as part of the total compensation program. These
special grants reward and recognize significant contributions to our clients, shareholders and the firm and aid in retaining key talent.
|
Several factors are considered by ClearBridge Senior Management when determining discretionary compensation for portfolio managers. These include but are not limited to:
|
|
|
Investment performance.
A portfolio managers compensation is linked to the pre-tax investment performance of the fund/accounts managed by
the portfolio manager. Investment performance is calculated for 1-, 3-, and 5-year periods measured against the applicable product benchmark (e.g., a securities index and, with respect to a fund, the benchmark set forth in the funds
Prospectus) and relative to applicable industry peer groups. The greatest weight is generally placed on 3- and 5-year performance.
|
|
|
|
Appropriate risk positioning that is consistent with ClearBridges investment philosophy and the Investment Committee/CIO approach to generation
of alpha;
|
|
|
|
Overall firm profitability and performance;
|
|
|
|
Amount and nature of assets managed by the portfolio manager;
|
|
|
|
Contributions for asset retention, gathering and client satisfaction;
|
|
|
|
Contribution to mentoring, coaching and/or supervising;
|
56
|
|
|
Contribution and communication of investment ideas in ClearBridges Investment Committee meetings and on a day to day basis;
|
|
|
|
Market compensation survey research by independent third parties
|
Potential Conflicts of Interest
Potential conflicts of interest may arise
when the funds portfolio managers also have day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the funds portfolio managers.
The subadviser and the fund have adopted compliance policies and procedures that are designed to address various conflicts of interest
that may arise for the subadviser and the individuals that each employs. For example, the subadviser seeks to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage
funds and accounts that share a similar investment style. The subadviser has also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is
no guarantee, however, that the policies and procedures adopted by the subadviser and the fund will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:
Allocation of Limited Time and Attention.
A portfolio manager who is responsible for managing multiple funds and/or accounts may
devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those
accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
Allocation of Limited Investment Opportunities.
If a portfolio manager
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 a funds ability to take full advantage of the
investment opportunity.
Pursuit of Differing Strategies.
At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a
particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit
of one or more other funds and/or accounts.
Selection of Broker/Dealers.
Portfolio managers may be able to select or
influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide brokerage and research services
(as those terms are defined in Section 28(e) of the 1934 Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others.
Although the payment of brokerage commissions is subject to the requirement that the subadviser determines in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the fund, a
decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the funds and/or accounts managed. For this reason, the subadviser has formed a brokerage committee that reviews, among other things, the
allocation of brokerage to broker/dealers, best execution and soft dollar usage.
57
Variation in Compensation.
A conflict of interest may arise where the financial or
other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the managers management fee (and the percentage paid to the subadviser) and/or the portfolio managers
compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others.
The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to enhance the
portfolio managers performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the
portfolio manager.
Related Business Opportunities.
The manager or its affiliates may provide more services (such as
distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that
provide greater overall returns to the manager and its affiliates.
Portfolio Manager Securities Ownership
The table below identifies ownership of the funds securities by the portfolio managers as of October 31, 2012. These holdings are in
addition to the shares held for the portfolio managers benefit under the subadvisers incentive compensation program.
|
|
|
|
|
Portfolio Manager
|
|
Dollar Range of
Ownership of
Securities ($)
|
|
Mark McAllister
|
|
|
50,001-100,000
|
|
Peter Vanderlee
|
|
|
50,001-100,000
|
|
Expenses
In addition to amounts payable under the Management Agreement and the 12b-1 Plan (as discussed below), the fund is responsible for its own expenses, including, among other things: interest; taxes;
governmental fees; voluntary assessments and other expenses incurred in connection with membership in investment company organizations; organization costs of the fund; the cost (including brokerage commissions, transaction fees or charges, if any)
in connection with the purchase or sale of the funds securities and other investments and any losses in connection therewith; fees and expenses of custodians, transfer agents, registrars, independent pricing vendors or other agents; legal
expenses; loan commitment fees; expenses relating to the issuance and redemption or repurchase of the funds shares and servicing shareholder accounts; expenses of registering and qualifying the funds shares for sale under applicable
federal and state law; expenses of preparing, setting in print, printing and distributing prospectuses and statements of additional information and any supplements thereto, reports, proxy statements, notices and dividends to the funds
shareholders; costs of stationery; website costs; costs of meetings of the Board or any committee thereof, meetings of shareholders and other meetings of the fund; Board fees; audit fees; travel expenses of officers, Trustees and employees of the
fund, if any; the funds pro rata portion of premiums on any fidelity bond and other insurance covering the fund and its officers, Trustees and employees; and litigation expenses and any non-recurring or extraordinary expenses as may arise,
including, without limitation, those relating to actions, suits or proceedings to which the fund is a party and any legal obligation which the fund may have to indemnify the funds Trustees and officers with respect thereto.
Management may agree to implement an expense cap, waive fees and/or reimburse operating expenses for one or more classes of shares. Any
such waived fees and/or reimbursed expenses are described in the funds Prospectus. The expense caps and waived fees and/or reimbursed expenses do not cover extraordinary expenses, such as (a) any expenses or charges related to litigation,
derivative actions, demand related to litigation,
58
regulatory or other government investigations and proceedings, for cause regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such
expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and taxes; and
(c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or
expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the fund or class or the acquisition of all or substantially all of the
assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of the fund or class (except to the extent relating to routine items such as the election of Trustees or the approval of the
independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes
of fee disclosure in Form N-1A as the same may be amended from time to time.
In order to implement an expense cap, the
manager will, as necessary, waive management fees or reimburse operating expenses. However, the manager is permitted to recapture amounts previously waived or reimbursed by the manager to the fund during the same fiscal year if the funds total
annual operating expenses have fallen to a level below the expense cap shown in the funds Prospectus. In no case will the manager recapture any amount that would result, on any particular fund business day, in the funds total annual
operating expenses exceeding the expense cap.
Distributor
LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 International Drive, Baltimore, Maryland 21202, serves as the funds sole and exclusive distributor pursuant to a written
agreement dated August 5, 2010 (the distribution agreement).
LMIS may be deemed to be an underwriter for
purposes of the 1933 Act. The distributors obligation is an agency or best efforts arrangement under which the distributor is required to take and pay only for such shares of the fund as may be sold to the public. The distributor
is not obligated to sell any stated number of shares.
The distribution agreement is renewable from year to year if approved
(a) by the Trustees or by a vote of a majority of the funds outstanding voting securities, and (b) by the affirmative vote of a majority of Independent Trustees who are not parties to such agreement or interested persons of any such
party by votes cast in person at a meeting called for such purpose. The distribution agreement provides that it will terminate if assigned, and that it may be terminated without penalty by either party on 60 days written notice.
Initial Sales Charge
The aggregate dollar amounts of initial sales charge on Class A shares received by LMIS were as follows:
Class A Shares
|
|
|
|
|
For the fiscal year ended October 31
|
|
LMIS ($)
|
|
2012
|
|
|
69,937
|
|
2011
|
|
|
1,170
|
|
2010
|
|
|
312
|
|
59
Contingent Deferred Sales Charges
The aggregate dollar amounts of contingent deferred sales charges on Class A and Class C shares received and retained by LMIS were as
follows:
Class A Shares
|
|
|
|
|
For the fiscal year ended October 31
|
|
LMIS ($)
|
|
2012
|
|
|
617
|
|
2011
|
|
|
0
|
|
2010
|
|
|
2
|
|
Class B Shares
|
|
|
|
|
For the fiscal year ended October 31
|
|
LMIS ($)
|
|
2012
|
|
|
N/A
|
|
2011*
|
|
|
200
|
|
2010
|
|
|
442
|
|
|
*
|
All outstanding Class B shares were converted to Class A shares on June 21, 2011.
|
Class C Shares
|
|
|
|
|
For the fiscal year ended October 31
|
|
LMIS ($)
|
|
2012
|
|
|
185
|
|
2011
|
|
|
31
|
|
2010
|
|
|
110
|
|
Shareholder Services and Distribution Plan
The Trust, on behalf of the fund, has adopted an amended shareholder services and distribution plan (the 12b-1 Plan) pursuant
to Rule l2b-1 under the 1940 Act with respect to its Class A, Class C, Class FI, Class R and Class R1 shares. Under the 12b-1 Plan, the fund pays distribution fees to LMIS for the services it provides and expenses it bears with respect to the
distribution of Class C, Class R and Class R1 shares and service fees for Class A, Class C, Class FI, Class R and Class R1 shares. The distributor will provide the Board with periodic reports of amounts expended under the 12b-1 Plan and the
purposes for which such expenditures were made. The fund pays service fees, accrued daily and payable monthly, calculated at the annual rate of 0.25% of the value of the funds average daily net assets attributable to the funds
Class A, Class C, Class FI, Class R and Class R1 shares. In addition, the fund pays distribution fees with respect to the Class C and Class R1 shares at the annual rate of 0.75% of the funds average daily net assets attributable to each
such class and with respect to the Class R shares at the annual rate of 0.25% of the funds average daily net assets attributable to such class.
Fees under the 12b-1 Plan may be used to make payments to the distributor for distribution services, Service Agents and other parties in respect of the sale of shares of the fund, and to make payments for
advertising, marketing or other promotional activity, and payments for preparation, printing and distribution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders. The fund
may also make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient may vary based upon certain factors, including, among other things,
the levels of sales of fund shares and/or shareholder services provided.
The 12b-1 Plan also provides that the distributor
and Service Agents may receive all or a portion of the sales charges paid by Class A and Class C investors.
The 12b-1
Plan permits the fund to pay fees to the distributor, Service Agents and others as compensation for their services, not as reimbursement for specific expenses incurred. Thus, even if their expenses exceed the
60
fees provided for by the 12b-1 Plan, the fund will not be obligated to pay more than those fees and, if their expenses are less than the fees paid to them, they will realize a profit. The fund
may pay the fees to the distributor and others until the 12b-1 Plan or distribution agreement is terminated or not renewed. In that event, the distributors or other recipients expenses in excess of fees received or accrued through the
termination date will be the distributors or other recipients sole responsibility and not obligations of the fund. In their annual consideration of the continuation of the 12b-1 Plan for the fund, the Trustees will review the 12b-1 Plan
and the expenses for each class within the fund separately.
The 12b-1 Plan also recognizes that various service providers to
the fund, such as the manager, may make payments for distribution-related expenses out of their own resources, including past profits, or payments received from the fund for other purposes, such as management fees, and that the funds
distributor or Service Agents may from time to time use their own resources for distribution-related services, in addition to the fees paid under the 12b-1 Plan. The 12b-1 Plan specifically provides that, to the extent that such payments might be
deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the fund within the context of Rule 12b-1, then the payments are deemed to be authorized by the 12b-1 Plan, if permitted under applicable law.
The 12b-1 Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a
majority of the Trustees and a majority of the Independent Trustees of the Trust who have no direct or indirect financial interest in the operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (for purposes of this paragraph
Qualified Trustees). The Qualified Trustees, in the exercise of their business judgment in the best interests of the shareholders of the fund and each class, have approved the continuation of the 12b-1 Plan. The 12b-1 Plan requires that
the fund and the distributor provide to the Board and the Board review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the 12b-1 Plan. The 12b-1 Plan further provides that the selection and nomination
of the Qualified Trustees is committed to the discretion of the Qualified Trustees then in office. The 12b-1 Plan may be terminated with respect to any class of the fund at any time by a vote of a majority of the funds Qualified Trustees or by
a vote of a majority of the outstanding voting securities of that class. The 12b-1 Plan may not be amended to increase materially the amount of permitted expenses of the class thereunder without the approval of a majority of the outstanding
securities of that class and may not be materially amended in any case without a vote of a majority of both the Trustees and Qualified Trustees. The fund will preserve copies of any plan, agreement or report made pursuant to the 12b-1 Plan for a
period of not less than six years, and for the first two years the fund will preserve such copies in an easily accessible place.
As contemplated by the 12b-1 Plan, the distributor acts as an agent of the fund in connection with the offering of shares of the fund pursuant to the distribution agreement. Dealer reallowances, if any,
are described in the funds Prospectus.
The following service and distribution fees were incurred by the fund pursuant
to the 12b-1 Plan during the fiscal year ended October 31, 2012:
|
|
|
|
|
Class A
|
|
$
|
210,037
|
|
Class C
|
|
$
|
39,070
|
|
Distribution expenses incurred by LMIS during the fiscal year ended October 31, 2012 for
compensation to Service Agents, printing costs of prospectuses and marketing materials are expressed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party
Fees ($)
|
|
|
Financial
Consultant
Compensation
(Amortized) ($)
|
|
|
Marketing ($)
|
|
|
Printing ($)
|
|
|
Total
Current
Expenses ($)
|
|
Class A
|
|
|
207,968
|
|
|
|
0
|
|
|
|
29,049
|
|
|
|
2,062
|
|
|
|
239,079
|
|
Class C
|
|
|
4,801
|
|
|
|
11,574
|
|
|
|
12,419
|
|
|
|
10
|
|
|
|
28,804
|
|
61
No information is presented for Class FI, Class R and Class R1 shares because no shares of
those classes were outstanding during the fiscal year ended October 31, 2012.
Custodian and Transfer Agent
State Street Bank and Trust Company (State Street), One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian
of the fund. State Street, among other things, maintains a custody account or accounts in the name of the fund, receives and delivers all assets for the fund upon purchase and upon sale or maturity, collects and receives all income and other
payments and distributions on account of the assets of the fund and makes disbursements on behalf of the fund. State Street neither determines the funds investment policies nor decides which securities the fund will buy or sell. For its
services, State Street receives a monthly fee based upon the daily average market value of securities held in custody and also receives securities transaction charges, including out-of-pocket expenses. The fund may also periodically enter into
arrangements with other qualified custodians with respect to certain types of securities or other transactions such as repurchase agreements or derivatives transactions. State Street may also act as the funds securities lending agent and in
that case would receive a share of the income generated by such activities.
Boston Financial Data Services, Inc.
(BFDS), located at 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.
BNY Mellon Investment Servicing (US) Inc.
(BNY), located at 4400 Computer Drive, Westborough, Massachusetts 01581, serves as co-transfer agent with BFDS with respect to shares purchased by clients of certain service providers. Under the co-transfer agency agreement with BNY, BNY
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, BNY receives a monthly fee computed on the
basis of the number of shareholder accounts it maintains for the fund during the month and is reimbursed for out-of-pocket expenses.
Counsel
Willkie
Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019, serves as counsel to the Trust and the fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, serves as counsel to the Independent
Trustees.
Independent Registered Public Accounting Firm
KPMG LLP, an independent registered public accounting firm, located at 345 Park Avenue, New York, New York 10154, has been selected to audit and report upon the funds financial statements and
financial highlights for the fiscal year ending October 31, 2013.
Code of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, the fund, the manager, the subadviser and Western Asset, and the distributor have adopted codes
of ethics that permit personnel to invest in securities for their own accounts, including securities that may be purchased or held by the fund. All personnel must place the interests of clients first and avoid activities, interests and relationships
that might interfere with the duty to make decisions in the
62
best interests of the clients. All personal securities transactions by employees must adhere to the requirements of the codes and must be conducted in such a manner as to avoid any actual or
potential conflict of interest, the appearance of such a conflict or the abuse of an employees position of trust and responsibility. Copies of the codes of ethics of the fund, the manager, the subadviser and Western Asset, and the distributor
are on file with the SEC.
Proxy Voting Guidelines and Procedures
Although individual Trustees may not agree with particular policies or votes by the manager, the Board has delegated proxy voting
discretion to the manager, believing that the manager should be responsible for voting because it is a matter relating to the investment decision making process.
LMPFA 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, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA
shall 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 LMPFA (or its affiliates if such conflict is known to
persons responsible for voting at LMPFA) and the fund, the Board of Directors of LMPFA shall consider how to address the conflict and/or how to vote the proxies. LMPFA shall maintain records of all proxy votes in accordance with applicable
securities laws and regulations, to the extent that LMPFA votes proxies. LMPFA shall 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, a copy of which is 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, including retirement plans purchasing through certain Service Agents, may purchase shares directly from the fund. When
purchasing shares of the fund, investors must specify whether the purchase is for Class A, Class C, Class FI, Class R, Class I or Class IS shares. Service Agents may charge their customers an annual account maintenance fee in connection
with a brokerage account through which an investor purchases or holds shares. Accounts held directly at the transfer agent are not subject to a maintenance fee.
There are minimum investment requirements of $1,000 for initial investments and $50 for subsequent investments for purchases of Class A shares by: (i) current and retired board members of Legg
Mason, (ii) current and retired board members of any fund advised by LMPFA or its affiliates (such board members, together with board members of Legg Mason, are referred to herein as Board Members), (iii) current employees of
Legg Mason and its affiliates, (iv) the immediate families of such persons (immediate families are such persons spouse, including the surviving spouse of a deceased Board Member, and children under the age of 21)
and (v) a pension, profit-sharing or other benefit plan for the benefit of such persons. The fund
63
reserves the right to waive or change minimums, to decline any order to purchase its shares and to suspend the offering of shares from time to time.
Purchase orders received by the fund prior to the close of regular trading on the NYSE on any day the fund calculates its NAV are priced
according to the NAV determined on that day (the trade date). Orders received by a Service Agent prior to the close of regular trading on the NYSE on any day the fund calculates its NAV are priced according to the NAV determined on that
day, provided the order is transmitted by the Service Agent to the funds transfer agent in accordance with their agreed-upon procedures. Payment must be made with the purchase order.
Class I Shares.
The following persons are eligible to purchase Class I shares of a fund: (i) current employees of the funds
manager and its affiliates; (ii) current and former board members of investment companies managed by affiliates of Legg Mason; (iii) current and former board members of Legg Mason; and (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. 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.
Under certain
circumstances, an investor who purchases fund shares pursuant to a fee-based advisory account program of an Eligible Financial Intermediary as authorized by LMIS may be afforded an opportunity to make a conversion between one or more share classes
owned by the investor in the same fund to Class I shares of that fund. Such a conversion in these particular circumstances does not cause the investor to realize taxable gain or loss.
Class R1 Shares.
Class R1 shares are closed to all new purchases and incoming exchanges.
Systematic Investment Plan.
Shareholders may make additions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan, the distributor or the transfer agent is authorized through preauthorized transfers of at least $50 on a monthly, quarterly, every alternate month, semi-annual or annual
basis to charge the shareholders account held with a bank or other financial institution as indicated by the shareholder, to provide for systematic additions to the shareholders fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by the distributor or the transfer agent. The Systematic Investment Plan authorizes the distributor to apply cash held in the shareholders brokerage account to make additions to the
account. Additional information is available from the fund or a Service Agent.
For additional information regarding
applicable investment minimums and eligibility requirements for purchases of fund shares, please see the funds Prospectus.
Sales Charge Alternatives
The following classes of shares are available for purchase. See the Prospectus for a discussion of who is eligible to purchase certain
classes and of factors to consider in selecting which class of shares to purchase.
Class A Shares.
Class A
shares are sold to investors at the public offering price, which is the NAV plus an initial sales charge, as described in the funds Prospectus.
Members of the selling group may receive a portion of the sales charge as described in the Prospectus and may be deemed to be underwriters of the fund as defined in the 1933 Act. Sales charges are
calculated based on the aggregate of purchases of Class A shares of the fund made at one time by any person, which includes an individual and his or her spouse and children under the age of 21, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. For additional information regarding sales charge reductions, see Sales Charge Waivers and Reductions below.
64
You do not pay an initial sales charge when you buy $1,000,000 or more of Class A
shares. However, if you redeem these Class A shares within 18 months of purchase (or within 12 months for shares purchased prior to August 1, 2012), you will pay a contingent deferred sales charge of 1.00%.
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.
Class C Shares.
Class C shares are sold without an initial sales charge but are subject to a contingent deferred sales charge payable upon certain redemptions. See Contingent Deferred Sales
Charge Provisions below.
Class FI, Class R, Class I and Class IS Shares.
Class FI, Class R, Class I and
Class IS shares are sold at NAV with no initial sales charge and no contingent deferred sales charge upon redemption.
Sales Charge
Waivers and Reductions
Initial Sales Charge Waivers.
Purchases of Class A shares may be made at NAV without an
initial sales charge in the following circumstances:
(a) sales to (i) current and retired Board Members,
(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;
(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 sales charge.
All existing
retirement plan shareholders who purchased Class A shares at NAV prior to November 20, 2006, are permitted to purchase additional Class A shares at NAV. Certain existing programs for current and prospective retirement plan investors
sponsored by financial intermediaries approved by LMIS prior to November 20, 2006 will also remain eligible to purchase Class A shares at NAV.
65
There are several ways you can combine multiple purchases of Class A shares of funds
sold by the distributor to take advantage of the breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent 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 seven Asset Level Goal amounts, as follows:
|
|
|
|
|
(1) $25,000
|
|
|
(5
|
) $500,000
|
(2) $50,000
|
|
|
(6
|
) $750,000
|
(3) $100,000
|
|
|
(7
|
) $1,000,000
|
(4) $250,000
|
|
|
|
|
Each time you make a Class A purchase under a Letter of Intent, you will be entitled to pay the
sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you
are investing in for purchases of $100,000. Sales charges and breakpoints vary among the funds sold by the distributor.
When
you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this
purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases,
which are valued at current value as of the date of calculation. Your commitment will be met if at any time during the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested
dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a
Letter of Intent will not entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred
sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.
66
Eligible Fund Purchases.
Generally, any shares of a fund sold by the distributor may
be credited towards your Asset Level Goal. Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your Asset Level Goal.
The eligible funds may change from time to time. Investors should check with their Service Agent to see which funds may be eligible.
Eligible Accounts.
Purchases may be made through any account in your name, or in the name of your spouse or your
children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset
Level Goal.
Eligible Prior Purchases.
You may also credit towards your Asset Level Goal any Eligible Fund Purchases
made in Eligible Accounts at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.
Increasing the Amount of the Letter of Intent.
You may at any time increase your Asset Level Goal. You must, however, contact your
Service Agent, or if you purchase your shares directly through the transfer agent, contact the transfer agent, prior to making any purchases in an amount in excess of your current Asset Level Goal. Upon such an increase, you will be credited by way
of additional shares at the then-current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter of Intent and (b) the aggregate applicable sales charges for
the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.
Sales and Exchanges.
Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed
or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to
meeting the Asset Level Goal will result in the cancellation of the Letter. See Failure to Meet Asset Level Goal below. Exchanges in accordance with the funds Prospectus are permitted, and shares so exchanged will continue to count
towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.
Cancellation of Letter of
Intent.
You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through the transfer agent, by notifying the transfer agent in writing. The Letter will be automatically cancelled if
all shares are sold or redeemed as set forth above. See Failure to Meet Asset Level Goal below.
Escrowed
Shares.
Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted will be held in escrow during the term of your Letter.
The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset
Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter are met.
Failure to Meet Asset Level Goal.
If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal whether because you made insufficient Eligible Fund
Purchases, redeemed all of your holdings or cancelled the Letter before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if
you had not entered into the Letter. You may, however, be entitled to any breakpoints that would have been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due.
For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through the transfer agent, the transfer agent, as your attorney-in-fact for
67
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: (a) Class C shares and (b) Class A shares that
were purchased without an initial sales charge but are subject to a contingent deferred sales charge. A contingent deferred sales charge may be imposed on certain redemptions of these shares.
Any applicable contingent deferred sales charge will be assessed on the NAV at the time of purchase or redemption, whichever is less.
Class A shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge
if redeemed within 18 months of purchase (or within 12 months for shares purchased prior to August 1, 2012). Class C shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge if redeemed
within 12 months of purchase.
In determining the applicability of any contingent deferred sales charge, it will be assumed
that a redemption is made first of shares representing capital appreciation, next of shares representing the reinvestment of dividends and capital gain distributions, next of shares that are not subject to the contingent deferred sales charge and
finally of other shares held by the shareholder for the longest period of time. The length of time that contingent deferred sales charge shares acquired through an exchange have been held will be calculated from the date the shares exchanged were
initially acquired in one of the other funds sold by the distributor. For federal income tax purposes, the amount of the contingent deferred sales charge will reduce the gain or increase the loss, as the case may be, on the amount realized on
redemption. The funds distributor receives contingent deferred sales charges in partial consideration for its expenses in selling shares.
Waivers of Contingent Deferred Sales Charge
The contingent deferred sales charge will be waived on: (a) exchanges (see Exchange Privilege); (b) automatic cash withdrawals in amounts equal to or less than 2.00% per month
of the shareholders account balance at the time the withdrawals commence, up to a maximum of 12.00% in one year (see Automatic Cash Withdrawal Plan); (c) redemptions of shares within 12 months following the death or disability
(as defined in the Code) of the shareholder; (d) mandatory post-retirement distributions from retirement plans or IRAs commencing on or after attainment of age
70
1
/
2
(except that shareholders who purchased shares subject to a contingent deferred sales charge prior to May 23, 2005 will be grandfathered and will be eligible to obtain the waiver at age
59
1
/
2
by demonstrating such eligibility at the time of redemption); (e) involuntary redemptions; (f) redemptions of shares to effect a combination of the fund with any investment company by merger,
acquisition of assets or otherwise; (g) tax-free returns of an excess contribution to any retirement plan; and (h) certain redemptions of shares of the fund in connection with lump-sum or other distributions made by eligible retirement
plans or redemption of shares by participants in certain wrap fee or asset allocation programs sponsored by broker/dealers and other financial institutions that have entered into agreements with the distributor or the manager.
The contingent deferred sales charge is waived on Class C shares purchased by retirement plan omnibus accounts
held on the books of the fund.
A shareholder who has redeemed shares from other funds sold by the distributor may, under
certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption.
68
Contingent deferred sales charge waivers will be granted subject to confirmation by the
distributor or the transfer agent of the shareholders status or holdings, as the case may be.
Grandfathered Retirement Program with
Exchange Features
Certain retirement plan programs with exchange features in effect prior to November 20, 2006
(collectively, the Grandfathered Retirement Program), that are authorized by the distributor to offer eligible retirement plan investors the opportunity to exchange all of their Class C shares for Class A shares of an applicable
fund sold by the distributor, are permitted to maintain such share class exchange feature for current and prospective retirement plan investors. Under the Grandfathered Retirement Program, Class C shares of the fund may be purchased by plans
investing less than $3 million. Class C shares are eligible for exchange into Class A shares not later than eight years after the plan joins the program. They are eligible for exchange in the following circumstances:
If a participating plans total Class C holdings in all non-money market funds sold by the distributor equal at least $3,000,000 at
the end of the fifth year after the date the participating plan enrolled in the Grandfathered Retirement Program, the participating plan will be offered the opportunity to exchange all of its Class C shares for Class A shares of the fund. Such
participating plans will be notified of the pending exchange in writing within 30 days after the fifth anniversary of the enrollment date and, unless the exchange offer has been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the participating plan does not qualify for the five-year exchange to Class A shares, a review of the participating plans holdings will be performed each quarter until either the participating plan
qualifies or the end of the eighth year.
Any participating plan that has not previously qualified for an exchange into
Class A shares will be offered the opportunity to exchange all of its Class C shares for Class A shares of the same fund regardless of asset size at the end of the eighth year after the date the participating plan enrolled in the
Grandfathered Retirement Program. Such plans will be notified of the pending exchange in writing approximately 60 days before the eighth anniversary of the enrollment date and, unless the exchange has been rejected in writing, the exchange will
occur on or about the eighth anniversary date. Once an exchange has occurred, a participating plan will not be eligible to acquire additional Class C shares, but instead may acquire Class A shares of the same fund. Any Class C shares not
converted will continue to be subject to the distribution fee.
For further information regarding this Program, contact your
Service Agent or the transfer agent. Participating plans that enrolled in the Grandfathered Retirement Program prior to June 2, 2003 should contact the transfer agent for information regarding Class C exchange privileges applicable to their
plan.
Determination of Public Offering Price
The fund offers its shares on a continuous basis. The public offering price for each class of shares of the fund is equal to the NAV per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The public offering price for Class C, Class FI, Class R, Class R1, Class I and Class IS shares (and Class A share purchases, including applicable rights of accumulation,
equaling or exceeding $1,000,000) is equal to the NAV per share at the time of purchase and no sales charge is imposed at the time of purchase. A contingent deferred sales charge, however, is imposed on certain redemptions of Class C shares and on
Class A shares when purchased in amounts equaling or exceeding $1,000,000.
Set forth below is an example of the
method of computing the offering price of the Class A shares of the fund based on the NAV of a share of the fund as of October 31, 2012.
|
|
|
|
|
Class A (based on a NAV of $15.78 and a maximum
initial sales charge of 5.75%)
|
|
$
|
16.74
|
|
69
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a) for any period during which the NYSE is closed (other
than for customary weekend and holiday closings), (b) when trading in the markets the fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the funds investments or determination of
NAV is not reasonably practicable or (c) for such other periods as the SEC by order may permit for protection of the funds shareholders.
Redemption proceeds will be mailed to an investors address of record. The transfer agent may require additional supporting documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received until the transfer agent receives all required documents in proper form.
If a shareholder holds shares in more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer
shares of the class than specified, the redemption request will be delayed until the transfer agent receives further instructions. The redemption proceeds will be remitted on or before the seventh business day following receipt of proper tender,
except on any days on which the NYSE is closed or as permitted under the 1940 Act, in extraordinary circumstances. Redemption proceeds for shares purchased by check, other than a certified or official bank check, will be remitted upon clearance of
the check, which may take up to ten days. Each Service Agent is responsible for transmitting promptly orders for its customers.
The Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and disclosed
to its customers by each Service Agent.
Additional Information Regarding Telephone Redemption and Exchange Program.
Neither the fund nor its agents will be liable for following instructions communicated by telephone that are reasonably believed to be genuine. The fund and its agents will employ procedures designed to verify the identity of the caller and
legitimacy of instructions (for example, a shareholders name and account number will be required and phone calls may be recorded). The fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or
to impose a charge for this service at any time following at least seven (7) days prior notice to shareholders.
Automatic Cash
Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan) is available to shareholders as
described in the Prospectus. To the extent withdrawals under the Withdrawal Plan exceed dividends, distributions and appreciation of a shareholders investment in the fund, there will be a reduction in the value of the shareholders
investment, and continued withdrawal payments may reduce the shareholders investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in the fund. The Withdrawal Plan will be carried over on
exchanges between funds sold by the distributor or classes of the fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at NAV in additional shares of the fund.
For additional information, shareholders should contact their Service Agent. A shareholder who purchases shares directly through the
transfer agent may continue to do so and applications for participation in the Withdrawal Plan should be sent to the transfer agent. Withdrawals may be scheduled on any day of the month; however, if the shareholder does not specify a day, the
transfer agent will schedule the withdrawal on the 25th day (or the next business day if the 25th day is a weekend or holiday) of the month.
70
Legg Mason Institutional Funds Systematic Withdrawal Plan
Certain shareholders of Class FI, Class I or Class IS 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.
Redemptions in
Kind
If the funds manager determines that it would not be in the best interests of the funds remaining
shareholders to make a redemption payment wholly in cash, the fund may honor a redemption request by delivering portfolio securities to a shareholder to pay all or a portion of the redemption proceeds. However, the fund will not use securities to
satisfy any request for redemption, or combination of requests from the same shareholder in any 90-day period, if the total redemption amount does not exceed $250,000 or 1% of the net assets of the fund, whichever is less. When a redemption is paid
in kind, the securities distributed to the redeeming shareholder will be valued in accordance with the procedures described under Share price in the funds Prospectus. Because a redemption in-kind may be used during
times when the markets experience increased illiquidity, these valuation methods may include fair value estimations and a shareholder may have difficulty selling those securities at the valuation price. A shareholder receiving securities from the
fund may incur costs in holding and when subsequently selling those securities, and the market price of those securities will be subject to fluctuation until they are sold. The fund will not use securities to pay redemptions by LMIS or other
affiliated persons of the fund, except as permitted by law, SEC rules or orders, or interpretive guidance from the SEC staff or other proper authorities.
EXCHANGE PRIVILEGE
The exchange privilege
enables shareholders to acquire shares of the same class in another fund sold by the distributor. This privilege is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Prior to any exchange,
the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is being considered. Prospectuses may be obtained from a Service Agent.
Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the
then-current NAV, and the proceeds are immediately invested in shares of the fund being acquired at that funds then current NAV. The distributor reserves the right to reject any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
Class A, Class FI, Class R, Class I and Class IS
Exchanges.
Class A, Class FI, Class R, Class I and Class IS shareholders of the fund who wish to exchange all or a portion of their shares for shares of the respective class in another fund may do so without imposition of any charge.
Class C Exchanges.
Class C shares of the fund may be exchanged for other Class C shares without a contingent
deferred sales charge. Upon an exchange, the new Class C shares will be deemed to have been purchased on the same date as the Class C shares of the fund that have been exchanged.
Class R1 Exchanges.
Class R1 shares are closed to all new purchases and incoming exchanges.
71
Certain retirement plan programs with exchange features in effect prior to
November 20, 2006, as approved by LMIS, will remain eligible for exchange from Class C shares to Class A shares in accordance with the program terms. See Grandfathered Retirement Programs with Exchange Features for additional
information.
Additional Information Regarding the Exchange Privilege
The fund is not designed to provide investors with a means of speculation on short-term market movements. A pattern of frequent exchanges
by investors can be disruptive to efficient portfolio management and, consequently, can be detrimental to the fund and its shareholders. See Frequent trading of fund shares in the Prospectus.
During times of drastic economic or market conditions, the fund may suspend the exchange privilege temporarily without notice and treat
exchange requests based on their separate componentsredemption orders with a simultaneous request to purchase the other funds shares. In such a case, the redemption request would be processed at the funds next determined NAV but
the purchase order would be effective only at the NAV next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.
Certain shareholders may be able to exchange shares by telephone. See the funds Prospectus for additional information. Exchanges
will be processed at the NAV next determined. Redemption procedures discussed above are also applicable for exchanging shares, and exchanges will be made upon receipt of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares of the fund exchanged, no signature guarantee is required.
This exchange privilege may be modified or terminated at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should
contact the transfer agent or, if they hold fund shares through a Service Agent, their Service Agent, to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares
exchanged and could result in taxable gain or loss to the shareholder making the exchange.
VALUATION OF SHARES
The NAV per share of each class is calculated on each day, Monday through Friday, except days on which the NYSE is closed. As of the date of this SAI, the NYSE is normally open for trading every weekday
except in the event of an emergency or for the following holidays (or the days on which they are observed): New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. Because of the differences in distribution fees and class-specific expenses, the per share NAV of each class will differ. Please see the 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 and Western Asset manages the cash and short-term instruments of the fund.
The cost of securities purchased from underwriters includes an underwriting commission, concession or a net price. 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
72
buy at one price and selling the security 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 agents. The fund will pay a spread or commission in connection with such transactions. Commissions are negotiated with brokers on such transactions. The aggregate brokerage commissions paid by the fund for the three most recent
fiscal years are set forth below under Aggregate Brokerage Commissions Paid.
Pursuant to the 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 such brokers or dealers and the placing of such orders, subject to applicable law, brokers or dealers
may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act) to the fund and/or the other accounts over which the subadviser or its affiliates exercise investment discretion. The
subadviser is authorized to pay a broker or dealer that provides such brokerage and research services a commission for executing a portfolio transaction for the fund which is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the 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. Investment research
services include information and analysis on particular companies and industries as well as market or economic trends and portfolio strategy, market quotations for portfolio evaluations, analytical software and similar products and services. If a
research service also assists the subadviser in a non-research capacity (such as bookkeeping or other administrative functions), then only the percentage or component that provides assistance to the subadviser in the investment decision making
process may be paid in commission dollars. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the 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 reduces its expenses as subadviser. Arrangements for the receipt of research
services from brokers may create conflicts of interest.
Research services furnished to the subadviser by brokers that effect
securities transactions for the fund may be used by the subadviser in servicing other investment companies and accounts which the subadviser manages. Similarly, research services furnished to the subadviser by brokers that 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.
For the fiscal year ended October 31, 2012, the fund paid commissions to brokers that provided research
services as follows:
|
|
|
|
|
Total Dollar Amount of Brokerage Transactions
Related to Research Services
($)
|
|
Total Dollar Amount of Brokerage Commissions Paid on
Transactions
Related to Research Services ($)
|
|
161,170,848
|
|
|
116,049
|
|
The fund contemplates that, consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through affiliated broker/dealers, as defined in the 1940 Act. The funds Board has adopted procedures in accordance with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
such affiliates are reasonable and fair in the context of the market in which such affiliates operate.
73
Aggregate Brokerage Commissions Paid
For the fiscal years ended October 31, 2012, 2011 and 2010, the fund paid aggregate brokerage commissions as set forth in the table
below.
|
|
|
|
|
Fiscal Year Ended October 31:
|
|
Aggregate Brokerage
Commissions Paid ($)
|
|
2012
|
|
|
219,511
|
|
2011
|
|
|
48,579
|
|
2010
|
|
|
113,869
|
|
The increase in brokerage commissions from 2011 to 2012 was due to the adoption of new investment
objectives and strategies in January 2012.
For the fiscal years ended October 31, 2012, 2011 and 2010, the fund did not
pay any brokerage commissions to LMIS or its affiliates.
In certain instances there may be securities that are suitable as an
investment for the fund as well as for one or more of the other clients of the subadviser. 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. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could
adversely affect the price of or the size of the position obtainable in a security for the fund. When purchases or sales of the same security for the fund and for other portfolios managed by the subadviser occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available to large volume purchases or sales.
At
October 31, 2012, 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.
74
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, 2012, 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 frequency of the release under such arrangements, and the length of the lag, if any, between the date of the information
and the date on which the information is disclosed. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay Before Dissemination
|
State Street Bank and Trust Company (Fund Custodian and Accounting Agent)
|
|
Daily
|
|
None
|
A.S.A.P. Advisor Services, Inc.
|
|
Quarterly
|
|
8-10 Days after Quarter-End
|
Bloomberg L.P.
|
|
Quarterly
|
|
Sent 6 Business Days after Quarter-End
|
Lipper Analytical Services Corp.
|
|
Quarterly
|
|
Sent 6 Business Days after Quarter-End
|
Morningstar
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Institutional Shareholder Services (Proxy Voting Services)
|
|
As necessary
|
|
None
|
Thomson/Vestek
|
|
Daily
|
|
None
|
FactSet
|
|
Daily
|
|
None
|
The Bank of New York Mellon
|
|
Daily
|
|
None
|
Thomson
|
|
Semi-annually
|
|
None
|
SunGard/Protegent (formerly Dataware)
|
|
Daily
|
|
None
|
ITG
|
|
Daily
|
|
None
|
The Northern Trust Company
|
|
Daily
|
|
None
|
Middle Office Solutions, LLC
|
|
Daily
|
|
None
|
NaviSite, Inc.
|
|
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
|
Baseline
|
|
Daily
|
|
None
|
Frank Russell
|
|
Monthly
|
|
1 Day
|
Callan Associates
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Mercer LLC
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
eVestment Alliance
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
75
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay Before Dissemination
|
Rogerscasey
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Cambridge Associates LLC
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Wilshire Associates Inc.
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Informa Investment Solutions
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Prima Capital
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Investor Tools
|
|
Daily
|
|
None
|
Advent
|
|
Daily
|
|
None
|
BARRA
|
|
Daily
|
|
None
|
Plexus
|
|
Quarterly (Calendar)
|
|
Sent 1-3 Business Days after Quarter-End
|
Elkins/McSherry
|
|
Quarterly (Calendar)
|
|
Sent 1-3 Business Days after Quarter-End
|
Quantitative Services Group
|
|
Daily
|
|
None
|
Deutsche Bank
|
|
Monthly
|
|
6-8 Business Days
|
Fitch
|
|
Monthly
|
|
6-8 Business Days
|
Liberty Hampshire
|
|
Weekly and Month End
|
|
None
|
SunTrust
|
|
Weekly and Month End
|
|
None
|
S&P (Rating Agency)
|
|
Weekly Tuesday Night
|
|
1 Business Day
|
Electra Information Systems
|
|
Daily
|
|
None
|
Cabot Research
|
|
Weekly
|
|
None
|
Goldman Sachs
|
|
Daily
|
|
None
|
Chicago Mercantile Exchange
|
|
Daily
|
|
None
|
Canterbury Consulting
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Broadridge
|
|
Daily
|
|
None
|
DST Global Solutions Limited
|
|
Monthly
|
|
Sent 6 Business Days after Month-End
|
Interactive Data Corp
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Daily
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None
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Citigroup Global Markets Inc.
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Daily
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None
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Glass Lewis & Co.
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Daily
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None
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Fidelity
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Quarterly
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5 Business Days
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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 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:
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1.
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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.
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76
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2.
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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.
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3.
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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.
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4.
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A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (
i.e
., brokers and custodians).
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5.
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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.
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6.
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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.
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7.
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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.
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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.
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 a 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 a subadviser may be able to infer the portfolio holdings of the fund from the portfolio holdings in that investors account.
THE TRUST
The Trust.
The fund is a series of Legg Mason Partners Equity Trust (referred to in this section as the trust), a Maryland statutory
trust. The certificate of trust to establish the trust was filed with the State of Maryland on October 4, 2006. The fund was redomiciled as a series of the trust on April 16, 2007. Prior thereto, the fund was a series of Legg Mason
Partners Investment Trust, a Massachusetts business trust. Prior to the reorganization of the fund as a series of Legg Mason Partners Investment Trust, the fund was a series of Legg Mason Partners Trust II, a Massachusetts business 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 Board (referred to in this section as the trustees) and shareholders of a trust, while the more specific
77
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 (referred to in this section as the
declaration). Some of the more significant provisions of 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.
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 or insurance provided in the declaration with respect to actions or omissions of persons entitled to indemnification under
the declaration prior to the amendment.
Issuance and Redemption of Shares.
The fund may issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are
not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the trustees may determine. The fund may involuntarily redeem a shareholders shares upon certain conditions as may be determined by the trustees,
including, for example, if the shareholder fails to provide the fund with identification required by law, or if the fund is unable to verify the information received from the shareholder. Additionally, as discussed below, shares may be redeemed in
connection with the closing of small accounts.
Disclosure of Shareholder Holdings.
The declaration specifically requires shareholders, upon demand, to disclose to the fund information with respect to the direct and
indirect ownership of shares in order to comply with various laws or regulations, and the fund may disclose such ownership if required by law or regulation, or as the trustees otherwise decide.
78
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 of 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 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 or of a committee of the Board, lead independent
trustee or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.
Derivative Actions.
The declaration provides a detailed process for the
bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction and other harm that can be
79
caused to the fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand by three unrelated shareholders must 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.
TAXES
The following is a summary of certain material U.S. federal income tax considerations regarding the purchase, ownership and disposition
of shares of the fund by U.S. persons. This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the fund or to all categories of investors, some of which may be subject to special tax rules.
Current and prospective shareholders are urged to consult their own tax 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 intends to continue to qualify to be treated as a regulated investment company under the Code each taxable year. To so qualify, the fund must, among other things: (a) derive at least 90% of
its gross income in each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies 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
80
one issuer, to an amount not greater than 5% of the funds assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of
its assets is invested in the securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer, any two or more issuers of which 20% or more of the voting stock is held by the fund and that
are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships.
Although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated
investment company with respect to items attributable to 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). Fund investments in partnerships, including in qualified publicly traded partnerships, may result in the
fund being subject to state, local or foreign income, franchise or withholding tax liabilities.
As a regulated investment
company, the fund will not be subject to U.S. federal income tax on its net investment income (
i.e.
, income other than its net realized long-term and short-term capital gains) and its net realized long-term and short-term capital gains, if
any, that it distributes to its shareholders, provided an amount equal to at least (i) 90% of the sum of its investment company taxable income (
i.e
.
, its taxable income minus the excess, if any, of its net realized long-term
capital gains over its net realized short-term capital losses (including any capital loss carryovers), plus or minus certain other adjustments as specified in the Code) and (ii) 90% of its net tax-exempt income for the taxable year is
distributed to its shareholders in compliance with the Codes timing and other requirements. However, any taxable income or gain the fund does not distribute will be subject to tax at regular corporate rates.
On October 31, 2012, the unused capital loss carryforward of the fund was $32,518,288. For federal income tax purposes, this
amount is available to be applied against the funds future realized capital gains that are realized prior to the expiration of the carryforward, if any. The fund had the following net capital loss carryforward remaining:
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|
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|
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Year of Expiration
|
|
Amount ($)
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2013
|
|
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7,162,775
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2016
|
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12,236,288
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2017
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13,119,225
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For taxable years beginning in 2011 or after, capital losses will not be subject to expiration.
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 98% of its ordinary income for that year and at least 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 retained by the fund that is subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. The fund anticipates that it will pay such dividends and will make such distributions as are necessary in
order to avoid the application of this excise tax.
If, in any taxable year, the fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be deductible by the fund in computing its taxable income.
In addition, in the event of a failure to qualify, the funds distributions, to the extent derived from the funds current or accumulated earnings and profits, will constitute dividends that are taxable to shareholders as ordinary income,
81
even though those distributions might otherwise (at least in part) have been treated in the shareholders hands as long-term capital gains. However, such dividends will be eligible
(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 fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. If the fund fails to qualify as a regulated investment company for a period greater than
two taxable years, the fund may be required to recognize any net built-in gains with respect to certain of its assets (
i.e
., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized
with respect to such assets if the fund had been liquidated) in order to qualify as a regulated investment company in a subsequent year.
The funds transactions in foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies) will be subject to special provisions
of the Code (including provisions relating to hedging transactions and straddles) that, among other things, may affect the character of gains and losses realized by the fund (
i.e
., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to the fund and defer fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the fund
to mark-to-market certain types of the positions in its portfolio (
i.e
., treat them as if they were closed out at the end of each year) and (b) may cause the fund to recognize income without receiving cash with which to pay dividends or
make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books
and records when it acquires any foreign currency, forward contract, 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 indexes, are subject to special tax rules. All section 1256 contracts held by the fund at the end of its taxable year are required to be marked to their market value, and any
unrealized gain or loss on those positions will be included in the funds income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss
realized by the fund from positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a hedging transaction nor part of a straddle, 60% of the
resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the fund.
As a result of entering into swap contracts, the fund may make or receive periodic net payments. The fund may also make or
receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap will generally
result in capital gain or loss (which will be a long-term capital gain or loss if the fund has been a party to the swap for more than one year). With respect to certain types of swaps, the fund may be required to currently recognize income or loss
with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as ordinary income or loss. The tax treatment of many types of credit default swaps is uncertain.
The fund may be required to treat amounts as taxable income or gain, subject to the distribution requirements referred to
above, even though no corresponding amounts of cash are received concurrently, as a result of (a) mark-to-market, constructive sale or rules applicable to PFICs (as defined below) or partnerships or trusts in which the fund invests or to
certain options, futures or forward contracts, or appreciated financial positions or (b) 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 (c) tax rules applicable to debt obligations acquired with original issue
82
discount, including zero-coupon or deferred payment bonds and pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. The fund may
therefore be required to obtain cash to be used to satisfy these distribution requirements by selling securities at times that it might not otherwise be desirable to do so or borrowing the necessary cash, thereby incurring interest expenses.
In certain situations, the fund may, for a taxable year, defer all or a portion of its capital losses and currency losses
realized after October and certain ordinary losses realized after December until the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals
and other rules regarding gains and losses realized after October (or December) may affect the tax character of shareholder distributions.
In general, gain or loss on a short sale is recognized when the fund closes the sale by delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or loss from a short
sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital asset in the funds hands. Except with respect to certain situations where the property used by the fund to
close a short sale has a long-term holding period on the date of the short sale, special rules would generally treat the gains on short sales as short-term capital gains. These rules may also terminate the running of the holding period of
substantially identical property held by the fund. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, substantially identical property has been held by the fund for
more than one year. In general, the fund will not be permitted to deduct payments made to reimburse the lender of securities for dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the short sale is entered
into. In the event that the fund were to experience an ownership change as defined under the Code, the funds loss carryforwards, if any, may be subject to limitation.
Foreign Investments.
Dividends or other income (including, in some cases, capital gains) received by the fund from investments in foreign securities may be subject to withholding and other taxes
imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases.
Foreign taxes paid by the fund will reduce the return from the funds investments.
For taxable years beginning before January 1, 2014, properly designated dividends are generally exempt from U.S. federal
withholding tax where they (i) are paid in respect of the funds qualified net interest income (generally, the funds U.S. source interest income, other than certain contingent interest and interest from obligations of a
corporation or partnership in which the fund is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the funds qualified short-term capital gains (generally, the
excess of the funds net short-term capital gain over the funds long-term capital loss for such taxable year). However, depending on its circumstances, the fund may designate all, some or none of its potentially eligible dividends as such
qualified net interest income or as qualified short-term capital gains and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute Form). In the case of shares held through an intermediary, the
intermediary may withhold even if the fund designates the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to
their accounts.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between
the time the fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the fund actually collects such income or pays such liabilities are generally treated as ordinary income or ordinary
loss. In general, gains (and losses) realized on debt instruments will be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the U.S. dollar and the currencies in which the instruments are
denominated. Similarly, gains or losses on foreign currency, foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt securities denominated in foreign currency, to the extent attributable
to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss unless the fund were to elect otherwise.
83
Passive Foreign Investment Companies.
If the fund purchases shares in certain
foreign investment entities, called passive foreign investment companies (PFICs), it may be subject to U.S. federal income tax on a portion of any excess distribution or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the fund to its shareholders. Additional charges in the nature of interest may be imposed on the fund in respect of deferred taxes arising from such distributions or gains.
If the fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing fund under the Code, in lieu of the
foregoing requirements, the fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the fund, and such amounts would be subject to the
90% and excise tax distribution requirements described above. In order to make this election, the fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.
Alternatively, the fund may make a mark-to-market election that will result in the fund being treated as if it had sold and
repurchased its PFIC stock at the end of each year. In such case, the fund would report any such gains as ordinary income and would deduct any such losses as ordinary losses to the extent of previously recognized gains. The election must be made
separately for each PFIC owned by the fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the Internal Revenue Service (the IRS). By making the election, the fund could potentially
ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of
PFIC stock. The fund may have to distribute this phantom income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax.
The fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules.
Taxation of U.S. Shareholders
Dividends and Distributions.
Dividends and other distributions by the fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is made.
However, any dividend declared by the fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed to have been received by each shareholder on December 31
of such calendar year and to have been paid by the fund not later than such December 31, provided such dividend is actually paid by the fund during January of the following calendar year. The fund intends to distribute annually to its
shareholders substantially all of its investment company taxable income, and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if the fund retains for
investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (at a maximum rate of 35%) on the amount
retained. In that event, the fund will designate such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the 35% tax paid by the fund on the undistributed amount against their U.S. federal income tax liabilities, if any, and
to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed
capital gains included in the shareholders income. Organizations or persons not subject to federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the fund upon filing appropriate
returns or claims for refund with the IRS.
Dividends of net investment income and distributions of 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
84
capital gains, if any, that the fund reports as capital gains dividends are taxable as long-term capital gains, whether paid in cash or in shares and regardless of how long a shareholder has held
shares of the fund. Such dividends will not be eligible for the dividends received deduction. Dividends and distributions paid by the fund attributable to dividends on stock of U.S. corporations received by the fund, with respect to which the fund
meets certain holding period requirements, will be eligible for the deduction for dividends received by corporations. Special rules apply, however, to regular dividends paid to individuals. Such a dividend may be subject to tax at the rates
generally applicable to long-term capital gains for individuals (15% for individuals with incomes below $400,000 ($450,000 if married filing jointly), 20% for individuals with any income above those amounts that is long-term capital gain and 0% at
certain income levels; the above threshold amounts will be adjusted annually for inflation), provided that the individual receiving the dividend satisfies certain holding period and other requirements. Dividends subject to these special rules are
not actually treated as capital gains, however, and thus are not included in the computation of an individuals net capital gain and generally cannot be used to offset capital losses. The long-term capital gains rates will apply to: (a) 100% of
the regular dividends paid by the fund to an individual in a particular taxable year if 95% or more of the funds gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain
from such sales exceeds net long-term capital loss from such sales) in that taxable year is attributable to qualified dividend income received by the fund; or (b) the portion of the regular dividends paid by the fund to an individual in a particular
taxable year that is attributable to qualified dividend income received by the fund in that taxable year if such qualified dividend income accounts for less than 95% of the funds gross income (ignoring gains attributable to the sale of stocks
and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) for that taxable year. For this purpose, qualified dividend income generally means income from dividends
received by the fund from U.S. corporations and qualified foreign corporations, provided that the fund satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the stock in certain
ways. Also, dividends received by the fund from a REIT or another regulated investment company generally are qualified dividend income only to the extent the dividend distributions are made out of qualified dividend income received by such REIT or
other regulated investment company. In the case of securities lending transactions, payments in lieu of dividends are not qualified dividend income. If a shareholder elects to treat fund dividends as investment income for purposes of the limitation
on the deductibility of investment interest, such dividends would not be qualified dividend income.
We will send you
information after the end of each year setting forth the amount of dividends paid by us that are eligible for the reduced rates.
If an individual receives a regular dividend qualifying for the long-term capital gains rates and such dividend constitutes an extraordinary dividend, and the individual subsequently
recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such extraordinary dividend. An extraordinary dividend on common
stock for this purpose is generally a dividend (a) in an amount greater than or equal to 10% of the taxpayers tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within an 85-day period or (b) in an
amount greater than 20% of the taxpayers tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period. Distributions in excess of the funds current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of a shareholders basis in his shares of the fund, and as a capital gain thereafter (if the shareholder holds his shares of the fund as capital
assets). Shareholders receiving dividends or distributions in the form of additional shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving
cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to the record date for a taxable dividend or capital gain distribution should be aware
that, although the price of shares just purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If the fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such
85
dividends are included in the funds gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (
i.e.,
the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, the fund may
be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
Under current law, the fund serves to block unrelated business taxable income (UBTI) from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder
could realize UBTI by virtue of its investment in the fund if shares in the fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). Certain types of income received by the
fund from REITs, real estate mortgage investment conduits, taxable mortgage pools or other investments may cause the fund to designate some or all of its distributions as excess inclusion income. To fund shareholders such excess
inclusion income may (a) constitute taxable income, as UBTI for those shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities;
(b) not be offset by otherwise allowable deductions for tax purposes; (c) not be eligible for reduced U.S. withholding for non-U.S. shareholders even from tax treaty countries; and (d) cause the fund to be subject to tax if certain
disqualified organizations as defined by the Code are fund shareholders.
If a charitable remainder annuity trust
or charitable remainder unitrust (each as defined in Code Section 664) has UBTI for a tax year, a 100% excise tax on the UBTI is imposed on the trust.
Sales of Shares.
Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss equal to the difference between the amount realized and his or her basis in the shares. A
redemption of shares by the fund will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholders hands, and will be long-term capital gain or loss if
the shares are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains distributions in the fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired
will be increased to reflect the disallowed loss. Any loss realized by a shareholder on the sale of a fund share held by the shareholder for six months or less will be treated for U.S. federal income tax purposes as a long-term capital loss to the
extent of any distributions or deemed distributions of long-term capital gains received by the shareholder with respect to such share during such six month period. If a shareholder incurs a sales charge in acquiring shares of the fund, disposes of
those shares within 90 days and then by January 31 of the calendar year following the year of disposition acquires shares in a mutual fund for which the otherwise applicable sales charge is reduced by reason of a reinvestment right (
e.g.,
an exchange privilege), the original sales charge will not be taken into account in computing gain or loss on the original shares to the extent the subsequent sales charge is reduced. Instead, the disregarded portion of the original sales charge
will be added to the tax basis of the newly acquired shares. Furthermore, the same rule also applies to a disposition of the newly acquired shares made within 90 days of the second acquisition. This provision prevents a shareholder from immediately
deducting the sales charge by shifting his or her investment in a family of mutual funds.
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 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.)
86
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 account.
Backup Withholding.
The fund may be required to
withhold, for U.S. federal income tax purposes, 28% of the dividends, distributions and redemption proceeds payable to shareholders who fail to provide the fund with their correct taxpayer identification number or to make required certifications, or
who have been notified by the IRS that they are subject to backup withholding. Certain shareholders are exempt from backup withholding. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholders
U.S. federal income tax liability.
Notices
. Shareholders will be notified annually by the fund as
to the U.S. federal income tax status of the dividends, distributions and deemed distributions attributable to undistributed capital gains (discussed above in Taxes-Taxation of U.S. Shareholders-Dividends and Distributions) made by the
fund to its shareholders. Furthermore, shareholders will also receive, if appropriate, various written notices after the close of the funds taxable year regarding the U.S. federal income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as having been paid) by the fund to its shareholders during the preceding taxable year.
If the fund is held through a qualified retirement plan entitled to tax exempt treatment for federal income tax purposes, distributions will generally not be taxable currently. Special tax rules apply to
such retirement plans. You should consult your tax adviser regarding the tax treatment of distributions (which may include amounts attributable to fund distributions) which may be taxable when distributed from the retirement plan.
Other Taxes
Dividends,
distributions and redemption proceeds may also be subject to additional state, local and foreign taxes depending on each shareholders particular situation.
If a shareholder recognizes a loss with respect to the funds shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file
with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases 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.
Taxation of Non-U.S. Shareholders
Dividends paid by the fund to non-U.S. shareholders are generally subject to withholding tax at a 30% rate or a reduced rate specified by
an applicable income tax treaty to the extent derived from investment income and short-term capital gains. In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN certifying its
entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides a Form W-8ECI, certifying that the
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dividends are effectively connected with the non-U.S. shareholders conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to
regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional branch profits tax imposed at a rate of 30% (or lower
treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate.
In general, U.S. federal withholding tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any distributions of net long-term capital gains over net short-term capital
losses, exempt-interest dividends, or upon the sale or other disposition of shares of the fund.
For taxable years beginning
before January 1, 2014, properly reported dividends are generally exempt from U.S. federal withholding tax where they (a) are paid in respect of the funds qualified net interest income (generally, the funds U.S. source
interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the fund is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (b) are paid in respect
of the funds qualified short-term capital gains (generally, the excess of the funds net short-term capital gain over the funds long-term capital loss for such taxable year). However, depending on its circumstances, the
fund may 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 treat such dividends, in whole or in part, as ineligible for this exemption from
withholding. In order to qualify for this exemption from withholding, a non-U.S. shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or
substitute Form). In the case of shares held through an intermediary, the intermediary may withhold even if the fund reports the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. shareholders should contact
their intermediaries with respect to the application of these rules to their accounts.
For taxable years beginning before
January 1, 2014, distributions that the fund reports as short-term capital gain dividends or long-term capital gain dividends will not be treated as such to a recipient non-U.S. shareholder if the distribution is
attributable to gain received from the sale or exchange of U.S. real property or an interest in a U.S. real property holding corporation and the funds direct or indirect interests in U.S. real property exceeded certain levels. Instead, if the
non-U.S. shareholder has not owned more than 5% of the outstanding shares of the fund at any time during the one year period ending on the date of distribution, such distributions will be subject to 30% withholding by the fund and will be treated as
ordinary dividends to the non-U.S. shareholder; if the non-U.S. shareholder owned more than 5% of the outstanding shares of the fund at any time during the one year period ending on the date of the distribution, such distribution will be treated as
real property gain subject to 35% withholding tax and could subject the non-U.S. shareholder to U.S. filing requirements. Additionally, if the funds direct or indirect interests in U.S. real property were to exceed certain levels, a non-U.S.
shareholder realizing gains upon redemption from the fund on or before December 31, 2013 could be subject to the 35% withholding tax and U.S. filing requirements unless more than 50% of the funds shares were owned by U.S. persons at such
time or unless the non-U.S. person had not held more than 5% of the funds outstanding shares throughout either such persons holding period for the redeemed shares or, if shorter, the previous five years.
In addition, the same rules apply with respect to distributions to a non-U.S. shareholder from the fund and redemptions of a non-U.S.
shareholders interest in the fund attributable to a REITs distribution to the fund of gain from the sale or exchange of U.S. real property or an interest in a U.S. real property holding corporation, if the funds direct or indirect
interests in U.S. real property were to exceed certain levels.
The rules laid out in the previous two paragraphs, other than
the withholding rules, will apply notwithstanding the funds participation in a wash sale transaction or its payment of a substitute dividend.
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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 December 31, 2013, 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 January 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 tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described here.
Foreign shareholders should consult their own tax advisers with respect to the particular tax consequences to them of an investment in the fund, including the applicability of non-U.S. taxes.
Shares of the fund held by a non-U.S. shareholder at death will be considered situated in the United States and subject to the U.S.
estate tax.
The foregoing is only a summary of certain material U.S. federal income tax consequences affecting the fund
and its shareholders. Current and prospective shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the fund.
FINANCIAL STATEMENTS
The audited financial statements of the fund (Statement of Assets and Liabilities, including the Schedule of Investments as of October 31, 2012, Statement of Operations for the year ended
October 31, 2012, Statements of Changes in Net Assets for each of the years in the two-year period ended October 31, 2012, Financial Highlights for each of the years in the three-year period ended October 31, 2012, the period from
January 1, 2009 to October 31, 2009, and each of the years or periods in the two-year period ended December 31, 2008, 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 27, 2012; Accession Number 0001193125-12-515961).
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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.
Description of Moodys Investors Service, Inc.s Long-Term Obligation Ratings:
Moodys long-term ratings are opinions of the relative credit risk of financial obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be honored as promised. Such ratings use Moodys Global Scale and reflect both the likelihood of default and any financial loss suffered in the event of default.
Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal 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 considered upper-medium grade and are subject to low credit risk.
Baa
Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess
certain speculative characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B
Obligations rated B are considered speculative and are subject to high
credit risk.
Caa
Obligations rated Caa are judged to be 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 class 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.
Description of Moodys Investors Service, Inc.s Short-Term Obligation Ratings:
Moodys short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt
instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
A-1
Moodys employs the following designations to indicate the relative repayment ability
of rated issuers:
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.
Note
: Canadian issuers rated P-1 or P-2 have their short-term
ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.
Description of Moodys
Investors Service, Inc.s US Municipal Ratings:
US Municipal Short-Term Obligation Ratings:
There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated
as Municipal Investment Grade (MIG) and are divided into three levelsMIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings
expire at the maturity of the obligation.
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.
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 the degree of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of the
degree of risk associated with the ability to receive purchase price upon demand (demand feature), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR,
e.g.
, Aaa/NR or NR/VMIG 1. VMIG
rating expirations are a function of each issues specific structural or credit features.
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.
A-2
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 payment-capacity 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
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.
A-3
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, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. 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. 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.
Plus (+) or Minus (): 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.
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.
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. Short-term ratings are also used to
indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating.
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 having significant speculative characteristics. Ratings of B-1, B-2 and B-3 may be assigned to
indicate finer distinctions within the B category. The obligor
A-4
currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its
financial commitment on the obligation.
B-1
A short-term obligation rated B-1 is regarded as having
significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2
A short-term obligation rated B-2 is regarded as having significant speculative characteristics, and the
obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3
A short-term obligation rated B-3 is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
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, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period.
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 has
indicated that its 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.
Description of Standard & Poors Ratings Groups Dual Ratings:
Standard & Poors assigns dual ratings to all debt issues that have a put option or demand feature as part of
their structure. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term rating symbols are used for bonds to denote the
A-5
long-term maturity and the short term rating symbols for the put option (for example, AAA/A-1+). With U.S. municipal short-term demand debt, note rating symbols are used with the
short-term issue credit rating symbols (for example, SP-1+/A-1+).
Description of Standard & Poors Ratings
Groups Active Qualifiers (Currently applied and/or outstanding)
i: This subscript 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 subscript
indicates that the rating addresses the interest portion of the obligation only. The i subscript will always be used in conjunction with the p subscript, which addresses likelihood of receipt of principal. For example, a
rated obligation could be assigned ratings of AAAp NRi indicating that the principal portion is rated AAA and the interest portion of the obligation is not rated.
L: Ratings qualified with L apply only to amounts invested up to federal deposit insurance limits.
p: This subscript 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 subscript indicates that the rating addresses the principal portion of the obligation only.
The p subscript will always be used in conjunction with the i subscript, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of AAAp NRi indicating that the
principal portion is rated AAA and the interest portion of the obligation is not rated.
pi: Ratings with a
pi subscript 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 subscript. Ratings with a pi subscript 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: Preliminary ratings,
with the prelim qualifier, 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 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.
A-6
t: 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.
unsolicited: Unsolicited ratings are those credit ratings assigned at the initiative of Standard & Poors and not at the request of the issuer or its agents.
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% and 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 Issuer Default Rating. 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.
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
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.
A-7
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 B.
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. CCC ratings indicate that default is a real possibility.
CC
Very high levels of credit risk. CC ratings indicate that default of some kind appears probable.
C
Exceptionally high levels of credit risk. C ratings indicate that default appears imminent or inevitable.
D
Default. D ratings indicate 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 (3) the coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
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. Imminent default alternatively refers to the case where an issuer has formally announced a coercive 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
A-8
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 Fitch Ratings 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 Fitch Ratings 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
assigned. 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 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.
In the case of public finance, the ratings also 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.
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. Or, the default of a specific short-term obligation.
D
Default.
Indicates a broad-based default event for an entity, or the default of all short-term obligations.
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,
A-9
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: Rating 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. 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.
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 Fitch Ratings expectations regarding final documentation,
typically based upon a review of the final draft documentation provided by the issuer. No other conditionality pertains to an expected rating. While expected ratings typically convert to final ratings within a short time, as determined by the
issuers decisions regarding 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, as with final ratings.
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.
A-10
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.
Paid-In-Full: This tranche has reached maturity, regardless of whether it was amortized or called early. As the issue no longer exists,
it is therefore no longer rated. Indicated in rating databases with the symbol PIF.
NR: 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.
A-11
APPENDIX B
C
LEARBRIDGE
I
NVESTMENTS
, LLC
P
ROXY
V
OTING
P
OLICIES
AND
P
ROCEDURES
A
MENDED
AS
OF
M
ARCH
6, 2012
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I.
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Types of Accounts for Which ClearBridge Votes Proxies
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II.
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General Guidelines
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III.
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How ClearBridge Votes
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IV.
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Conflicts of Interest
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A.
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Procedures for Identifying Conflicts of Interest
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B.
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Procedures for Assessing Materiality of Conflicts of Interest and for Addressing Material Conflicts of
Interest
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C.
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Third Party Proxy Voting FirmConflicts of Interest
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V.
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Voting Policy
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A.
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Election of Directors
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B.
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Proxy Contests
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C.
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Auditors
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D.
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Proxy Contest Defenses
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E.
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Tender Offer Defenses
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F.
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Miscellaneous Governance Provisions
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G.
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Capital Structure
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H.
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Executive and Director Compensation
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I.
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State of Incorporation
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J.
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Mergers and Corporate Restructuring
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K.
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Social and Environmental Issues
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L.
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Miscellaneous
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VI.
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Other Considerations
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A.
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Share Blocking
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B.
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Securities on Loan
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VII.
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Disclosure of Proxy Voting
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VIII.
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Recordkeeping and Oversight
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B-1
CLEARBRIDGE INVESTMENTS, LLC
Proxy Voting Policies and Procedures
I. TYPES OF ACCOUNTS FOR WHICH CLEARBRIDGE VOTES PROXIES
ClearBridge votes
proxies for each client that has specifically authorized us to vote them in the investment management contract or otherwise and votes proxies for each ERISA account unless the plan document or investment advisory agreement specifically reserves the
responsibility to vote proxies to the plan trustees or other named fiduciary. These policies and procedures are intended to fulfill applicable requirements imposed on ClearBridge by the Investment Advisers Act of 1940, as amended, the Investment
Company Act of 1940, as amended, and the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations adopted under these laws.
II. GENERAL GUIDELINES
In voting proxies, we are guided by general
fiduciary principles. Our goal is to act prudently, solely in the best interest of the beneficial owners of the accounts we manage and, in the case of ERISA accounts, for the exclusive purpose of providing economic benefits to such persons. We
attempt to provide for the consideration of all factors that could affect the value of the investment and will vote proxies in the manner that we believe will be consistent with efforts to maximize shareholder values.
III. HOW CLEARBRIDGE VOTES
Section V of these policies and procedures sets forth certain stated positions. In the case of a proxy issue for which there is a stated position, we generally vote in accordance with the stated position.
In the case of a proxy issue for which there is a list of factors set forth in Section V that we consider in voting on such issue, we consider those factors and vote on a case-by-case basis in accordance with the general principles set forth above.
In the case of a proxy issue for which there is no stated position or list of factors that we consider in voting on such issue, we vote on a case-by-case basis in accordance with the general principles set forth above.
We may utilize an
external service provider to provide us with information and/or a recommendation with regard to proxy votes but we are not required to follow any such recommendations. The use of an external service provider does not relieve us of our responsibility
for the proxy vote.
For routine matters, we usually vote according to our policy or the external service providers
recommendation, although we are not obligated to do so and an individual portfolio manager may vote contrary to our policy or the recommendation of the external service provider. If a matter is non-routine,
e.g.
, managements
recommendation is different than that of the external service provider and ClearBridge is a significant holder or it is a significant holding for ClearBridge, the issues will be highlighted to the appropriate investment teams and their views
solicited by members of the Proxy Committee. Different investment teams may vote differently on the same issue, depending upon their assessment of clients best interests.
ClearBridges proxy voting process is overseen and coordinated by its Proxy Committee.
IV. CONFLICTS OF INTEREST
In furtherance of ClearBridges goal to vote proxies in the best interests of clients, ClearBridge follows procedures designed to
identify and address material conflicts that may arise between ClearBridges interests and those of its clients before voting proxies on behalf of such clients.
B-2
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A.
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Procedures for Identifying Conflicts of Interest
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ClearBridge relies on the following to seek to identify conflicts of interest with respect to proxy voting:
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1.
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ClearBridges employees are periodically reminded of their obligation (i) to be aware of the potential for conflicts of interest on the part of ClearBridge
with respect to voting proxies on behalf of client accounts both as a result of their personal relationships or personal or business relationships relating to another Legg Mason business unit, and (ii) to bring conflicts of interest of which
they become aware to the attention of ClearBridges General Counsel/Chief Compliance Officer.
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2.
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ClearBridges finance area maintains and provides to ClearBridge Compliance and proxy voting personnel an up- to-date list of all client relationships that have
historically accounted for or are projected to account for greater than 1% of ClearBridges net revenues.
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3.
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As a general matter, ClearBridge takes the position that relationships between a non-ClearBridge Legg Mason unit and an issuer (
e.g.
, investment management
relationship between an issuer and a non-ClearBridge Legg Mason affiliate) do not present a conflict of interest for ClearBridge in voting proxies with respect to such issuer because ClearBridge operates as an independent business unit from other
Legg Mason business units and because of the existence of informational barriers between ClearBridge and certain other Legg Mason business units. As noted above, ClearBridge employees are under an obligation to bring such conflicts of interest,
including conflicts of interest which may arise because of an attempt by another Legg Mason business unit or non-ClearBridge Legg Mason officer or employee to influence proxy voting by ClearBridge to the attention of ClearBridge Compliance.
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4.
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A list of issuers with respect to which ClearBridge has a potential conflict of interest in voting proxies on behalf of client accounts will be maintained by
ClearBridge proxy voting personnel. ClearBridge will not vote proxies relating to such issuers until it has been determined that the conflict of interest is not material or a method for resolving the conflict of interest has been agreed upon and
implemented, as described in Section IV below.
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B.
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Procedures for Assessing Materiality of Conflicts of Interest and for Addressing Material Conflicts of Interest
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1.
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ClearBridge maintains a Proxy Committee which, among other things, reviews and addresses conflicts of interest brought to its attention. The Proxy Committee is
comprised of such ClearBridge personnel (and others, at ClearBridges request), as are designated from time to time. The current members of the Proxy Committee are set forth in the Proxy Committees Terms of Reference.
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2.
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All conflicts of interest identified pursuant to the procedures outlined in Section IV. A. must be brought to the attention of the Proxy Committee for resolution. A
proxy issue that will be voted in accordance with a stated ClearBridge position on such issue or in accordance with the recommendation of an independent third party generally is not brought to the attention of the Proxy Committee for a conflict of
interest review because ClearBridges position is that any conflict of interest issues are resolved by voting in accordance with a pre-determined policy or in accordance with the recommendation of an independent third party.
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3.
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The Proxy Committee will determine whether a conflict of interest is material. A conflict of interest will be considered material to the extent that it is determined
that such conflict is likely to influence, or appear to influence, ClearBridges decision-making in voting the proxy. All materiality determinations will be based on an assessment of the particular facts and circumstances. A written record of
all materiality determinations made by the Proxy Committee will be maintained.
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B-3
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4.
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If it is determined by the Proxy Committee that a conflict of interest is not material, ClearBridge may vote proxies notwithstanding the existence of the conflict.
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5.
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If it is determined by the Proxy Committee that a conflict of interest is material, the Proxy Committee will determine an appropriate method to resolve such conflict of
interest before the proxy affected by the conflict of interest is voted. Such determination shall be based on the particular facts and circumstances, including the importance of the proxy issue, the nature of the conflict of interest, etc. Such
methods may include:
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disclosing the conflict to clients and obtaining their consent before voting;
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suggesting to clients that they engage another party to vote the proxy on their behalf;
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in the case of a conflict of interest resulting from a particular employees personal relationships, removing such employee from the
decision-making process with respect to such proxy vote; or
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such other method as is deemed appropriate given the particular facts and circumstances, including the importance of the proxy issue, the nature of the
conflict of interest, etc.
*
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A written record of the method used to resolve a material conflict of interest shall be maintained.
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C.
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Third Party Proxy Voting FirmConflicts of Interest
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With respect to a third party proxy voting firm described herein, the Proxy Committee will periodically review and assess such firms policies, procedures and practices with respect to the disclosure
and handling of conflicts of interest.
V. VOTING POLICY
These are policy guidelines that can always be superseded, subject to the duty to act solely in the best interest of the beneficial owners of accounts, by the investment management professionals
responsible for the account holding the shares being voted. There may be occasions when different investment teams vote differently on the same issue. A ClearBridge investment team (
e.g.
, ClearBridges Social Awareness Investment team)
may adopt proxy voting policies that supplement these policies and procedures. In addition, in the case of Taft-Hartley clients, ClearBridge will comply with a client direction to vote proxies in accordance with Institutional Shareholder
Services (ISS) PVS Proxy Voting Guidelines, which ISS represents to be fully consistent with AFL-CIO guidelines.
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1.
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Voting on Director Nominees in Uncontested Elections.
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a.
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We withhold our vote from a director nominee who:
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attended less than 75 percent of the companys board and committee meetings without a valid excuse (illness, service to the nation/local
government, work on behalf of the company);
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were members of the companys board when such board failed to act on a shareholder proposal that received approval of a majority of shares cast
for the previous two consecutive years;
|
*
|
Especially in the case of an apparent, as opposed to actual, conflict of interest, the Proxy Committee may resolve such conflict of interest by satisfying itself that
ClearBridges proposed vote on a proxy issue is in the best interest of client accounts and is not being influenced by the conflict of interest.
|
B-4
|
|
|
received more than 50 percent withheld votes of the shares cast at the previous board election, and the company has failed to address the issue as to
why;
|
|
|
|
is an insider where: (1) such person serves on any of the audit, compensation or nominating committees of the companys board, (2) the
companys board performs the functions typically performed by a companys audit, compensation and nominating committees, or (3) the full board is less than a majority independent (unless the director nominee is also the company CEO,
in which case we will vote FOR);
|
|
|
|
is a member of the companys audit committee, when excessive non-audit fees were paid to the auditor, or there are chronic control issues and an
absence of established effective control mechanisms.
|
|
b.
|
We vote for all other director nominees.
|
|
2.
|
Chairman and CEO is the Same Person.
|
We vote on a case-by-case basis on shareholder proposals that would require the positions of the Chairman and CEO to be held by different persons. We would generally vote FOR such a proposal unless there
are compelling reasons to vote against the proposal, including:
|
|
|
Designation of a lead director
|
|
|
|
Majority of independent directors (supermajority)
|
|
|
|
All independent key committees
|
|
|
|
Size of the company (based on market capitalization)
|
|
|
|
Established governance guidelines
|
|
3.
|
Majority of Independent Directors
|
|
a.
|
We vote for shareholder proposals that request that the board be comprised of a majority of independent directors. Generally that would require that the director have
no connection to the company other than the board seat. In determining whether an independent director is truly independent (e.g. when voting on a slate of director candidates), we consider certain factors including, but not necessarily limited to,
the following: whether the director or his/her company provided professional services to the company or its affiliates either currently or in the past year; whether the director has any transactional relationship with the company; whether the
director is a significant customer or supplier of the company; whether the director is employed by a foundation or university that received significant grants or endowments from the company or its affiliates; and whether there are interlocking
directorships.
|
|
b.
|
We vote for shareholder proposals that request that the board audit, compensation and/or nominating committees include independent directors exclusively.
|
|
4.
|
Stock Ownership Requirements
|
We vote against shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a director, or
to remain on the board.
We vote against
shareholder proposals to limit the tenure of independent directors.
B-5
|
6.
|
Director and Officer Indemnification and Liability Protection
|
|
a.
|
Subject to subparagraphs 2, 3, and 4 below, we vote for proposals concerning director and officer indemnification and liability protection.
|
|
b.
|
We vote for proposals to limit and against proposals to eliminate entirely director and officer liability for monetary damages for violating the duty of care.
|
|
c.
|
We vote against indemnification proposals that would expand coverage beyond just legal expenses to acts, such as negligence, that are more serious violations of
fiduciary obligations than mere carelessness.
|
|
d.
|
We vote for only those proposals that provide such expanded coverage noted in subparagraph 3 above in cases when a directors or officers legal defense was
unsuccessful if: (1) the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company,
and
(2) if only the directors legal expenses would be covered.
|
|
7.
|
Director Qualifications
|
|
a.
|
We vote case-by-case on proposals that establish or amend director qualifications. Considerations include how reasonable the criteria are and to what degree they may
preclude dissident nominees from joining the board.
|
|
b.
|
We vote against shareholder proposals requiring two candidates per board seat.
|
|
1.
|
Voting for Director Nominees in Contested Elections
|
We vote on a case-by-case basis in contested elections of directors. Considerations include: chronology of events leading up to the proxy contest; qualifications of director nominees (incumbents and
dissidents); for incumbents, whether the board is comprised of a majority of outside directors; whether key committees (i.e.: nominating, audit, compensation) comprise solely of independent outsiders; discussion with the respective portfolio
manager(s).
|
2.
|
Reimburse Proxy Solicitation Expenses
|
We vote on a case-by-case basis on proposals to provide full reimbursement for dissidents waging a proxy contest. Considerations include: identity of persons who will pay solicitation expenses; cost of
solicitation; percentage that will be paid to proxy solicitation firms.
We vote for
proposals to ratify auditors, unless an auditor has a financial interest in or association with the company, and is therefore not independent; or there is reason to believe that the independent auditor has rendered an opinion that is neither
accurate nor indicative of the companys financial position or there is reason to believe the independent auditor has not followed the highest level of ethical conduct. Specifically, we will vote to ratify auditors if the auditors only provide
the company audit services and such other audit-related and non-audit services the provision of which will not cause such auditors to lose their independence under applicable laws, rules and regulations.
|
2.
|
Financial Statements and Director and Auditor Reports
|
We generally vote for management proposals seeking approval of financial accounts and reports and the discharge of management and supervisory board members, unless there is concern about the past actions
of the companys auditors or directors.
B-6
|
3.
|
Remuneration of Auditors
|
We
vote for proposals to authorize the board or an audit committee of the board to determine the remuneration of auditors, unless there is evidence of excessive compensation relative to the size and nature of the company.
|
4.
|
Indemnification of Auditors
|
We
vote against proposals to indemnify auditors.
|
D.
|
Proxy Contest Defenses
|
|
1.
|
Board Structure: Staggered vs. Annual Elections
|
|
a.
|
We vote against proposals to classify the board.
|
|
b.
|
We vote for proposals to repeal classified boards and to elect all directors annually.
|
|
2.
|
Shareholder Ability to Remove Directors
|
|
a.
|
We vote against proposals that provide that directors may be removed
only
for cause.
|
|
b.
|
We vote for proposals to restore shareholder ability to remove directors with or without cause.
|
|
c.
|
We vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
|
|
d.
|
We vote for proposals that permit shareholders to elect directors to fill board vacancies.
|
|
a.
|
If plurality voting is in place for uncontested director elections, we vote for proposals to permit or restore cumulative voting.
|
|
b.
|
If majority voting is in place for uncontested director elections, we vote against cumulative voting.
|
|
c.
|
If plurality voting is in place for uncontested director elections, and proposals to adopt both cumulative voting and majority voting are on the same slate, we vote for
majority voting and against cumulative voting.
|
We vote for
non-binding and/or binding resolutions requesting that the board amend a companys by-laws to stipulate that directors need to be elected with an affirmative majority of the votes cast, provided that it does not conflict with the state law
where the company is incorporated. In addition, all resolutions need to provide for a carve-out for a plurality vote standard when there are more nominees than board seats (i.e. contested election). In addition, ClearBridge strongly encourages
companies to adopt a post-election director resignation policy setting guidelines for the company to follow to promptly address situations involving holdover directors.
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5.
|
Shareholder Ability to Call Special Meetings
|
|
a.
|
We vote against proposals to restrict or prohibit shareholder ability to call special meetings.
|
|
b.
|
We vote for proposals that provide shareholders with the ability to call special meetings, taking into account a minimum ownership threshold of 10 percent (and investor
ownership structure, depending on bylaws).
|
B-7
|
6.
|
Shareholder Ability to Act by Written Consent
|
|
a.
|
We vote against proposals to restrict or prohibit shareholder ability to take action by written consent.
|
|
b.
|
We vote for proposals to allow or make easier shareholder action by written consent.
|
|
7.
|
Shareholder Ability to Alter the Size of the Board
|
|
a.
|
We vote for proposals that seek to fix the size of the board.
|
|
b.
|
We vote against proposals that give management the ability to alter the size of the board without shareholder approval.
|
|
8.
|
Advance Notice Proposals
|
We
vote on advance notice proposals on a case-by-case basis, giving support to those proposals which allow shareholders to submit proposals as close to the meeting date as reasonably possible and within the broadest window possible.
|
a.
|
We vote against proposals giving the board exclusive authority to amend the by-laws.
|
|
b.
|
We vote for proposals giving the board the ability to amend the by-laws in addition to shareholders.
|
|
10.
|
Article Amendments (not otherwise covered by ClearBridge Proxy Voting Policies and Procedures).
|
We review on a case-by-case basis all proposals seeking amendments to the articles of association.
We vote for article amendments if:
|
|
|
shareholder rights are protected;
|
|
|
|
there is negligible or positive impact on shareholder value;
|
|
|
|
management provides adequate reasons for the amendments; and
|
|
|
|
the company is required to do so by law (if applicable).
|
|
a.
|
We vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification.
|
|
b.
|
We vote on a case-by-case basis on shareholder proposals to redeem a companys poison pill. Considerations include: when the plan was originally adopted; financial
condition of the company; terms of the poison pill.
|
|
c.
|
We vote on a case-by-case basis on management proposals to ratify a poison pill. Considerations include: sunset provisionpoison pill is submitted to shareholders
for ratification or rejection every 2 to 3 years; shareholder redemption feature -10% of the shares may call a special meeting or seek a written consent to vote on rescinding the rights plan.
|
|
a.
|
We vote for fair price proposals, as long as the shareholder vote requirement embedded in the provision is no more than a majority of disinterested shares.
|
B-8
|
b.
|
We vote for shareholder proposals to lower the shareholder vote requirement in existing fair price provisions.
|
|
a.
|
We vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a companys ability to make greenmail payments.
|
|
b.
|
We vote on a case-by-case basis on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
|
|
a.
|
We vote against dual class exchange offers.
|
|
b.
|
We vote against dual class re-capitalization.
|
|
5.
|
Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws
|
|
a.
|
We vote against management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments.
|
|
b.
|
We vote for shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments.
|
|
6.
|
Supermajority Shareholder Vote Requirement to Approve Mergers
|
|
a.
|
We vote against management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations.
|
|
b.
|
We vote for shareholder proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations.
|
|
7.
|
White Squire Placements
|
We vote
for shareholder proposals to require approval of blank check preferred stock issues.
|
F.
|
Miscellaneous Governance Provisions
|
|
a.
|
We vote for shareholder proposals that request corporations to adopt confidential voting, use independent tabulators and use independent inspectors of election as long
as the proposals include clauses for proxy contests as follows: in the case of a contested election, management is permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in
place. If the dissidents do not agree, the confidential voting policy is waived.
|
|
b.
|
We vote for management proposals to adopt confidential voting subject to the proviso for contested elections set forth in sub-paragraph A.1 above.
|
We vote for
shareholder proposals that would allow significant company shareholders equal access to managements proxy material in order to evaluate and propose voting recommendations on proxy proposals and director nominees, and in order to nominate their
own candidates to the board.
We vote on a
case-by-case basis on bundled or conditioned proxy proposals. In the case of items that are conditioned upon each other, we examine the benefits and costs of the packaged items. In instances
B-9
when the joint effect of the conditioned items is not in shareholders best interests and therefore not in the best interests of the beneficial owners of accounts, we vote against the
proposals. If the combined effect is positive, we support such proposals.
|
4.
|
Shareholder Advisory Committees
|
We vote on a case-by-case basis on proposals to establish a shareholder advisory committee. Considerations include: rationale and cost to
the firm to form such a committee. We generally vote against such proposals if the board and key nominating committees are comprised solely of independent/outside directors.
We vote for
proposals that seek to bring forth other business matters.
We vote on a
case-by-case basis on proposals that seek to adjourn a shareholder meeting in order to solicit additional votes.
We vote
against proposals if a company fails to provide shareholders with adequate information upon which to base their voting decision.
|
1.
|
Common Stock Authorization
|
|
a.
|
We vote on a case-by-case basis on proposals to increase the number of shares of common stock authorized for issue, except as described in paragraph 2 below.
|
|
b.
|
Subject to paragraph 3, below we vote for the approval requesting increases in authorized shares if the company meets certain criteria:
|
|
|
|
Company has already issued a certain percentage (i.e. greater than 50%) of the companys allotment.
|
|
|
|
The proposed increase is reasonable (i.e. less than 150% of current inventory) based on an analysis of the companys historical stock management
or future growth outlook of the company.
|
|
c.
|
We vote on a case-by-case basis, based on the input of affected portfolio managers, if holding is greater than 1% of an account.
|
|
2.
|
Stock Distributions: Splits and Dividends
|
We vote on a case-by-case basis on management proposals to increase common share authorization for a stock split, provided that the split does not result in an increase of authorized but unissued shares
of more than 100% after giving effect to the shares needed for the split.
We vote
for management proposals to implement a reverse stock split, provided that the reverse split does not result in an increase of authorized but unissued shares of more than 100% after giving effect to the shares needed for the reverse split.
|
4.
|
Blank Check Preferred Stock
|
|
a.
|
We vote against proposals to create, authorize or increase the number of shares with regard to blank check preferred stock with unspecified voting, conversion, dividend
distribution and other rights.
|
B-10
|
b.
|
We vote for proposals to create declawed blank check preferred stock (stock that cannot be used as a takeover defense).
|
|
c.
|
We vote for proposals to authorize preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and the terms
of the preferred stock appear reasonable.
|
|
d.
|
We vote for proposals requiring a shareholder vote for blank check preferred stock issues.
|
|
5.
|
Adjust Par Value of Common Stock
|
We vote for management proposals to reduce the par value of common stock.
|
a.
|
We vote on a case-by-case basis for shareholder proposals seeking to establish them and consider the following factors:
|
|
|
|
Characteristics of the size of the holding (holder owning more than 1% of the outstanding shares).
|
|
|
|
Percentage of the rights offering (rule of thumb less than 5%).
|
|
b.
|
We vote on a case-by-case basis for shareholder proposals seeking the elimination of pre-emptive rights.
|
We vote on a
case-by-case basis for proposals to increase common and/or preferred shares and to issue shares as part of a debt-restructuring plan. Generally, we approve proposals that facilitate debt restructuring.
|
8.
|
Share Repurchase Programs
|
We
vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
We vote for
proposals to create a new class of nonvoting or sub voting common stock if:
|
|
|
It is intended for financing purposes with minimal or no dilution to current shareholders
|
|
|
|
It is not designed to preserve the voting power of an insider or significant shareholder
|
|
10.
|
Issue Stock for Use with Rights Plan
|
We vote against proposals that increase authorized common stock for the explicit purpose of implementing a shareholder rights plan (poison pill).
|
11.
|
Debt Issuance Requests
|
When
evaluating a debt issuance request, the issuing companys present financial situation is examined. The main factor for analysis is the companys current debt-to-equity ratio, or gearing level. A high gearing level may incline markets and
financial analysts to downgrade the companys bond rating, increasing its investment risk factor in the process. A gearing level up to 100 percent is considered acceptable.
We vote for debt issuances for companies when the gearing level is between zero and 100 percent.
We view on a case-by-case basis proposals where the issuance of debt will result in the gearing level being greater than 100 percent. Any
proposed debt issuance is compared to industry and market standards.
B-11
We generally
vote for the adopting of financing plans if we believe they are in the best economic interests of shareholders.
|
H.
|
Executive and Director Compensation
|
In general, we vote for executive and director compensation plans, with the view that viable compensation programs reward the creation of stockholder wealth by having high payout sensitivity to increases
in shareholder value. Certain factors, however, such as repricing underwater stock options without shareholder approval, would cause us to vote against a plan. Additionally, in some cases we would vote against a plan deemed unnecessary.
|
1.
|
OBRA-Related Compensation Proposals
|
|
a.
|
Amendments that Place a Cap on Annual Grant or Amend Administrative Features
|
We vote for plans that simply amend shareholder-approved plans to include administrative features or place a cap on the annual grants any one participant may receive to comply with the provisions of
Section 162(m) of the Internal Revenue Code.
|
b.
|
Amendments to Added Performance-Based Goals
|
We vote for amendments to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) of the Internal Revenue Code.
|
c.
|
Amendments to Increase Shares and Retain Tax Deductions Under OBRA
|
We vote for amendments to existing plans to increase shares reserved and to qualify the plan for favorable tax treatment under the provisions of Section 162(m) the Internal Revenue Code.
|
d.
|
Approval of Cash or Cash-and-Stock Bonus Plans
|
We vote for cash or cash-and-stock bonus plans to exempt the compensation from taxes under the provisions of Section 162(m) of the Internal Revenue Code.
We vote
for proposals to expense stock options on financial statements.
We vote on
a case by case basis with respect to proposals seeking to index stock options. Considerations include whether the issuer expenses stock options on its financial statements and whether the issuers compensation committee is comprised solely of
independent directors.
|
4.
|
Shareholder Proposals to Limit Executive and Director Pay
|
|
a.
|
We vote on a case-by-case basis on all shareholder proposals that seek additional disclosure of executive and director pay information. Considerations include: cost and
form of disclosure. We vote for such proposals if additional disclosure is relevant to shareholders needs and would not put the company at a competitive disadvantage relative to its industry.
|
|
b.
|
We vote on a case-by-case basis on all other shareholder proposals that seek to limit executive and director pay.
|
We have a policy of voting to reasonably limit the level of options and other equity-based compensation arrangements available to
management to reasonably limit shareholder dilution and management compensation. For options and equity-based compensation arrangements, we vote FOR proposals or amendments that would result in the available awards being less than 10% of fully
diluted outstanding shares (i.e. if the combined total of shares, common share equivalents and options available to be awarded under all current and proposed compensation plans is less than 10% of fully
B-12
diluted shares). In the event the available awards exceed the 10% threshold, we would also consider the % relative to the common practice of its specific industry (e.g. technology firms). Other
considerations would include, without limitation, the following:
|
|
|
Compensation committee comprised of independent outside directors
|
|
|
|
Repricing without shareholder approval prohibited
|
|
|
|
3-year average burn rate for company
|
|
|
|
Plan administrator has authority to accelerate the vesting of awards
|
|
|
|
Shares under the plan subject to performance criteria
|
|
a.
|
We vote for shareholder proposals to have golden parachutes submitted for shareholder ratification.
|
|
b.
|
We vote on a case-by-case basis on all proposals to ratify or cancel golden parachutes. Considerations include: the amount should not exceed 3 times average base salary
plus guaranteed benefits; golden parachute should be less attractive than an ongoing employment opportunity with the firm.
|
|
a.
|
We vote for shareholder proposals that request a company not to make any death benefit payments to senior executives estates or beneficiaries, or pay premiums in
respect to any life insurance policy covering a senior executives life (golden coffin). We carve out benefits provided under a plan, policy or arrangement applicable to a broader group of employees, such as offering group universal
life insurance.
|
|
b.
|
We vote for shareholder proposals that request shareholder approval of survivor benefits for future agreements that, following the death of a senior executive, would
obligate the company to make payments or awards not earned.
|
|
7.
|
Anti Tax Gross-up Policy
|
|
a.
|
We vote for proposals that ask a company to adopt a policy whereby it will not make, or promise to make, any tax gross-up payment to its senior executives, except for
tax gross-ups provided pursuant to a plan, policy, or arrangement applicable to management employees of the company generally, such as relocation or expatriate tax equalization policy; we also vote for proposals that ask management to put gross-up
payments to a shareholder vote.
|
|
b.
|
We vote against proposals where a company will make, or promise to make, any tax gross-up payment to its senior executives without a shareholder vote, except for tax
gross-ups provided pursuant to a plan, policy, or arrangement applicable to management employees of the company generally, such as relocation or expatriate tax equalization policy.
|
|
8.
|
Employee Stock Ownership Plans (ESOPs)
|
We vote for proposals that request shareholder approval in order to implement an ESOP or to increase authorized shares for existing ESOPs, except in cases when the number of shares allocated to the ESOP
is excessive (i.e., generally greater than five percent of outstanding shares).
|
9.
|
Employee Stock Purchase Plans
|
|
a.
|
We vote for qualified plans where all of the following apply:
|
|
|
|
The purchase price is at least 85 percent of fair market value
|
B-13
|
|
|
The offering period is 27 months or less
|
|
|
|
The number of shares allocated to the plan is five percent or less of outstanding shares
|
If the above do not apply, we vote on a case-by-case basis.
|
b.
|
We vote for non-qualified plans where all of the following apply:
|
|
|
|
All employees of the company are eligible to participate (excluding 5 percent or more beneficial owners)
|
|
|
|
There are limits on employee contribution (ex: fixed dollar amount)
|
|
|
|
There is a company matching contribution with a maximum of 25 percent of an employees contribution
|
|
|
|
There is no discount on the stock price on purchase date (since there is a company match)
|
If the above do not apply, we vote against the non-qualified employee stock purchase plan.
|
10.
|
401(k) Employee Benefit Plans
|
We vote for proposals to implement a 401(k) savings plan for employees.
|
11.
|
Stock Compensation Plans
|
|
a.
|
We vote for stock compensation plans which provide a dollar-for-dollar cash for stock exchange.
|
|
b.
|
We vote on a case-by-case basis for stock compensation plans which do not provide a dollar-for-dollar cash for stock exchange using a quantitative model.
|
|
12.
|
Directors Retirement Plans
|
|
a.
|
We vote against retirement plans for non-employee directors.
|
|
b.
|
We vote for shareholder proposals to eliminate retirement plans for non-employee directors.
|
|
13.
|
Management Proposals to Reprice Options
|
We vote on a case-by-case basis on management proposals seeking approval to reprice options. Considerations include the following:
|
|
|
Historic trading patterns
|
|
|
|
Rationale for the repricing
|
|
|
|
Value-for-value exchange
|
|
14.
|
Shareholder Proposals Recording Executive and Director Pay
|
|
a.
|
We vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation.
|
|
b.
|
We vote against shareholder proposals requiring director fees be paid in stock only.
|
|
c.
|
We vote for shareholder proposals to put option repricing to a shareholder vote.
|
B-14
|
d.
|
We vote for shareholder proposals that call for a non-binding advisory vote on executive pay (say-on-pay). Company boards would adopt a policy giving
shareholders the opportunity at each annual meeting to vote on an advisory resolution to ratify the compensation of the named executive officers set forth in the proxy statements summary compensation table.
|
|
e.
|
We vote annual for the frequency of say-on-pay proposals rather than once every two or three years.
|
|
f.
|
We vote on a case-by-case basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus
peers, pay level versus industry, and long term corporate outlook.
|
|
15.
|
Management Proposals On Executive Compensation
|
|
a.
|
For non-binding advisory votes on executive officer compensation, when management and the external service provider agree, we vote for the proposal. When management and
the external service provider disagree, the proposal becomes a refer item. In the case of a Refer item, the factors under consideration will include the following:
|
|
|
|
Company performance over the last 1-, 3- and 5-year periods on a total shareholder return basis
|
|
|
|
Performance metrics for short- and long-term incentive programs
|
|
|
|
CEO pay relative to company performance (is there a misalignment)
|
|
|
|
Tax gross-ups to senior executives
|
|
|
|
Change-in-control arrangements
|
|
|
|
Presence of a clawback provision, ownership guidelines, or stock holding requirements for senior executives
|
|
b.
|
We vote annual for the frequency of say-on-pay proposals rather than once every two or three years.
|
|
16.
|
Stock Retention / Holding Period of Equity Awards
|
We vote on a case-by-case basis on shareholder proposals asking companies to adopt policies requiring senior executives to retain all or a significant (>50 percent) portion of their shares acquired
through equity compensation plans, either:
|
|
|
While employed and/or for one to two years following the termination of their employment; or
|
|
|
|
For a substantial period following the lapse of all other vesting requirements for the award, with ratable release of a portion of the shares annually
during the lock-up period
|
The following factors will be taken into consideration:
|
|
|
Whether the company has any holding period, retention ratio, or named executive officer ownership requirements currently in place
|
|
|
|
Actual stock ownership of the companys named executive officers
|
|
|
|
Policies aimed at mitigating risk taking by senior executives
|
|
|
|
Pay practices at the company that we deem problematic
|
B-15
|
I.
|
State/Country of Incorporation
|
|
1.
|
Voting on State Takeover Statutes
|
|
a.
|
We vote for proposals to opt out of state freeze-out provisions.
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b.
|
We vote for proposals to opt out of state disgorgement provisions.
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|
2.
|
Voting on Re-incorporation Proposals
|
We vote on a case-by-case basis on proposals to change a companys state or country of incorporation. Considerations include: reasons for re-incorporation (i.e. financial, restructuring, etc);
advantages/benefits for change (i.e. lower taxes); compare the differences in state/country laws governing the corporation.
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3.
|
Control Share Acquisition Provisions
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|
a.
|
We vote against proposals to amend the charter to include control share acquisition provisions.
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|
b.
|
We vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to
shareholders.
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|
c.
|
We vote for proposals to restore voting rights to the control shares.
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|
d.
|
We vote for proposals to opt out of control share cashout statutes.
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|
J.
|
Mergers and Corporate Restructuring
|
|
1.
|
Mergers and Acquisitions
|
We
vote on a case-by-case basis on mergers and acquisitions. Considerations include: benefits/advantages of the combined companies (i.e. economies of scale, operating synergies, increase in market power/share, etc
); offer price (premium or
discount); change in the capital structure; impact on shareholder rights.
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2.
|
Corporate Restructuring
|
We vote
on a case-by-case basis on corporate restructuring proposals involving minority squeeze outs and leveraged buyouts. Considerations include: offer price, other alternatives/offers considered and review of fairness opinions.
We vote on a
case-by-case basis on spin-offs. Considerations include the tax and regulatory advantages, planned use of sale proceeds, market focus, and managerial incentives.
We vote on a
case-by-case basis on asset sales. Considerations include the impact on the balance sheet/working capital, value received for the asset, and potential elimination of diseconomies.
We vote on a
case-by-case basis on liquidations after reviewing managements efforts to pursue other alternatives, appraisal value of assets, and the compensation plan for executives managing the liquidation.
We vote for
proposals to restore, or provide shareholders with, rights of appraisal.
B-16
|
7.
|
Changing Corporate Name
|
We vote
for proposals to change the corporate name, unless the proposed name change bears a negative connotation.
|
8.
|
Conversion of Securities
|
We
vote on a case-by-case basis on proposals regarding conversion of securities. Considerations include the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and
conflicts of interest.
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9.
|
Stakeholder Provisions
|
We vote
against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
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K.
|
Social and Environmental Issues
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|
1.
|
In general we vote on a case-by-case basis on shareholder social and environmental proposals, on the basis that their impact on share value may be difficult to
quantify. In most cases, however, we vote for disclosure reports that seek additional information, particularly when it appears the company has not adequately addressed shareholders social and environmental concerns. In determining our vote on
shareholder social and environmental proposals, we also analyze the following factors:
|
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a.
|
whether adoption of the proposal would have either a positive or negative impact on the companys short-term or long-term share value;
|
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b.
|
the percentage of sales, assets and earnings affected;
|
|
c.
|
the degree to which the companys stated position on the issues could affect its reputation or sales, or leave it vulnerable to boycott or selective purchasing;
|
|
d.
|
whether the issues presented should be dealt with through government or company-specific action;
|
|
e.
|
whether the company has already responded in some appropriate manner to the request embodied in a proposal;
|
|
f.
|
whether the companys analysis and voting recommendation to shareholders is persuasive;
|
|
g.
|
what other companies have done in response to the issue;
|
|
h.
|
whether the proposal itself is well framed and reasonable;
|
|
i.
|
whether implementation of the proposal would achieve the objectives sought in the proposal; and
|
|
j.
|
whether the subject of the proposal is best left to the discretion of the board.
|
|
2.
|
Among the social and environmental issues to which we apply this analysis are the following:
|
|
a.
|
Energy Efficiency and Resource Utilization
|
|
b.
|
Environmental Impact and Climate Change
|
|
c.
|
Human Rights and Impact on Communities of Corporate Activities
|
|
d.
|
Equal Employment Opportunity and Non Discrimination
|
|
e.
|
ILO Standards and Child/Slave Labor
|
|
f.
|
Product Integrity and Marketing
|
|
g.
|
Sustainability Reporting
|
B-17
|
1.
|
Charitable Contributions
|
We
vote against proposals to eliminate, direct or otherwise restrict charitable contributions.
|
2.
|
Political Contributions
|
In
general, we vote on a case-by-case basis on shareholder proposals pertaining to political contributions. In determining our vote on political contribution proposals we consider, among other things, the following:
|
|
|
Does the company have a political contributions policy publicly available
|
|
|
|
How extensive is the disclosure on these documents
|
|
|
|
What oversight mechanisms the company has in place for approving/reviewing political contributions and expenditures
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|
|
|
Does the company provide information on its trade association expenditures
|
|
|
|
Total amount of political expenditure by the company in recent history
|
|
a.
|
We vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
|
|
b.
|
We vote against proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to
support the proposal.
|
|
c.
|
We vote for by-law or charter changes that are of a housekeeping nature (updates or corrections).
|
|
d.
|
We vote for management proposals to change the date/time/location of the annual meeting unless the proposed change is unreasonable.
|
|
e.
|
We vote against shareholder proposals to change the date/time/location of the annual meeting unless the current scheduling or location is unreasonable.
|
|
f.
|
We vote against proposals to approve other business when it appears as voting item.
|
In some
markets, shareholders are routinely asked to approve:
|
|
|
the opening of the shareholder meeting
|
|
|
|
that the meeting has been convened under local regulatory requirements
|
|
|
|
the presence of a quorum
|
|
|
|
the agenda for the shareholder meeting
|
|
|
|
the election of the chair of the meeting
|
|
|
|
the allowance of questions
|
B-18
|
|
|
the publication of minutes
|
|
|
|
the closing of the shareholder meeting
|
We generally vote for these and similar routine management proposals.
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5.
|
Allocation of Income and Dividends
|
We generally vote for management proposals concerning allocation of income and the distribution of dividends, unless the amount of the distribution is consistently and unusually small or large.
|
6.
|
Stock (Scrip) Dividend Alternatives
|
|
a.
|
We vote for most stock (scrip) dividend proposals.
|
|
b.
|
We vote against proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value.
|
ClearBridge has determined that registered investment companies, particularly closed end investment companies,
raise special policy issues making specific voting guidelines frequently inapplicable. To the extent that ClearBridge has proxy voting authority with respect to shares of registered investment companies, ClearBridge shall vote such shares in the
best interest of client accounts and subject to the general fiduciary principles set forth herein without regard to the specific voting guidelines set forth in Section V. A. through L.
The voting policy guidelines set forth in Section V may be changed from time to time by ClearBridge in its sole discretion.
VI. OTHER CONSIDERATIONS
In certain
situations, ClearBridge may determine not to vote proxies on behalf of a client because ClearBridge believes that the expected benefit to the client of voting shares is outweighed by countervailing considerations. Examples of situations in which
ClearBridge may determine not to vote proxies on behalf of a client include:
Proxy
voting in certain countries requires share blocking. This means that shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting (e.g. one week) with a designated depositary. During the
blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares have been returned to client accounts by the designated depositary. In deciding whether to vote shares subject to share
blocking, ClearBridge will consider and weigh, based on the particular facts and circumstances, the expected benefit to clients of voting in relation to the detriment to clients of not being able to sell such shares during the applicable period.
Certain clients of ClearBridge, such as an institutional client or a mutual fund for which ClearBridge acts as a sub-adviser, may engage
in securities lending with respect to the securities in their accounts. ClearBridge typically does not direct or oversee such securities lending activities. To the extent feasible and practical under the circumstances, ClearBridge will request that
the client recall shares that are on loan so that such shares can be voted if ClearBridge believes that the expected benefit to the client of voting such shares outweighs the detriment to the client of recalling such shares (
e.g.
, foregone
income). The ability to timely recall shares for proxy voting purposes typically is not entirely within the control of ClearBridge and requires the cooperation of the client and its other service providers. Under certain circumstances, the recall of
shares in time for such shares to be voted may not be possible due to applicable proxy voting record dates and administrative considerations.
B-19
VII. DISCLOSURE OF PROXY VOTING
ClearBridge employees may not disclose to others outside of ClearBridge (including employees of other Legg Mason business units) how ClearBridge intends to vote a proxy absent prior approval from
ClearBridges General Counsel/Chief Compliance Officer, except that a ClearBridge investment professional may disclose to a third party (other than an employee of another Legg Mason business unit) how s/he intends to vote without obtaining
prior approval from ClearBridges General Counsel/Chief Compliance Officer if (1) the disclosure is intended to facilitate a discussion of publicly available information by ClearBridge personnel with a representative of a company whose
securities are the subject of the proxy, (2) the companys market capitalization exceeds $1 billion and (3) ClearBridge has voting power with respect to less than 5% of the outstanding common stock of the company.
If a ClearBridge employee receives a request to disclose ClearBridges proxy voting intentions to, or is otherwise contacted by, another person
outside of ClearBridge (including an employee of another Legg Mason business unit) in connection with an upcoming proxy voting matter, he/she should immediately notify ClearBridges General Counsel/Chief Compliance Officer.
If a portfolio manager wants to take a public stance with regards to a proxy, s/he must consult with ClearBridges General Counsel/Chief Compliance
Officer before making or issuing a public statement.
VIII. RECORDKEEPING AND OVERSIGHT
ClearBridge shall maintain the following records relating to proxy voting:
|
|
|
a copy of these policies and procedures;
|
|
|
|
a copy of each proxy form (as voted);
|
|
|
|
a copy of each proxy solicitation (including proxy statements) and related materials with regard to each vote;
|
|
|
|
documentation relating to the identification and resolution of conflicts of interest;
|
|
|
|
any documents created by ClearBridge that were material to a proxy voting decision or that memorialized the basis for that decision; and
|
|
|
|
a copy of each written client request for information on how ClearBridge voted proxies on behalf of the client, and a copy of any written response by
ClearBridge to any (written or oral) client request for information on how ClearBridge voted proxies on behalf of the requesting client.
|
Such records shall be maintained and preserved in an easily accessible place for a period of not less than six years from the end of the fiscal year during which the last entry was made on such record,
the first two years in an appropriate office of the ClearBridge adviser.
To the extent that ClearBridge is authorized to vote proxies for a
United States Registered Investment Company, ClearBridge shall maintain such records as are necessary to allow such fund to comply with its recordkeeping, reporting and disclosure obligations under applicable laws, rules and regulations.
In lieu of keeping copies of proxy statements, ClearBridge may rely on proxy statements filed on the EDGAR system as well as on third party records of
proxy statements and votes cast if the third party provides an undertaking to provide the documents promptly upon request.
B-20
PART C
OTHER INFORMATION
Unless
otherwise noted, all references are to the Registrants initial registration statement on Form N-1A (the Registration Statement) as filed with the Securities and Exchange Commission (SEC) on October 21, 1991 (File
Nos. 33-43446 and 811-06444).
(a) (1) The Registrants Declaration of Trust dated as of October 2, 2006 is
incorporated herein by reference to Post-Effective Amendment No. 70 as filed with the SEC on April 16, 2007 (Post-Effective Amendment No. 70).
(2) The Registrants Declaration of Trust dated as of October 2, 2006 as amended and restated as of August 18, 2011 is incorporated herein by reference to Post-Effective Amendment
No. 213 as filed with the SEC on August 22, 2011 (Post-Effective Amendment No. 213).
(3)
Designation of Series of Shares of Beneficial Interests in the Trust effective as of February 8, 2007 is incorporated herein by reference to Post-Effective Amendment No. 70.
(4) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of August 9, 2007 is
incorporated herein by reference to Post-Effective Amendment No. 72 as filed with the SEC on August 24, 2007 (Post-Effective Amendment No. 72).
(5) Amended and Restated Designation of Classes effective as of August 9, 2007 is incorporated herein by reference to Post-Effective Amendment No. 72.
(6) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust and Amended and Restated Designation of
Classes effective as of November 8, 2007 is incorporated herein by reference to Post-Effective Amendment No. 76 as filed with the SEC on November 30, 2007 (Post-Effective Amendment No. 76).
(7) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of February 7, 2008 is
incorporated herein by reference to Post-Effective Amendment No. 87 as filed with the SEC on February 15, 2008 (Post-Effective Amendment No. 87).
(8) Amended and Restated Designation of Classes effective as of February 7, 2008 is incorporated herein by reference to Post-Effective Amendment No. 87.
(9) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of May 8, 2008 is
incorporated herein by reference to Post-Effective Amendment No. 109 as filed with the SEC on June 3, 2008 (Post-Effective Amendment No. 109).
(10) Amended and Restated Designation of Classes effective as of May 8, 2008 is incorporated herein by reference to Post-Effective Amendment No. 109.
(11) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of June 6, 2008 is
incorporated herein by reference to Post-Effective Amendment No. 110 as filed with the SEC on June 6, 2008 (Post-Effective Amendment No. 110).
(12) Amended and Restated Designation of Classes effective as of June 6, 2008 is incorporated herein by reference to Post-Effective Amendment No. 110.
(13) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of January 28, 2009 is
incorporated herein by reference to Post-Effective Amendment No. 133 as filed with the SEC on January 28, 2009 (Post-Effective Amendment No. 133).
(14) Amended and Restated Designation of Classes effective as of January 28, 2009 is incorporated herein by reference to Post-Effective Amendment No. 133.
(15) Amended and Restated Designation of Classes effective as of February 26, 2009 is incorporated herein by reference to
Post-Effective Amendment No. 137 as filed with the SEC on February 27, 2009 (Post-Effective Amendment No. 137).
- 2 -
(16) Amended and Restated Designation of Classes effective as of February 26, 2009 is
incorporated herein by reference to Post-Effective Amendment No. 146 as filed with the SEC on June 25, 2009 (Post-Effective Amendment No. 146).
(17) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of August 5, 2009 is incorporated herein by reference to Post-Effective Amendment
No. 150 as filed with the SEC on November 6, 2009 (Post-Effective Amendment No. 150).
(18) Amended
and Restated Designation of Classes effective as of August 5, 2009 is incorporated herein by reference to Post-Effective Amendment No. 150.
(19) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of December 7, 2009 is incorporated herein by reference to Post-Effective Amendment
No. 159 as filed with the SEC on February 16, 2010 (Post-Effective Amendment No. 159).
(20) Amended
and Restated Designation of Classes effective as of December 7, 2009 is incorporated herein by reference to Post-Effective Amendment No. 159.
(21) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of February 4, 2010 is incorporated herein by reference to Post-Effective Amendment
No. 162 as filed with the SEC on March 15, 2010 (Post-Effective Amendment No. 162).
(22) Amended
and Restated Designation of Classes effective as of February 4, 2010 is incorporated herein by reference to Post-Effective Amendment No. 162.
(23) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of May 6, 2010 is incorporated herein by reference to Post-Effective Amendment No. 171
as filed with the SEC on June 4, 2010 (Post-Effective Amendment No. 171).
(24) Amended and Restated
Designation of Classes effective as of May 6, 2010 is incorporated herein by reference to Post-Effective Amendment No. 171.
(25) Amended and Restated Designation of Series of Shares of Beneficial Interests in the Trust effective as of May 6, 2010 is incorporated herein by reference to Post-Effective Amendment No. 172
as filed with the SEC on June 16, 2010 (Post-Effective Amendment No. 172).
(26) Amended and Restated
Designation of Classes effective as of May 6, 2010 is incorporated herein by reference to Post-Effective Amendment No. 172.
(27) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of June 15, 2010 is incorporated herein by reference to Post-Effective Amendment
No. 173 as filed with the SEC on July 28, 2010 (Post-Effective Amendment No. 173).
(28) Amended and
Restated Designation of Classes effective as of June 15, 2010 is incorporated herein by reference to Post-Effective Amendment No. 173.
(29) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust is incorporated herein by reference to Post-Effective Amendment No. 179 as filed with the SEC on
December 29, 2010 (Post-Effective Amendment No. 179).
(30) Amended and Restated Designation of Classes
effective as of November 4, 2010 is incorporated herein by reference to Exhibit 1(bb) to the Registration Statement on Form N-14 of Legg Mason Partners Equity Trust as filed with the SEC on November 19, 2010.
(31) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of January 17, 2012 is
incorporated herein by reference to Post-Effective Amendment No. 218 as filed with the SEC on January 25, 2012 (Post-Effective Amendment No. 218).
(32) Amended and Restated Designation of Classes effective as of January 17, 2012 is incorporated herein by reference to Post-Effective Amendment No. 218.
(33) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of April 13, 2012 is
incorporated herein by reference to Post-Effective Amendment No. 230 as filed with the SEC on April 13, 2012 (Post-Effective Amendment No. 230).
- 3 -
(34) Amended and Restated Designation of Classes effective as of April 13, 2012 is
incorporated herein by reference to Post-Effective Amendment No. 230.
(35) Amended and Restated Designation of Classes
effective as of August 1, 2012 is incorporated herein by reference to Post-Effective Amendment No. 243 as filed with the SEC on August 23, 2012.
(36) Amended and Restated Designation of Series of Shares of Beneficial Interest in the Trust effective as of September 12, 2012 is incorporated herein by reference to Post-Effective Amendment
No. 246 as filed with the SEC on September 12, 2012 (Post-Effective Amendment No. 246).
(37)
Amended and Restated Designation of Classes effective as of September 12, 2012 is incorporated herein by reference to Post-Effective Amendment No. 246.
(38) Amended and Restated Designation of Series effective as of October 1, 2012 is incorporated herein by reference to Post-Effective Amendment No. 249 as filed with the SEC on November 30,
2012 (Post-Effective Amendment No. 249).
(39) Amended and Restated Designation of Series dated
November 28, 2012 is incorporated herein by reference to Post-Effective Amendment No. 249.
(40) Amended and Restated
Designation of Classes dated November 28, 2012 is incorporated herein by reference to Post-Effective Amendment No. 249.
(41) Amended and Restated Designation of Classes dated January 1, 2013 is incorporated herein by reference to Post-Effective Amendment No. 255 as filed with the SEC on December 12, 2012.
(42) Amended and Restated Designation of Classes dated February 6, 2013 is incorporated herein by reference to
Post-Effective Amendment No. 257 as filed with the SEC on February 22, 2013 (Post-Effective Amendment No. 257).
(b)(1) The Registrants By-Laws dated October 4, 2006 are incorporated herein by reference to Post-Effective Amendment No. 70.
(2) The Registrants By-Laws dated October 4, 2006 as amended and restated as of August 18, 2011 are
incorporated herein by reference to Post-Effective Amendment No. 213.
(c) Not Applicable.
(d) (1) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Aggressive Growth Fund (formerly
known as Legg Mason Partners Aggressive Growth Fund), and Legg Mason Partners Fund Advisor, LLC (LMPFA) is incorporated herein by reference to Post-Effective Amendment No. 78 as filed with the SEC on December 14, 2007
(Post-Effective Amendment No. 78).
(2) Form of Management Agreement between the Registrant, on behalf of Legg
Mason ClearBridge Tactical Dividend Income Fund (formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(3) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Dividend Strategy Fund (formerly known as
Legg Mason Partners Dividend Strategy Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(4) Form of Management Agreement between the Registrant, on behalf of Legg Mason Esemplia Emerging Markets Equity Fund (formerly known as Legg Mason Partners Emerging Markets Equity Fund), and LMPFA is
incorporated herein by reference to Post-Effective Amendment No. 78.
(5) Form of Management Agreement between the
Registrant, on behalf of Legg Mason Investment Counsel Financial Services Fund (formerly known as Legg Mason Barrett Financial Services Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(6) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Fundamental All Cap Value Fund (formerly
known as Legg Mason ClearBridge Fundamental Value Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(7) Form of Management Agreement between the Registrant, on behalf of Legg Mason Global Currents International All Cap Opportunity Fund (formerly known as Legg Mason Partners International All Cap
Opportunity Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
- 4 -
(8) Form of Management Agreement between the Registrant, on behalf of Legg Mason Capital
Management All Cap Fund (formerly known as Legg Mason Partners All Cap Fund), and Legg Mason Capital Management Inc. (LMCM) is incorporated herein by reference to Post-Effective Amendment No. 73 as filed with the SEC on
August 27, 2007 (Post-Effective Amendment No. 73).
(9) Form of Management Agreement between the
Registrant, on behalf of Legg Mason ClearBridge Small Cap Value Fund (formerly known as Legg Mason Partners Small Cap Value Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(10) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Appreciation Fund (formerly known as Legg
Mason Partners Appreciation Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(11)
Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Equity Income Builder Fund (formerly known as Legg Mason ClearBridge Capital and Income Fund), and LMPFA is incorporated herein by reference to Post-Effective
Amendment No. 78.
(12) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Capital
Fund (formerly known as Legg Mason Partners Capital Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(13) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Equity Fund (formerly known as Legg Mason Partners Equity Fund), and LMPFA is incorporated herein by reference
to Post-Effective Amendment No. 78.
(14) Form of Management Agreement between the Registrant, on behalf of Legg Mason
Batterymarch Global Equity Fund (formerly known as Legg Mason Partners Global Equity Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 73.
(15) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Large Cap Value Fund (formerly known as Legg
Mason ClearBridge Investors Value Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(16) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Large Cap Growth Fund (formerly known as
Legg Mason Partners Large Cap Growth Fund) and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(17) Form of Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Allocation 100% (formerly known as Legg Mason Partners Lifestyle Allocation 100%), and LMPFA is incorporated
herein by reference to Post-Effective Amendment No. 73.
(18) Form of Amended Management Agreement between the Registrant,
on behalf of Legg Mason Lifestyle Allocation 100% (formerly known as Legg Mason Partners Lifestyle Allocation 100%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95 as filed with the SEC on April 4, 2008
(Post-Effective Amendment No. 95).
(19) Form of Management Agreement between the Registrant, on behalf of
Legg Mason Lifestyle Allocation 30% (formerly known as Legg Mason Partners Lifestyle Allocation 30%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(20) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Allocation 30% (formerly known as Legg
Mason Partners Lifestyle Allocation 30%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(21) Form of Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Allocation 50% (formerly known as Legg Mason
Partners Lifestyle Allocation 50%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(22) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Allocation 50% (formerly known as Legg
Mason Partners Lifestyle Allocation 50%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
- 5 -
(23) Form of Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle
Allocation 70% (formerly known as Legg Mason Partners Lifestyle Allocation 70%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(24) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Allocation 70% (formerly known as Legg Mason Partners Lifestyle Allocation 70%), and LMPFA is
incorporated herein by reference to Post-Effective Amendment No. 95.
(25) Form of Management Agreement between the
Registrant, on behalf of Legg Mason Lifestyle Allocation 85% (formerly known as Legg Mason Partners Lifestyle Allocation 85%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(26) Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Allocation 85% (formerly known as Legg
Mason Partners Lifestyle Allocation 85%), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 95.
(27) Form of Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Income Fund (formerly known as Legg Mason
Partners Lifestyle Income Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(28)
Form of Amended Management Agreement between the Registrant, on behalf of Legg Mason Lifestyle Income Fund (formerly known as Legg Mason Partners Lifestyle Income Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment
No. 95.
(29) Form of Management Agreement between the Registrant, on behalf of Legg Mason ClearBridge Mid Cap Core Fund
(formerly known as Legg Mason Partners Mid Cap Core Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(30) Form of Management Agreement between the Registrant, on behalf of Legg Mason Batterymarch S&P 500 Index Fund (formerly known as Legg Mason Partners S&P 500 Index Fund), and LMPFA is
incorporated herein by reference to Post-Effective Amendment No. 78.
(31) Form of Management Agreement between the
Registrant, on behalf of Legg Mason ClearBridge Small Cap Growth Fund (formerly known as Legg Mason Partners Small Cap Growth Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(32) Form of Management Agreement between the Registrant, on behalf of Legg Mason Investment Counsel Social Awareness Fund (formerly known
as Legg Mason Partners Social Awareness Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 78.
(33) Form of Management Agreement between the Registrant, on behalf of Legg Mason Batterymarch U.S. Large Cap Equity Fund (formerly known as Legg Mason Partners U.S. Large Cap Equity Fund), and LMPFA is
incorporated herein by reference from Post-Effective Amendment No. 87.
(34) Form of Management Agreement between the
Registrant, on behalf of Legg Mason Target Retirement 2015 (formerly known as Legg Mason Partners Target Retirement 2015), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120 as filed with the SEC on
August 28, 2008 (Post-Effective Amendment No. 120).
(35) Form of Management Agreement between the
Registrant, on behalf of Legg Mason Target Retirement 2020 (formerly known as Legg Mason Partners Target Retirement 2020), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(36) Form of Management Agreement between the Registrant, on behalf of Legg Mason Target Retirement 2025 (formerly known as Legg Mason
Partners Target Retirement 2025), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(37)
Form of Management Agreement between the Registrant, on behalf of Legg Mason Target Retirement 2030 (formerly known as Legg Mason Partners Target Retirement 2030), and LMPFA is incorporated herein by reference to Post-Effective Amendment
No. 120.
(38) Form of Management Agreement between the Registrant, on behalf of Legg Mason Target Retirement 2035
(formerly known as Legg Mason Partners Target Retirement 2035), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
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(39) Form of Management Agreement between the Registrant, on behalf of Legg Mason Target
Retirement 2040 (formerly known as Legg Mason Partners Target Retirement 2040), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(40) Form of Management Agreement between the Registrant, on behalf of Legg Mason Target Retirement 2045 (formerly known as Legg Mason Partners Target Retirement 2045), and LMPFA is incorporated herein by
reference to Post-Effective Amendment No. 120.
(41) Form of Management Agreement between the Registrant, on behalf of
Legg Mason Target Retirement 2050 (formerly known as Legg Mason Partners Target Retirement 2050), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(42) Form of Management Agreement between the Registrant, on behalf of Legg Mason Target Retirement Fund (formerly known as Legg Mason
Partners Target Retirement Fund), and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 120.
(43)
Form of Management Agreement between the Registrant, on behalf of Legg Mason Permal Tactical Allocation Fund, and LMPFA is incorporated herein by reference to Post-Effective Amendment No. 141 as filed with the SEC on April 9, 2009
(Post-Effective Amendment No. 141).
(44) Form of Management Agreement between the Registrant, on behalf of
Legg Mason ClearBridge Mid Cap Growth Fund, and LMPFA, is incorporated herein by reference to Post-Effective Amendment No. 177 as filed with the SEC on August 31, 2010 (Post-Effective Amendment No. 177).
(45) Form of Management Agreement between the Registrant, on behalf of Legg Mason Global Currents International Small Cap Opportunity
Fund, and LMPFA, is incorporated herein by reference to Post-Effective Amendment No. 178 as filed with the SEC on September 29, 2010 (Post-Effective Amendment No. 178).
(46) Form of Management Agreement between the Registrant, on behalf of Legg Mason Dynamic Multi-Strategy Fund, and LMPFA, is incorporated
herein by reference to Post-Effective Amendment No. 238 as filed with the SEC on June 25, 2012 (Post-Effective Amendment No. 238).
(47) Form of Management Agreement between the Registrant, on behalf of ClearBridge Select Fund, and LMPFA, is incorporated herein by reference to Post-Effective Amendment No. 249.
(48) Form of Management Agreement between the Registrant, on behalf of Legg Mason Batterymarch Managed Volatility International Dividend
Fund, and LMPFA, is incorporated herein by reference to Post-Effective Amendment No. 259 as filed with the SEC on February 25, 2013 (Post-Effective Amendment No. 259).
(49) Form of Management Agreement between the Registrant, on behalf of Legg Mason Batterymarch Managed Volatility Global Dividend Fund,
and LMPFA, is incorporated herein by reference to Post-Effective Amendment No. 260 as filed with the SEC on February 25, 2013 (Post-Effective Amendment No. 260).
(50) Form of Subadvisory Agreement between LMPFA and ClearBridge Investments, LLC (formerly known as ClearBridge Advisors, LLC)
(ClearBridge), with respect to Legg Mason ClearBridge Aggressive Growth Fund (formerly known as Legg Mason Partners Aggressive Growth Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(51) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Tactical Dividend Income Fund
(formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(52) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Dividend Strategy Fund (formerly known as Legg Mason Partners Dividend Strategy Fund), is
incorporated herein by reference to Post-Effective Amendment No. 78.
(53) Form of Subadvisory Agreement between LMPFA and
Legg Mason International Equities Limited (LMIE), with respect to Legg Mason Esemplia Emerging Markets Equity Fund (formerly known as Legg Mason Partners Emerging Markets Equity Fund), is incorporated herein by reference to
Post-Effective Amendment No. 78.
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(54) Form of Subadvisory Agreement between LMPFA and Legg Mason Investment Counsel, LLC
(LMIC), with respect to Legg Mason Investment Counsel Financial Services Fund (formerly known as Legg Mason Barrett Financial Services Fund) is incorporated herein by reference to Post-Effective Amendment No. 73.
(55) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Fundamental All Cap Value Fund
(formerly known as Legg Mason ClearBridge Fundamental Value Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(56) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Small Cap Value Fund (formerly known as Legg Mason Partners Small Cap Value Fund), is incorporated
herein by reference to Post-Effective Amendment No. 78.
(57) Form of Subadvisory Agreement between LMPFA and ClearBridge,
with respect to Legg Mason ClearBridge Appreciation Fund (formerly known as Legg Mason Partners Appreciation Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(58) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Equity Income Builder Fund
(formerly known as Legg Mason ClearBridge Capital and Income Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(59) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Capital Fund (formerly known as Legg Mason Partners Capital Fund), is incorporated herein by
reference to Post-Effective Amendment No. 78.
(60) Form of Subadvisory Agreement between LMPFA and ClearBridge, with
respect to Legg Mason ClearBridge Equity Fund (formerly known as Legg Mason Partners Equity Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(61) Form of Subadvisory Agreement between LMPFA and Batterymarch Financial Management, Inc. (Batterymarch), with respect to Legg Mason Batterymarch Global Equity Fund (formerly known as Legg
Mason Partners Global Equity Fund), is incorporated herein by reference to Post-Effective Amendment No. 73.
(62) Form of
Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Large Cap Value Fund (formerly known as Legg Mason ClearBridge Investors Value Fund), is incorporated herein by reference to Post-Effective Amendment
No. 78.
(63) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Large
Cap Growth Fund (formerly known as Legg Mason Partners Large Cap Growth Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(64) Form of Subadvisory Agreement between LMPFA and Legg Mason Global Asset Allocation, LLC (LMGAA), with respect to Legg Mason Lifestyle Allocation 100% (formerly known as Legg Mason
Partners Lifestyle Allocation 100%), is incorporated herein by reference to Post-Effective Amendment No. 74 as filed with the SEC on November 1, 2007 (Post-Effective Amendment No. 74).
(65) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Lifestyle Allocation 30% (formerly known as Legg
Mason Partners Lifestyle Allocation 30%), is incorporated herein by reference to Post-Effective Amendment No. 74.
(66)
Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Lifestyle Allocation 50% (formerly known as Legg Mason Partners Lifestyle Allocation 50%), is incorporated herein by reference to Post-Effective Amendment No. 74.
(67) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Lifestyle Allocation 70% (formerly
known as Legg Mason Partners Lifestyle Allocation 70%), is incorporated herein by reference to Post-Effective Amendment No. 74.
(68) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Lifestyle Allocation 85% (formerly known as Legg Mason Partners Lifestyle Allocation 85%), is incorporated herein by
reference to Post-Effective Amendment No. 74.
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(69) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason
Lifestyle Income Fund (formerly known as Legg Mason Partners Lifestyle Income Fund), is incorporated herein by reference to Post-Effective Amendment No. 74.
(70) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Mid Cap Core Fund (formerly known as Legg Mason Partners Mid Cap Core Fund), is incorporated herein
by reference to Post-Effective Amendment No. 78.
(71) Form of Subadvisory Agreement between LMPFA and Batterymarch, with
respect to Legg Mason Batterymarch S&P 500 Index Fund (formerly known as Legg Mason Partners S&P 500 Index Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(72) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Small Cap Growth Fund (formerly
known as Legg Mason Partners Small Cap Growth Fund), is incorporated herein by reference to Post-Effective Amendment No. 78.
(73) Form of Subadvisory Agreement between LMPFA and LMIC, with respect to Legg Mason Investment Counsel Social Awareness Fund (formerly known as Legg Mason Partners Social Awareness Fund), is
incorporated herein by reference to Post-Effective Amendment No. 73.
(74) Form of Subadvisory Agreement between LMPFA and
Batterymarch, with respect to Legg Mason Batterymarch U.S. Large Cap Equity Fund (formerly known as Legg Mason Partners U.S. Large Cap Equity Fund), is incorporated herein by reference to Post-Effective Amendment No. 87.
(75) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2015 (formerly known as Legg
Mason Partners Target Retirement 2015), is incorporated herein by reference to Post-Effective Amendment No. 120.
(76)
Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2020 (formerly known as Legg Mason Partners Target Retirement 2020), is incorporated herein by reference to Post-Effective Amendment No. 120.
(77) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2025 (formerly known
as Legg Mason Partners Target Retirement 2025), is incorporated herein by reference to Post-Effective Amendment No. 120.
(78) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2030 (formerly known as Legg
Mason Partners Target Retirement 2030), is incorporated herein by reference to Post-Effective Amendment No. 120.
(79)
Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2035 (formerly known as Legg Mason Partners Target Retirement 2035), is incorporated herein by reference to Post-Effective Amendment No. 120.
(80) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2040 (formerly known
as Legg Mason Partners Target Retirement 2040), is incorporated herein by reference to Post-Effective Amendment No. 120.
(81) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2045 (formerly known as Legg
Mason Partners Target Retirement 2045), is incorporated herein by reference to Post-Effective Amendment No. 120.
(82)
Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement 2050 (formerly known as Legg Mason Partners Target Retirement 2050), is incorporated herein by reference to Post-Effective Amendment No. 120.
(83) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Target Retirement Fund (formerly known
as Legg Mason Partners Target Retirement Fund), is incorporated herein by reference to Post-Effective Amendment No. 120.
(84) Form of Subadvisory Agreement between LMPFA and Global Currents Investment Management, LLC (GCIM), with respect to Legg
Mason Global Currents International All Cap Opportunity Fund (formerly known as Legg Mason Partners International All Cap Opportunity Fund), is incorporated herein by reference to Post-Effective Amendment No. 126 as filed with the SEC on
November 26, 2008.
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(85) Form of Subadvisory Agreement between LMPFA and Permal Asset Management Inc.
(Permal), with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(86) Form of Subadvisory Agreement between LMPFA and LMGAA, with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(87) Form of Sub-Administration Agreement between LMCM and LMPFA, with respect to Legg Mason Capital Management All Cap Fund
(formerly known as Legg Mason Partners All Cap Fund), is incorporated herein by reference to Post-Effective Amendment No. 76.
(88) Form of Subadvisory Agreement between LMPFA and ClearBridge, with respect to Legg Mason ClearBridge Mid Cap Growth Fund, is incorporated herein by reference to Post-Effective Amendment No. 177.
(89) Form of Subadvisory Agreement between LMPFA and GCIM, with respect to Legg Mason Global Currents International Small Cap
Opportunity Fund, is incorporated herein by reference to Post-Effective Amendment No. 178.
(90) Form of Subadvisory
Agreement between LMPFA and LMIC, with respect to Legg Mason Investment Counsel Financial Services Fund (formerly known as Legg Mason Barrett Financial Services Fund), is incorporated herein by reference to Post-Effective Amendment No. 175 as
filed with the SEC on August 25, 2010 (Post-Effective Amendment No. 175).
(91) Form of Subadvisory
Agreement between LMPFA and Western Asset Management Company (WAM), regarding Legg Mason Batterymarch Global Equity Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215 as filed
with the SEC on December 16, 2011 (Post-Effective Amendment No. 215).
(92) Form of Subadvisory Agreement
between LMPFA and WAM, regarding Legg Mason Batterymarch U.S. Large Cap Equity Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(93) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Batterymarch S&P 500 Index Fund, dated November 4,
2010, is incorporated herein by reference to Post-Effective Amendment No. 215.
(94) Form of Subadvisory Agreement between
LMPFA and WAM, regarding Legg Mason ClearBridge Aggressive Growth Fund, dated November 4, 2010, is incorporated herein by reference to Post-Effective Amendment No. 215.
(95) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Appreciation Fund, dated February 2, 2011,
is incorporated herein by reference to Post-Effective Amendment No. 215.
(96) Form of Subadvisory Agreement between LMPFA
and WAM, regarding Legg Mason ClearBridge Capital Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(97) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Tactical Dividend Income Fund (formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), dated
February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(98) Form of Subadvisory
Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Dividend Strategy Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(99) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Equity Fund, dated February 2, 2011, is
incorporated herein by reference to Post-Effective Amendment No. 215.
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(100) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge
Equity Income Builder Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(101) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Fundamental All Cap Value Fund, dated November 4, 2010, is incorporated herein by reference to
Post-Effective Amendment No. 215.
(102) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason
ClearBridge Large Cap Growth Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(103) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Large Cap Value Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective
Amendment No. 215.
(104) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Mid Cap
Core Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(105)
Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Mid Cap Growth Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(106) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason ClearBridge Small Cap Growth Fund, dated February 2,
2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(107) Form of Subadvisory Agreement
between LMPFA and WAM, regarding Legg Mason ClearBridge Small Cap Value Fund, dated November 4, 2010, is incorporated herein by reference to Post-Effective Amendment No. 215.
(108) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Esemplia Emerging Markets Equity Fund, dated
February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(109) Form of Subadvisory
Agreement between LMPFA and WAM, regarding Legg Mason Global Currents International All Cap Opportunity Fund, dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(110) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Global Currents International Small Cap Opportunity Fund,
dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(111) Form of
Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Lifestyle Allocation 50%, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(112) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Lifestyle Allocation 70%, dated May 5, 2011, is
incorporated herein by reference to Post-Effective Amendment No. 215.
(113) Form of Subadvisory Agreement between LMPFA
and WAM, regarding Legg Mason Lifestyle Allocation 85%, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(114) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Lifestyle Allocation 100%, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment
No. 215.
(115) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Permal Tactical Allocation Fund,
dated February 2, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
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(116) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Target
Retirement 2015, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(117)
Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Target Retirement 2020, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(118) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Target Retirement 2025, dated May 5, 2011, is
incorporated herein by reference to Post-Effective Amendment No. 215.
(119) Form of Subadvisory Agreement between LMPFA
and WAM, regarding Legg Mason Target Retirement 2030, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(120) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Target Retirement 2035, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment
No. 215.
(121) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Target Retirement 2040, dated
May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(122) Form of Subadvisory
Agreement between LMPFA and WAM, regarding Legg Mason Target Retirement 2045, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(123) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Target Retirement 2050, dated May 5, 2011, is
incorporated herein by reference to Post-Effective Amendment No. 215.
(124) Form of Subadvisory Agreement between LMPFA
and WAM, regarding Legg Mason Target Retirement Fund, dated May 5, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(125) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Dynamic Multi-Strategy Fund is incorporated herein by reference to Post-Effective Amendment No. 238.
(126) Form of Subadvisory Agreement between LMPFA and LMGAA, regarding Legg Mason Dynamic Multi-Strategy Fund is incorporated herein by
reference to Post-Effective Amendment No. 238.
(127) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg
Mason Capital Management All Cap Fund, is incorporated herein by reference to Post-Effective Amendment No. 247 as filed with the SEC on September 26, 2012.
(128) Form of Subadvisory Agreement between LMPFA and WAM, regarding ClearBridge Select Fund is incorporated herein by reference to Post-Effective Amendment No. 249.
(129) Form of Subadvisory Agreement between LMPFA and ClearBridge, regarding ClearBridge Select Fund is incorporated herein by reference
to Post-Effective Amendment No. 249.
(130) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason
Batterymarch Managed Volatility International Dividend Fund is incorporated herein by reference to Post-Effective Amendment No. 259.
(131) Form of Subadvisory Agreement between LMPFA and Batterymarch, regarding Legg Mason Batterymarch Managed Volatility International Dividend Fund is incorporated herein by reference to Post-Effective
Amendment No. 259.
(132) Form of Subadvisory Agreement between LMPFA and WAM, regarding Legg Mason Batterymarch Managed
Volatility Global Dividend Fund is incorporated herein by reference to Post-Effective Amendment No. 260.
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(133) Form of Subadvisory Agreement between LMPFA and Batterymarch, regarding Legg Mason
Batterymarch Managed Volatility Global Dividend Fund is incorporated herein by reference to Post-Effective Amendment No. 260.
(e) (1) Form of Distribution Agreement with Citigroup Global Markets Inc. (CGMI) is incorporated herein by reference to Post-Effective Amendment No. 30 as filed with the SEC on
August 16, 2000 (Post-Effective Amendment No. 30).
(2) Form of Distribution Agreement with PFS
Distributors, Inc. is incorporated herein by reference to Post-Effective Amendment No. 30.
(3) Form of Amendment to the
Distribution Agreement with CGMI dated as of December 1, 2005, is incorporated herein by reference to Post-Effective Amendment No. 56 as filed with the SEC on January 27, 2006 (Post-Effective Amendment No. 56).
(4) Form of Amendment of Distribution Agreement and Assumption of Duties and Responsibilities, among the Registrant, PFS
Distributors, Inc. and PFS Investments, Inc. (PFS), dated as of December 1, 2005, is incorporated herein by reference to Post-Effective Amendment No. 56.
(5) Letter Agreement amending the Distribution Agreements with CGMI dated April 10, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
(6) Letter Agreement amending the Distribution Agreements with PFS dated April 6, 2007, is incorporated herein by reference to
Post-Effective Amendment No. 76.
(7) Form of Distribution Agreement with Legg Mason Investor Services, LLC
(LMIS) is incorporated herein by reference to Post-Effective Amendment No. 128, as filed with the SEC on December 15, 2008.
(8) Form of Distribution Agreement with LMIS, with respect to Legg Mason Permal Tactical Allocation Fund, is incorporated herein by reference to Post-Effective Amendment No. 141.
(9) Form of Distribution Agreement with LMIS, with respect to Legg Mason ClearBridge Mid Cap Growth Fund, is incorporated herein by
reference to Post-Effective Amendment No. 177.
(10) Form of Distribution Agreement with LMIS, with respect to Legg Mason
Global Currents International Small Cap Opportunity Fund, is incorporated herein by reference to Post-Effective Amendment No. 178.
(11) Form of Distribution Agreement with LMIS dated August 5, 2010 is incorporated herein by reference to Post-Effective Amendment No. 218.
(f) (1) Emeritus Retirement Plan relating to certain funds, established effective as of January 1, 2007, is incorporated herein
by reference to Post-Effective Amendment No. 60 as filed with the SEC on December 5, 2006 (Post-Effective Amendment No. 60).
(2) Amended and Restated Trustee Retirement Plan relating to certain funds dated as of January 1, 2005 (the General Retirement Plan), is incorporated herein by reference to Post-Effective
Amendment No. 61 as filed with the SEC on January 8, 2007 (Post-Effective Amendment No. 61).
(3)
Legg Mason Investment Series (f/k/a Smith Barney Investment Series) Amended and Restated Trustees Retirement Plan dated as of January 1, 2005, is incorporated herein by reference to Post-Effective Amendment No. 61.
(4) Amendment to the General Retirement Plan and the Legg Mason Partners Investment Series Amended and Restated Trustees Retirement Plan
is incorporated herein by reference to Post-Effective Amendment No. 61.
(5) Amended and Restated Emeritus Retirement Plan
relating to certain funds, established effective as of January 1, 2007, is incorporated herein by reference to Post-Effective Amendment No. 61.
(g) (1) Custodian Services Agreement with State Street Bank and Trust Company (State Street), dated October 5, 2012, is incorporated herein by reference to Post-Effective Amendment
No. 249.
(2) Fund Accounting Services Agreement with State Street, dated October 5, 2012, is incorporated herein by
reference to Post-Effective Amendment No. 249.
- 13 -
(3) Letter Agreement amending the Custodian Services Agreement and Fund Accounting Services
Agreement with State Street, effective as of November 30, 2012, is incorporated herein by reference to Post-Effective Amendment No. 249.
(4) Form of Letter Agreement amending the Custodian Services Agreement and Fund Accounting Services Agreement with State Street is incorporated herein by reference to Post-Effective Amendment
No. 259.
(h) (1) Transfer Agency and Services Agreement, dated January 1, 2006, between the Registrant and BNY
Mellon Investment Servicing (US) Inc. (BNY) (formerly PNC Global Investment Servicing (U.S.) Inc.) is incorporated herein by reference to Post-Effective Amendment No. 56.
(2) Co-Transfer Agency and Services Agreement, dated April 1, 2009, between the Registrant and BNY incorporated herein by reference
to Post-Effective Amendment No. 147 as filed with the SEC on July 29, 2009.
(3) Form of Letter Agreement amending
the Co-Transfer Agency and Services Agreement, dated April 1, 2009, between the Registrant and BNY is incorporated herein by reference to Post-Effective Amendment No. 238.
(4) Transfer Agency and Services Agreement, dated April 4, 2009, between each series of the Registrant and Boston Financial Data
Services, Inc. is incorporated herein by reference to Post-Effective Amendment No. 141.
(5) Form of Letter Agreement
amending the Transfer Agency and Services Agreement, dated April 4, 2009, between each series of the Registrant and Boston Financial Data Services, Inc. is incorporated herein by reference to Post-Effective Amendment No. 238.
(6) Form of Letter Agreement amending the Transfer Agency and Services Agreement, dated April 4, 2009, between each series of the
Registrant and Boston Financial Data Services, Inc., dated November 28, 2012 is incorporated herein by reference to Post-Effective Amendment No. 249.
(7) Form of Letter Agreement amending the Transfer Agency and Services Agreement, dated April 4, 2009, between each series of the Registrant and Boston Financial Data Services, Inc. is incorporated
herein by reference to Post-Effective Amendment No. 259.
(8) Form of License Agreement between the Registrant and Legg
Mason Properties, Inc. is incorporated herein by reference to Post-Effective Amendment No. 58 as filed with the SEC on April 28, 2006 (Post-Effective Amendment No. 58).
(9) License Agreement between the Registrant and Citigroup Inc. dated December 1, 2005 is incorporated herein by reference to
Post-Effective Amendment No. 58.
(10) Form of Fee Waiver and Expense Reimbursement Agreement is incorporated herein by
reference to Post-Effective Amendment No. 60.
(11) Letter Agreement amending the Transfer Agency and Services Agreement
with BNY, dated April 9, 2007, is incorporated herein by reference to Post-Effective Amendment No. 76.
(12) Form of
Fee Waiver and Expense Reimbursement Agreement with respect to Legg Mason Lifestyle Allocation 100% (formerly known as Legg Mason Partners Lifestyle Allocation 100%), Legg Mason Lifestyle Allocation 85% (formerly known as Legg Mason Partners
Lifestyle Allocation 85%), Legg Mason Lifestyle Allocation 70% (formerly known as Legg Mason Partners Lifestyle Allocation 70%), Legg Mason Lifestyle Allocation 50% (formerly known as Legg Mason Partners Lifestyle Allocation 50%), Legg Mason
Lifestyle Allocation 30% (formerly known as Legg Mason Partners Lifestyle Allocation 30%) and Legg Mason Lifestyle Income Fund (formerly known as Legg Mason Partners Lifestyle Income Fund) is incorporated herein by reference to Post-Effective
Amendment No. 95.
(13) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target
Retirement 2015 (formerly known as Legg Mason Partners Target Retirement 2015), is incorporated herein by reference to Post-Effective Amendment No. 120.
(14) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target Retirement 2020 (formerly known as Legg Mason Partners Target Retirement 2020), is incorporated herein by
reference to Post-Effective Amendment No. 120.
- 14 -
(15) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason
Target Retirement 2025 (formerly known as Legg Mason Partners Target Retirement 2025), is incorporated herein by reference to Post-Effective Amendment No. 120.
(16) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target Retirement 2030 (formerly known as Legg Mason Partners Target Retirement 2030), is incorporated herein by
reference to Post-Effective Amendment No. 120.
(17) Form of Fee Waiver and Expense Reimbursement Agreement, with respect
to Legg Mason Target Retirement 2035 (formerly known as Legg Mason Partners Target Retirement 2035), is incorporated herein by reference to Post-Effective Amendment No. 120.
(18) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target Retirement 2040 (formerly known as Legg
Mason Partners Target Retirement 2040), is incorporated herein by reference to Post-Effective Amendment No. 120.
(19)
Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target Retirement 2045 (formerly known as Legg Mason Partners Target Retirement 2045), is incorporated herein by reference to Post-Effective Amendment No. 120.
(20) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target Retirement 2050 (formerly known
as Legg Mason Partners Target Retirement 2050), is incorporated herein by reference to Post-Effective Amendment No. 120.
(21) Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Target Retirement Fund (formerly known as Legg
Mason Partners Target Retirement Fund), is incorporated herein by reference to Post-Effective Amendment No. 120.
(22)
Form of Fee Waiver and Expense Reimbursement Agreement, with respect to Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(23) Fee Waiver and Expense Reimbursement Resolutions adopted by the Board of Trustees are incorporated herein by reference to
Post-Effective Amendment No. 198 filed on April 26, 2011.
(24) Fee Waiver and Expense Reimbursement Resolutions
adopted by the Board of Trustees with respect to Legg Mason Dynamic Multi-Strategy Fund are incorporated herein by reference to Post-Effective Amendment No. 238.
(25) Fee Waiver and Expense Reimbursement Resolutions adopted by the Board of Trustees with respect to ClearBridge Select Fund are incorporated herein by reference to Post-Effective Amendment
No. 249.
(26) Fee Waiver and Expense Reimbursement Resolutions adopted by the Board of Trustees are incorporated herein
by reference to Post-Effective Amendment No. 259.
(i) (1) Opinion of Counsel regarding legality of shares being
registered is incorporated herein by reference to Pre-Effective Amendment No. 1 filed on December 6, 1991 (Pre-Effective Amendment No. 1).
(2) Legal Counsels consent is incorporated herein by reference to Post-Effective Amendment No. 24 as filed with the SEC on March 30, 1999 (Post-Effective Amendment
No. 24).
(3) Opinion and Consent of Counsel regarding the legality of shares being registered is incorporated
herein by reference to Post-Effective Amendment No. 70.
(4) Opinion of Willkie Farr & Gallagher LLP regarding
legality of Class FI and Class R shares of Legg Mason Lifestyle Allocation 100% (formerly known as Legg Mason Partners Lifestyle Allocation 100%), Legg Mason Lifestyle Allocation 85% (formerly known as Legg Mason Partners Lifestyle Allocation 85%),
Legg Mason Lifestyle Allocation 70% (formerly known as Legg Mason Partners Lifestyle Allocation 70%), Legg Mason Lifestyle Allocation 50% (formerly known as Legg Mason Partners Lifestyle Allocation 50%), Legg Mason Lifestyle Allocation 30% (formerly
known as Legg Mason Partners Lifestyle Allocation 30%) and Legg Mason Lifestyle Income Fund (formerly known as Legg Mason Partners Lifestyle Income Fund) is incorporated by reference to Post-Effective Amendment No. 75 filed on November 19,
2007 (Post-Effective Amendment No. 75).
- 15 -
(5) Opinion of Venable LLP regarding legality of Class FI and Class R shares of Legg Mason
Lifestyle Allocation 100% (formerly known as Legg Mason Partners Lifestyle Allocation 100%), Legg Mason Lifestyle Allocation 85% (formerly known as Legg Mason Partners Lifestyle Allocation 85%), Legg Mason Lifestyle Allocation 70% (formerly known as
Legg Mason Partners Lifestyle Allocation 70%), Legg Mason Lifestyle Allocation 50% (formerly known as Legg Mason Partners Lifestyle Allocation 50%), Legg Mason Lifestyle Allocation 30% (formerly known as Legg Mason Partners Lifestyle Allocation 30%)
and Legg Mason Lifestyle Income Fund (formerly known as Legg Mason Partners Lifestyle Income Fund) is incorporated by reference to Post-Effective Amendment No. 75.
(6) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class FI and Class R Shares of Legg Mason ClearBridge Fundamental All Cap Value Fund (formerly Legg Mason Partners Fundamental
Value Fund) and Legg Mason ClearBridge Small Cap Value Fund (formerly Legg Mason Partners Small Cap Value Fund) is incorporated by reference to Post-Effective Amendment No. 76.
(7) Opinion of Venable LLP regarding legality of Class FI and Class R Shares of Legg Mason ClearBridge Fundamental All Cap Value Fund
(formerly Legg Mason Partners Fundamental Value Fund) and Legg Mason ClearBridge Small Cap Value Fund (formerly Legg Mason Partners Small Cap Value Fund) is incorporated by reference to Post-Effective Amendment No. 76.
(8) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class FI and Class R shares of Legg Mason ClearBridge Tactical
Dividend Income Fund (formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), Legg Mason ClearBridge Dividend Strategy Fund (formerly known as Legg Mason Partners Dividend Strategy Fund), Legg Mason Esemplia Emerging Markets
Equity Fund (formerly known as Legg Mason Partners Emerging Markets Equity Fund) and Legg Mason Global Currents International All Cap Opportunity Fund (formerly known as Legg Mason Partners International All Cap Opportunity Fund) is incorporated by
reference to Post-Effective Amendment No. 78.
(9) Opinion of Venable LLP regarding legality of Class FI and Class R
shares of Legg Mason ClearBridge Tactical Dividend Income Fund (formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), Legg Mason ClearBridge Dividend Strategy Fund (formerly known as Legg Mason Partners Dividend Strategy
Fund), Legg Mason Esemplia Emerging Markets Equity Fund (formerly known as Legg Mason Partners Emerging Markets Equity Fund) and Legg Mason Global Currents International All Cap Opportunity Fund (formerly known as Legg Mason Partners International
All Cap Opportunity Fund) is incorporated by reference to Post-Effective Amendment No. 78.
(10) Opinion of Willkie
Farr & Gallagher LLP regarding legality of Class FI and Class R shares of Legg Mason ClearBridge Mid Cap Core Fund (formerly known as Legg Mason Partners Mid Cap Core Fund) is incorporated by reference to Post-Effective Amendment
No. 79 as filed with the SEC on December 28, 2007 (Post-Effective Amendment No. 79).
(11) Opinion
of Venable LLP regarding legality of Class FI and Class R shares of Legg Mason ClearBridge Mid Cap Core Fund (formerly known as Legg Mason Partners Mid Cap Core Fund) is incorporated by reference to Post-Effective Amendment No. 79.
(12) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class FI and Class R shares of Legg Mason Batterymarch Global
Equity Fund (formerly known as Legg Mason Partners Global Equity Fund) is incorporated by reference to Post-Effective Amendment No. 82 as filed with the SEC on February 5, 2008 (Post-Effective Amendment No. 82).
(13) Opinion of Venable LLP regarding legality of Class FI and Class R shares of Legg Mason Batterymarch Global Equity Fund
(formerly known as Legg Mason Partners Global Equity Fund) is incorporated by reference to Post-Effective Amendment No. 82.
(14) Opinion of Willkie Farr & Gallagher LLP regarding the legality of Class A, C, FI, R, I and IS shares of Legg Mason
Batterymarch U.S. Large Cap Equity Fund (formerly known as Legg Mason Partners U.S. Large Cap Equity Fund) is incorporated herein by reference to Post-Effective Amendment No. 87.
- 16 -
(15) Opinion of Venable LLP regarding the legality of Class A, C, FI, R, I and IS
shares of Legg Mason Batterymarch U.S. Large Cap Equity Fund (formerly known as Legg Mason Partners U.S. Large Cap Equity Fund) is incorporated herein by reference to Post-Effective Amendment No. 87.
(16) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class IS shares of Legg Mason ClearBridge Appreciation Fund
(formerly known as Legg Mason Partners Appreciation Fund), Class FI and Class R Shares of Legg Mason ClearBridge Equity Income Builder Fund (formerly known as Legg Mason ClearBridge Capital and Income Fund), Class FI, Class R and Class IS shares of
Legg Mason ClearBridge Capital Fund (formerly known as Legg Mason Partners Capital Fund), Class FI and Class R shares of Legg Mason ClearBridge Equity Fund (formerly known as Legg Mason Partners Equity Fund), Class FI, Class R and Class IS shares of
Legg Mason ClearBridge Large Cap Value Fund (formerly known as Legg Mason Partners Investors Value Fund), Class IS shares of Legg Mason ClearBridge Small Cap Growth Fund (formerly Legg Mason Partners Small Cap Growth Fund) and Class FI and Class R
shares of Legg Mason Investment Counsel Social Awareness Fund (formerly known as Legg Mason Partners Social Awareness Fund) is incorporated by reference to Post-Effective Amendment No. 90 is incorporated by reference to Post-Effective Amendment
No. 90 as filed with the SEC on February 26, 2008 (Post-Effective Amendment No. 90).
(17) Opinion
of Venable LLP regarding legality of Class IS shares of Legg Mason ClearBridge Appreciation Fund (formerly known as Legg Mason Partners Appreciation Fund), Class FI and Class R Shares of Legg Mason ClearBridge Equity Income Builder Fund (formerly
known as Legg Mason ClearBridge Capital and Income Fund), Class FI, Class R and Class IS shares of Legg Mason ClearBridge Capital Fund (formerly known as Legg Mason Partners Capital Fund), Class FI and Class R shares of Legg Mason ClearBridge Equity
Fund (formerly known as Legg Mason Partners Equity Fund), Class FI, Class R and Class IS shares of Legg Mason ClearBridge Large Cap Value Fund (formerly known as Legg Mason Partners Investors Value Fund), Class IS shares of Legg Mason ClearBridge
Small Cap Growth Fund (formerly Legg Mason Partners Small Cap Growth Fund) and Class FI and Class R shares of Legg Mason Investment Counsel Social Awareness Fund (formerly known as Legg Mason Partners Social Awareness Fund) is incorporated by
reference to Post-Effective Amendment No. 90.
(18) Opinion of Willkie Farr & Gallagher LLP regarding legality of
Class IS Shares of Legg Mason ClearBridge Aggressive Growth Fund (formerly Legg Mason Partners Aggressive Growth Fund), Legg Mason ClearBridge Fundamental All Cap Value Fund (formerly Legg Mason Partners Fundamental Value Fund), Legg Mason Global
Currents International All Cap Opportunity Fund (formerly Legg Mason Partners International All Cap Opportunity Fund), Legg Mason ClearBridge Large Cap Growth Fund (formerly Legg Mason Partners Large Cap Growth Fund) and Legg Mason ClearBridge Mid
Cap Core Fund (formerly Legg Mason Partners Mid Cap Core Fund) is incorporated herein by reference to Post-Effective Amendment No. 103 as filed with the SEC on May 5, 2008 (Post-Effective Amendment No. 103).
(19) Opinion of Venable LLP regarding legality of Class IS Shares of Legg Mason ClearBridge Aggressive Growth Fund (formerly Legg Mason
Partners Aggressive Growth Fund), Legg Mason ClearBridge Fundamental All Cap Value Fund (formerly Legg Mason Partners Fundamental Value Fund), Legg Mason Global Currents International All Cap Opportunity Fund (formerly Legg Mason Partners
International All Cap Opportunity Fund), Legg Mason ClearBridge Large Cap Growth Fund (formerly Legg Mason Partners Large Cap Growth Fund) and Legg Mason ClearBridge Mid Cap Core Fund (formerly Legg Mason Partners Mid Cap Core Fund) is incorporated
herein by reference to Post-Effective Amendment No. 103.
(20) Opinion of Willkie Farr & Gallagher LLP regarding
legality of Class FI and R shares of Legg Mason Investment Counsel Financial Services Fund (formerly Legg Mason Partners Financial Services Fund) is incorporated by reference to Post-Effective Amendment No. 104 as filed with the SEC on
May 7, 2008 (Post-Effective Amendment No. 104).
(21) Opinion of Venable LLP regarding legality of Class
FI and R shares of Legg Mason Investment Counsel Financial Services Fund (formerly Legg Mason Partners Financial Services Fund) is incorporated by reference to Post-Effective Amendment No. 104.
- 17 -
(22) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class FI and
Class R shares of Legg Mason Capital Management All Cap Fund (formerly Legg Mason Partners All Cap Fund) is incorporated herein by reference to Post-Effective Amendment No. 108 as filed with the SEC on May 30, 2008 (Post-Effective
Amendment No. 108).
(23) Opinion of Venable LLP regarding legality of Class FI and Class R shares Legg Mason
Capital Management All Cap Fund (formerly Legg Mason Partners All Cap Fund) is incorporated herein by reference to Post-Effective Amendment No. 108.
(24) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class A, C, FI, R, I and IS shares of Legg Mason Target Retirement 2015 (formerly Legg Mason Partners Target Retirement
2015), Legg Mason Target Retirement 2020 (formerly Legg Mason Partners Target Retirement 2020), Legg Mason Target Retirement 2025 (formerly Legg Mason Partners Target Retirement 2025) , Legg Mason Target Retirement 2030(formerly Legg Mason Partners
Target Retirement 2030) , Legg Mason Target Retirement 2035 (formerly Legg Mason Partners Target Retirement 2035) , Legg Mason Target Retirement 2040 (formerly Legg Mason Partners Target Retirement 2040) , Legg Mason Target Retirement 2045 (formerly
Legg Mason Partners Target Retirement 2045) , Legg Mason Target Retirement 2050 (formerly Legg Mason Partners Target Retirement 2050) and Legg Mason Target Retirement Fund (formerly Legg Mason Partners Target Retirement Fund) is incorporated by
reference to Post-Effective Amendment No. 110.
(25) Opinion of Venable LLP regarding legality of Class A, C, FI, R,
I and IS shares of Legg Mason Target Retirement 2015 (formerly Legg Mason Partners Target Retirement 2015), Legg Mason Target Retirement 2020 (formerly Legg Mason Partners Target Retirement 2020), Legg Mason Target Retirement 2025 (formerly Legg
Mason Partners Target Retirement 2025) , Legg Mason Target Retirement 2030(formerly Legg Mason Partners Target Retirement 2030) , Legg Mason Target Retirement 2035 (formerly Legg Mason Partners Target Retirement 2035) , Legg Mason Target Retirement
2040 (formerly Legg Mason Partners Target Retirement 2040) , Legg Mason Target Retirement 2045 (formerly Legg Mason Partners Target Retirement 2045) , Legg Mason Target Retirement 2050 (formerly Legg Mason Partners Target Retirement 2050) and Legg
Mason Target Retirement Fund (formerly Legg Mason Partners Target Retirement Fund) is incorporated by reference to Post-Effective Amendment No. 110.
(26) Opinion of Willkie Farr & Gallagher LLP regarding the legality of Class R1 shares of Legg Mason ClearBridge Appreciation Fund (formerly Legg Mason Partners Appreciation Fund), Legg Mason
ClearBridge Large Cap Value Fund (formerly Legg Mason ClearBridge Investors Value Fund), Legg Mason Batterymarch Global Equity Fund (formerly Legg Mason Partners Global Equity Fund) and Legg Mason ClearBridge Small Cap Growth Fund (Legg Mason
Partners Small Cap Growth Fund) is incorporated by reference to Post-Effective Amendment No. 137.
(27) Opinion of Venable
LLP regarding the legality of Class R1 shares of Legg Mason ClearBridge Appreciation Fund (formerly Legg Mason Partners Appreciation Fund), Legg Mason ClearBridge Large Cap Value Fund (formerly Legg Mason ClearBridge Investors Value Fund), Legg
Mason Batterymarch Global Equity Fund (formerly Legg Mason Partners Global Equity Fund) and Legg Mason ClearBridge Small Cap Growth Fund (Legg Mason Partners Small Cap Growth Fund) is incorporated by reference to Post-Effective Amendment
No. 137.
(28) Opinion of Willkie Farr & Gallagher LLP regarding the legality of Class R1 shares of Legg Mason
Target Retirement 2015 (formerly Legg Mason Partners Target Retirement 2015), Legg Mason Target Retirement 2020 (formerly Legg Mason Partners Target Retirement 2020), Legg Mason Target Retirement 2025 (formerly Legg Mason Partners Target Retirement
2025) , Legg Mason Target Retirement 2030(formerly Legg Mason Partners Target Retirement 2030) , Legg Mason Target Retirement 2035 (formerly Legg Mason Partners Target Retirement 2035) , Legg Mason Target Retirement 2040 (formerly Legg Mason
Partners Target Retirement 2040) , Legg Mason Target Retirement 2045 (formerly Legg Mason Partners Target Retirement 2045) , Legg Mason Target Retirement 2050 (formerly Legg Mason Partners Target Retirement 2050) and Legg Mason Target Retirement
Fund (formerly Legg Mason Partners Target Retirement Fund) is incorporated by reference to Post-Effective Amendment No. 140 as filed with the SEC on April 1, 2009 (Post-Effective Amendment No. 140).
- 18 -
(29) Opinion of Venable LLP regarding the legality of Class R1 shares of Legg Mason Target
Retirement 2015 (formerly Legg Mason Partners Target Retirement 2015), Legg Mason Target Retirement 2020 (formerly Legg Mason Partners Target Retirement 2020), Legg Mason Target Retirement 2025 (formerly Legg Mason Partners Target Retirement 2025) ,
Legg Mason Target Retirement 2030(formerly Legg Mason Partners Target Retirement 2030) , Legg Mason Target Retirement 2035 (formerly Legg Mason Partners Target Retirement 2035) , Legg Mason Target Retirement 2040 (formerly Legg Mason Partners Target
Retirement 2040) , Legg Mason Target Retirement 2045 (formerly Legg Mason Partners Target Retirement 2045) , Legg Mason Target Retirement 2050 (formerly Legg Mason Partners Target Retirement 2050) and Legg Mason Target Retirement Fund (formerly Legg
Mason Partners Target Retirement Fund) is incorporated by reference to Post-Effective Amendment No. 140.
(30) Opinion of
Willkie Farr & Gallagher LLP regarding legality of Class A, Class C, Class I, Class FI, Class R and Class IS shares of Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment
No. 141.
(31) Opinion of Venable LLP regarding legality of Class A, Class C, Class I, Class FI, Class R and Class IS
shares of Legg Mason Permal Tactical Allocation Fund is incorporated herein by reference to Post-Effective Amendment No. 141.
(32) Opinion of Willkie Farr & Gallagher LLP regarding the legality of Class R1 shares of Legg Mason Capital Management All Cap Fund (formerly Legg Mason Partners All Cap Fund) is incorporated
herein by reference to Post-Effective Amendment No. 146.
(33) Opinion of Venable LLP regarding the legality of Class R1
shares of Legg Mason Capital Management All Cap Fund (formerly Legg Mason Partners All Cap Fund) is incorporated herein by reference to Post-Effective Amendment No. 146.
(34) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class R1 Shares of Legg Mason ClearBridge Aggressive Growth Fund is incorporated herein by reference to Post-Effective Amendment
No. 149 as filed with the SEC on October 30, 2009 (Post-Effective Amendment No. 149).
(35) Opinion
of Venable LLP regarding legality of Class R1 Shares of Legg Mason ClearBridge Aggressive Growth Fund is incorporated herein by reference to Post-Effective Amendment No. 149.
(36) Opinion of Willkie Farr & Gallagher LLP regarding the legality of Class R1 shares of Legg Mason ClearBridge Fundamental
Value Fund and Legg Mason ClearBridge Small Cap Value Fund is incorporated herein by reference to Post-Effective Amendment No. 150.
(37) Opinion of Venable LLP regarding the legality of Class R1 shares of Legg Mason ClearBridge Fundamental Value Fund and Legg Mason ClearBridge Small Cap Value Fund is incorporated herein by reference
to Post-effective Amendment No. 150.
(38) Opinion of Willkie Farr & Gallagher LLP regarding the legality of
Class R1 shares of Legg Mason ClearBridge Capital Fund, Legg Mason ClearBridge Tactical Dividend Income Fund (formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), Legg Mason ClearBridge Dividend Strategy Fund, Legg Mason
Esemplia Emerging Markets Equity Fund, Legg Mason ClearBridge Equity Fund, Legg Mason Global Currents International All Cap Opportunity Fund and Legg Mason ClearBridge Mid Cap Core Fund is incorporated by reference to Post-Effective Amendment
No. 153 as filed with the SEC on November 24, 2009 (Post-Effective Amendment No. 153).
(39) Opinion
of Venable LLP regarding the legality of Class R1 shares of Legg Mason ClearBridge Capital Fund, Legg Mason ClearBridge Tactical Dividend Income Fund (formerly known as Legg Mason ClearBridge Diversified Large Cap Growth Fund), Legg Mason
ClearBridge Dividend Strategy Fund, Legg Mason Esemplia Emerging Markets Equity Fund, Legg Mason ClearBridge Equity Fund, Legg Mason Global Currents International All Cap Opportunity Fund and Legg Mason ClearBridge Mid Cap Core Fund is incorporated
by reference to Post-Effective Amendment No. 153.
(40) Opinion of Willkie Farr & Gallagher LLP regarding the
legality of Class R1 shares of Legg Mason ClearBridge Large Cap Growth Fund and Legg Mason Batterymarch U.S. Large Cap Equity Fund is incorporated herein by reference to Post-Effective Amendment No. 155 as filed with the SEC on January 6,
2010 (Post-Effective Amendment No. 155).
- 19 -
(41) Opinion of Venable LLP regarding the legality of Class R1 shares of Legg Mason
ClearBridge Large Cap Growth Fund and Legg Mason Batterymarch U.S. Large Cap Equity Fund is incorporated herein by reference to Post-Effective Amendment No. 155.
(42) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class IS shares and Class R1 shares of Legg Mason ClearBridge Equity Income Builder Fund is incorporated herein by reference to
Post-Effective Amendment No. 159.
(43) Opinion of Venable LLP regarding legality of Class IS shares and Class R1 shares
of Legg Mason ClearBridge Equity Income Builder Fund is incorporated herein by reference to Post-Effective Amendment No. 159.
(44) Opinion of Willkie Farr & Gallagher LLP regarding legality of Class R1 shares of Legg Mason Investment Counsel Social Awareness Fund, Legg Mason Lifestyle Allocation 100%, Legg Mason
Lifestyle Allocation 85%, Legg Mason Lifestyle Allocation 70%, Legg Mason Lifestyle Allocation 50%, Legg Mason Lifestyle Allocation 30% and Legg Mason Lifestyle Income Fund is incorporated by reference to Post-Effective Amendment No. 162.
(45) Opinion of Venable LLP regarding legality of Class R1 shares of Legg Mason Investment Counsel Social Awareness Fund, Legg
Mason Lifestyle Allocation 100%, Legg Mason Lifestyle Allocation 85%, Legg Mason Lifestyle Allocation 70%, Legg Mason Lifestyle Allocation 50%, Legg Mason Lifestyle Allocation 30% and Legg Mason Lifestyle Income Fund is incorporated by reference to
Post-Effective Amendment No. 162.
(46) Opinion of Venable LLP regarding legality of Class R1 shares of Legg Mason
Investment Counsel Financial Services Fund (formerly Legg Mason Barrett Financial Services Fund) is incorporated by reference to Post-Effective Amendment No. 170 as filed with the SEC on May 27, 2010.
(47) Opinion of Venable LLP regarding the legality of Class A, Class C, Class FI, Class R, Class R1, Class I and Class IS shares of
Legg Mason ClearBridge Mid Cap Growth Fund is incorporated herein by reference to Post-Effective Amendment No. 171.
(48)
Opinion of Venable LLP regarding the legality of shares of Class A, Class C, Class FI, Class R, Class R1, Class I and Class IS shares of Legg Mason Global Currents International Small Cap Opportunity Fund is incorporated herein by reference to
Post-Effective Amendment No. 172.
(49) Opinion of Venable LLP regarding the legality of shares of Class A, Class C,
Class FI, Class R, Class I and Class IS shares of Legg Mason Dynamic Multi-Strategy Fund is incorporated herein by reference to Post-Effective Amendment No. 230.
(50) Opinion of Venable LLP regarding the legality of shares of Class A, Class C, Class FI, Class R, Class I and Class IS shares of Legg Mason ClearBridge Select Fund is incorporated herein by
reference to Post-Effective Amendment No. 246.
(51) Opinion of Venable LLP regarding the legality of shares of
Class A, Class C, Class FI, Class R, Class I and Class IS shares of Legg Mason Batterymarch Managed Volatility International Dividend Fund and Legg Mason Batterymarch Managed Volatility Global Dividend Fund incorporated herein by reference to
Post-Effective Amendment No. 251 as filed with the SEC on December 12, 2012.
(52) Opinion of Venable LLP regarding
legality of Class IS Shares of ClearBridge Small Cap Value Fund and ClearBridge Tactical Dividend Income Fund is filed herewith.
(j) (1) Consents of Independent Registered Public Accounting Firm are filed herewith.
(2) Power of Attorney, dated November 3, 2011, is incorporated herein by reference to Post-Effective Amendment No. 215.
(3) Power of Attorney, dated January 31, 2012 is incorporated herein by reference to Post-Effective Amendment
No. 220 as filed with the SEC on February 22, 2012.
- 20 -
(4) Power of Attorney, dated February 6, 2013 is incorporated herein by reference to
Post-Effective Amendment No. 257.
(k) Not Applicable.
(l) Purchase Agreement between the Registrant and Shearson Lehman Brothers Inc. is incorporated herein by reference to Pre-Effective
Amendment No. 1.
(m) (1) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R
and I Shares is incorporated herein by reference to Post-Effective Amendment No. 74.
(2) Amended Shareholder Services and
Distribution Plan relating to Class A, B, C, FI, R and I Shares is incorporated herein by reference to Post-Effective Amendment No. 81 as filed with the SEC on January 29, 2008.
(3) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R, I and IS Shares dated as of February 7,
2008 is incorporated herein by reference to Post-Effective Amendment No. 86 as filed with the SEC on February 15, 2008.
(4) Amended Shareholder Services and Distribution Plan relating to Class A, B, C, FI, R, I and IS Shares dated as of August 7, 2008 is incorporated herein by reference to Post-Effective
Amendment No. 119 as filed with the SEC on August 28, 2008 (Post-Effective Amendment No. 119).
(5)
Amended Shareholder Services and Distribution Plan relating to Class R1 Shares dated as of February 26, 2009 is incorporated herein by reference to Post-Effective Amendment No. 137.
(6) Amended Shareholder Services and Distribution Plan relating to Class R1 Shares dated as of February 26, 2009 is incorporated
herein by reference to Post-Effective Amendment No. 146.
(7) Amended Shareholder Services and Distribution Plan dated as
of December 7, 2009 is incorporated herein by reference to Post-Effective Amendment No. 159.
(8) Amended Shareholder
Services and Distribution Plan dated as of February 4, 2010 is incorporated herein by reference to Post-Effective Amendment No. 162.
(9) Amended Shareholder Services and Distribution Plan dated as of August 5, 2010 is incorporated herein by reference to Post-Effective Amendment No. 177.
(n)(1) Rule 18f-3(d) Multiple Class Plan of the Registrant pursuant to Rule 18f-3 is incorporated herein by reference to
Post-Effective Amendment No. 76.
(o) Not Applicable.
(p)(1) Code of Ethics of Legg Mason & Co., LLC (adopted by LMPFA, LMIS and LMGAA) is incorporated herein by reference to
Post-Effective Amendment No. 215.
|
(2)
|
Code of Ethics of LMIE is incorporated herein by reference to Post-Effective Amendment No. 61.
|
|
(3)
|
Code of Ethics of Batterymarch dated February 1, 2005 is incorporated herein by reference to Post-Effective Amendment No. 61.
|
|
(4)
|
Code of Ethics of LMIC is incorporated herein by reference to Post-Effective Amendment No. 62 as filed with the SEC on January 10, 2007 (Post-Effective
Amendment No. 62).
|
|
(5)
|
Code of Ethics of LMCM is incorporated herein by reference to Post-Effective Amendment No. 73.
|
|
(6)
|
Code of Ethics of GCIM is incorporated herein by reference to Post-Effective Amendment No. 111 as filed with the SEC on July 3, 2008.
|
|
(7)
|
Code of Ethics of Permal is incorporated herein by reference to Post-Effective Amendment No. 141.
|
|
(8)
|
Code of Ethics of ClearBridge is incorporated herein by reference to Post-Effective Amendment No. 148 as filed with the SEC on August 26, 2009.
|
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(9)
|
Code of Ethics of WAM is incorporated herein by reference to Post-Effective Amendment No. 215.
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- 21 -
Item 29.
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Persons Controlled by or under Common Control with Registrant
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Not Applicable.
The response to this
item is incorporated herein by reference to Pre-Effective Amendment No. 1.
The directors and officers of the Registrant and the
personnel of the Registrants manager are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of
1940.
Reference is hereby made to (a) paragraph 9 of the Distribution Agreement between the Registrant and LMIS, incorporated by
reference herein.
Item 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).
Investment AdviserLegg Mason Capital Management, LLC. (LMCM)
LMCM
is organized under the laws of the State of Maryland as a limited liability company. LMCM is a direct wholly-owned subsidiary of Legg Mason.
LMCM is registered as an investment adviser under the Advisers Act. The list required by this Item 31 of officers and directors of LMCM together
with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMCM
pursuant to the Advisers Act (SEC File No. 801-18115).
SubadviserClearBridge Investments, LLC (formerly
known as ClearBridge Advisors, LLC) (ClearBridge)
ClearBridge was organized under the laws of the State of Delaware as a
limited liability company. ClearBridge is a direct wholly-owned subsidiary of Legg Mason.
ClearBridge is registered as an investment adviser
under the Advisers Act. The list required by this Item 31 of officers and directors of ClearBridge together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by ClearBridge pursuant to the Advisers Act (SEC File No. 801-64710).
SubadviserBatterymarch Financial Management, Inc. (Batterymarch)
Batterymarch was organized under the laws of the State of Maryland as a corporation. Batterymarch is an indirect wholly-owned subsidiary of Legg Mason.
Batterymarch is registered as an investment adviser under the Advisers Act. The list required by this Item 31 of officers and directors
of Batterymarch together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by Batterymarch pursuant to the Advisers Act (SEC File No. 801- 48035).
- 22 -
SubadviserGlobal Currents Investment Management, LLC (GCIM)
GCIM was organized under the laws of the State of Delaware as a limited liability corporation. GCIM is a wholly owned subsidiary of
Legg Mason.
GCIM is registered as an investment adviser under the Advisers Act. The list required by this Item 31 of officers and
directors of GCIM together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D
of Form ADV filed by GCIM pursuant to the Advisers Act (SEC File No. 801-68663).
SubadviserLegg Mason
International Equities Limited (LMIE)
The list required by this Item 31 of officers and directors of LMIE, together
with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by LMIE
pursuant to the Advisers Act (SEC File No. 801-57655).
SubadviserLegg Mason Global Asset Allocation, LLC
(LMGAA).
LMGAA is organized under the laws of the State of Delaware as a limited liability company. LMGAA is a
wholly-owned subsidiary of Legg Mason.
LMGAA is registered as an investment adviser under the Advisers Act. The list required by this
Item 31 of officers and directors of LMGAA together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV filed by LMGAA pursuant to the Advisers Act (SEC File No. 801-67287).
SubadviserLegg Mason Investment Counsel, LLC (LMIC)
LMIC is organized under the laws of the State of Maryland as a limited liability company. LMIC is a wholly-owned subsidiary of Legg Mason.
LMIC is registered as an investment adviser under the Advisers Act. The list required by this Item 31 of officers and directors of LMIC 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 LMIC
pursuant to the Advisers Act (SEC File No. 801-63656).
SubadviserPermal Asset Management Inc.
(Permal)
Permal was formed in June 2002 under the laws of the State of Delaware as a corporation. Permal is a wholly-owned
subsidiary of Legg Mason. Permal is registered as an investment adviser under the Advisers Act. The list required by this Item 31 of officers and directors of Permal, together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by Permal pursuant to the Advisers Act (SEC File No. 801-61864).
SubadviserWestern Asset Management Company (WAM)
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
Ronald R. Dewhurst
James W. Hirschmann III
Jeffrey A.
Nattans
- 23 -
Officers
|
|
|
Bruce D. Alberts
|
|
Chief Financial Officer
|
Brett B. Canon
|
|
Director of Risk Management and Operations
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Daniel E. Giddings
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Assistant Secretary
|
James W. Hirschmann III
|
|
Chief Executive Officer and President
|
James J. Flick
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Director of Global Client Service and Marketing
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Dennis J. McNamara
|
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Director of Portfolio Operations
|
Charles A. Ruys de Perez
|
|
Secretary, General Counsel and Head of Legal and Compliance
|
Following is a list of other substantial business activities in which directors, officers or partners of WAM have been
engaged as director, officer, employee, partner or trustee.
|
|
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Officer/Director
|
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Other Offices Held
|
Jeffrey A. Nattans
|
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Director, WAM
|
|
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Vice President, Legg Mason, Inc.
|
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Manager and Vice President, LMIH
|
|
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Director, WAML
|
|
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Director, Western Japan
|
|
|
Director, WAM Australia
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|
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Director, WAMCO Hldgs Ltd.
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|
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Director, Western Singapore
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Officer/Director
|
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Other Offices Held
|
James W. Hirschmann III
|
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Director, WAM
|
|
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Director, WAML
|
Item 32.
|
Principal Underwriter
|
(a) LMIS, the
distributor of the Registrant, is a distributor of funds that are series of the following registrants: Legg Mason Partners Premium Money Market Trust, Legg Mason Partners Institutional Trust, Legg Mason Partners Money Market Trust, Legg Mason
Partners Variable Equity Trust, Legg Mason Partners Variable Income Trust, Legg Mason Partners Income Trust, Legg Mason Charles Street Trust, Inc., Legg Mason Global Trust, Inc., Legg Mason Capital Management Growth Trust, Inc., Legg Mason
Investment Trust, Inc., Legg Mason Capital Management Special Investment Trust, Inc., Legg Mason Tax-Free Income Fund, Legg Mason Capital Management Value Trust, Inc., Western Asset Funds, Inc. and Legg Mason Global Asset Management Trust.
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*
|
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Position and Offices
with Underwriter LMIS
|
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Positions and Offices
with Registrant
|
Thomas J. Hirschmann
|
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Co-Managing Director
|
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None
|
|
|
|
Joseph A. Sullivan
|
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Co-Managing Director
|
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None
|
|
|
|
Jeremy OShea
100 First
Stamford Pl.
Stamford, CT 06902-6732
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Vice President
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None
|
- 24 -
|
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Matthew Schiffman
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Vice President
|
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None
|
100 First Stamford Pl.
|
|
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Stamford, CT 06902-6732
|
|
|
|
|
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Jason Bennett
|
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Chief Financial Officer, Treasurer
|
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None
|
|
|
and Financial Reporting Officer
|
|
|
|
|
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Kenneth D. Cieprisz
|
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Chief Compliance Officer
|
|
None
|
620 8th Avenue, 49th Floor
|
|
|
|
|
New York, NY 10018
|
|
|
|
|
|
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Elisabeth F. Craig
|
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Secretary
|
|
None
|
|
|
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Vicki Schmelzer
|
|
Assistant Secretary
|
|
None
|
|
|
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Susan Kerr
|
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AML Compliance Officer
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|
None
|
100 First Stamford Pl.
|
|
|
|
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Stamford, CT 06902
|
|
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|
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*
|
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 Equity Trust
620 Eighth Avenue
New York, NY 10018
With respect to the Registrants Investment Managers:
(2) Legg Mason Partners Fund Advisor, LLC
620 Eighth Avenue
New York, NY 10018
(3) Legg
Mason Capital Management, LLC
100 International Drive
Baltimore, MD 21202
With respect to the Registrants Subadvisers:
(4) Legg Mason International Equities Limited
620 Eighth Avenue
New York, NY 10018
(5) Batterymarch Financial Management, Inc.
John Hancock Tower
200 Clarendon Street
Boston, MA 02116
(6)
ClearBridge Investments, LLC
620 Eighth Avenue
New York, NY 10018
- 25 -
(7) Legg Mason Global Asset Allocation, LLC
100 First Stamford Place
Stamford, CT 06902
620 Eighth Avenue
New York, NY 10018
(8) Legg
Mason Investment Counsel, LLC
100 International Drive
Baltimore, MD 21202
(9) Global Currents Investment Management, LLC
100 International Drive
Baltimore, MD 21202
(10) Permal Asset Management Inc.
900 Third Avenue
New York, NY 10022
(11) c/o
Western Asset Management Company
620 Eighth Avenue
New York, New York 10018
With respect to the Registrants Custodian:
(12) State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
With respect to the Registrants Transfer Agent:
(13) Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, Massachusetts 02169
(14) BNY Mellon Investment Servicing (US) Inc.
4400 Computer Drive
Westborough, MA 01581
With respect to the Registrants Distributor:
(15) Legg Mason Investor Services, LLC
100 International Drive
Baltimore, MD 21202
Item 34.
|
Management Services
|
Not applicable.
Not applicable.
- 26 -
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the Securities Act), and the Investment Company
Act of 1940, as amended, the Registrant, LEGG MASON PARTNERS EQUITY TRUST, has duly caused this Post-Effective Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on this
21
st
day of March 2013.
LEGG MASON PARTNERS EQUITY TRUST, on behalf of ClearBridge Small Cap Value Fund and ClearBridge Tactical Dividend Income Fund.
|
|
|
By:
|
|
/s/ R. Jay Gerken
|
|
|
R. Jay Gerken
|
|
|
President and Chief Executive Officer
|
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act, this Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated below on March 21, 2013.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
/s/ R. Jay Gerken
|
|
President, Chief Executive Officer and Trustee
|
|
|
R. Jay Gerken
|
|
|
|
|
|
|
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/s/ Richard F. Sennett
|
|
Principal Financial Officer
|
|
|
Richard F. Sennett
|
|
|
|
|
|
|
|
Paul R. Ades*
|
|
Trustee
|
|
|
Paul R. Ades
|
|
|
|
|
|
|
|
Andrew L. Breech*
|
|
Trustee
|
|
|
Andrew L. Breech
|
|
|
|
|
|
|
|
Dwight B. Crane*
|
|
Trustee
|
|
|
Dwight B. Crane
|
|
|
|
|
|
|
|
Frank G. Hubbard*
|
|
Trustee
|
|
|
Frank G. Hubbard
|
|
|
|
|
|
|
|
Howard J. Johnson*
|
|
Trustee
|
|
|
Howard J. Johnson
|
|
|
|
|
|
|
|
Jerome H. Miller*
|
|
Trustee
|
|
|
Jerome H. Miller
|
|
|
|
|
|
|
|
Ken Miller*
|
|
Trustee
|
|
|
Ken Miller
|
|
|
|
|
|
|
|
John J. Murphy*
|
|
Trustee
|
|
|
John J. Murphy
|
|
|
|
|
- 27 -
|
|
|
|
|
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Thomas F. Schlafly*
|
|
Trustee
|
|
|
Thomas F. Schlafly
|
|
|
|
|
|
|
|
Jerry A. Viscione*
|
|
Trustee
|
|
|
Jerry A. Viscione
|
|
|
|
|
|
|
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*By:
|
|
/s/ R. Jay Gerken
|
|
|
R. Jay Gerken, as Agent
|
- 28 -
INDEX TO EXHIBITS
|
|
|
Index No.
|
|
Description of Exhibit
|
|
|
(i)(52)
|
|
Opinion of Venable LLP
|
|
|
(j)(1)
|
|
Consents of Independent Registered Public Accounting Firm
|
- 29 -