-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B4N0sgUuxeiAh4ItydJ8/jqFVolS3vigHnqh4bfxxqCMCckVWHNlkmAjVgNq/0uq RaNwVulsKgBVGPQqRv69pA== 0000950169-00-000541.txt : 20000519 0000950169-00-000541.hdr.sgml : 20000519 ACCESSION NUMBER: 0000950169-00-000541 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20000518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LM INSTITUTIONAL FUND ADVISORS I INC CENTRAL INDEX KEY: 0000863520 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 033-34929 FILM NUMBER: 639504 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-06110 FILM NUMBER: 639505 BUSINESS ADDRESS: STREET 1: 111 S CALVERT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 3015393400 MAIL ADDRESS: STREET 1: 111 S CALVERT ST STREET 2: 111 S CALVERT ST CITY: BALTIMORE STATE: MD ZIP: 21202 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN ASSET TRUST INC DATE OF NAME CHANGE: 19920703 485APOS 1 LMIFA I As filed with the Securities and Exchange Commission on May 18, 2000 Registration Nos. 33-34929 and 811-06110 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-1A REGISTRATION STATEMENT UNDER [X] THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 21 [X] REGISTRATION STATEMENT UNDER [X] THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 23 [X] (Check appropriate box or boxes) LM Institutional Fund Advisors I, Inc. (Exact name of registrant as specified in charter) 100 Light Street Baltimore, Maryland 21202 (Address of principal executive offices) Registrant's Telephone Number, Including Area Code: (410) 539-0000 Name and address of agent for service: Copy to: --------------------- -------- Charles A. Bacigalupo Bryan Chegwidden, Esq. 100 Light Street Ropes & Gray Baltimore, Maryland 21202 One International Place Boston, MA 02110 It is proposed that this filing will become effective (check appropriate box): [ ] Immediately upon filing pursuant to paragraph (b) of Rule 485 [ ] On _____________ pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] On _____________ pursuant to paragraph (a)(1) [X] 75 days after filing pursuant to paragraph (a)(2) [ ] On _____________ pursuant to paragraph (a)(2) If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Prospectus August 1, 2000 This Prospectus describes the shares of a family of institutional mutual funds managed by LM Institutional Advisors, Inc. LM Institutional Fund Advisors I Western Asset Government Money Market Portfolio Western Asset Money Market Portfolio Western Asset Intermediate Portfolio Western Asset Intermediate Plus Portfolio Western Asset Core Portfolio Western Asset Core Plus Portfolio Western Asset Inflation Indexed Bond Portfolio Western Asset High Yield Portfolio Western Asset Non-U.S. Fixed Income Portfolio Western Asset Global Strategic Income Portfolio Western Asset Enhanced Equity Portfolio LM Institutional Fund Advisors II LM Value Institutional Portfolio LM Special Investment Institutional Portfolio LM Total Return Institutional Portfolio LM Balanced Institutional Portfolio Batterymarch U.S. MidCapitalization Equity Portfolio Batterymarch U.S. Small Capitalization Equity Portfolio Batterymarch International Equity Portfolio Batterymarch Emerging Markets Portfolio These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. LM Institutional Advisors Incorporated Table of Contents Prospectus Summary 3 Description of Each Portfolio, Its Investment Objective and Principal Investment Strategies 3 Principal Risks 15 Performance Information 19 Fees and Expenses 22 Management of the Portfolios 31 Purchase of Shares 33 Distribution Plans 35 Redemption of Shares 35 Exchange Privilege 36 Net Asset Value 36 Dividends and Distributions to Shareholders 37 Tax Information 38 Financial Highlights 38 Appendix A -- Prior Performance of LMIFA II Advisers' Other Accounts 39
2 Prospectus Summary General LM Institutional Fund Advisors I, Inc. ("LMIFA I") consists of the following portfolios: Western Asset Government Money Market Portfolio, Western Asset Money Market Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio, Western Asset Inflation Indexed Bond Portfolio, Western Asset High Yield Portfolio, Western Asset Non-U.S. Fixed Income Portfolio, Western Asset Global Strategic Income Portfolio and Western Asset Enhanced Equity Portfolio. LM Institutional Fund Advisors II, Inc. ("LMIFA II") consists of the following portfolios: LM Value Institutional Portfolio, LM Special Investment Institutional Portfolio, LM Total Return Institutional Portfolio, LM Balanced Institutional Portfolio, Batterymarch U.S. MidCapitalization Equity Portfolio, Batterymarch U.S. Small Capitalization Equity Portfolio, Batterymarch International Equity Portfolio and Batterymarch Emerging Markets Portfolio. Manager and Advisers LM Institutional Advisors, Inc. (the "Manager") serves as the investment manager to each Portfolio. Legg Mason Fund Adviser, Inc. ("LMFA"), Batterymarch Financial Management, Inc. ("Batterymarch"), Western Asset Management Company ("Western Asset") and Western Asset Management Company Limited ("WAML") serve as the investment advisers to the various Portfolios as noted below. LMFA, Batterymarch, Western Asset and WAML are referred to as "Advisers." Description of Each Portfolio, Its Investment Objective and Principal Investment Strategies The investment objective and policies for each Portfolio are stated below. There is no assurance a Portfolio will meet its objectives. Western Asset Government Money Market Portfolio Adviser: Western Asset Objective: High current income consistent with liquidity and conservation of principal The Portfolio is a money market fund that seeks to maintain a net asset value of $1.00 per share by investing in government money market instruments. To achieve its objective, the Portfolio generally adheres to the following practices: . It invests only in obligations of the U.S. Government and its agencies and instrumentalities, repurchase agreements secured by such instruments and in U.S. dollar-denominated debt obligations of "supranational organizations." "Supranational organizations" are non-governmental entities designated or supported by a government or governmental entity to promote economic development, such as the European Community, the International Monetary Fund, the United Nations and the World Bank. . It generally buys instruments maturing in 397 days or less. It can also buy certain variable and floating rate securities. . It maintains a dollar-weighted average portfolio maturity of 90 days or less. . It may purchase or sell securities on a forward commitment basis. . It may engage in reverse repurchase agreements and other borrowings as permitted by applicable law. Among the principal risks of investing in the Portfolio are Interest Rate Risk and Credit Risk. Please see "Principal Risks" for a discussion of these and other risks. 3 Western Asset Money Market Portfolio Adviser: Western Asset Objective: High current income consistent with liquidity and conservation of principal The Portfolio is a money market fund that seeks to maintain a net asset value of $1.00 per share. To achieve its objective, the Portfolio generally adheres to the following practices: . It generally invests in money market instruments, such as: (i) U.S. government obligations (ii) municipal obligations (iii) instruments such as certificates of deposit, demand and time deposits, savings shares and bankers' acceptances issued by domestic and foreign banks and savings and loan institutions that have over $1 billion in total assets or where the principal amount is insured by the Federal Deposit Insurance Corporation (iv) repurchase agreements (v) commercial paper and other short-term investments . It invests only in "high quality" money market instruments. "High quality" money market instruments are those that: (i) have received one of the two highest ratings by two or more Nationally Recognized Statistical Rating Organizations ("NRSRO"); (ii) receive one of the two highest ratings by one NRSRO if only one has rated the security; or (iii) if unrated, are determined by Western Asset to be of comparable quality. . It may not invest more than 5% of its total assets in the "first tier" securities of any one issuer (except for U.S. government obligations). "First tier" securities are those that: (i) have been rated in the highest rating category by two NRSROs; (ii) receive the highest rating by one NRSRO if only one has rated the security; or (iii) if unrated, are determined by Western Asset to be of comparable quality. . It may not invest more than 1% of its total assets or $1 million (whichever is greater) in the "second tier" securities of any one issuer. "Second tier" securities are all "high quality" securities that are not "first tier" securities. . It may not invest more than 5% of its total assets in "second tier" securities. . It may invest only in U.S. dollar-denominated securities. These include foreign investments denominated in U.S. dollars. . It may engage in reverse repurchase agreements and make other borrowings. . It generally buys money market securities maturing in 397 days or less. It can also buy certain variable and floating rate securities. . It may purchase or sell securities on a forward commitment basis. . It maintains a dollar-weighted average portfolio maturity of 90 days or less. Among the principal risks of investing in the Portfolio are Interest Rate Risk and Credit Risk. Please see "Principal Risks" for a discussion of these and other risks. Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio Advisers: Western Asset and WAML (non-U.S. portions of Intermediate Plus and Core Plus Portfolios) Objective: Maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average duration specified for each Portfolio Each of these Portfolios invests in a portfolio of fixed income securities of various maturities. To achieve their objectives, the Portfolios invest primarily in: . U.S. Government obligations . mortgage- and other asset-backed securities 4 . U.S. dollar-denominated obligations of foreign governments, international agencies or supranational organizations . U.S. dollar-denominated fixed income securities of non-governmental domestic or foreign issuers In addition to the foregoing principal investment strategies, the Portfolios are also permitted to: . purchase other securities and instruments, including: (i) preferred stocks (ii) structured notes (iii) municipal obligations (iv) convertible securities (v) pay-in-kind securities and zero coupon bonds (vi) certificates of deposit, time deposits and bankers' acceptances issued by domestic and foreign banks (vii) commercial paper and other short-term investments . invest up to 25% of their total assets in the securities of foreign issuers . buy or sell futures contracts and options for both hedging and non-hedging purposes, including for purposes of enhancing returns . buy or sell securities on a forward commitment basis . lend its portfolio securities . engage in foreign currency exchange transactions . engage in repurchase agreements and reverse repurchase agreements . borrow money for temporary or emergency purposes Each of the Portfolios may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders. Each Portfolio in this group differs from the others in terms of its investment policies regarding its target dollar weighted average duration, and the two "Plus" Portfolios, the Intermediate Plus and Core Plus, differ from the other Portfolios in terms of their policies with respect to U.S. dollar-denominated securities and the credit quality of their investments. These differences are summarized in the following table. "Duration" refers to the range within which the dollar weighted average duration of a Portfolio is expected to fluctuate. With respect to the Core and Core Plus Portfolios, the average duration is expected to range within 20% of the duration of the domestic bond market as a whole (normally four to six years, although this may vary) as measured by Western Asset. "Foreign Currency Exposure" refers to whether a Portfolio presently intends to limit its investments to U.S. dollar-denominated securities. "Credit Quality" refers to the percentage of a Portfolio's net assets that may be invested in debt securities that are rated, at the time of purchase, below investment grade, but at least B or higher by an NRSRO or, if unrated, determined by the Adviser to be of comparable quality. The continued holding of securities downgraded below investment grade or, if unrated, determined by the Adviser to be of comparable quality, will be evaluated by the Adviser on a case by case basis.
Portfolio Duration Foreign Currency Exposure Credit Quality Intermediate 2-4 Years U.S. Dollar-Denominated Only Currently Anticipates No Securities Below Investment Grade - ------------------------------------------------------------------------------------------------------------------------- Intermediate Plus 2-4 Years The Portfolio may invest up to Up to 15% 20% of its total assets in non-U.S. Below Investment Grade dollar denominated securities. - ------------------------------------------------------------------------------------------------------------------------- Core Generally U.S. Dollar-Denominated Only Currently Anticipates 4-6 Years No Securities Below Investment Grade - ------------------------------------------------------------------------------------------------------------------------- Core Plus Generally The Portfolio may invest up to Up to 15% 4-6 Years 20% of its total assets in non-U.S. Below Investment Grade dollar-denominated securities. - -------------------------------------------------------------------------------------------------------------------------
Among the principal risks of investing in these Portfolios are Interest Rate Risk, Credit Risk, Call Risk, Special Risks of Mortgage-Backed and Asset-Backed Securities, Foreign Securities Risk, Borrowing Risk, Derivatives Risk and Hedging Risk. In addition to those risks, Special Risks of High Yield Securities, Liquidity Risk and Currency Risk are among the principal risks of investing in the Intermediate Plus and Core Plus Portfolios. Please see "Principal Risks" for a discussion of these and other risks. 5 Western Asset Inflation Indexed Bond Portfolio Adviser: Western Asset Objective: Maximize total return, consistent with preservation of capital Under normal market conditions, the Portfolio invests at least 65% of its total assets in inflation-indexed fixed income securities issued in the United States. Inflation-indexed bonds are fixed income securities that are structured to provide protection against inflation. The principal or interest components of an inflation-indexed bond are adjusted periodically according to the general movements of inflation in the country of issue. The U.S. Treasury uses the Consumer Price Index for Urban Consumers, non-seasonally adjusted, as its inflation measure. The Adviser uses fundamental investment techniques to select issues. The average modified duration of the Portfolio is expected to range within 3 years of that of its benchmark, the Lehman Brothers Treasury Inflation Notes Index. Although the Portfolio is expected to maintain an average credit quality of AAA/Aaa, it may invest up to 35% of its net assets in securities rated below AAA/Aaa but above BBB/Baa at the time of purchase or unrated securities of comparable quality at the time of purchase. Consistent with its investment objective, the Portfolio may invest in fixed income securities of any maturity. To achieve its objective, the Portfolio may also invest in other securities or instruments, including: . U.S. Government obligations . corporate obligations . foreign inflation-indexed securities . preferred stocks . non-U.S. debt issued in U.S. dollars or foreign currencies . mortgage- and other asset-backed securities . municipal obligations . variable and floating rate debt securities . commercial paper and other short-term investments . certificates of deposit, fixed time deposits and bankers' acceptances . loan participations and assignments . structured notes . repurchase agreements . pay-in-kind securities and zero coupon bonds The Portfolio may also: . engage in reverse repurchase agreements . borrow money for temporary or emergency purposes . buy or sell futures contracts and options for both hedging and non-hedging purposes, including for purposes of enhancing returns . buy or sell foreign currencies, foreign currency options, or foreign currency futures contracts and related options . enter into foreign currency forward contracts for hedging and non-hedging purposes, including for purposes of enhancing returns . loan its portfolio securities . buy or sell securities on a forward commitment basis Among the principal risks of investing in the Portfolio are Interest Rate Risk, Credit Risk, Market Risk, Derivatives Risk, Liquidity Risk, Foreign Securities Risk, Currency Risk, Call Risk, Borrowing Risk, Special Risks of Mortgage-Backed and Asset-Backed Securities and Hedging Risk. 6 Western Asset High Yield Portfolio Adviser: Western Asset Objective: Maximize total return, consistent with prudent investment management Under normal market conditions, the Portfolio will invest at least 75% of its total assets in U.S. dollar-denominated debt or fixed income securities that are rated below investment grade at the time of purchase by one or more NRSROs or are of a comparable quality as determined by Western Asset. These securities are commonly known as "junk bonds" or "high yield bonds." Western Asset expects that, under normal market conditions, all or substantially all of the Portfolio's assets will be invested in such securities. To achieve its objective, the Portfolio may also make other investments, including: . mortgage- and other asset-backed securities . municipal obligations . variable and floating rate debt securities . commercial paper and other short-term investments . corporate obligations ("Corporate obligations" include preferred stock, convertible securities, zero coupon securities and pay-in-kind securities.) . common stocks and warrants . certificates of deposit, fixed time deposits and bankers' acceptances issued by domestic banks The Portfolio is also permitted to: . invest up to 25% of its total assets in foreign currency-denominated foreign securities . buy or sell futures contracts and options for both hedging and non-hedging purposes, including for purposes of enhancing returns . engage in foreign currency exchange transactions . lend its portfolio securities . borrow money for temporary or emergency purposes . buy or sell securities on a forward commitment basis . engage in repurchase agreements and reverse repurchase agreements The Portfolio may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders. Among the principal risks of investing in the Portfolio are Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of Mortgage-Backed and Asset-Backed Securities, Market Risk, Foreign Securities Risk, Liquidity Risk, Borrowing Risk, Emerging Markets Risk, Currency Risk, Derivatives Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. Western Asset Non-U.S. Fixed Income Portfolio Adviser: WAML Objective: Maximize total return, consistent with prudent investment management Under normal market conditions, the Portfolio invests at least 75% of its total assets in debt and fixed income securities denominated in major foreign currencies. WAML anticipates that, under normal market conditions, all or substantially all of the Portfolio's assets will be invested in securities of foreign issuers and that these foreign issuers will represent at least three foreign countries. Under current market conditions, the Portfolio expects that substantially all of its currency risk will be hedged to U.S. dollars. To achieve its objective, the Portfolio may invest in a variety of securities, including: . U.S. dollar-denominated or foreign currency-denominated obligations of foreign governments, international agencies or supranational entities . foreign currency exchange-related securities, including foreign currency warrants . U.S. Government obligations . mortgage- and other asset-backed securities . variable and floating rate debt securities . commercial paper and other short-term investments 7 . corporate obligations . certificates of deposit, fixed time deposits and bankers' acceptances . loan participations and assignments . indexed securities and structured notes . repurchase agreements The Portfolio may also: . engage in reverse repurchase agreements . borrow money for temporary or emergency purposes . buy or sell futures contracts and options for both hedging and non-hedging purposes, including for purposes of enhancing returns . buy or sell foreign currencies, foreign currency options, or foreign currency futures contracts and related options . enter into foreign currency forward contracts for hedging and non-hedging purposes, including for purposes of enhancing returns . loan its portfolio securities The Portfolio does not currently intend to invest in securities that are rated at the time of purchase below investment grade, although it may do so if market conditions are favorable. The Portfolio is "non-diversified" within the meaning of the Investment Company Act. See "Principal Risks--Non-Diversification." WAML anticipates that from time to time over 25% of the Portfolio's assets may be invested in securities of issuers located in a single country. Because the Portfolio may concentrate a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting such currency or issuers within that country than would a more diversified portfolio of securities. The Portfolio may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders. Among the principal risks of investing in the Portfolio are Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of Mortgage-Backed and Asset-Backed Securities, Market Risk, Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk, Liquidity Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. Western Asset Global Strategic Income Portfolio Advisers: WAML (non-U.S. portion) and Western Asset (U.S. portion) Objective: Income and capital appreciation To achieve its investment objective, the Portfolio invests primarily in various types of U.S. dollar-denominated and foreign currency-denominated fixed income securities, including: . U.S. and foreign corporate fixed income securities . Debt obligations of corporate and governmental issuers in emerging market countries (These include "Brady Bonds"; bonds issued as a result of a debt restructuring plan; Eurobonds; domestic and international bonds issued under the laws of a developing country; and emerging market loans.) . sovereign debt obligations of developed nations, including those of the United States . debt obligations of "supranational organizations" . mortgage- and other asset-backed securities The Portfolio may invest in a variety of other securities, including: . foreign currency exchange-related securities, including foreign currency warrants . variable and floating rate debt securities . commercial paper and other short-term investments . municipal obligations . certificates of deposit, fixed time deposits and bankers' acceptances . loan participations and assignments . indexed securities and structured notes . repurchase agreements The Portfolio may invest up to 60% of its net assets in securities that are rated at the time of purchase below investment grade or are of comparable quality at the time of purchase as determined by WAML or Western Asset. These securities 8 are commonly known as "junk bonds" or "high yield bonds." The Portfolio may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders. The Portfolio may also: . engage in reverse repurchase agreements . borrow money for temporary or emergency purposes . loan its portfolio securities . buy or sell futures contracts and options for both hedging and non-hedging purposes, including for purposes of enhancing returns . buy or sell foreign currencies, foreign currency options, or foreign currency futures contracts and related options . enter into foreign currency forward contracts for hedging and non-hedging purposes, including for purposes of enhancing returns Under normal market conditions, the Portfolio will invest at least 80% of its total assets in securities of issuers representing at least three countries (one of which may be the U.S.) and at least 65% of its total assets in income producing securities. Because the Portfolio may concentrate a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting issuers within that country or currency than would a more diversified portfolio of securities. The Portfolio is "non-diversified" within the meaning of the Investment Company Act. See "Principal Risks--Non-Diversification." Among the principal risks of investing in the Portfolio are Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of Mortgage-Backed and Asset-Backed Securities, Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk, Liquidity Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. Western Asset Enhanced Equity Portfolio Adviser: Western Asset Objective: Long-term total return The Portfolio's assets will be comprised of two components: an equity component and a fixed income component. . The equity component will generally maintain full exposure to the U.S. equity market as represented by the S&P 500 Index (the "Index"). . The fixed income component will try to generate interest and gains in excess of the Portfolio's expenses, including transaction costs related to its investments. The Portfolio expects that its performance will approximate that of the Index, with the extent to which the Portfolio outperforms or underperforms the Index depending largely, but not exclusively, on whether the fixed income component has earned sufficient amounts to offset the Portfolio's expenses. Up to 10% of the Portfolio's net assets may be invested in securities rated below investment grade at the time of purchase or unrated securities of comparable quality at the time of purchase (commonly known as "junk bonds" or "high yield bonds") and up to 20% of its net assets may be invested in foreign securities. The Portfolio may buy and sell investments relatively often, which involves higher brokerage commissions and other expenses, and may increase taxes payable by shareholders. The following information summarizes the investment practices of the Portfolio's two components. Equity Component The Portfolio's equity component invests primarily in: (i) common stocks that are represented in the Index ("S&P stocks") and (ii) stock index futures, options on stock indexes, options on stock index futures and other derivative instruments that are based on the Index ("S&P derivatives"). The Equity Component of the Portfolio adheres to the following practices: . It may invest in any combination of S&P stocks and S&P derivatives. . It currently plans to invest predominantly, and likely exclusively, in S&P derivatives. . It will not be limited to purchasing S&P stocks in the same proportion as such stocks are weighted in the Index. . It will seek to remain invested in S&P stocks and S&P derivatives even when the Index is declining. 9 The Index is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. Standard and Poor's ("S&P") chooses the stocks to be included in the Index solely on a statistical basis. The weightings of stocks in the Index are based on each stock's relative total market value, that is, its market price per share times the number of shares out-standing. The Portfolio is neither sponsored by nor affiliated with S&P. Fixed Income Component The fixed income component will invest primarily in the following types of fixed income securities: . U.S. Government obligations . securities of non-governmental domestic or foreign issuers . municipal securities . mortgage- and other asset-backed securities . preferred stocks . obligations of foreign governments, international agencies or supranational entities The fixed income component may also take other actions, including: . investing in certificates of deposit, time deposits and bankers' acceptances issued by domestic and foreign banks . investing in commercial paper and other short-term investments . engaging in repurchase agreements, reverse repurchase agreements and other borrowings . purchasing or selling futures contracts and options . engaging in foreign currency exchange transactions Among the principal risks of investing in the Portfolio are Market Risk, Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of Mortgage-Backed and Asset-Backed Securities, Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. LM Value Institutional Portfolio Adviser: LMFA Objective: Long-term growth of capital The Portfolio invests primarily in equity securities (including common and preferred stocks), and securities convertible into equity securities, that, in the Adviser's opinion, offer the potential for capital growth. The Adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the Adviser's assessment of their intrinsic value. Intrinsic value, according to the Adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies, the value of its assets, and the costs to replicate its business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, are also important. Securities may be undervalued due to uncertainty arising from the availability of accurate information, economic growth and change, changes in competitive conditions, technological change, changes in government policy or geo-political dynamics, and more. The Adviser takes a long-term approach to investing, generally characterized by long holding periods and low portfolio turnover. The Portfolio generally invests in companies with market capitalizations greater than $5 billion, but may invest in companies of any size. The Adviser typically sells a security when, in the Adviser's assessment, the security no longer appears to offer a long-term above average risk-adjusted rate of return, when a more compelling investment opportunity is found, or when the investment basis no longer applies. The Portfolio may also invest in debt securities of companies having one or more of the above characteristics. The Portfolio may invest up to 25% of its net assets in long-term debt securities. Up to 10% of its total assets may be invested in convertible and/or debt securities rated below investment grade, i.e., not rated at least BBB by Standard & Poor's or Baa by Moody's Investors Service, Inc. or, if unrated by those entities, deemed by the Adviser to be of comparable quality. These bonds are commonly referred to as junk bonds. 10 For temporary purposes, or when cash is temporarily available, the Portfolio may invest without limit in investment grade, short-term debt instruments, including government, corporate and money market securities. The Portfolio may not achieve its investment objective when so invested. Among the principal risks of investing in the Portfolio are Market Risk, Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Foreign Securities Risk, Borrowing Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. LM Special Investment Institutional Portfolio Adviser: LMFA Objective: Capital appreciation The Portfolio invests primarily in equity securities, and securities convertible into equity securities, of companies whose market capitalizations are typically classified as small to mid-sized. The Adviser defines small to mid-sized companies as those below the top 500 U.S. companies in terms of market capitalization. It also invests in "special situations" without regard to market capitalization. Special situations are companies undergoing unusual or possibly one-time developments that, in the opinion of the Adviser, make them attractive for investment. Such developments may include actual or anticipated: sale or termination of an unprofitable part of the company's business; change in the company's management or in management's philosophy; change in the industry in which the company operates; introduction of new products or technologies; or the prospect or effect of acquisition or merger activities. The Adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the Adviser's assessment of their intrinsic value. Intrinsic value, according to the Adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies, the value of its assets, and the costs to replicate its business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, are also important. Securities may be undervalued due to uncertainty arising from the availability of accurate information, economic growth and change, changes in competitive conditions, technological change, changes in government policy or geo-political dynamics, and more. The Portfolio also invests in debt securities of companies having one or more of the above characteristics. The Portfolio may invest up to 35% of its net assets in debt securities rated below investment grade, i.e., rated below BBB/Baa (or, if unrated, determined by the Adviser to be of comparable quality). These bonds are commonly referred to as junk bonds. The Portfolio may invest up to 20% of its total assets in securities of companies involved in actual or anticipated reorganizations or restructurings. The Adviser typically sells a security when, in the Adviser's assessment, the security no longer appears to offer a long-term above average risk-adjusted rate of return, when a more compelling investment opportunity is found, or when the investment basis no longer applies. For temporary defensive purposes, or when cash is temporarily available, the Portfolio may invest without limit in investment grade, short-term debt instruments, including government, corporate and money market securities. The Portfolio may not achieve its investment objective when so invested. Among the principal risks of investing in the Portfolio are Market Risk, Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Foreign Securities Risk, Borrowing Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. LM Total Return Institutional Portfolio Adviser: LMFA Objective: Capital appreciation and current income in order to achieve an attractive total investment return consistent with reasonable risk The Portfolio invests primarily in securities that, in the Adviser's opinion, offer the potential for long-term capital growth and attractive current income. The Portfolio invests primarily in common stocks, debt securities, and securities convertible into common stocks, but is not limited to these types of securities. The Portfolio may invest in securities that do not pay current income but do, in the Adviser's opinion, offer prospects for capital appreciation and/or future income. The Adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts 11 to the Adviser's assessment of their intrinsic value. Intrinsic value, according to the Adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its costs of capital, private market values of similar companies, the value of its assets, and the costs to replicate its business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, are also important. Securities may be undervalued due to uncertainty arising from the availability of accurate information, economic growth and change, changes in competitive conditions, technological change, changes in government policy or geo-political dynamics, and more. The Portfolio may invest in companies of any size. The Adviser typically sells a security when, in the Adviser's assessment, the security no longer appears to offer long-term attractive total returns at reasonable risk, when a more compelling investment opportunity is found, or when the investment basis no longer applies. The Portfolio may invest in money market securities for temporary defensive purposes or when cash is temporarily available. The Portfolio may not achieve its investment objective when so invested. Consistent with the investment objective, the Portfolio may also invest in debt securities when the Adviser believes the return on such securities may equal or exceed the return on equity securities. The Portfolio may invest in debt securities of any maturity of both foreign and domestic issuers without regard to rating, and may invest its assets in debt securities without regard to a percentage limit. The Adviser currently anticipates that under normal market conditions the Portfolio will invest no more than 50% of its total assets in intermediate-term and long-term debt securities and no more than 5% of its total assets in debt securities that are not investment grade quality (commonly referred to as junk bonds). Among the principal risks of investing in the Portfolio are Market Risk, Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Liquidity Risk, Borrowing Risk, Foreign Securities Risk, Currency Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. LM Balanced Institutional Portfolio Adviser: LMFA Objective: Long-term capital appreciation and current income The Portfolio is a "fund of funds" which is comprised of two separate investment components: an equity component and a fixed income component. The equity component will consist solely of Institutional Class shares of the LM Value Institutional Portfolio ("Value Institutional Portfolio"), a series of LM Institutional Fund Advisors II, Inc., while the fixed income component will consist solely of Institutional Class shares of the Western Asset Core Portfolio ("Core Portfolio"), a series of LM Institutional Fund Advisors I, Inc. The investment objectives, principal investment strategies and related risks of the Core Portfolio and the Value Institutional Portfolio are described elsewhere in this Prospectus. LMFA, the Portfolio's Adviser, will be responsible for allocating assets between the two components. LMFA currently anticipates that under normal market conditions approximately 60% of the Portfolio's total assets will be allocated to the equity component and approximately 40% will be allocated to the fixed income component. However, LMFA reserves the right to vary these percentages, as it deems appropriate and market opportunities arise, subject to the limitation that, under normal market conditions, at least 25% of the Portfolio's total assets will be allocated to the fixed income component. The Portfolio may also hold cash or other short-term investments and may not achieve its investment objective when so invested. Batterymarch U.S. MidCapitalization Equity Portfolio Adviser: Batterymarch Objective: Long-term capital appreciation Under normal market conditions, the Portfolio will invest at least 65% of its total assets in equity securities of companies with medium market capitalizations domiciled, or having their principal activities, in the United States. The Adviser defines medium market capitalization companies as those with market capitalizations similar, in its judgment, to the market capitalization of companies in the Standard & Poor's MidCap 400 Index, determined at the time of the Portfolio's investment. The S&P MidCap 400 Index is a market weighted composite index of 400 stocks in the middle capitalization sector of the U.S. equities market. A company that was a medium market capitalization company at the time of the Portfolio's investment will continue to be treated as such for purposes of the 65% test, even if its market capitalization is no longer similar to that of companies in the S&P MidCap 400 Index. Equity securities include common stock, preferred stock, securities convertible into or exchangeable for common stock, rights and warrants to acquire such securities and substantially similar forms of equity with comparable risk. The 12 Portfolio may also invest in securities of companies in the form of American Depository Receipts, which are typically dollar-denominated instruments traded on an exchange in the United States. The Adviser uses a bottom-up, quantitative stock selection process. The cornerstone of this process is a proprietary stock selection model that ranks the stocks in the Portfolio's investable universe by relative attractiveness. The quantitative factors within this model reflect a style neutral investment philosophy and are intended to measure growth, value, fundamental expectations and technical indicators. In addition to its principal investment strategies, the Portfolio may engage in other transactions. For example, although the Portfolio expects to remain substantially fully invested in equity securities, the Portfolio may invest in debt or fixed income securities, cash and money market instruments, including repurchase agreements. Under normal market conditions, up to 5% of the Portfolio's total assets may be invested in fixed income securities rated below investment grade or, if unrated, determined by the Adviser to be of comparable quality. The Portfolio may also engage in reverse repurchase agreement transactions and other borrowings, purchase restricted and illiquid securities, lend its portfolio securities, invest in securities of other investment companies, engage in foreign currency exchange transactions and engage in futures and options transactions. Among the principal risks of investing in the Portfolio are Market Risk, Interest Rate Risk, Credit Risk, Borrowing Risk, Liquidity Risk, Derivatives Risk, Foreign Securities Risk, Currency Risk, Special Risks of High Yield Securities and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. Batterymarch U.S. Small Capitalization Equity Portfolio Adviser: Batterymarch Objective: Long-term capital appreciation Under normal market conditions, the Portfolio will invest at least 65% of its total assets in equity securities of companies with small market capitalizations domiciled, or having their principal activities, in the United States. The Adviser defines small market capitalization companies as those whose market capitalizations are similar, in its judgment, to the market capitalization of companies in the Russell 2000 Index, determined at the time of the Portfolio's investment. The Russell 2000 Index is a capitalization-weighted broad-based index of 2000 small capitalization U.S. companies. A company that was a small market capitalization company at the time of the Portfolio's investment will continue to be treated as such for purposes of the 65% test, even if its market capitalization is no longer similar to that of companies in the Russell 2000 Index. Equity securities include common stock, preferred stock, securities convertible into or exchangeable for common stock, rights and warrants to acquire such securities and substantially similar forms of equity with comparable risk. The Portfolio may also invest in securities of companies in the form of American Depository Receipts, which are typically dollar-denominated instruments traded on an exchange in the United States. The Adviser uses a bottom-up, quantitative stock selection process. The cornerstone of this process is a proprietary stock selection model that ranks the stocks in the Portfolio's investable universe by relative attractiveness on a daily basis. The quantitative factors within this model reflect a style neutral investment philosophy and are intended to measure growth, value, fundamental expectations and technical indicators. In addition to its principal investment strategies, the Portfolio may engage in other transactions. For example, although the Portfolio expects to remain substantially fully invested in equity securities, the Portfolio may invest in debt or fixed income securities, cash and money market instruments, including repurchase agreements. Under normal market conditions, up to 5% of the Portfolio's total assets may be invested in fixed income securities rated below investment grade or, if unrated, determined by the Adviser to be of comparable quality. The Portfolio may also engage in reverse repurchase agreement transactions and other borrowings, purchase restricted and illiquid securities, lend its portfolio securities, invest in securities of other investment companies, engage in foreign currency exchange transactions and engage in futures and options transactions. Among the principal risks of investing in the Portfolio are Market Risk, Interest Rate Risk, Credit Risk, Borrowing Risk, Liquidity Risk, Derivatives Risk, Special Risks of High Yield Securities and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. 13 Batterymarch International Equity Portfolio Adviser: Batterymarch Objective: Long-term total return Under normal market conditions, the Portfolio will invest substantially all of its assets, but in any event at least 65% of its total assets, in non-U.S. equity securities. The primary focus of the Adviser is stock selection, with a secondary focus on country allocation. The Adviser uses a bottom-up, quantitative stock selection process for the developed markets portion of the Portfolio's portfolio. The cornerstone of this process is a proprietary stock selection model that ranks the 2,800 stocks in the Portfolio's investable universe by relative attractiveness on a daily basis. The quantitative factors within this model are intended to measure growth, value, fundamental expectations and technical indicators (i.e., supply and demand). Country allocation for the developed markets portion of the Portfolio is based on rankings generated by the Adviser's proprietary country model. The Adviser examines securities from over 20 international stock markets, with emphasis on several of the largest: Japan, United Kingdom, France, Canada and Germany. The Portfolio may invest up to 35% of its total assets in emerging market equity securities. The Adviser's investment strategy for the emerging markets portion of the Portfolio represents a distinctive combination of quantitative methodology and traditional fundamental analysis. The emerging markets allocation focuses on what the Adviser believes are higher-quality, dominant companies, which the Adviser believes to have strong growth prospects and reasonable valuations. Country allocation for the emerging markets portion of the Portfolio also combines quantitative and fundamental approaches. The Portfolio will normally be invested across a broad range of industries and across a number of countries, consistent with the objective of maximum total return. However, more than 25% of the Portfolio's total assets may be invested in securities of issuers located in a single country, which is currently expected to be the case with respect to both Japan and the United Kingdom. Because the Portfolio may concentrate a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting such currency or issuers within that country than would a more diversified portfolio of securities. The Portfolio may invest without limit in cash and money market instruments, including repurchase agreements, in circumstances when cash is temporarily available, or for temporary defensive purposes when the Adviser believes such action is war-ranted by abnormal market or economic situations. The Portfolio may not achieve its investment objectives when so invested. Up to 5% of the Portfolio's total assets may be invested in fixed income securities rated below investment grade or, if unrated, determined by the Adviser to be below investment grade. The Adviser may also seek to enhance portfolio returns through active currency hedging strategies, although there can be no assurances that such strategies will be pursued or, if pursued, will be successful. Among the principal risks of investing in the Portfolio are Market Risk, Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Borrowing Risk, Derivatives Risk and Hedging Risk. Please see "Principal Risks" for a discussion of these and other risks. Batterymarch Emerging Markets Portfolio Adviser: Batterymarch Objective: Long-term capital appreciation Under normal market conditions, the Portfolio will invest substantially all of its assets, but in any event at least 65% of its total assets, in equity securities and convertible securities of emerging market issuers. Emerging market countries are those countries having less fully developed economic and political systems and include any country: (i) having an "emerging stock market" or considered a "frontier market" as defined by the International Finance Corporation; (ii) with low- to middle-income economies according to the International Bank for Reconstruction and Development ("World Bank"); (iii) listed in World Bank publications as developing; or (iv) included in the Morgan Stanley Capital International (MSCI) Emerging Markets published index. Emerging market equity securities include common stock, preferred stock, securities convertible into common stock, rights and warrants to acquire such securities and substantially similar forms of equity with comparable risk characteristics that are: (1) publicly traded on emerging market stock exchanges, or whose principal trading market is over-the-counter (i.e., off-exchange) in an emerging market country; (2) 14 securities denominated in any currency if issued by companies to finance operations in an emerging market country; (3) securities of companies that derive a substantial portion (i.e., in excess of 50%) of their total revenues from goods or services produced in, or sales made in, emerging market countries; (4) securities of companies organized under the laws of an emerging market country or region, which are publicly traded in securities markets elsewhere; or (5) American depositary receipts ("ADRs") (or similar instruments) with respect to the foregoing. The Portfolio intends to invest in Asia, Latin America, the Indian Subcontinent, Southern and Eastern Europe, the Middle East and Africa, although it may not invest in all these markets at all times and may not invest in any particular market when it deems investment in that country or region to be inadvisable. More than 25% of the Portfolio's total assets may be invested in securities of issuers located in a single country. Because the Portfolio may concentrate a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting such currency or issuers within that country than would a more diversified portfolio of securities. The Adviser focuses on what the Adviser believes are higher-quality, dominant emerging markets companies which the Adviser believes to have strong growth prospects and reasonable valuations, selected from an investable universe of approximately 1,000 stocks. The Adviser's emerging markets investment strategy represents a distinctive combination of quantitative methodology and traditional fundamental analysis. Traditional "on-the-ground" fundamental research is combined by the Adviser with quantitative valuation disciplines in those markets where reliable data is available. In determining country allocation, the Adviser also merges quantitative and fundamental approaches. The Portfolio may invest without limit in cash and money market instruments, including repurchase agreements, in circumstances when cash is temporarily available, or for temporary defensive purposes when the Adviser believes such action is warranted by abnormal market or economic situations. The Portfolio may not achieve its investment objective when so invested. Up to 10% of the Portfolio's total assets may be invested in fixed income securities rated below investment grade or, if unrated, determined by the Adviser to be below investment grade (i.e., rated below BBB/Baa and commonly referred to as junk bonds). Among the principal risks of investing in the Portfolio are Market Risk, Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield Securities, Borrowing Risk, Derivatives Risk and Hedging Risk. Please see "Principal Risks" for a discussion of those and other risks. Principal Risks In General At any time, your investment in a mutual fund may be worth more or less than the price you originally paid for it. You may lose money by investing in any of these Portfolios because: (1) the value of the investments it owns changes, sometimes rapidly and unpredictably; (2) the Portfolio is not successful in reaching its goal because of its strategy or because it did not implement its strategy properly; or (3) unforeseen occurrences in the securities markets negatively affect the Portfolio. An investment in the Western Asset Government Money Market and Western Asset Money Market Portfolios is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although these Portfolios seek to reserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these Portfolios. The following risks apply to the Portfolios. You should read this section carefully before you invest in order to learn more about the Portfolio in which you will invest. Market Risk Certain of the Portfolios may invest, directly or indirectly, their assets in equity securities. Prices of equity securities generally fluctuate more than those of other securities. A Portfolio may experience a substantial or complete loss on an individual stock. Market risk may affect a single issuer, industry or section of the economy or may affect the market as a whole. The Batterymarch International Equity Portfolio and the Batterymarch Emerging Markets Portfolio invest 15 primarily in foreign equity securities. Foreign securities have additional risks, see "Foreign Securities Risk" and "Currency Risk" below. Securities of "small cap" companies, such as those in which the Batterymarch U.S. Small Capitalization Equity Portfolio may invest, entail special risks. Such companies often have limited operating histories and may have more restricted product lines or more limited financial resources than larger, more established companies. For these and other reasons, they may be more severely affected by economic downturns or other adverse developments than are larger, more established companies. Securities of "small cap" companies may be traded "over-the-counter" and often trade less frequently and in more limited volume, may be subject to greater volatility and may be more difficult to value than securities of larger, more established companies. "Small cap" companies are often involved in actual or anticipated reorganizations or restructurings, which involve special risks, including difficulty in obtaining information as to the financial condition of such companies. Market prices of such companies' securities may be subject to sudden and erratic price volatility. The securities of "mid-sized" companies, such as those in which the Batterymarch U.S. MidCapitalization Equity Portfolio and the LM Special Investment Institutional Portfolio may invest, share many of these same risks. Foreign Securities Risk Investments in foreign securities (including those denominated in U.S. dollars) involve certain risks not typically associated with investments in domestic issuers. The values of foreign securities are subject to economic and political developments in the countries and regions where the companies operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies, and to changes in exchange rates. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country. In general, less information is publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. Some securities issued by foreign governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of the foreign government. Even where a security is backed by the full faith and credit of a foreign government, it may be difficult for a Portfolio to pursue its rights against a foreign government in that country's courts. Some foreign governments have defaulted on principal and interest payments. In addition, a Portfolio's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic developments. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Emerging Markets Risk The risks of foreign investment are greater for investments in emerging markets. Among others, these types of investments can include not only equity securities, but also "Brady Bonds," bonds issued as a result of a debt restructuring plan, Eurobonds, domestic and international bonds issued under the laws of a developing country, emerging market loans and other debt instruments. Emerging market countries typically have economic and political systems that are less fully developed, and can be expected to be less stable than those of more advanced countries. For example, the economies of such countries can be subject to rapid and unpredictable rates of inflation or deflation. Low trading volumes may result in a lack of liquidity and in price volatility. Emerging market countries may have policies that restrict investment by foreigners, or that prevent foreign investors from withdrawing their money at will. Because some of the Portfolios may invest a significant amount of their total assets in emerging market securities, investors should be able to tolerate sudden and sometimes substantial fluctuations in the value of their investments. An investment in any Portfolio that invests in emerging market securities, which includes the Batterymarch Emerging Markets Portfolio, the Batterymarch International Equity Portfolio, the Western Asset High Yield Portfolio, the Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global Strategic Income Portfolio, should be considered speculative. Currency Risk Because certain Portfolios may invest in securities denominated in foreign currencies, their value can be affected by changes in the rates of exchange between those currencies and the U.S. dollar. Currency exchange rates can be volatile and 16 affected by, among other factors, the general economics of a country, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls, and speculation. A security may be denominated in a currency that is different from the currency where the issuer is domiciled. In addition to the policies described elsewhere in this Prospectus, the Portfolios may from time to time attempt to hedge a portion of their currency risk, using a variety of techniques, including currency futures, forwards, or options. However, these instruments may not always work as intended, and in certain cases a Portfolio may be worse off than if it had not used a hedging instrument. For most emerging market currencies, there are not suitable hedging instruments available. See "Hedging Risk" below for more information. Interest Rate Risk Each Portfolio may be subject to interest rate risk, which is the possibility that the market prices of the Portfolios' fixed income investments may decline due to an increase in market interest rates. Generally, the longer the maturity of a fixed-income security, the greater is the effect on its value when rates increase. Certain securities pay interest at variable or floating rates. Variable rate securities reset at specified intervals, while floating rate securities reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the effect of market interest rates on the value of the security. However, some securities do not track the underlying index directly, but reset based on formulas that can produce an effect similar to leveraging; others may also provide for interest payments that vary inversely with market rates. The market prices of these securities may fluctuate significantly when interest rates change. Credit Risk A Portfolio is also subject to credit risk, i.e., 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 less able to pay. This is broadly gauged by the credit ratings of the securities in which a Portfolio invests. However, ratings are only the opinions of the agencies issuing them and are not absolute guarantees as to quality. Not all securities are rated. Moody's Investors Service considers debt securities rated Baa to have speculative characteristics. Debt securities rated below investment grade (i.e., securities rated below Baa/BBB) are deemed by the rating agencies to be speculative and may involve major risk of exposure to adverse conditions. These ratings may indicate that the securities are highly speculative and may be in default or in danger of default as to principal and interest. Unrated securities of comparable quality share these risks. Not all U.S. government securities are backed by the full faith and credit of the United States. Some are backed only by the credit of the issuing agency or instrumentality. Accordingly, there is a risk of default on these securities. Call Risk Many fixed income securities, especially those issued at high interest rates, provide that the issuer may repay them early. Issuers often exercise this right when interest rates are low. Accordingly, holders of callable securities may not benefit fully from the increase in value that other fixed income securities experience when rates decline. Furthermore, a Portfolio reinvests the proceeds of the payoff at current yields, which are lower than those paid by the security that was paid off. Special Risks of High Yield Securities Securities rated below Baa/BBB, commonly known as junk bonds or high yield securities, have speculative characteristics. Accordingly, there is a greater possibility that the issuers of these securities may be unable to make timely payments of interest and principal and thus default. If this happens, or is perceived as likely to happen, the values of these investments will usually be more volatile. These securities may be less liquid than higher-rated securities, which means a Portfolio may have difficulty selling them at times, and may have to apply a greater degree of judgment in establishing a price. When a Portfolio buys lower rated debt, the achievement of its goals depends more on the Advisers' ability than would be the case if a Portfolio were buying investment grade debt. Unrated securities of comparable quality share these risks. 17 Borrowing Risk When a Portfolio is borrowing money or otherwise leveraging its portfolio, the value of an investment in that Portfolio will be more volatile and all other risks will tend to be compounded. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of a Portfolio's holdings. Portfolios may take on borrowing risk or similar risks by using reverse repurchase agreements, dollar rolls and other borrowings, by investing collateral from loans of portfolio securities, through the use of when-issued, delayed-delivery or forward commitment transactions or by using other derivatives. The use of leverage may also cause a Portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or meet segregation requirements. Liquidity Risk Liquidity risk exists when particular investments are difficult to sell. A Portfolio may not be able to sell these illiquid investments at the best prices. Investments in derivatives, foreign investments, restricted securities, securities having small market capitalization, and securities having substantial market and/or credit risk tend to involve greater liquidity risk. Special Risks of Mortgage-Backed and Asset-Backed Securities Mortgage-backed securities represent an interest in a pool of mortgages. When market interest rates decline, many mortgages are refinanced, and mortgage- backed securities are paid off earlier than expected. Prepayments may also occur on a scheduled basis or due to foreclosure. The effect on a Portfolio's return is similar to that discussed above for call risk. When market interest rates increase, the market values of mortgage-backed securities decline. At the same time, however, mortgage refinancings and prepayments slow, which lengthens the effective maturities of these securities. As a result, the negative effect of the rate increase on the market value of mortgage-backed securities is usually more pronounced than it is for other types of fixed income securities, potentially increasing the volatility of a Portfolio. Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset- backed securities to enforce its security interest in the underlying assets may be limited. Asset-backed securities are subject to many of the same risks as mortgage-backed securities. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which a Portfolio may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause a Portfolio to experience a loss equal to any unamortized premium. Non-Diversification The Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global Strategic Income Portfolio are non-diversified, meaning each may invest a greater percentage of its total assets in securities of any one issuer, or may invest in a smaller number of different issuers, than it could if it were a "diversified" company under the Investment Company Act. When a Portfolio's assets are invested in the securities of a limited number of issuers, or in a limited number of countries or currencies, the value of its shares will be more susceptible to any single economic, political or regulatory event than shares of a more diversified fund. Derivatives Risk A Portfolio may engage in a variety of transactions using "derivatives," such as futures, options, warrants and swaps. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Derivatives may be traded on organized exchanges, or in individually negotiated transactions with other parties (these are known as "over the counter"). A Portfolio may use derivatives both for hedging and non-hedging purposes, including for purposes of enhancing returns. Although the Advisers have the flexibility to make use of derivatives, they may choose not to for a variety of reasons, even under very volatile market conditions. 18 Derivatives involve special risks and costs and may result in losses to a Portfolio. The successful use of derivatives requires sophisticated management, and a Portfolio will depend on the Adviser's ability to analyze and manage derivatives transactions. The prices of derivatives may move in unexpected ways, especially in abnormal market conditions. Some derivatives are "leveraged" and therefore may magnify or otherwise increase investment losses to a Portfolio. A Portfolio's use of derivatives may also increase the amount of taxes payable by shareholders. Other risks arise from the potential inability to terminate or sell derivatives positions. A liquid secondary market may not always exist for a Portfolio's derivatives positions at any time. In fact, many over-the-counter instruments will not be liquid. Over-the-counter instruments also involve the risk that the other party will not meet its obligations to a Portfolio. Hedging Risk The decision as to whether and to what extent a Portfolio will engage in hedging transactions to hedge against such risks as credit risk, currency risk and market risk will depend on a number of factors, including prevailing market conditions, the composition of the Portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that a Portfolio will engage in hedging transactions at any given time or from time to time or that any such strategies will be successful. Hedging transactions involve costs and may result in losses. Turnover The length of time a Portfolio has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a Portfolio is known as "portfolio turnover." As a result of a Portfolio's investment policies, under certain market conditions a Portfolio's turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to a Portfolio, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Higher portfolio turnover rates, such as those above 100%, are likely to result in higher brokerage commissions or other transactions costs and could give rise to a greater amount of taxable capital gains. Risks Associated with Other Policies the Portfolios May Pursue In addition to the investment strategies described above, a Portfolio may also make other types of investments, and therefore may be subject to other risks. Some of these risks are described in each Portfolio's Statement of Additional Information ("SAI"). The terms "debt" and "fixed income securities" are used in this Prospectus interchangeably, and, where used, are not intended to be limiting. At times the Advisers may judge that market conditions make pursuing a Portfolio's investment strategies inconsistent with the best interests of its shareholders. The Advisers then may temporarily use alternative strategies that are mainly designed to limit a Portfolio's losses. Although the Advisers have the flexibility to use these strategies, they may choose not to for a variety of reasons, even in very volatile market conditions. These strategies may cause a Portfolio to miss out on investment opportunities, and may prevent a Portfolio from achieving its goal. In addition, an Adviser may also keep a portion of a Portfolio's assets in cash for temporary or defensive purposes, in order to meet redemption requests or for investment purposes. Except for the investment objective of each of the Western Asset Core, Western Asset Intermediate and Western Asset Money Market Portfolios, the Directors may change a Portfolio's investment objective, investment strategies and other policies without shareholder approval. Performance Information The following information provides some indication of a Portfolio's risks. The charts and tables show year-to-year changes in the performance of the Institutional Class shares for the Western Asset Core, Western Asset Intermediate, Western Asset Core Plus, Western Asset Non-U.S. Fixed Income, and LM Value Institutional Portfolios. The tables following the charts compare each Portfolio's performance to that of a broad measure of market performance. SEC Rules do not require charts and tables for the other Portfolios or for the Financial Intermediary Class shares. However, the performance for the Financial Intermediary Class would be lower for each Portfolio since this Class has higher expenses. Of course, a Portfolio's past performance is not an indication of future performance. 19 Western Asset Core Portfolio Calendar-Year Total Returns Best quarter: Second quarter 1995: +6.91% Worst quarter: First quarter 1994: -2.60% More recent return information: January 1, 2000 - June 30, 2000: ____% Performance Chart: 1991: 18.02% 1992: 7.85% 1993: 13.86% 1994: -4.33% 1995: 20.97% 1996: 3.70% 1997: 10.17% 1998: 8.34% 1999: -1.69% Average Annual Total Returns for periods ended December 31, 1999 1 Year 5 Years Portfolio Inception (September 4, 1990) Core Portfolio -1.69% 8.04% 8.58% Salomon Broad Market Index* -0.83% 7.73% 7.99%** *The Salomon Brothers Broad Market Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The Index includes institutionally traded U.S. Treasury, government- sponsored, mortgage and corporate securities. The Index does not incur fees and expenses and cannot be purchased directly by investors. **The average annual total return since inception shown for the Index is from August 31, 1990. Western Asset Intermediate Portfolio Calendar-Year Total Returns Best quarter: Second quarter 1995: +5.17% Worst quarter: First quarter 1996: -0.61% More recent return information: January 1, 2000 - June 30, 2000: ____% Performance Chart: 1995: 15.51% 1996: 4.69% 1997: 8.40% 1998: 7.71% 1999: 0.39% Average Annual Total Returns for periods ended December 31, 1999 1 Year 5 Years Portfolio Inception (July 1, 1994) Intermediate Portfolio 0.39% 7.22% 6.65% Lehman Intermediate Gov't/Corp Bond Index* 0.39% 7.10% 6.57%** *The Lehman Brothers Intermediate Gov't/Corp Bond Index is an unmanaged index that measures the performance of intermediate (1-10 year) government and corporate fixed-rate debt issues. The Index does not incur fees and expenses and cannot be purchased directly by investors. **The average annual total return since inception shown for the Index is from June 30, 1994. 20 Western Asset Core Plus Portfolio Calendar-Year Total Returns Best quarter: Third quarter 1999: +0.93% Worst quarter: Second quarter 1999: -1.12% More recent return information: January 1, 2000 - June 30, 2000: ____% Performance Chart: 1999: -1.15% Average Annual Total Returns for periods ended December 31, 1999 1 Year Portfolio Inception (July 8, 1998) Core Plus Portfolio -1.15% 1.63% Salomon Broad Market Index* -0.83% 2.45%** *The Salomon Brothers Broad Market Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The Index includes institutionally traded U.S. Treasury, government- sponsored, mortgage and corporate securities. The Index does not incur fees and expenses and cannot be purchased directly by investors. **The average annual total return since inception shown for the Index is from June 30, 1998. Western Asset Non-U.S. Fixed Income Portfolio Calendar-Year Total Returns Best quarter: Fourth quarter 1999: 1.10% Worst quarter: Third quarter 1999: -1.15% More recent return information: January 1, 2000 - June 30, 2000: ____% Performance Chart: 1999: -1.78% Average Annual Total Returns for periods ended December 31, 1999 1 Year Portfolio Inception (July 15, 1998) Non-U.S. Portfolio -1.78% 3.14% Salomon World Gov't ex-U.S. Index (Hedged)* 2.88% 5.47%** *The Salomon Brothers World Government ex-U.S. Index (Hedged) is an unmanaged index that tracks debt issues traded in 14 world government bond markets. The Index does not incur fees and expenses and cannot be purchased directly by investors. **The average annual total return since inception shown for the Index is from July 31, 1998. LM Value Institutional Portfolio Calendar-Year Total Returns Best quarter: Fourth quarter 1998: 36.14% Worst quarter: Third quarter 1999: -9.45% More recent return information: January 1, 2000 - June 30, 2000: ____% Performance Chart: 1999: 27.27% 21 Average Annual Total Returns for periods ended December 31, 1999 1 Year Portfolio Inception (September 22, 1998) Value Institutional Portfolio 27.27% 52.02% S&P 500 Index* 21.04% 35.97%** *The S&P 500 Index is an unmanaged of 500 common stocks and is considered to be a broad indicator of general market performance. The Index does not incur fees and expenses and cannot be purchased directly by investors. **The average annual total return since inception shown for the Index is from September 30, 1998. Fees and Expenses The following tables describe the fees and expenses that you may pay if you buy and hold shares of a Portfolio. Expenses are based on annualized actual expenses for the fiscal year ended March 31, 2000 for the Western Asset Intermediate Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio, Western Asset Non-U.S. Fixed Income Portfolio and LM Value Institutional Portfolio. Expenses for the other Portfolios are based on estimated amounts for the current fiscal year. The examples below the tables are intended to help you compare the cost of investing in a Portfolio with the cost of investing in other mutual funds. The examples assume that you invest $10,000 in a Portfolio for the time periods indicated and then redeem all of your shares at the end of those periods. The examples also assume that your investment has a 5% return each year and that the Portfolio's operating expenses remain the same. Your actual costs may be higher or lower. Western Asset Government Money Market Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.20% 0.20% Distribution (12b-1) Fees* None 0.10% Other Expenses 0.15% 0.15% ----- ----- Total Annual Fund Operating Expenses 0.35% 0.45% ===== ===== Expense Reimbursement/Waiver (0.05%) (0.05%) ------- ------- Net Expenses** 0.30% 0.40% ===== ===== Examples 1 Year $36 $46 3 Years $113 $144
22 Western Asset Money Market Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.20% 0.20% Distribution (12b-1) Fees* None 0.10% Other Expenses 0.15% 0.15% ----- ----- Total Annual Fund Operating Expenses 0.35% 0.45% ===== ===== Expense Reimbursement/Waiver (0.05%) (0.05%) ------- ------- Net Expenses** 0.30% 0.40% ===== ===== Examples 1 Year $36 $46 3 Years $113 $144
Western Asset Intermediate Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.40% 0.40% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.08% 0.08% ----- ----- Total Annual Fund Operating Expenses 0.48% 0.73% ===== ===== Expense Reimbursement/Waiver (0.03%) (0.03%) ------- ------- Net Expenses** 0.45% 0.70% ===== ===== Examples 1 Year $49 $75 3 Years $154 $233 5 Years $269 $406 10 Years $604 $906
23 Western Asset Intermediate Plus Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.40% 0.40% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.15% 0.15% ----- ----- Total Annual Fund Operating Expenses 0.55% 0.80% ===== ===== Expense Reimbursement/Waiver (0.10%) (0.10%) ------- ------- Net Expenses** 0.45% 0.70% ===== ===== Examples 1 Year $56 $82 3 Years $176 $255
Western Asset Core Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.45% 0.45% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.06% 0.06% ----- ----- Total Annual Fund Operating Expenses** 0.51% 0.76% ===== ===== Expense Reimbursement/Waiver (0.01%) (0.01%) ------- ------- Net Expenses** 0.50% 0.75% ===== ===== Examples 1 Year $52 $78 3 Years $164 $245 5 Years $285 $422 10 Years $640 $942
24 Western Asset Core Plus Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.45% 0.45% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.20% 0.20% ----- ----- Total Annual Fund Operating Expenses 0.65% 0.90% ===== ===== Expense Reimbursement/Waiver (0.15%) (0.15%) ------- ------- Net Expenses** 0.50% 0.75% ===== ===== Examples 1 Year $66 $92 3 Years $208 $287 5 Years $362 $498 10 Years $810 $1,108
Western Asset Inflation Indexed Bond Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.20% 0.20% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.15% 0.15% ----- ----- Total Annual Fund Operating Expenses 0.35% 0.60% ===== ===== Expense Reimbursement/Waiver (0.10%) (0.10%) ------- ------- Net Expenses** 0.25% 0.50% ===== ===== Examples 1 Year $36 $61 3 Years $113 $192
25 Western Asset High Yield Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.55% 0.55% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.15% 0.15% ----- ----- Total Annual Fund Operating Expenses 0.70% 0.95% ===== ===== Expense Reimbursement/Waiver (0.15%) (0.15%) ------- ------- Net Expenses** 0.55% 0.80% ===== ===== Examples 1 Year $72 $97 3 Years $224 $303
Western Asset Non-U.S. Fixed Income Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.45% 0.45% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.38% 0.38% ----- ----- Total Annual Fund Operating Expenses 0.83% 1.08% ===== ===== Expense Reimbursement/Waiver (0.28%) (0.28%) ------- ------- Net Expenses** 0.55% 0.80% ===== ===== Examples 1 Year $85 $110 3 Years $265 $343 5 Years $460 $595 10 Years $1,025 $1,317
26 Western Asset Global Strategic Income Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.45% 0.45% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.40% 0.40% ----- ----- Total Annual Fund Operating Expenses 0.85% 1.10% ===== ===== Expense Reimbursement/Waiver (0.05%) (0.05%) ------- ------- Net Expenses** 0.80% 1.05% ===== ===== Examples 1 Year $87 $112 3 Years $271 $350
Western Asset Enhanced Equity Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.55% 0.55% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.20% 0.20% ----- ----- Total Annual Fund Operating Expenses 0.75% 1.00% ===== ===== Expense Reimbursement/Waiver (0.10%) (0.10%) ------- ------- Net Expenses** 0.65% 0.90% ===== ===== Examples 1 Year $77 $102 3 Years $240 $318
LM Value Institutional Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) 0.01% 0.02% Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.60% 0.60% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.14% 0.14% ----- ----- Total Annual Fund Operating Expenses 0.75% 1.01% ===== ===== Expense Reimbursement/Waiver None (0.01%) ------- Net Expenses** 0.75% 1.00% ===== ===== Examples 1 Year $77 $102 3 Years $240 $318 5 Years $417 $552 10 Years $930 $1,225
27 LM Special Investment Institutional Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.60% 0.60% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.25% 0.25% ----- ----- Total Annual Fund Operating Expenses 0.85% 1.10% ===== ===== Expense Reimbursement/Waiver (0.10%) (0.10%) ------- ------- Net Expenses** 0.75% 1.00% ===== ===== Examples 1 Year $87 $112 3 Years $271 $350
LM Total Return Institutional Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.60% 0.60% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.25% 0.25% ----- ----- Total Annual Fund Operating Expenses 0.85% 1.10% ===== ===== Expense Reimbursement/Waiver (0.10%) (0.10%) ------- ------- Net Expenses** 0.75% 1.00% ===== ===== Examples 1 Year $87 $112 3 Years $271 $350
28 LM Balanced Institutional Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.05% 0.05% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.25% 0.25% ----- ----- Total Annual Fund Operating Expenses** 0.30% 0.55% ===== ===== Total Annual Expenses of Underlying Portfolios+ 0.65% 0.65% ----- ----- Total Expenses of Balanced Portfolio and Underlying Portfolios 0.95% 1.20% ===== ===== Examples 1 Year $97 $122 3 Years $303 $381
Batterymarch U.S. MidCapitalization Equity Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.50% 0.50% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.25% 0.25% ----- ----- Total Annual Fund Operating Expenses** 0.75% 1.00% ===== ===== Examples 1 Year $77 $102 3 Years $240 $318
Batterymarch U.S. Small Capitalization Equity Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.70% 0.70% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.25% 0.25% ----- ----- Total Annual Fund Operating Expenses** 0.95% 1.20% ===== ===== Examples 1 Year $97 $122 3 Years $303 $381
29 Batterymarch International Equity Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.65% 0.65% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.40% 0.40% ----- ----- Total Annual Fund Operating Expenses 1.05% 1.30% ===== ===== Expense Reimbursement/Waiver (0.05%) (0.05%) ------- ------- Net Expenses** 1.00% 1.25% ===== ===== Examples 1 Year $107 $132 3 Years $334 $412
Batterymarch Emerging Markets Portfolio
Institutional Class Financial Intermediary Class ------------------- ---------------------------- Shareholder Fees (Fees paid directly from your investment) None None Annual Fund Operating Expenses (Expenses deducted from Portfolio assets) Management Fees 0.65% 0.65% Distribution (12b-1) Fees* None 0.25% Other Expenses 0.85% 0.85% ----- ----- Total Annual Fund Operating Expenses 1.50% 1.75% ===== ===== Expense Reimbursement/Waiver (0.05%) (0.05%) ------- ------- Net Expenses** 1.45% 1.70% ===== ===== Examples 1 Year $153 $178 3 Years $474 $551
*The 12b-1 fees shown in the tables reflect the amount to which the Directors have currently limited payments under the Portfolios' Distribution Plans. Pursuant to each Portfolio's Distribution Plan, the Directors may increase the 12b-1 fees to 0.40% of average net assets without shareholder approval. **The Manager is contractually obligated to limit Portfolio expenses to the level shown through August 1, 2001. +Shareholders of the LM Balanced Institutional Portfolio ("Balanced Portfolio") will indirectly bear the Balanced Portfolio's pro rata share of the operating expenses incurred by the underlying Portfolios in which the Balanced Portfolio invests. Consequently, the fees and corresponding examples for the Balanced Portfolio include both the estimated fees of the Balanced Portfolio and a composite of the fees of the Core Portfolio and the Value Institutional Portfolio actually incurred in the last fiscal year. The Manager is contractually obligated to limit the expenses of the underlying Portfolios through August 1, 2001. For the purposes of calculating the effect of the fees of the underlying Portfolios on Balanced Portfolio shareholders, it has been assumed that LMFA will allocate 60% of the Balanced Portfolio's assets to the Value Institutional Portfolio and 40% to the Core Portfolio. LMFA reserves the right to vary the allocation of the Balanced Portfolio's assets, as it deems appropriate, subject to certain limitations discussed earlier in this Prospectus. The actual fees and expenses incurred directly and indirectly by shareholders of the Balanced Portfolio may be higher or lower than those shown above. 30 Management of the Portfolios General LMIFA I and LMIFA II are open-end management investment companies comprised of a variety of separate investment portfolios. LMIFA I was incorporated in Maryland on May 16, 1990. LMIFA II was incorporated in Maryland on January 13, 1998. Board of Directors The business affairs of LMIFA I and LMIFA II are managed under the direction of a Board of Directors for each corporation, and the Directors of each corporation are responsible for generally overseeing the conduct of the relevant Portfolio's business. Information about the Directors and executive officers may be found in the relevant SAI. Each Board of Directors has retained the Manager and the Advisers to manage the Portfolios' affairs, furnish a continuing investment program for the Portfolios and make investment decisions on their behalf, subject to such policies as the Directors may determine. Manager, Advisers and Portfolio Managers The Portfolios are managed by the Manager. Each Portfolio pays the Manager a monthly fee based on the average net assets of the Portfolio at the following annual rates (shown prior to any waivers or reimbursements): Annual Percentage of Portfolio Average Net Assets --------- ------------------ Western Asset Money Market Portfolio 0.20% Western Asset Government Money Market Portfolio 0.20% Western Asset Intermediate Portfolio 0.40% Western Asset Intermediate Plus Portfolio 0.40% Western Asset Core Portfolio 0.45% Western Asset Core Plus Portfolio 0.45% Western Asset Inflation Indexed Bond Portfolio 0.20% Western Asset High Yield Portfolio 0.55% Western Asset Non-U.S. Fixed Income Portfolio 0.45% Western Asset Global Strategic Income Portfolio 0.45% Western Asset Enhanced Equity Portfolio 0.55% LM Value Institutional Portfolio 0.60% LM Special Investment Institutional Portfolio 0.60% LM Total Return Institutional Portfolio 0.60% LM Balanced Institutional Portfolio 0.05%* Batterymarch U.S. MidCapitalization Equity Portfolio 0.50% Batterymarch U.S. Small Capitalization Equity Portfolio 0.70% Batterymarch International Equity Portfolio 0.65% Batterymarch Emerging Markets Portfolio 0.65% *Does not include management fees attributable to the Portfolio's investment in the Value Institutional and Core Portfolios. See "Fees and Expenses--LM Balanced Institutional Portfolio" and the related notes for a description of these fees. The Manager is a Maryland corporation formed on February 20, 1998 and is a wholly owned subsidiary of Legg Mason, Inc., a financial services holding company. The Manager acts as investment manager of only these investment company portfolios. Total assets under management by the Manager were approximately $____ as of June 30, 2000. The Manager's address is 100 Light Street, Baltimore, Maryland 21202. In order to assist in carrying out its investment advisory responsibilities, the Manager has retained the Advisers to render advisory services to the Portfolios. The Manager pays the fees of the Advisers. 31 To the extent the Manager receives a management fee after taking into account its contractual obligation to limit expenses as discussed in "Fees and Expenses" above, the Manager will pay a Portfolio's Adviser the entire management fee it receives from the Portfolio. LMFA. LMFA, founded in 1982, acts as adviser or manager to ____ investment company portfolios which had aggregate assets under management of approximately $____ billion as of June 30, 2000. LMFA's address is 100 Light Street, Baltimore, Maryland 21202. LMFA is a subsidiary of Legg Mason, Inc. Batterymarch. Batterymarch, founded in 1969 and now a wholly owned subsidiary of Legg Mason, Inc., acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds, as well as to individual investors. Total assets under management by Batterymarch were approximately $____ billion as of June 30, 2000. The address of Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116. Western Asset. Western Asset, established in 1971 and now a wholly owned subsidiary of Legg Mason, Inc., acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. Total assets under management by Western Asset were approximately $____ billion as of June 30, 2000. The address of Western Asset is 117 East Colorado Boulevard, Pasadena, CA 91105. WAML. WAML, a wholly owned subsidiary of Legg Mason, Inc., acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. Total assets under management by WAML were approximately $____ billion as of June 30, 2000. The address of WAML is 155 Bishopsgate, London, England. Expense Limitations The Manager has, until August 1, 2001, contractually agreed to waive its fees and/or reimburse each Portfolio to the extent a Portfolio's expenses (exclusive of taxes, interest, deferred organization expenses, 12b-1 fees, brokerage and extraordinary expenses) for any class exceed during that month the annual rate set forth in the Fees and Expenses section. Any amounts waived or reimbursed in a particular fiscal year will be subject to repayment by a Portfolio to the Manager to the extent that from time to time during the next three fiscal years the repayment will not cause a Portfolio's expenses to exceed the limit, if any, agreed to by the Manager at that time. Portfolio Managers The names and business experience for each portfolio manager for the past five years are set forth in the following chart. Manager and Business Portfolio Experience (past 5 years) LM Value Institutional Portfolio Bill Miller is a portfolio manager and President of LMFA. Mr. Miller has been employed by LMFA as a portfolio manager since 1982. LM Special Investment Institutional Portfolio Bill Miller (see above) LM Total Return Institutional Portfolio Nancy T. Dennin is a portfolio manager and Senior Vice President of LMFA. Ms. Dennin has been employed by LMFA since 1985 and has served as a portfolio manager or co-manager for over seven years. LM Balanced Institutional Portfolio Bill Miller (see above) Neither Western Asset, WAML nor Batterymarch employs individual portfolio managers to determine the investments of a Portfolio. Instead, the day-to-day management of the various Portfolios' investments will be the responsibility of the Western Asset Investment Strategy Group, the WAML Investment Strategy Group, the Batterymarch Developed Markets (U.S.) team, the Batterymarch Developed Markets (EAFE) team or the Batterymarch Emerging Markets team, as the case may be. 32 Expenses Each Portfolio pays its share of all expenses that are not assumed by the Manager, the Adviser or other parties, including Directors', auditing, legal, custodial, transfer agency and distribution fees (which are in turn allocated to the Financial Intermediary Class of shares). Purchase of Shares The Portfolios offer two classes of shares: Institutional Class and Financial Intermediary Class. Shares in the Financial Intermediary Class bear a 12b-1 fee. See "Distribution Plans" below for more information. Initial Investment Prior to or concurrent with the initial purchase of shares in any Portfolio, each investor must open an account for that Portfolio by completing and signing an Application and mailing it to LM Institutional Advisors, Inc. at the following address: P.O. Box 17635, Baltimore, Maryland 21297-1635. The Portfolios have established minimum investment criteria that vary depending upon which class of shares you wish to purchase. For Institutional Class shares, investors must have at least $50 million in investable assets and invest in the aggregate at least $1 million in the Portfolios. For Financial Intermediary Class shares, investors must have at least $30 million in investable assets and invest in the aggregate at least $1 million in the Portfolios. The Portfolios reserve the right to revise the minimum investment requirement and may waive it at their sole discretion. A purchase order, together with payment in one of the forms described in the following paragraphs, received by Boston Financial Data Services (the "Transfer Agent" or "BFDS") prior to the close of regular trading on the New York Stock Exchange (ordinarily 4:00 p.m., Eastern time) ("close of the Exchange") will be effected at that day's net asset value. An order received after the close of the Exchange will generally be effected at the net asset value determined on the next business day. However, orders received by certain retirement plans and other financial intermediaries by the close of the Exchange and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the following business day will be effected at the net asset value determined on the prior business day. ---------- Purchases of shares can be made by wiring federal funds to State Street Bank and Trust Company. Purchases of shares of the Western Asset Money Market Portfolio or the Western Asset Government Money Market Portfolio may ONLY be made by federal funds wire. Before wiring federal funds, the investor must first telephone the Portfolio at 1-888-425-6432 to receive instructions for wire transfer. On the telephone, the following information will be required: shareholder name; name of the per-son authorizing the transaction; shareholder account number; name of the Portfolio and class of shares to be purchased; amount being wired; and name of the wiring bank. Funds should be wired through the Federal Reserve System to: State Street Bank and Trust Company ABA #011-000-028 DDA #99046096 LM Institutional Fund Advisors [insert name of Portfolio] [Insert your account name and number] The wire should state that the funds are for the purchase of shares of a specific Portfolio and share class and include the account name and number. With respect to the Western Asset Government Money Market Portfolio and Western Asset Money Market Portfolio, if a purchase order for shares is received prior to 12:00 noon, Eastern time, and payment in federal funds is received by the Transfer Agent by the close of the federal funds wire on the day the purchase order is received, dividends will accrue starting that day. If a purchase order is received after 12:00 noon, Eastern time, and payment in federal funds is received by the Transfer Agent by the close of the federal funds wire on the day the purchase order is received, or as otherwise agreed to by the relevant Portfolio, the order will be effected at that day's net asset value, but dividends will not begin to accrue until the following business day. With respect to the Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and Western Asset Inflation Indexed Bond Portfolio, dividends will begin to accrue on the first business day following the day payment in federal funds is received by the Transfer Agent. 33 Shares may also be purchased and paid for by the contribution of eligible portfolio securities, subject in each case to approval by the Manager. Approval will depend on, among other things, the nature and quality of the securities offered and the current needs of the Portfolio in question. Securities offered in payment for shares will be valued in the same way and at the same time the Portfolio values its portfolio securities for purposes of determining net asset value. (See "Net Asset Value" below.) Investors who wish to purchase Portfolio shares through the contribution of securities should contact the Portfolio at 1- 888-425-6432 for instructions. Investors should also realize that at the time of contribution they may be required to recognize a gain or loss for tax purposes on securities contributed. The Portfolio has full discretion to reject any securities offered as payment for shares. As described below, each Portfolio may offer Financial Intermediary Class shares that are offered primarily through financial intermediaries. Each Portfolio may pay financial intermediaries for their services out of that class' assets pursuant to the class' distribution plan or otherwise. Legg Mason and its affiliates (including the Manager and the Advisers) may also from time to time, at their own expense, make payments to financial intermediaries that sell shares of the Portfolios or to other parties in connection with the sale of shares. If investors effect transactions through a broker or agent, investors may be charged a fee by that broker or agent. Any shares purchased or received as a distribution will be credited directly to the investor's account. Additional Investments Additional investments may be made at any time at the relevant net asset value for that class by following the procedures outlined above. Investors should always furnish a shareholder account number when making additional purchases. Other Purchase Information Purchases will be made in full and fractional shares. In the interest of economy and convenience, certificates for shares will not be issued. Each Portfolio and Legg Mason Wood Walker, Incorporated, the Portfolios' Distributor ("LMWW"), reserves the right, in its sole discretion, to suspend the offering of shares or to reject any purchase order, in whole or in part, when, in the judgment of management, such suspension or rejection is in the best interests of the Portfolio; to waive the minimum initial investment for certain investors; and to redeem shares if information provided in the Application should prove to be incorrect in any manner judged by a Portfolio to be material (e.g., in a manner such as to render the shareholder ineligible to purchase shares of a Portfolio). A Portfolio may suspend the offering of shares at any time and resume it at any time thereafter. Shares of the Portfolios may not be qualified or registered for sale in all States. Prospective investors should inquire as to whether shares of a particular Portfolio are available for offer and sale in their State of residence. Shares of the Portfolio may not be offered or sold in any State unless registered or qualified in that jurisdiction or unless an exemption from registration or qualification is available. Purchases and sales of Portfolio shares should be made for long-term investment purposes only. Each Portfolio reserves the right to restrict purchases of shares (including exchanges) when it determines that a pattern of frequent purchases and sales made in response to short-term fluctuations in share price appears evident. Retirement Plans Shares of the Portfolios are available for purchase by retirement plans, including 401(k) plans, 403(b) plans and Individual Retirement Accounts ("IRAs"). The administrator of a plan or employee benefits office can provide participants or employees with detailed information on how to participate in the plan and how to elect a Portfolio as an investment option. Participants in a retirement or savings plan may be permitted to elect different investment options, alter the amounts contributed to the plan, or change how contributions are allocated among investment options in accordance with the plan's specific provisions. The plan administrator or employee benefits office should be consulted for details. For questions about participant accounts, participants should contact their employee benefits office, the plan administrator, or the organization that provides recordkeeping services for the plan. Investors who purchase shares through retirement plans should be aware that the plan administrator may aggregate purchase and redemption orders of participants in the plan. Therefore, there may be a delay between the time the investor places an order with the plan administrator and the time the order is forwarded to the Transfer Agent for execution. 34 Account Registration Changes Changes in registration or account privileges may be made in writing to the Portfolio. Signature guarantees may be required. See "Signature Guarantee" below. All correspondence must include the account number and must be sent to: LM Institutional Advisors, Inc. P.O. Box 17635 Baltimore, Maryland 21297-1635 Distribution Plans The Board of Directors has adopted Distribution Plans pursuant to Rule 12b-1 under the 1940 Act with respect to shares of the Financial Intermediary Class of each Portfolio. Under the terms of each Plan, a Portfolio is permitted to pay, out of the assets of the Financial Intermediary Class of the Portfolio, in an amount up to 0.40% on an annual basis of the average daily net assets of that class, LMWW, financial intermediaries and other parties that provide services in connection with or are otherwise involved in the distribution of shares or administration of plans or programs that use Portfolio shares as their funding medium, and to reimburse certain other expenses and payments. Payments under the Plans are currently limited to 0.25% (or 0.10% in the case of the Western Asset Government Money Market Portfolio and the Western Asset Money Market Portfolio) of average daily net assets. Because the fees are paid out of a Portfolio's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. For more information regarding the Plans and their terms, see the relevant SAI. Redemption of Shares Portfolio shares may be redeemed through three methods: (1) by sending a written request for redemption to LM Institutional Advisors, Inc. at P.O. Box 17635, Baltimore, Maryland 21297-1635; (2) by calling the Portfolio at 1-888-425-6432; or (3) by wire communication with the Transfer Agent. In each case, the investor should first notify the Portfolio at 1-888-425-6432 of the intention to redeem. No charge is made for redemptions. Shareholders who wish to be able to redeem by telephone or wire communication must complete an authorization form in advance. Redemptions over $10,000,000 may be initiated by telephone, but must be confirmed in writing prior to processing. Upon receipt of a request for redemption as described below (a request "in good order") before the close of the Exchange on any day when the Exchange is open, the Transfer Agent will redeem Portfolio shares at that day's net asset value per share. Requests for redemption received by the Transfer Agent after the close of the Exchange will be executed at the net asset value next determined. However, orders received by certain retirement plans and other financial intermediaries by the close of the Exchange and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the following business day will be effected at the net asset value determined on the prior business day. The Portfolios may refuse to effect redemption requests during periods permitted by federal securities laws. Requests for redemption should indicate: 1) The number of shares or dollar amount to be redeemed and the investor's shareholder account number; 2) The investor's name and the names of any co-owner of the account, using exactly the same name or names used in establishing the account; 3) Proof of authorization to request redemption on behalf of any co-owner of the account (please contact the Portfolio for further details); and 4) The name, address, and account number to which the redemption payment should be sent. Payment of the redemption price normally will be made by wire one business day after receipt of a redemption request in good order. However, each Portfolio reserves the right to postpone the payment date when the Exchange is closed, when trading is restricted, or during other periods as permitted by federal securities laws, or to take up to seven days to make payment upon redemption if the Portfolio involved could be adversely affected by immediate payment. Redemption proceeds may also be paid in kind at the discretion of the Portfolio. Shareholders who receive a redemption in kind may incur costs to dispose of such securities. Other supporting legal documents, such as copies of the trust instrument or power of attorney, may be required from corporations or other organizations, fiduciaries or persons other than the shareholder of record making the request for redemption or repurchase. If you have a question concerning the sale or redemption of shares, please contact the Portfolio by calling 1-888-425-6432. 35 Any Portfolio may elect to close any shareholder account when the current value of the account is less than $1 million due to redemptions or exchanges by the shareholder by redeeming all of the shares in the account and mailing the proceeds to the investor. If a Portfolio elects to redeem the shares in an account, the shareholder will be notified that the account is below $1 million and will be allowed 30 days in which to make an additional investment in order to avoid having the account closed. Shares will be redeemed at the net asset value calculated on the day of redemption. Any Portfolio may change the $1 million minimum account balance from time to time without notice to shareholders. Signature Guarantee When a signature guarantee is called for, the shareholder should have "Signature Guaranteed" stamped under his or her signature and guaranteed by any of the following entities: U.S. banks, foreign banks having a U.S. correspondent bank, credit unions, savings associations, U.S. registered dealers and brokers, municipal securities dealers and brokers, government securities dealers and brokers, national securities exchanges, registered securities associations and clearing agencies (each an "Eligible Guarantor Institution"). Each Portfolio and its agents reserve the right to reject any signature guarantee pursuant to written signature guarantee standards or procedures, which may be revised in the future to permit them to reject signature guarantees from Eligible Guarantor Institutions that do not, based on credit guidelines, satisfy such written standards or procedures. Any Portfolio may change the signature guarantee requirements from time to time without prior notice to shareholders. Exchange Privilege Shareholders in any Portfolio may exchange their shares for shares of the same class of any of the other Portfolios, provided that the shares of that class are being offered at the time of the proposed exchange. Investments by exchange among any of the Portfolios are made at the per share net asset values next determined after the order for exchange is received in good order. The exchange privilege is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where a Portfolio believes doing so would be in its best interest, the Portfolio reserves the right to revise or terminate the exchange privilege without notice to the extent permitted by applicable law, limit the amount or number of exchanges or reject any exchange. For further information concerning the exchange privilege, or to make an exchange, please contact the Portfolio at 1-888-425-6432. Net Asset Value Net asset value per share of each class of shares is determined daily for each Portfolio as of the close of regular trading on the Exchange (normally 4:00 p.m., Eastern time), on every day that the Exchange is open, by subtracting the Portfolio's liabilities attributable to a given class of shares from its total assets attributable to the class and dividing the result by the number of shares of that class outstanding. Net asset value will not be determined on days on which the Exchange is closed for trading. Except for the Western Asset Money Market Portfolio and the Western Asset Government Money Market Portfolio, portfolio securities and other assets for which market quotations are readily available are valued at current market value. Current market value means the last sale price of the day for a comparable position, or, in the absence of any such sales, the mean between representative bid and asked prices obtained from a quotation reporting system. Securities with remaining maturities of 60 days or less are generally valued at amortized cost. Fixed income securities, including those to be purchased under firm commitment agreements, are normally valued on the basis of quotations obtained from brokers and dealers or pricing services which take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Certain fixed income securities for which daily market quotations are not readily available may be valued with reference to fixed income securities whose prices are more readily available and whose durations are comparable to those of the securities being valued. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Directors or persons acting at their direction. The values of foreign securities quoted in foreign currencies are translated into U.S. dollars at current exchange rates or at such other rates as the Directors or persons acting at their direction may determine in computing net asset value. 36 Because of time zone differences, foreign exchanges and securities markets will usually be closed prior to the time of the closing of the Exchange and values of foreign investments will be determined as of the earlier closing of such exchanges and securities markets. However, events affecting the values of such foreign securities may occasionally occur between the earlier closings of such exchanges and securities market and the closings of the Exchange which will not be reflected in the computation of the net asset value. If an event materially affecting the value of such foreign securities occurs during such period, then such securities will be valued at fair value as determined in food faith by the Directors or persons acting at their direction. In addition, if a Portfolio holds securities that are primarily listed on foreign exchanges that trade on days when the Exchange is not open, the net asset value of the Portfolio's shares may be subject to change on days when shareholders will not be able to purchase or redeem the Portfolio's shares. The Western Asset Money Market Portfolio and the Western Asset Government Money Market Portfolio each attempts to maintain a per share net asset value of $1.00 by using the amortized cost method of valuation as permitted by SEC Rule 2a-7. Neither Portfolio can guarantee that the net asset value will always remain at $1.00 per share. Dividends and Distributions to Shareholders The Western Asset High Yield Portfolio, Western Asset Non-U.S. Fixed Income Portfolio, Western Asset Global Strategic Income Portfolio, Western Asset Enhanced Equity Portfolio, LM Value Institutional Portfolio and LM Total Return Institutional Portfolio declare and pay dividends quarterly out of their net investment income, if available, for that quarter. The Western Asset Money Market Portfolio and Western Asset Government Money Market Portfolio declare as a dividend at the close of regular trading on the Exchange each business day, to shareholders of record as of 12:00 noon, Eastern Time, that day, substantially all of their net investment income since the prior business day's dividend. The Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and Western Asset Inflation Indexed Bond Portfolio declare as a dividend at the close of regular trading on the Exchange each business day, to shareholders of record as of the close of the Exchange that day, substantially all of their net investment income since the prior business day's dividend. The Western Asset Money Market Portfolio, Western Asset Government Money Market Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and Western Asset Inflation Indexed Bond Portfolio pay dividends monthly. All other Portfolios declare and pay dividends annually out of their net investment income, if available, for that year. Distributions of net realized capital gains are made annually. Shareholders may elect to receive dividends and distributions in one of four ways: 1) Receive both dividends and other distributions in shares of the same class of the distributing Portfolio; 2) Receive dividends in cash and other distributions in shares of the same class of the distributing Portfolio; 3) Receive dividends in shares of the same class of the distributing Portfolio and other distributions in cash; or 4) Receive both dividends and other distributions in cash. If no election is made, both dividends and other distributions are credited to a shareholder's Portfolio account in shares (of the same class as the shares already held) at the net asset value of the shares determined as of the close of the Exchange on the reinvestment date. For the Western Money Market Portfolio, Western Asset Government Money Market Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and Western Asset Inflation Indexed Bond Portfolio, reinvestment of dividends and other distributions occurs on the payment date. A shareholder who redeems all shares in the Western Asset Money Market Portfolio, Western Asset Government Money Market Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio or Western Asset Inflation Indexed Bond Portfolio will receive all dividends and other distributions declared for that monthly cycle prior to the redemption date (i.e., all dividends and other distributions from the first day of that monthly cycle, if invested on that first day, to the date of the redemption). For the other Portfolios, reinvestment occurs on the ex-dividend date. An election to receive dividends or other distributions in cash rather than additional shares may be made by notifying the Portfolio in writing. 37 The Directors reserve the right to revise the dividend policy or postpone the payment of dividends if warranted in their judgment due to unusual circumstances, such as an unexpected large expense, loss or fluctuation in net asset value. Tax Information Each Portfolio intends to qualify or continue to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements necessary for it to be relieved of federal taxes on income and gains it distributes to shareholders. Each Portfolio will distribute substantially all its net investment income and net realized capital gains to its shareholders on a current basis. Distributions from a Portfolio (whether paid in cash or reinvested in shares of the Portfolio) will be taxable to shareholders (other than IRAs, other qualified retirement plans and other tax-exempt investors) as ordinary income to the extent derived from the Portfolio's investment income and net short-term gains. Portfolio distributions of net capital gains (that is, the excess of net gains from capital assets held for more than one year over net losses from capital assets held for not more than one year) will be taxable as long-term capital gain (generally at a 20% rate for non-corporate shareholders). Distributions of income and capital gains are taxable whether received in cash or reinvested in additional shares. If a dividend or distribution is made shortly after a shareholder purchases shares in a Portfolio, while in effect a return of capital to the Shareholder, the dividend or distribution is taxable as described above. Special tax rules apply to investments through defined contributions plans and other tax-qualified plans. Shareholders should consult their tax adviser to determine the suitability of shares of a Portfolio as an investment through such plans and the precise effect of an investment on their particular tax situation. A Portfolio's investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, a Portfolio's yield on those securities would be decreased. Shareholders may be entitled to claim a credit or deduction with respect to foreign taxes. In addition, a Portfolio's investments in foreign securities or foreign currencies may increase or accelerate the Portfolio's recognition of ordinary income and may affect the timing or amount of the Portfolio's distributions. Early each year, each Portfolio will notify its shareholders of the amount and tax status of distributions paid during that year. In addition to income tax on a Portfolio's distributions, any gain that results if a shareholder (other than an IRA or other tax-exempt investor) sells or exchanges its shares generally is subject to income tax. The LM Balanced Institutional Portfolio's use of a "fund of funds" structure could adversely affect the character, timing and amount of distributions to shareholders. Investments in certain debt obligations, including obligations issued at a discount and inflation-indexed investments made by the Western Asset Inflation Indexed Bond Portfolio, may cause the Portfolio to recognize taxable income in excess of the cash generated by such obligations. Thus a Portfolio could be required at times to liquidate other investments, including when it is not advantageous to do so, in order to satisfy its distribution requirements. The foregoing is a summary of certain federal income tax consequences of investing in a Portfolio. Shareholders are urged to consult their tax advisers with respect to the effects of this investment on their particular tax situation (including possible liability for state and local taxes). Financial Highlights The financial highlights tables are intended to help you understand each Portfolio's recent financial performance for the past five years or, if shorter, since the inception of the Portfolio's operations. Certain information reflects financial results for a single Portfolio share. The total returns represent the rate that an investor would have earned or lost on an investment in the Portfolios, assuming reinvestment of all dividends and distributions. This information has been derived from the financial statements of LMIFA I and LMIFA II, which have been audited by PricewaterhouseCoopers LLP and Ernst & Young LLP, respectively. Their reports and the Portfolios' financial statements are included in the Portfolios' annual reports to shareholders, which are available upon request. (Financial Highlights to be supplied in a post-effective amendment) 38 Appendix A: Prior Performance of LMIFA II Advisers' Other Accounts The LM Value Institutional Portfolio has performance results only for the period from September 22, 1998 to June 30, 2000. The Batterymarch U.S. Small Capitalization Equity Portfolio has performance results only for the period from March 13, 2000 to June 30, 2000. The other six Portfolios of LMIFA II have not yet commenced operations and have no performance record of their own. However, other than in the case of the LM Balanced Institutional Portfolio, the Advisers of LMIFA II have managed other client accounts that have investment objectives, policies and strategies that are similar, but not necessarily identical, to those of the Portfolios that they manage. In the case of the LM Balanced Institutional Portfolio, each of the Portfolios in which that Portfolio invests has prior performance. Representative investment performance for these accounts is stated below. The investment performance is shown on an annual total return basis, with returns for periods of less than one year not annualized, and on an average annual total return basis. The performance information is provided through June 30, 2000. The prior performance information shown is in two categories and reflects the performance of either: (1) composites of certain of the Adviser's separately managed accounts and (2) SEC-registered, open-end investment companies. In each case, the account or accounts have investment objectives, policies and strategies substantially similar (although not necessarily identical) to those of the relevant Portfolio and were managed throughout the periods shown using investment styles and strategies substantially similar (although not necessarily identical) to those of the relevant Portfolio, except in the case of the LM Balanced Institutional Portfolio, where information is provided for each of the equity and fixed income components. To the extent a composite of accounts is shown, the composite includes all of the fully-discretionary, fee-paying accounts managed by such Adviser during the periods shown using investment objectives, policies and strategies substantially similar (although not necessarily identical) to those of the relevant Portfolio. The performance information for composites has been adjusted to give effect to the Portfolios' estimated fees and expenses, before waivers and reimbursements, for the Financial Intermediary Class shares as shown in the tables beginning on page 42. The performance information for composites assumes reinvestment of all dividends and proceeds from capital transactions and has been prepared in accordance with the Performance Presentation Standards established by the Association for Investment Management and Research ("AIMR standards"), except for the deduction of estimated fees and expenses listed in the Fees and Expenses tables as noted above. The performance results would be more favorable if they had been adjusted for estimated fees and expenses of the Institutional Class shares of the Portfolios. Accounts included in composites are generally not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on each of the Portfolios by the Investment Company Act of 1940 (the "1940 Act") or the Code. The performance results for these accounts might have been adversely affected had the accounts been subject to these requirements, restrictions and limitations. Performance for SEC-registered, open-end investment companies is calculated using the SEC's standardized total return formula, which is based upon the change in value of an assumed initial investment of $10,000 from the beginning through the end of a period and assumes reinvestment of all dividends and other distributions. For periods of more than one year, the result is then annualized and expressed as a percentage of the initial investment, and includes the effect of operating expenses, including advisory fees. Information about the investment objectives, policies, expenses and net assets of each of the investment companies follows the performance information. The method for calculating performance for the composites produces a different result than if the performance were calculated using the SEC's method for calculating the total return of an open-end investment company. A Portfolio's expenses, timing of purchases and sales of portfolio securities, timing and availability of cash flows, cash positions (which are typically greater for open-end investment companies than for separate accounts), and brokerage commissions are some of the factors that might cause performance results of the Portfolio to vary from that of the composites and/or investment companies shown. In particular, the large infusions of cash that are typically associated with the commencement of operations of new mutual funds such as the Portfolios, as well as differences in the amount of assets held by the Portfolios as opposed to the accounts and/or investment companies shown below, can affect the ability and the manner in which security positions are accumulated or liquidated, and thus may cause a Portfolio's performance to vary from that of the composites and/or investment companies shown below. As noted above, the investment objectives, policies, styles and strategies of each Portfolio are not necessarily identical to those of the relevant composites and/or investment companies shown below. Again, for these and other reasons, the performance of the Portfolios will vary from that of the composites and/or investment companies. 39 Prior Performance of Accounts Similar to the LM Value Institutional Portfolio. The investment performance for the period from July 1, 1990 to June 30, 2000 of all accounts managed by LMFA and Legg Mason Capital Management, Inc. ("LMCM"), an affiliate of LMFA that shares investment personnel with LMFA, that have investment objectives, policies and strategies that are substantially similar to those of the Portfolio is shown below. The benchmark index to which the accounts are compared is the S&P 500 Index. The S&P 500 Index is an unmanaged index representing the performance of 500 companies selected by S&P. Although used as a benchmark, the Index's performance may not be comparable to the accounts' performance because, unlike the performance of the accounts, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 42.41% 22.77% 1998 39.39% 30.16% 1997 53.32% 34.71% 1996 29.69% 26.00% 1995 28.64% 26.07% 1994 5.72% 1.41% 1993 14.94% 13.63% 1992 19.53% 13.41% 1991 -4.32% 7.39% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% 10 Year ____% ____% The number of accounts included in the composite has ranged from ____ to ____ over the relevant period and the aggregate assets of the accounts has ranged from ____ to ____ over the period. One of the accounts included in the composite is a registered investment company. In addition, all of the fully discretionary accounts of LMCM with assets greater than $25 million are included in the composite after a period of three months and after the account becomes fully invested. Accounts included in the composite are generally not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the Portfolio by the 1940 Act or the Code. The performance results for these accounts might have been adversely affected had the accounts been subject to these requirements, restrictions and limitations. These potential differences do not adversely affect the determination that the accounts included in this composite are managed in a substantially similar manner to the Portfolio. The investment performance for the period from July 1, 1990 to June 30, 2000 for the Primary Class shares of the Legg Mason Value Trust ("Value Trust"), which has been advised by LMFA since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 41.65% 22.77% 1998 38.48% 30.16% 1997 52.16% 34.71% 1996 28.64% 26.00% 1995 27.59% 26.07% 1994 4.86% 1.41% 1993 13.95% 13.63% 1992 18.48% 13.41% 1991 -5.20% 7.39% 40 Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% 10 Year ____% ____% Value Trust, which commenced operations on April 16, 1982, is a diversified open-end investment company. Value Trust's investment objective is long-term growth of capital. Value Trust invests primarily in equity securities that, in the Adviser's opinion, offer the potential for capital growth. The Adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the Adviser's assessment of their intrinsic value. Intrinsic value, according to the Adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies, the value of its assets, and the costs to replicate the business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, are also important. Securities may be undervalued due to uncertainty arising from the availability of accurate information, economic growth and change, changes in competitive conditions, technological change, changes in government policy or geo-political dynamics, and more. The Adviser takes a long- term approach to investing, generally characterized by long holding periods and low portfolio turnover. Value Trust generally invests in companies with market capitalizations greater than $5 billion, but may invest in companies of any size. Value Trust may also invest in debt securities of companies having one or more of the above characteristics. Value Trust may invest up to 25% of its net assets in long-term debt securities. Up to 10% of its total assets may be invested in debt securities rated below investment grade. For temporary purposes, or when cash is temporarily available, Value Trust may invest without limit in investment grade, short-term debt instruments, including government, corporate and money market securities. As of June 30, 2000, Value Trust had approximately $____ billion in assets. For its fiscal year ended March 31, 2000, the Primary Class shares of Value Trust had a total expense ratio of ____%. THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS BEEN IN OPERATION ONLY SINCE SEPTEMBER 22, 1998. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. The investment performance for the period September 22, 1998 (inception) to June 30, 2000 for the Institutional Class shares of the LM Value Institutional Portfolio ("Value Institutional"), which has been advised by LMFA since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 (9/22/98) 57.31% 36.33% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% Inception (9/22/98) ____% ____% 41 The investment performance for the period October 22, 1998 (inception) to June 30, 2000 for the Financial Intermediary Class shares of Value Institutional is shown below. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 (10/22/98) 46.85% 28.45% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% Inception (10/22/98) ____% ____% Prior Performance of a Registered Investment Company Similar to the LM Special Investment Institutional Portfolio. The investment performance for the period from July 1, 1990 to June 30, 2000 for the Primary Class shares the Legg Mason Special Investment Trust ("Special Investment Trust") is shown below. LMFA has served as the Adviser of the Special Investment Trust since its inception. The benchmark index to which Special Investment Trust is compared is the S&P 500 Index. The S&P 500 Index is an unmanaged index representing the performance of 500 companies selected by S&P. Although used as a benchmark, the Index's performance may not be comparable to Special Investment Trust's performance since, unlike the performance of Special Investment Trust, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 27.18% 22.77% 1998 22.29% 30.16% 1997 22.52% 34.17% 1996 25.89% 26.00% 1995 8.85% 26.07% 1994 4.97% 1.41% 1993 25.72% 13.63% 1992 12.34% 13.41% 1991 14.37% 7.39% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% 10 Year ____% ____% Special Investment Trust, which commenced operations on December 30, 1985, is a diversified open-end investment company. Special Investment Trust's investment objective is capital appreciation. Special Investment Trust invests primarily in equity securities, and securities convertible into equity securities, of companies whose market capitalizations are typically classified as small to mid- sized. The Adviser defines small to mid-sized companies as those below the top 500 U.S. companies in terms of market capitalization. It also invests in "special situations" without regard to market capitalization. Special situations are securities undergoing unusual or possibly one-time developments that, in the opinion of the Adviser, make them attractive for investment. Such developments may include actual or anticipated: sale or termination of an unprofitable part of the company's business; change in the company's management or in management's philosophy; a basic change in the industry in which the company operates; introduction of new products or technologies; or the prospect or effect of acquisition or merger activities. Special Investment Trust's Adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the Adviser's assessment of their intrinsic value. Intrinsic value, according to the Adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not 42 limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies, the value of its assets, and the costs to replicate the business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, are also important. Securities may be undervalued due to uncertainty arising from the availability of accurate information, economic growth and change, changes in competitive conditions, technological change, changes in government policy or geo-political dynamics, and more. Special Investment Trust also invests in debt securities of companies having one or more of the above characteristics. Special Investment Trust may invest up to 35% of its net assets in debt securities rated below investment grade. Special Investment Trust may invest up to 20% of its total assets in securities of companies involved in actual or anticipated reorganizations or restructurings. For temporary defensive purposes, or when cash is temporarily available, Special Investment Trust may invest without limit in investment grade, short-term debt instruments, including government, corporate and money market securities. As of June 30, 2000, Special Investment Trust had approximately $____ billion in assets. For its fiscal year ended March 31, 2000, the Primary Class shares of Special Investment Trust had a total expense ratio of ____%. THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PER- FORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. Prior Performance of a Registered Investment Company Similar to the LM Total Return Institutional Portfolio. The investment performance for the period from July 1, 1990 to June 30, 2000 for the Primary Class shares the Legg Mason Total Return Trust, Inc. ("Total Return Trust") is shown below. LMFA serves as Adviser to the Total Return Trust. The benchmark index to which Total Return Trust is compared is the S&P 500 Index. The S&P 500 Index is an unmanaged index representing the performance of 500 companies selected by S&P. Although used as a benchmark, the Index's performance may not be comparable to Total Return Trust's performance since, unlike the performance of Total Return Trust, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 3.45% 22.77% 1998 23.31% 30.16% 1997 38.14% 34.71% 1996 23.28% 26.00% 1995 11.83% 26.07% 1994 4.69% 1.41% 1993 14.66% 13.63% 1992 25.09% 13.41% 1991 2.45% 7.39% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% 10 Year ____% ____% Total Return Trust, which commenced operations on November 21, 1985, is a diversified open-end investment company. Total Return Trust's investment objective is to obtain capital appreciation and current income in order to achieve an attractive total investment return consistent with reasonable risk. Total Return Trust invests primarily in securities that, in the Adviser's opinion, offer the potential for long-term capital growth and attractive current income. Total Return Trust invests primarily in common stocks, debt securities, and securities convertible into common stocks, but is not limited to these types of securities. Total Return Trust may invest in securities that do not pay current income but do, in 43 the Adviser's opinion, offer prospects for capital appreciation and/or future income. The Adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the Adviser's assessment of their intrinsic value. Intrinsic value, according to the Adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies, the value of its assets, and the costs to replicate the business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, are also important. Securities may be undervalued due to uncertainty arising from the availability of accurate information, economic growth and change, changes in competitive conditions, technological change, changes in government policy or geo-political dynamics, and more. The Total Return Trust may invest in companies of any size. Total Return Trust may invest in money market securities for temporary defensive purposes or when cash is temporarily available. Consistent with the investment objective, Total Return Trust may also invest in debt securities when the Adviser believes the return on certain debt securities may equal or exceed the return on equity securities. Total Return Trust may invest in debt securities of any maturity of both foreign and domestic issuers without regard to rating, and may invest its assets in such securities without regard to a percentage limit. The Adviser currently anticipates that under normal market conditions, the fund will invest no more than 50% of its total assets in intermediate-term and long- term debt securities and no more than 5% of its total assets in debt securities not rated investment grade. As of June 30, 2000 Total Return Trust had approximately $____ million in assets. For its fiscal year ended March 31, 2000, the Primary Class shares of Total Return Trust had a total expense ratio of ____%. THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PER- FORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. Prior Performance of the Underlying Portfolios of the LM Balanced Institutional Portfolio. The LM Balanced Institutional Portfolio is a Portfolio that invests its assets in shares of Value Institutional and the Western Asset Core Portfolio ("Core"). The prior performance shown below is not that of the LM Balanced Institutional Portfolio, but for Value Institutional and Core. The prior performance information for Value Institutional and Core should not be considered a substitute for the performance of the LM Balanced Institutional Portfolio. As described elsewhere in the Prospectus, the LM Balanced Institutional Portfolio's Adviser will allocate the assets of the Portfolio between Value Institutional and Core in its discretion, and there can be no assurance that any particular allocation will be achieved or maintained. The Balanced Portfolio will bear its own expenses, which are not reflected in the prior performance shown in the Prospectus. As the Balanced Portfolio may only invest in the Institutional Class shares of the underlying Portfolios, the returns below do not reflect any 12b-1 fees. The investment performance for the period September 22, 1998 (inception) to June 30, 2000 for the Institutional Class shares of Value Institutional, which has been advised by LMFA since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance S&P 500 Performance 2000 ____% ____% 1999 (9/22/98) 57.31% 36.33% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P 500 Performance 1 Year ____% ____% Inception (9/22/98) ____% ____% For a description of Value Institutional, please see page 10 of the Prospectus. As of June 30, 2000, Value Institutional had approximately $____ million in assets. For its fiscal year ended March 31, 2000, the Institutional Class shares of Value Institutional had a total expense ratio of 0.75% (after fee waivers; ____% in the absence of such waivers). 44 The investment performance for the period September 4, 1990 (inception) to June 30, 2000 for the Institutional Class shares of Core, which has been advised by Western Asset since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance Salomon Broad Market Performance 2000 ____% ____% 1999 1.99% 3.12% 1998 11.64% 10.59% 1997 8.27% 8.17% 1996 4.86% 4.95% 1995 14.10% 12.55% 1994 -0.88% -1.17% 1993 14.52% 11.98% 1992 15.61% 14.12% 1991 (9/4/90) 11.01% 10.72% Average Annual Total Return Period Ended June 30, 2000, Account Performance Salomon Broad Market Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% Inception (9/4/90) ____% ____% For a description of Core, see page 4 of the Prospectus. As of June 30, 2000, Core had approximately $____ million in assets. For its fiscal year ended March 31, 2000, the Institutional Class shares of Core had a total expense ratio of 0.50%. THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. Prior Performance of Accounts Similar to the Batterymarch U.S. MidCapitalization Equity Portfolio. The investment performance for the period from November 6, 1998 to June 30, 2000 of all accounts managed by Batterymarch that have investment objectives, policies and strategies that are substantially similar to those of the Portfolio is shown below. November 6, 1998 represents the commencement of investment activities for the initial account included in the Composite. The benchmark index to which the accounts are compared is the S&P MidCap 400 Index ("S&P 400"). The S&P 400 is an unmanaged, market-weighted composite index of 400 stocks in the middle capitalization sector of the U.S. equities market. Although used as a benchmark, the Index's performance may not be comparable to the accounts' performance since, unlike the performance of the accounts, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance S&P Mid Cap 400 Performance 2000 ____% ____% 1999 (11/6/98) ____% ____% Average Annual Total Return Period Ended June 30, 2000 Account Performance S&P Mid Cap 400 Performance 1 Year ____% ____% Inception (11/6/98) ____% ____% The number of accounts included in the composite has ranged from ____ to ____ over the relevant period and the aggregate assets of the accounts has ranged from ____ to ____ over the period. Accounts included in the composite are generally not subject to the diversification requirements, specific tax restrictions and investment limitations imposed 45 on the Portfolio by the 1940 Act or the Code. The performance results for these accounts might have been adversely affected had the accounts been subject to these requirements, restrictions and limitations. These potential differences do not adversely affect the determination that the accounts included in this composite are managed in a substantially similar manner to the Portfolio. THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. Prior Performance of Accounts Similar to the Batterymarch U.S. Small Capitalization Equity Portfolio. The investment performance for the period from October 1, 1993 to June 30, 2000 of all accounts managed by Batterymarch that have investment objectives, policies and strategies that are substantially similar to those of the Portfolio is shown below. October 1, 1993 represents the commencement of investment activities for the initial account included in the composite. The benchmark index to which the accounts are compared is the Russell 2000 Index ("Russell 2000"). The Russell 2000 is an unmanaged, capitalization-weighted, broad-based index of 2,000 small capitalization U.S. companies. Although used as a benchmark, the Index's performance may not be comparable to the accounts' performance since, unlike the performance of the accounts, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance Russell 2000 Performance 2000 ____% ____% 1999 ____% ____% 1998 ____% ____% 1997 ____% ____% 1996 ____% ____% 1995 ____% ____% 1994 (10/1/93) ____% ____% Average Annual Total Return Period Ended June 30, 2000 Account Performance Russell 2000 Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% Inception (10/1/93) ____% ____% The number of accounts included in the composite has ranged from ____ to ____ over the relevant period and the aggregate assets of the accounts has ranged from ____ to ____ over the period. Accounts included in the composite are generally not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the Portfolio by the 1940 Act or the Code. The performance results for these accounts might have been adversely affected had the accounts been subject to these requirements, restrictions and limitations. These potential differences do not adversely affect the determination that the accounts included in this composite are managed in a substantially similar manner to the Portfolio. The investment performance for the period March 13, 1999 (inception) to June 30, 2000 for the Institutional Class shares of the Batterymarch U.S. Small Capitalization Equity Portfolio ("Batterymarch U.S. Small Cap"), which has been advised by Batterymarch since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance Russell 2000 Performance 2000 (3/13/00) ____% ____% Average Annual Total Return Period Ended June 30, 2000 Account Performance Russell 2000 Performance Inception (3/13/00) ____% ____% 46 THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. Prior Performance of Accounts Similar to the Batterymarch International Equity Portfolio. The investment performance for the period from July 1, 1990 to June 30, 2000 of all accounts managed by Batterymarch that have investment objectives, policies and strategies that are substantially similar to those of the Portfolio is shown below. The benchmark index to which the accounts are compared is the MSCI Europe Australia & Far East Index ("MSCI EAFE"). The MSCI EAFE is an unmanaged index representing the performance of share prices of approximately 1100 companies listed on stock exchanges around the world. Twenty countries are included in the Index. Although used as a benchmark, the Index's performance may not be comparable to the accounts' performance since, unlike the performance of the accounts, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance MSCI EAFE Performance 2000 ____% ____% 1999 -5.93% 7.92% 1998 11.72% 6.38% 1997 18.51% 13.16% 1996 14.24% 13.62% 1995 1.20% 1.95% 1994 17.32% 17.30% 1993 6.60% 20.70% 1992 8.26% -0.31% 1991 -15.96% -11.23% Average Annual Total Return Period Ended June 30, 2000 Account Performance MSCI EAFE Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% 10 Year ____% ____% The number of accounts included in the composite has ranged from ____ to ____ over the relevant period and the aggregate assets of the accounts has ranged from ____ to ____ over the period. One of the accounts included in the composite is a registered investment company. Accounts included in the composite are generally not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the Portfolio by the 1940 Act or the Code. The performance results for these accounts might have been adversely affected had the accounts been subject to these requirements, restrictions and limitations. These potential differences do not adversely affect the determination that the accounts included in this composite are managed in a substantially similar manner to the Portfolio. The investment performance for the period from February 17, 1995 (inception) to June 30, 2000 for the Primary Class shares the Legg Mason International Equity Trust ("International Equity Trust"), which has been advised by Batterymarch since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance MSCI EAFE Performance 2000 ____% ____% 1999 -7.03% 7.92% 1998 5.73% 6.38% 1997 18.74% 13.16% 1996 15.90% 13.62% 1995 (Inception 2/17/95) 4.00% 6.08% 47 Average Annual Total Return Period Ended June 30, 2000 Account Performance MSCI EAFE Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% Since Inception (2/17/95) ____% ____% International Equity Trust, which commenced operations on February 17, 1995, is a diversified open-end investment company. International Equity Trust's investment objective is maximum long-term total return. International Equity Trust's Adviser currently intends to invest substantially all of the fund's assets in non-U.S. equity securities. The primary focus of the Adviser is stock selection, with a secondary focus on country allocation. The Adviser uses a bottom-up, quantitative stock selection process for the developed markets portion of the fund's portfolio. The cornerstone of this process is a proprietary stock selection model that ranks the 2,800 stocks in the fund's principal investable universe by relative attractiveness on a daily basis. The quantitative factors within this model are intended to measure growth, value, fundamental expectations and technical indicators (i.e., supply and demand). Because the same quantitative factors are not effective across all markets due to individual market characteristics, the adviser adjusts the stock selection model to include factors that its research indicates are effective, eliminating factors that are not valid in a particular market. The Adviser runs the stock selection model and re-balances the portfolio daily, purchasing all stocks ranked "buys" by the model and selling all stocks ranked "sells." Stocks are sold when the original reason for purchase no longer pertains, the fundamentals have deteriorated or portfolio re-balancing warrants. Country allocation for the developed markets portion of the fund is based on rankings generated by the Adviser's proprietary country model. The Adviser examines securities from over 20 international stock markets, with emphasis on several of the largest: Japan, United Kingdom, France, Canada and Germany. International Equity Trust may invest up to 35% of its total assets in emerging market securities. The Adviser's investment strategy for the emerging markets portion of the fund represents a distinctive combination of tested quantitative methodology and traditional fundamental analysis. The emerging markets allocation focuses on higher-quality, dominant companies that the adviser believes to have strong growth prospects and reasonable evaluations. Country allocation for the emerging markets portion of the portfolio also combines quantitative and fundamental approaches. International Equity Trust's investment portfolio will normally be diversified across a broad range of industries and across a number of countries, consistent with the objective of maximum total return. The adviser may also seek to enhance portfolio returns through active currency hedging strategies. More than 25% of International Equity Trust's total assets may be denominated in a single currency or invested in securities of issuers located in a single country. When cash is temporarily available, or for temporary defensive purposes, when the adviser believes such action is warranted by abnormal market or economic situations, International Equity Trust may invest without limit in cash and U.S. dollar-denominated money market instruments, including repurchase agreements of domestic issuers. Such securities will be rated investment grade or, if unrated, will be determined by the fund's adviser to be investment grade. As of June 30, 2000, International Equity Trust had approximately $____ million in assets. For its fiscal year ended December 31, 1999, the Primary Class shares of International Equity Trust had a total expense ratio of ____%. THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. Prior Performance of Accounts Similar to the Batterymarch Emerging Markets Portfolio. The investment performance for the period from January 1, 1994 to June 30, 2000 of all accounts managed by Batterymarch that have investment objectives, policies and strategies that are substantially similar to those of the Portfolio is shown below. January 1, 1994 represents the commencement of investment activities for the initial account included in the composite. The benchmark index to which the accounts are compared is the MSCI Emerging Markets Free Index with Gross Dividends ("MSCI EMF"). The MSCI EMF is an unmanaged index representing the performance of a market-weighted aggregate of 26 individual emerging country indexes and takes into account local and market 48 restrictions on share ownership by foreigners. Although used as a benchmark, the Index's performance may not be comparable to the accounts' performance since, unlike the performance of the accounts, the Index's performance has not been adjusted for any fees or expenses. Yearly Total Return Year Ended June 30, Account Performance MSCI EMF Performance 2000 ____% ____% 1999 25.56% 28.71% 1998 -34.01% -39.08% 1997 19.99% 12.82% 1996 10.61% 8.47% 1995 -7.51% 0.01% 1994 (Inception 1/1/94) -10.82% -9.04% Average Annual Total Return Period Ended June 30, 2000 Account Performance MSCI EMF Performance 1 Year ____% ____% 3 Year ____% ____% 5 Year ____% ____% Since Inception (1/1/94) ____% ____% The number of accounts included in the composite has ranged from ____ to ____ over the relevant period and the aggregate assets of the accounts has ranged from ____ to ____ over the period. One of the accounts included in the composite is a registered investment company. Accounts included in the composite are generally not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the Portfolio by the 1940 Act or the Code. The performance results for these accounts might have been adversely affected had the accounts been subject to these requirements, restrictions and limitations. These potential differences do not adversely affect the determination that the accounts included in this composite are managed in a substantially similar manner to the Portfolio. The investment performance for the period from May 28, 1996 (inception) to June 30, 2000 for the Primary Class shares of the Legg Mason Emerging Markets Trust ("Emerging Markets Trust"), which has been advised by Batterymarch since its inception, is shown below. Yearly Total Return Year Ended June 30, Account Performance MSCI EMF Performance 2000 ____% ____% 1999 24.82% 28.71% 1998 -34.42% -39.08% 1997 27.41% 12.82% 1996 (Inception 5/28/96) 0.20% -0.45% Average Annual Total Return Period Ended June 30, 2000 Account Performance MSCI EMF Performance 1 Year ____% ____% 3 Year ____% ____% Since Inception (5/28/96) ____% ____% Emerging Markets Trust, which commenced operations on May 28, 1996, is a diversified open-end investment company. Emerging Markets Trust's investment objective is long-term capital appreciation. Emerging Markets Trust's Adviser intends to invest substantially all of the fund's assets in equity securities and convertible securities of emerging market issuers. Emerging Markets Trust intends to invest in Asia, Latin America, the Indian Subcontinent, Southern and Eastern Europe, the Middle East and Africa, although it may not invest in all these markets at all times and may not invest in any particular market when it deems investment in that country or region to be inadvisable. More than 25% of Emerging Markets Trust's total assets may be denominated in a single currency or invested in securities of issuers located in a single country. 49 The Adviser focuses on higher-quality, dominant emerging markets companies which the Adviser believes to have strong growth prospects and reasonable valuations, selected from a principal investable universe of approximately 1,000 stocks. The Adviser's emerging markets investment strategy represents a distinctive combination of quantitative methodology and traditional fundamental analysis. Traditional "on-the-ground" fundamental research is combined by the Adviser with tested quantitative valuation disciplines in those markets where reliable data is available. In determining country allocation, the Adviser also merges quantitative and fundamental approaches. In markets with reliable historical data, buy and sell decisions are driven by a combination of quantitative valuations and the Adviser's fundamental opinions. Stocks are sold when the original reason for purchase no longer pertains, the fundamentals have deteriorated or portfolio re-balancing warrants. When cash is temporarily available, or for temporary defensive purposes, when the Adviser believes such action is warranted by abnormal market or economic situations, the fund may invest without limit in cash and U.S. dollar- denominated money market instruments, including repurchase agreements of domestic issuers. Such securities will be rated investment grade or, if unrated, will be determined by the adviser to be investment grade. As of June 30, 2000, Emerging Markets Trust had approximately $____ million in assets. For its fiscal year ended December 31, 1999, the Primary Class shares of Emerging Markets Trust had a total expense ratio of 2.50% (after fee waivers; ____% in the absence of such waivers). THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S FUTURE PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN. 50 LM Institutional Fund Advisors I LM Institutional Fund Advisors II Investment Manager LM Institutional Advisors, Inc. P.O. Box 17635 Baltimore, Maryland 21297-1635 1-888-425-6432 Custodian State Street Bank and Trust Co. P.O. Box 1713 Boston, Massachusetts 02105 Transfer Agent Boston Financial Data Services P.O. Box 953 Boston, Massachusetts 02103 Counsel Ropes & Gray One International Place Boston, Massachusetts 02110 Independent Auditors PricewaterhouseCoopers LLP Ernst & Young LLP 250 W. Pratt Street 2001 Market Street Baltimore, Maryland 21201 Philadelphia, PA 19103 Distributors For all Portfolios: For LMIFA I Portfolios: Legg Mason Wood Walker, Incorporated Arroyo Seco, Inc. 100 Light Street P.O. Box 1476 117 East Colorado Boulevard Baltimore, Maryland 21203-1476 Pasadena, California 91105 For investors who want more information about LM Institutional Fund Advisors I, Inc. ("LMIFA I") and LM Institutional Fund Advisors II, Inc. ("LMIFA II"), the following documents are available upon request. Annual Reports Annual and semi-annual reports provide additional information about the Portfolios' investments. In the annual report, you will also find a discussion of the market conditions and investment strategies that significantly affected the performance of a Portfolio during the last fiscal year. Statement of Additional Information The SAI of each of LMIFA I and LMIFA II contains additional detailed information about LMIFA I and LMIFA II and is incorporated by reference into (legally part of) this prospectus. Investors can receive free copies of these materials, request other information about the Portfolios and make shareholder inquiries by calling 1-888-425-6432. Information about the Portfolios, including the SAI, can be reviewed and copied at the SEC's public reference room in Washington, D.C. Information on the operation of the public reference room may be obtained by calling the SEC at 1- 202-942-8090. Reports and other information about the Portfolios are available on the EDGAR database on the SEC's Internet site at http://www.sec.gov. Investors may also make an electronic request at: publicinfo@sec.gov or write to: SEC, Public Reference Section, Washington, D.C. 20549-0102. A fee will be charged for making copies. The Investment Company Act of 1940 file numbers for LMIFA I and LMIFA II are 811-06110 and 811-8611, respectively. LM INSTITUTIONAL FUND ADVISORS I, INC Statement of Additional Information August 1, 2000 LM Institutional Fund Advisors I, Inc. (the "Fund") is a no-load, open-end management investment company. LM Institutional Fund Advisors I, Inc. currently consists of eleven separate professionally managed investment portfolios. These eleven portfolios are described in this Statement of Additional Information ("SAI"). Each of these portfolios is referred to herein as a "Portfolio." This SAI is not a prospectus and should be read in conjunction with the Prospectus for the Portfolios, dated August 1, 2000, which has been filed with the Securities and Exchange Commission ("SEC"). Copies of the Portfolios' Prospectus are available without charge from LM Institutional Advisors, Inc. at 1-888-425-6432. Table of Contents Definitions 1 Additional Information About Investment Limitations and Policies 1 Additional Information About Securities, Investment Techniques and Related Risks 4 Valuation of Portfolio Shares 18 Management of the Portfolios 19 Purchases and Redemptions 24 Exchange Privilege 24 Portfolio Transactions and Brokerage 24 Additional Tax Information 25 Other Information 26 Principal Holders of Securities 26 Financial Statements and Report of Independent Accountants 30
[To be updated] Definitions "Adviser" means the investment advisory firm that manages a Portfolio's assets. Western Asset and WAML are each Advisers. "Code" means the Internal Revenue Code of 1986, as amended. "Distributor" means the party that is responsible for the distribution or sale of the Fund's shares. Legg Mason is the Fund's Distributor. Arroyo Seco, Inc. also serves as a Distributor to the Fund. "Exchange" means the New York Stock Exchange. "Fundamental Investment Limitation" means an investment limitation of a Portfolio that may be changed only with the affirmative vote of the lesser of (a) more than 50% of the outstanding shares of the relevant Portfolio or (b) 67% or more of the shares of the relevant Portfolio present at a shareholders' meeting if more than 50% of the outstanding shares of that Portfolio are represented at the meeting in person or by proxy. Only those policies or limitations expressly designated as such are fundamental investment limitations. All other policies and restrictions may be changed without shareholder approval. "Independent Director" means a Director of the Fund who is not an "interested person" (as defined in the 1940 Act) of the Fund. "Legg Mason" means Legg Mason Wood Walker, Incorporated. "Manager" means LM Institutional Advisors, Inc., 100 Light Street, Baltimore, MD 21202. "1940 Act" means the Investment Company Act of 1940, as amended. "NRSROs" means nationally recognized (or foreign) statistical rating organizations, including Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). "Plans" mean the Fund's Distribution and Shareholder Services Plans. "SEC" means the Securities and Exchange Commission. "12b-1 Director" means a Director of the Fund who is an Independent Director and who has no direct or indirect financial interest in the operation of the Fund's Plans or the Fund's Underwriting Agreement. "WAML" means Western Asset Management Company Limited, 155 Bishopsgate, London, England. WAML is the Adviser to the Western Asset Non-U.S. Fixed Income Portfolio and to the non-U.S. portion of the Western Asset Intermediate Plus Portfolio, the Western Asset Core Plus Portfolio, and the Western Asset Global Strategic Income Portfolio. "Western Asset" means Western Asset Management Company, 117 East Colorado Boulevard, Pasadena, CA 91105. Western Asset is the Adviser to each Portfolio other than the Western Asset Non-U.S. Fixed Income Portfolio. Additional Information About Investment Limitations and Policies Each Portfolio has adopted certain fundamental investment limitations that are set forth below. The Western Asset Core Portfolio may not: (1) Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Portfolio, except as may be necessary in connection with permitted borrowings, provided that this limitation does not prohibit escrow, collateral or margin arrangements in connection with the Portfolio's use of options, futures contracts, options on futures contracts, forward foreign currency contracts, when-issued securities or reverse repurchase agreements; (2) Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, or buy 10% or more of all the securities of any one issuer, except that up to 25% of the Portfolio's total assets may be invested without regard to this limitation, and provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities; (3) Purchase securities on margin, except for short-term credits necessary for clearance of portfolio transactions and except that the Portfolio may make margin deposits in connection with its use of options, futures contracts, options on futures contracts and forward foreign currency contracts; (4) Invest 25% or more of its total assets (taken at market value) in any one industry, provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements 1 thereon; and provided further that, for purposes of this limitation, U.S. branches of foreign banks are considered U.S. banks if they are subject to substantially the same regulation as domestic banks, and foreign branches of U.S. banks are considered U.S. banks if the domestic parent would be unconditionally liable in the event that the foreign branch failed to pay on the instruments for any reason; (5) Purchase or sell commodities or commodity contracts, except that the Portfolio may purchase or sell futures on fixed income instruments and foreign currencies and options thereon, may engage in transactions in foreign currencies and may purchase or sell options on securities and on foreign currencies and forward foreign currency contracts; (6) Underwrite securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, the Portfolio may be deemed an underwriter under federal securities laws; (7) Purchase or sell real estate, provided that the Portfolio may invest in securities secured by, or issued by companies that invest in, real estate or interests therein, including real estate investment trusts; or (8) Invest in oil, gas or mineral-related programs or leases, provided that the Portfolio may invest in securities issued by companies that engage in such activities. In addition, the Western Asset Core Portfolio may: (9) Lend or borrow money or issue senior securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time. Other than the Western Asset Core Portfolio, each Portfolio may (except as noted below): (1) Lend or borrow money or issue senior securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time. (2) Not concentrate investments in a particular industry or group of industries as concentration is defined under the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time. Securities issued or guaranteed by the U.S. Government, or its agencies or instrumentalities will not be considered to represent an industry. (This does not apply to the Western Asset Money Market and Western Asset Intermediate Portfolios.) (3) Underwrite securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time. (This does not apply to the Western Asset Money Market and Western Asset Intermediate Portfolios.) (4) Purchase or sell commodities, commodities contracts, futures contracts, options, forward contracts or real estate to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time. In addition, the Western Asset Money Market Portfolio and the Western Asset Intermediate Portfolio may not: (5) Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, or buy 10% or more of all the securities of any one issuer, except that up to 25% of the Portfolio's total assets may be invested without regard to this limitation, and provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities; (6) Invest 25% or more of its total assets (taken at market value) in any one industry, provided that this limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements thereon; and provided further that investments by the Western Asset Money Market Portfolio in U.S. bank instruments (such as bankers' acceptances, certificates of deposits and time or demand deposits) shall not be considered investments in any one industry for purposes of this policy; and provided further that, for purposes of this limitation, U.S. branches of foreign banks are considered U.S. banks if they are subject to substantially the same regulation as domestic banks, and foreign branches of U.S. banks are considered U.S. banks if the domestic parent would be unconditionally liable in the event that the foreign branch failed to pay on the instruments for any reason; (7) Underwrite securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, the Portfolio may be deemed an underwriter under federal securities laws. Additional Information With respect to fundamental investment limitations numbered (1) through (4) of each Portfolio, other than the Western Asset Core 2 Portfolio, and fundamental investment limitation numbered (9) of the Western Asset Core Portfolio, the fundamental investment limitations set forth above limit a Portfolio's ability to engage in certain investment practices and purchase securities to the extent permitted by, or consistent with, the 1940 Act. Relevant limitations of the 1940 Act are described below, which are based either on the 1940 Act itself, the rules or regulations thereunder, or interpretations promulgated by the SEC. As such, these limitations of the 1940 Act are not "fundamental," that is, the limitations will change as the statute, rules, regulations or interpretations change, and no shareholder vote will be required or sought. Fundamental Investment Restriction (1). Under the 1940 Act, a Portfolio may only borrow up to one-third of the value of its total assets. Borrowing by a Portfolio allows it to leverage its portfolio, which exposes it to certain risks. Leveraging increases the effect of any increase or decrease in the value of portfolio securities on a Portfolio's net asset value, and money borrowed will be subject to interest costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the return from the securities purchased with borrowed funds. A Portfolio may use borrowed money for any purpose permitted by the 1940 Act. The 1940 Act also restricts the ability of any mutual fund to lend. Under the 1940 Act, a Portfolio may only make loans if expressly permitted to do so by the Portfolio's investment policies, and a Portfolio may not make loans to persons who control or are under common control with the Portfolio. Thus, the 1940 Act effectively prohibits a Portfolio from making loans to certain persons when conflicts of interest or undue influence are most likely present. The Portfolios may, however, make other loans which if made would expose shareholders to additional risks, such as the failure of the other party to repay the loan. The ability of a mutual fund to issue senior securities is severely circumscribed by complex regulatory constraints under the 1940 Act that restrict, for instance, the amount, timing, and form of senior securities that may be issued. Certain portfolio management techniques such as the purchase of securities on margin, short sales, or the writing of puts on portfolio securities, may be considered senior securities unless appropriate steps are taken to segregate a Portfolio's assets or otherwise cover its obligations. Fundamental Investment Restriction (2). "Concentration" is interpreted under the 1940 Act to mean investment of 25% or more of a Portfolio's total assets in a single industry. If a Portfolio were to "concentrate" its investments in a particular industry, investors would be exposed to greater risks because the Portfolio's performance would be largely dependent on that industry's performance. None of the Portfolios has reserved the right to concentrate in any industry. For purposes of this limitation, the Portfolios do not consider certificates of deposit or banker's acceptances issued by domestic branches of U.S. or foreign banks to be in a single industry. If, in the future, these instruments are considered to be in the same industry, the Portfolios reserve the freedom of action to concentrate in such an industry. Fundamental Investment Restriction (3). The 1940 Act prohibits a diversified mutual fund from underwriting securities in excess of 25% of its total assets. Fundamental Investment Restriction (4). This restriction would permit investment in commodities, commodities contracts (e.g., futures contracts or options), forward contracts or real estate to the extent permitted under the 1940 Act. However, it is unlikely that the Portfolios would make such investments, other than the use of futures contracts, options, forward contracts and certain real estate-related instruments as explained in the Prospectus and this Statement of Additional Information. Each Portfolio, however, would like the ability to consider using these investment techniques in the future. Commodities, as opposed to commodity futures, represent the actual underlying bulk goods, such as grains, metals and food stuffs. Real estate-related instruments include real estate investment trusts, commercial and residential mortgage-backed securities, and real estate financings, and such instruments are generally sensitive to factors such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, overbuilding, and the management skill and creditworthiness of the issuer. Additional Information about Securities, Investment Techniques and Related Risks Foreign Securities Investing in the securities of issuers in any foreign country, or in securities denominated in a foreign currency, involves special risks and considerations not typically associated with investing in U.S. issuers or U.S. dollar-denominated securities. These include risks resulting from differences in accounting, auditing and financial reporting standards; lower liquidity than U.S. securities; the possibility of nationalization, expropriation or confiscatory taxation; adverse changes in investment or exchange control regulations (which may include suspension of the ability to transfer currency out of a country); and political instability. In many cases, there is less publicly available information concerning foreign issuers than is available concerning U.S. issuers. Additionally, purchases and sales of foreign securities and dividends and interest payable on those securities may be subject to foreign taxes and tax withholding. Foreign securities generally exhibit greater price volatility and a greater risk of illiquidity. To the extent a Portfolio purchases securities denominated in a foreign currency, a change in the value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of the Portfolio's assets and the Portfolio's income available for distribution. In addition, a Portfolio is required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for a foreign currency declines after a Portfolio's income has been earned and translated into U.S. dollars (but before payment), the Portfolio could be required to liquidate portfolio securities to make such distributions. Similarly, if an exchange rate declines between the time a Portfolio incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater than the equivalent amount in any such currency of such expenses at the time they were 3 incurred. The relative performance of various countries' securities markets historically has reflected wide variations relating to the unique characteristics of each country's economy. 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 payments position. Bank deposit insurance, if any, may be subject to widely varying regulations and limits in foreign countries. Foreign securities purchased by a Portfolio may be listed on foreign exchanges, traded over-the-counter or purchased in private transactions. Transactions on foreign exchanges are usually subject to mark-ups or commissions higher than negotiated commissions on U.S. transactions. There is less government supervision and regulation of exchanges and brokers in many foreign countries than in the United States. Additional costs associated with an investment in foreign securities may include higher custodial fees than apply to domestic custodial arrangements and transaction costs of foreign currency conversions. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. Emerging Market Issuers. The risks of foreign investment, described above, are greater for investments in emerging market issuers, and such investments should therefore be considered speculative. Debt securities of governmental and other issuers in emerging market countries will typically be rated below investment grade or be of comparable quality. For more information about lower-rated securities, see "Debt and Fixed Income Securities -- Lower-Rated Securities" below. 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 markets around the world. Emerging market countries may experience substantial rates of inflation or deflation. Inflation, deflation and rapid fluctuations in such rates have had, and may continue to have, very negative effects on the economies and securities markets of certain emerging market countries. While some emerging market countries have sought to develop a number of corrective mechanisms to reduce inflation or deflation or mitigate their effects, inflation and deflation may continue to have significant effects both on emerging market countries 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. Economies in emerging market countries generally are dependent heavily 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. 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. Hedging instruments are not typically available with respect to investments in emerging market countries and, to the extent they are available, the ongoing and indeterminate nature of the foregoing risks (and the costs associated with hedging transactions) would make it virtually impossible to hedge effectively against such risks. 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 a Portfolio 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 supply 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 Portfolio. In such a case, a Portfolio's ability to obtain U.S. dollars may be adversely affected by any increased restrictions imposed on the outflow of foreign exchange. If the Portfolio 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, a Portfolio's 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 the U.S. dollars. 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 market countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the U.S. and other more developed countries. Disclosure and regulatory standards in many respects are less stringent than in the U.S. and other major markets. There also may be a lower level of monitoring and regulation of an emerging market country's securities markets and the activities of investors in such markets; enforcement of existing regulations has been extremely limited. Some emerging markets have different settlement and clearance procedures, which, for example, may not call for delivery of a security to a Portfolio until well after the Portfolio has paid for such security. 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 a Portfolio to make intended securities purchases due to settlement problems could cause that Portfolio to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result either in losses to the Portfolio due to subsequent declines in value of the portfolio security or, if the Portfolio has entered into a contract to sell the security, in possible liability to the purchaser. 4 The risk also exists that an emergency situation may arise in one or more emerging market countries as a result of which trading of securities may cease or may be substantially curtailed and prices for a Portfolio's portfolio securities in such markets may not be readily available. Sovereign Debt Securities. Sovereign debt is subject to risks in addition to those relating to foreign 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 debtor's willingness or ability to repay in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward principal international lenders and the political constraints to which the sovereign debtor may be subject. Sovereign debtors also may be dependent on expected disbursements from foreign governments or multinational agencies, the country's access to trade and other international credits, and the country's balance of trade. Some emerging market sovereign debtors have in the past rescheduled their debt payments or declared moratoria on payments, and similar occurrences may happen in the future. Depositary Receipts. American Depositary Receipts, or "ADRs," are securities issued by a U.S. depositary (usually a bank) and represent a specified quantity of underlying non-U.S. securities on deposit with a custodian bank as collateral. A foreign issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the United States as a domestic issuer. Accordingly, the information available to a U.S. investor will be limited to the information the foreign issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer or the underlying security. ADRs may also be subject to exchange rate risks if the underlying securities are denominated in foreign currency. The Portfolios may also invest in similar non-U.S. instruments issued by foreign banks or trust companies such as "GDRs" and "EDRs." For purposes of its investment policies, each Portfolio will treat ADRs and similar instruments as equivalent to investment in the underlying securities. Options on Securities Under an option contract, one party generally has the right to require the other to buy or sell a specified amount of securities, units of an index, currencies or futures contracts, and may exercise that right if the market price of the underlying instrument moves in a direction advantageous to the holder of the option. Options with respect to securities indices typically call for cash settlement instead of delivery of the securities that comprise the index. A Portfolio may purchase call options on securities for any purpose. For example, a call option may be purchased by a Portfolio on a security that its Adviser intends to include in the Portfolio's investment portfolio in order to fix the cost of a future purchase. Call options also may be used as a means of participating in an anticipated price increase of a security on a more limited risk basis than would be possible if the security itself were purchased. In the event of a decline in the price of the underlying security, use of this strategy would serve to limit the Portfolio's potential loss to the option premium paid; conversely, if the market price of the underlying security increases above the exercise price and the Portfolio either sells or exercises the option, any profit realized would be reduced by the premium. A Portfolio may purchase put options on securities for any purpose. For example, a put option may be purchased by a Portfolio in order to hedge against a decline in the market value of securities held in its portfolio. The put option enables a Portfolio to sell the underlying security at the predetermined exercise price; thus the potential for loss to the Portfolio below the exercise price is limited to the option premium paid. If the market price of the underlying security is higher than the exercise price of the put option, any profit the Portfolio realizes on the sale of the security would be reduced by the premium paid for the put option less any amount for which the put option may be sold. A Portfolio may also write call and put options. Futures Contracts and Options on Futures Contracts A futures contract is an agreement between the parties to buy or sell a specified amount of one or more securities, units of an index or currencies at a specified price and date; futures contracts are generally closed out by the parties in advance of that date for a cash settlement. Each Portfolio will limit its use of futures contracts and futures options to hedging transactions or other circumstances permitted to registered investment companies by regulatory authorities. For example, a Portfolio might use futures contracts to attempt to hedge against anticipated changes in interest rates that might adversely affect either the value of the Portfolio's securities or the price of the securities which the Portfolio intends to purchase. A Portfolio's hedging may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce exposure to interest rate fluctuations, a Portfolio may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and options on futures contracts. Futures contracts may also be used for non-hedging purposes, such as to simulate full investment in underlying securities while retaining a cash balance for Portfolio management purposes, as a substitute for direct investment in a security, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract or option is priced more attractively than the underlying security or index. 5 A futures contract on a security or foreign currency is a bilateral agreement pursuant to which one party agrees to make, and the other party agrees to accept, delivery of the specified type of security or foreign currency called for in the contract at a specified future time and at a specified price. A Portfolio may, for example, purchase a futures contract on a security or foreign currency when it intends to purchase securities or foreign currency but has not yet done so. This strategy may minimize the effect of all or part of an increase in the market price of the security or the relative value of the foreign currency that a Portfolio intends to purchase in the future. A rise in the price of the security or foreign currency prior to its purchase may either be offset by an increase in the value of the futures contract purchased by a Portfolio or avoided by taking delivery of the security or foreign currency under the futures contract. Conversely, a fall in the market price of the underlying security or foreign currency may result in a corresponding decrease in the value of the futures position. A Portfolio may sell a futures contract on a security or foreign currency, for example, in order to continue to receive the income from a security or foreign currency, while endeavoring to avoid part or all of the decline in the market value of that security that would accompany an increase in interest rates. A Portfolio may also purchase a call option on a futures contract to hedge against a market advance in securities or foreign currency which the Portfolio plans to acquire at a future date. The purchase of a call option on a futures contract is analogous to the purchase of a call option on an individual security or foreign currency which can be used as a temporary substitute for a position in the security itself. A Portfolio also may write covered call options on futures contracts as a partial hedge against a decline in the price of securities or foreign currency held in the Portfolio's investment portfolio, or purchase put options on futures contracts in order to hedge against a decline in the value of securities or foreign currency held in the Portfolio's investment portfolio. A Portfolio may write a covered put option as a partial anticipatory hedge. When a purchase or sale of a futures contract is made by a Portfolio, the Portfolio is required to deposit with its custodian (or a broker, if legally permitted) a specified amount of cash or U.S. Government securities ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Portfolio upon termination of the contract, assuming all contractual obligations have been satisfied. Under certain circumstances, such as during periods of high volatility, a Portfolio may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory action. Each Portfolio expects to earn interest income on its initial margin deposits. A futures contract held by a Portfolio is valued daily at the official settlement price of the exchange on which it is traded. Each day the Portfolio pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by a Portfolio but is instead settlement between the Portfolio and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, each Portfolio will mark to market its open futures positions. A Portfolio is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements) and the current market value of the option and other futures positions held by the Portfolio. Although some futures contracts call for making or taking delivery of the underlying securities or currencies, generally those contracts are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (involving the same currency or underlying security and delivery month). If an offsetting purchase price is less than the original sale price, the Portfolio realizes a gain, or if it is more, the Portfolio realizes a loss. If an offsetting sale price is more than the original purchase price, the Portfolio realizes a gain, or if it is less, the Portfolio realizes a loss. The Portfolio will also bear transaction costs for each contract which will be included in these calculations. A Portfolio will not enter into futures contracts or option positions if, immediately thereafter, the initial margin deposits plus premiums paid by it, less the amount by which any such options positions are "in-the-money" at the time of purchase, would exceed 5% of the fair market value of the Portfolio's total assets. A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the-money" if the exercise price exceeds the value of the futures contract that is the subject of the option. The requirements for qualification as a regulated investment company also may limit the extent to which a Portfolio may enter into futures or options on futures. See "Additional Tax Information." Risks Associated with Futures and Options In considering the Portfolios' use of futures contracts and options, particular note should be taken of the following: (1) Positions in futures contracts and options may be closed out only on an exchange or board of trade which provides a secondary market for such futures contracts or options. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract and option prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract or option may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract or option subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. 6 (2) The ability to establish and close out positions in either futures contracts or exchange-listed options is also subject to the maintenance of a liquid secondary market. Consequently, it may not be possible for a Portfolio to close a position and, in the event of adverse price movements, the Portfolio would have to make daily cash payments of variation margin (except in the case of purchased options). However, in the event futures contracts or options have been used to hedge portfolio securities, such securities generally will not be sold until the contracts can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, there is no guarantee that the price of the securities will, in fact, correlate with the price movements in the contracts and thus provide an offset to losses on the contracts. The inability to close out a futures or option position may also restrict the Portfolio's ability to sell the underlying security or currency at a time when the Adviser might otherwise do so. (3) Successful use by a Portfolio of futures contracts and options will depend upon its Adviser's ability to predict market movements, which may require different skills and techniques than predicting changes in the prices of individual securities. Moreover, futures contracts relate not to the current level of the underlying instrument but to anticipated levels at some point in the future. There is, in addition, the risk that movements in the price of the futures contract or option will not correlate with movements in the prices of the securities or currencies being hedged. If the price of the securities or currencies being hedged has moved in a favorable direction, this advantage may be partially offset by losses in the futures or option position. In addition, if the Portfolio has insufficient cash, it may have to sell assets from its investment portfolio to meet daily variation margin requirements. Any such sale of assets may or may not be made at prices that reflect the rising market; consequently, a Portfolio may need to sell assets at a time when such sales are disadvantageous to the Portfolio. If the price of the futures or option contract moves more than the price of the underlying securities or currencies, the Portfolio will experience either a loss or a gain on the futures contract or option that may or may not be completely offset by movements in the price of the securities or currencies that are the subject of the hedge. (4) The value of an option position will reflect, among other things, the current market price of the underlying security, currency or futures contract, the time remaining until expiration, the relationship of the exercise price to the market price, the historical price volatility of the underlying security, currency or futures contract and general market conditions. For this reason, the successful use of options as a hedging strategy depends upon the Adviser's ability to forecast the direction of price fluctuations in the underlying market. (5) In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between price movements in the futures and options position and the securities or currencies being hedged, movements in the prices of futures and options contracts may not correlate perfectly with movements in the prices of the hedged securities or currencies due to price distortions in the futures and options markets. There may be several reasons unrelated to the value of the underlying securities or currencies which cause this situation to occur. First, as noted above, all participants in the futures market are subject to initial and variation margin requirements. If, to avoid meeting additional margin deposit requirements or for other reasons, investors choose to close a significant number of futures contracts through offsetting transactions, distortions in the normal price relationship between the securities or currencies and the futures markets may occur. Second, because the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market, there may be increased participation by speculators in the futures market; such speculative activity in the futures market also may cause temporary price distortions. Third, participants could make or take delivery of the underlying securities or currencies instead of closing out their contracts. As a result, a correct forecast of general market trends may not result in successful hedging through the use of futures or options contracts over the short term. In addition, activities of large traders involving arbitrage and other investment strategies may result in temporary price distortions. (6) Options normally have expiration dates of up to nine months. The exercise price of the options may be below, equal to or above the current market value of the underlying security, currency or futures contract. Options that expire unexercised have no value, and the Portfolio will realize a loss in the amount paid and any transaction costs. (7) Like options on securities, options on futures contracts have a limited life. The ability to establish and close out options on futures will be subject to the development and maintenance of liquid secondary markets on the relevant exchanges or boards of trade. There can be no certainty that liquid secondary markets for all options on futures contracts will develop. (8) Purchasers of options on futures contracts pay a premium in cash at the time of purchase. This amount and the transaction costs are all that is at risk. Sellers of options on futures contracts, however, must post an initial margin and are subject to additional margin calls which could be substantial in the event of adverse price movements. In addition, although the maximum amount at risk when the Portfolio purchases an option is the premium paid for the option and the transaction costs, there may be circumstances when the purchase of an option on a futures contract would result in a loss to the Portfolio when the use of a futures contract would not, such as when there is no movement in the value of the securities or currencies being hedged. (9) A Portfolio's activities in the futures and options markets may result in a higher portfolio turnover rate and additional transaction costs in the form of added brokerage commissions; however, a Portfolio also may save on commissions by using such contracts as a hedge rather than buying or selling individual securities in anticipation or as a result of market movements. 7 (10) A Portfolio may purchase and write both exchange-traded options and options traded on the OTC market. Exchange markets for options on debt securities exist but are relatively new, and the ability to establish and close out positions on the exchanges is subject to the maintenance of a liquid secondary market. Although the Portfolios intend to purchase or write only those exchange-traded options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular option at any specific time. Closing transactions may be effected with respect to options traded in the OTC markets only by negotiating directly with the other party to the option contract, or in a secondary market for the option if such market exists. Although the Portfolios will enter into OTC options only with dealers which agree to enter into, and which are expected to be capable of entering into, closing transactions with the Portfolios, there can be no assurance that a Portfolio will be able to liquidate an OTC option at a favorable price at any time prior to expiration. In the event of insolvency of the counterparty, a Portfolio may be unable to liquidate an OTC option. Accordingly, it may not be possible to effect closing transactions with respect to certain options, with the result that the Portfolio would have to exercise those options which it has purchased in order to realize any profit. With respect to options written by a Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because a Portfolio must maintain a covered position with respect to any call option it writes on a security or futures contract, the Portfolio may not sell the underlying security or futures contract or invest any cash, U.S. Government securities or short-term debt securities used as cover during the period it is obligated under such option. This requirement may impair a Portfolio's ability to sell a portfolio security or make an investment at a time when such a sale or investment might be advantageous. Additional Risks of Options on Securities, Futures Contracts and Options on Futures Contracts Traded on Foreign Exchanges Options on securities, options on currencies, futures contracts and options on futures contracts may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees and are subject to the risk of governmental actions affecting trading in, or the price of, foreign securities. The value of such positions also could be adversely affected by (1) other complex foreign political, legal and economic factors, (2) lesser availability than in the United States of data on which to make trading decisions, (3) delays in the Portfolios' ability to act upon economic events occurring in foreign markets during non-business hours in the United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (5) lesser trading volume. Cover for Hedging Strategies Each Portfolio will comply with guidelines established by the SEC with respect to coverage of hedging strategies by mutual funds, and, if the guidelines so require, will set aside cash or liquid securities in a segregated account with its custodian in the amount prescribed, as marked to market daily. Securities, options or futures positions used for cover and securities held in a segregated account cannot be sold or closed out while the hedging strategy is outstanding, unless they are replaced with similar assets. As a result, there is a possibility that the use of cover or segregation involving a large percentage of a Portfolio's assets could impede portfolio management or a Portfolio's ability to meet redemption requests or other current obligations. Foreign Currency Exchange Transactions Each Portfolio that may invest in securities that are denominated in foreign currencies may engage in a variety of foreign currency exchange transactions to protect against uncertainty in the level of future exchange rates. These transactions may be engaged in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect the value of specific portfolio positions ("position hedging"). A Portfolio may engage in transaction hedging to protect against a change in the foreign currency exchange rates between the date on which the Portfolio contracts to purchase or sell the security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. A Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate. If conditions warrant, for transaction hedging purposes, a Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and may purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. Each Portfolio may also purchase, sell and write exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A Portfolio may engage in "position hedging" to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which securities the Portfolio intends to buy are denominated). For position hedging purposes, each Portfolio may purchase, sell or write foreign currency futures contracts, foreign currency forward contracts, and options on exchanges or over-the-counter markets. In connection with position hedging, a Portfolio may also purchase or sell foreign currency on a spot basis. A Portfolio's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times involve currencies other than those in which its portfolio securities are then denominated. "Cross hedging" activities will be used when a Portfolio's Adviser believes that such transactions provide significant hedging opportunities for the Portfolio. Cross hedging 8 transactions by a Portfolio involve the further risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the values of such currencies and of the currency or other asset or liability which is the subject of the hedge. The decision as to whether and to what extent a Portfolio will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of a Portfolio's investments and the availability of suitable transactions. Accordingly, there can be no assurance that a Portfolio will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Risks Associated with Futures and Options" above. A Portfolio may also use other foreign currency exchange instruments and techniques when available and deemed appropriate by its Adviser. Preferred Stocks and Convertible Securities A preferred stock pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of an issuer's assets but is junior to the debt securities of the issuer in those same respects. The market prices of preferred stocks are subject to changes in interest rates and are more sensitive to changes in an issuer's creditworthiness than are the prices of debt securities. Shareholders of preferred stock may suffer a loss of value if dividends are not paid. Under ordinary circumstances, preferred stock does not carry voting rights. 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 (or another equity security) 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, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers. Convertible securities are usually subordinated to comparable-tier nonconvertible securities but rank senior to common stock in a corporation's 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 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 security's governing instrument. If a convertible security held by a Portfolio is called for redemption, the Portfolio will be required to (1) permit the issuer to redeem the security, (2) convert it into the underlying common stock or (3) sell it to a third party. Any of these actions could have an adverse effect on a Portfolio's ability to achieve its investment objective. Debt and Fixed Income Securities The Portfolios may invest in a variety of debt and fixed income securities. These securities share one principal risk: their values fluctuate with changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of a Portfolio's fixed income investments. Conversely, during periods of rising interest rates, the value of a Portfolio's fixed income investments will generally decline. The magnitude of these fluctuations will generally be greater when a Portfolio's duration or average maturity is longer. Changes in the value of portfolio securities will not affect interest income from those securities, but will be reflected in a Portfolio's net asset value. The most common types of these instruments, and the associated risks, are described below. Subject to its investment policies and applicable law, each of the Portfolios may invest in these and other instruments. U.S. Government Obligations. U.S. Government securities include (1) U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds (maturities generally greater than ten years) and (2) obligations issued or guaranteed by U.S. Government agencies or instrumentalities which are supported by any of the following: (a) the full faith and credit of the U.S. Government (such as GNMA certificates); (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Government (such as obligations of the Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government to purchase certain obligations of agencies or instrumentalities (such as securities issued by Fannie Mae); or (d) only the credit of the instrumentality (such as securities issued by Freddie Mac). In the case of obligations not backed by the full faith and credit of the United States, a Portfolio 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. Inflation-Indexed Securities. The Western Asset Inflation Indexed Bond Portfolio presently intends to invest in, and the other Portfolios may invest in, inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the CPI accruals as part of a semiannual coupon. 9 Inflation indexed securities issued by the U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation- adjusted principal amount. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value which has been adjusted for inflation. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The value of inflation indexed bonds is expected to fluctuate in response to changes in real interest rates, which are in turn tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. Although the principal value of these securities declines in periods of deflation, holders at maturity receive no less than par. If inflation is lower than expected during the period a Portfolio holds the security, the Portfolio may earn less on the security than on a conventional bond. Any increase in principal value is taxable in the year the increase occurs, even though holders do not receive cash representing the increase at that time. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure. The U.S. Treasury has only recently begun issuing inflation indexed bonds. As such, there is no trading history of these securities, and there can be no assurance that a liquid market in these instruments will develop. Certain foreign governments, such as the United Kingdom, Canada and Australia, have a longer history of issuing inflation indexed bonds, and there may be a more liquid market in certain of these countries for these securities. The periodic adjustment of U.S. inflation indexed bonds is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. In addition, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. Mortgage-Related Securities. Mortgage-related securities represent an interest in a pool of mortgages made by lenders such as commercial banks, savings and loan institutions, mortgage bankers and others. Mortgage-related securities may be issued by governmental, government-related or non-governmental entities, and provide regular payments which consist of interest and, in most cases, principal. In contrast, other forms of debt securities normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. In effect, payments on mortgage-related securities are a "pass-through" of the payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments to holders of mortgage-related securities are caused by repayments resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. As prepayment rates of individual pools of mortgage loans vary widely, it is not possible to predict accurately the average life of a particular security. Although mortgage-related securities are issued with stated maturities of up to forty years, unscheduled or early payments of principal and interest on the underlying mortgages may shorten considerably the securities' effective maturities. The volume of prepayments of principal on a pool of mortgages underlying a particular mortgage-related security will influence the yield of that security, and the principal returned to a Portfolio may be reinvested in instruments whose yield may be higher or lower than that which might have been obtained had such prepayments not occurred. When interest rates are declining, such prepayments usually increase, and reinvestments of such principal prepayments will be at a lower rate than that on the original mortgage-related security. An increase in mortgage prepayments could cause the Portfolio to incur a loss on a mortgage-related security that was purchased at a premium. On the other hand, a decrease in the rate of prepayments, resulting from an increase in market interest rates or other causes, may extend the effective maturities of mortgage-related securities, increasing their sensitivity to changes in market interest rates and potentially increasing the volatility of a Portfolio's shares. The rate of prepayment may also be affected by general economic conditions, the location and age of the mortgages, and other social and demographic conditions. In determining the average maturity or duration of a mortgage-related security, a Portfolio's Adviser must apply certain assumptions and projections about the maturity and prepayment of such security; actual prepayment rates may differ. Because of prepayments, mortgage-related securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates. Most issuers or poolers provide guarantees of payments, regardless of whether the mortgagor actually makes the payment. The guarantees made by issuers or poolers are often backed by various forms of credit, insurance and collateral, although these may be in amounts less than the full obligation of the pool to its shareholders. Pools often consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of one- to four- 10 family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, the Portfolios may purchase pools of variable-rate mortgages, growing-equity mortgages, graduated-payment mortgages and other types. All poolers apply standards for qualification to lending institutions which originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, many mortgages included in pools are insured through private mortgage insurance companies. The average life of mortgage-related securities varies with the maturities and the nature of the underlying mortgage instruments. For example, securities issued by the Government National Mortgage Association ("GNMA") tend to have a longer average life than participation certificates ("PCs") issued by the Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency for the conventional and privately-insured mortgages underlying FHLMC PCs to repay at faster rates than the Federal Housing Administration and Veterans Administration loans underlying GNMAs. In addition, the term of a security may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. In determining the dollar-weighted average maturity of a Portfolio, the Portfolio's Adviser will follow industry practice in assigning an average life to the mortgage-related securities held by each Portfolio unless the interest rate on the mortgages underlying the securities is such that a different prepayment rate is likely. For example, if a GNMA has a high interest rate relative to the market, that GNMA is likely to have a shorter overall maturity than a GNMA with a market rate coupon. Moreover, Western Asset may deem it appropriate to change the projected average life for a Portfolio's mortgage- related securities as a result of fluctuations in market interest rates and other factors. Yields on mortgage-related securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield to differ from the yield expected on the basis of average life. Reinvestment of the prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of the Portfolio. The compounding effect from reinvestments of monthly payments received by each Portfolio will increase the yield to shareholders compared to bonds that pay interest semi-annually. Government Mortgage-Related Securities. GNMA is the principal federal government guarantor of mortgage-related securities. GNMA is a wholly owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA pass- through securities are considered to have a relatively low risk of default in that (1) the underlying mortgage loan portfolio is comprised entirely of government-backed loans and (2) the timely payment of both principal and interest on the securities is guaranteed by the full faith and credit of the U.S. Government, regardless of whether they have been collected. GNMA pass- through securities are, however, subject to the same market risk as comparable debt securities. Therefore, the effective maturity and market value of a Portfolio's GNMA securities can be expected to fluctuate in response to changes in interest rate levels. Residential mortgage loans are also pooled by Freddie Mac, a corporate instrumentality of the U.S. Government. The mortgage loans in Freddie Mac's portfolio are not government backed; Freddie Mac, not the U.S. Government, guarantees the timely payment of interest and ultimate collection of principal on Freddie Mac securities. Freddie Mac also issues guaranteed mortgage certificates, on which it guarantees semiannual interest payments and a specified minimum annual payment of principal. Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. Fannie Mae purchases residential mortgages from a list of approved seller/servicers, which include savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest only by Fannie Mae, not the U.S. Government. Privately Issued Mortgage-Related Securities. Mortgage-related securities offered by private issuers include pass-through securities comprised of pools of residential mortgage loans; mortgage-backed bonds which are considered to be debt obligations of the institution issuing the bonds and are collateralized by mortgage loans; and bonds and collateralized mortgage obligations ("CMOs") which are collateralized by mortgage-related securities issued by Freddie Mac, Fannie Mae or GNMA or by pools of mortgages. CMOs are typically structured with classes or series which have different maturities and are generally retired in sequence. Each class of obligations receives periodic interest payments according to the coupon rate on the obligations. However, all monthly principal payments and any prepayments from the collateral pool are generally paid first to the "Class 1" holders. Thereafter, all payments of principal are generally allocated to the next most senior class of obligations until that class of obligations has been fully repaid. Although full payoff of each class of obligations is contractually required by a certain date, any or all classes of obligations may be paid off sooner than expected because of an increase in the payoff speed of the pool. Other allocation methods may be used. Payment of interest or principal on some classes or series of a CMO may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. Mortgage-related securities created by non-governmental issuers generally offer a higher rate of interest than government and government-related securities because there are no direct or indirect government guarantees of payment in the former securities, resulting in higher risks. Where privately issued securities are collateralized by securities issued by Freddie Mac, Fannie Mae or GNMA, the timely payment of interest and principal is supported by the government-related securities collateralizing such obligations. The market for conventional pools 11 is smaller and less liquid than the market for the government and government- related mortgage pools. Certain private mortgage pools are organized in such a way that the SEC staff considers them to be closed-end investment companies. Each Portfolio's investment in such pools is constrained by federal statute, which restricts investments in the shares of other investment companies. The private mortgage-related securities in which the Portfolios may invest include foreign mortgage pass-through securities ("Foreign Pass-Throughs"), which are structurally similar to the pass-through instruments described above. Such securities are issued by originators of and investors in mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment bankers, specialized financial institutions and special purpose subsidiaries of the foregoing. Foreign Pass-Throughs usually are backed by a pool of fixed rate or adjustable-rate mortgage loans. Certain Foreign Pass- Throughs in which the Portfolios invest typically are not guaranteed by an entity having the credit status of GNMA, but generally utilize various types of credit enhancement. Asset-Backed Securities. Asset-backed securities refer to securities that directly or indirectly represent a participation in, or are secured by and payable from, assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property and receivables from revolving credit (credit card) agreements. Such assets are securitized through the use of trusts or special purpose corporations. Asset-backed securities are backed by a pool of assets representing the obligations often of a number of different parties. Certain of such securities may be illiquid. The principal on asset-backed securities, like that on mortgage-backed securities, may be prepaid at any time. As a result, if such securities are purchased at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect. Conversely, if the securities are purchased at a discount, prepayments faster than expected will increase yield to maturity and prepayments slower than expected will decrease it. Accelerated prepayments also reduce the certainty of the yield because the Portfolio must reinvest the assets at the then-current rates. Accelerated prepayments on securities purchased at a premium also impose a risk of loss of principal. On the other hand, a decrease in the rate of prepayments may extend the effective maturities of the securities, increasing their sensitivity to changes in market interest rates and potentially increasing the volatility of a Portfolio's shares. The rate of prepayment may also be affected by general economic conditions and other social and demographic conditions. Each type of asset-backed security also entails unique risks depending on the type of assets involved and the legal structure used. For example, credit card receivables are generally unsecured obligations of the credit card holder and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. There have also been proposals to cap the interest rate that a credit card issuer may charge. In some transactions, the value of the asset-backed security is dependent on the performance of a third party acting as credit enhancer or servicer. Furthermore, in some transactions (such as those involving the securitization of vehicle loans or leases) it may be administratively burdensome to perfect the interest in the underlying collateral, and the underlying collateral may become damaged or stolen. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Because asset-backed securities are relatively new, the market experience in these securities is limited and the market's ability to sustain liquidity through all phases of the market cycle is not certain. Municipal Obligations. Municipal obligations include obligations issued to obtain funds for various public purposes, including constructing a wide range of public facilities, such as bridges, highways, housing, hospitals, mass transportation, schools and streets. Other public purposes for which municipal obligations may be issued include the refunding of outstanding obligations, the obtaining of funds for general operating expenses and the making of loans to other public institutions and facilities. In addition, certain types of industrial development bonds ("IDBs") and private activity bonds ("PABs") are issued by or on behalf of public authorities to finance various privately operated facilities, including certain pollution control facilities, convention or trade show facilities, and airport, mass transit, port or parking facilities. Municipal obligations also include short-term tax anticipation notes, bond anticipation notes, revenue anticipation notes and other forms of short-term debt obligations. Such notes may be issued with a short-term maturity in anticipation of the receipt of tax payments, the proceeds of bond placements or other revenues. Municipal obligations also include municipal lease obligations and certificates of participation. Municipal lease obligations, which are issued by state and local governments to acquire land, equipment and facilities, typically are not fully backed by the municipality's credit, and, if funds are not appropriated for the following year's lease payments, a lease may terminate, with the possibility of default on the lease obligation and significant loss to the Portfolio. Certificates of participation are participations in municipal lease obligations or installment sales contracts. Each certificate represents a proportionate interest in or right to the payments made. The two principal classifications of municipal obligations are "general obligation" and "revenue" bonds. "General obligation" bonds are secured by the issuer's pledge of its faith, credit and taxing power. "Revenue" bonds are payable only from the revenues derived from a 12 particular facility or class of facilities or from the proceeds of a special excise tax or other specific revenue source such as the corporate user of the facility being financed. IDBs and PABs are usually revenue bonds and are not payable from the unrestricted revenues of the issuer. The credit quality of IDBs and PABs is usually directly related to the credit standing of the corporate user of the facilities. The ability of state, county or local governments to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political and demographic conditions within or outside of the particular state. In addition, constitutional or statutory restrictions may limit a government's power to raise revenues or increase taxes. The availability of federal, state and local aid to issuers of municipal securities may also affect their ability to meet their obligations. Payments of principal and interest on revenue bonds will depend on the economic condition of the facility or specific revenue source from whose revenues the payments will be made. The facility's economic status, in turn, could be affected by economic, political and demographic conditions affecting the particular state. Corporate Debt Securities. A Portfolio may invest in debt securities (i.e., bonds, debentures, notes and other similar debt instruments) of domestic or foreign non-governmental issuers which meet the minimum credit quality criteria, if any, set forth for the Portfolio. Corporate debt securities may pay fixed or variable rates of interest, or interest at a rate contingent upon some other factor, such as the price of some commodity. These securities may include warrants, may be convertible into preferred or common equity, or may be bought as part of a unit containing common stock. Lower-Rated Securities. Non-investment grade securities, i.e., securities rated below Baa by Moody's or BBB by S&P or comparable ratings of other NRSROs or unrated securities of comparable quality, are described as "speculative" by Moody's and S&P and may be subject to greater market fluctuations and greater risk of loss of income or principal, including a greater possibility of default or bankruptcy of the issuer of such securities, than are more highly rated debt securities. Such securities are commonly referred to as "junk bonds." A Portfolio's Adviser seeks to minimize the risks of investing in all securities through diversification, in-depth credit analysis and attention to current developments in interest rates and market conditions and will monitor the ratings of securities held by the Portfolios and the creditworthiness of their issuers. If the rating of a security in which a Portfolio has invested falls below the minimum rating in which the Portfolio is permitted to invest, the Portfolio will either dispose of that security within a reasonable time or hold the security for so long as the Portfolio's Adviser determines appropriate for that Portfolio, having due regard for market conditions, tax implications and other applicable factors. A debt security may be callable, i.e., subject to redemption at the option of the issuer at a price established in the security's governing instrument. If a debt security held by a Portfolio is called for redemption, the Portfolio will be required to permit the issuer to redeem the security or sell it to a third party. Either of these actions could have an adverse effect on a Portfolio's ability to achieve its investment objective because, for example, the Portfolio may be able to reinvest the proceeds only in securities with lower yields or may receive a price upon sale that is lower than it would have received in the absence of the redemption. The market for lower-rated securities has expanded rapidly in recent years. This growth has paralleled a long economic expansion. At certain times in the past, the prices of many lower-rated securities declined, indicating concerns that issuers of such securities might experience financial difficulties. At those times, the yields on lower-rated securities rose dramatically, reflecting the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers' financial restructuring or default. There can be no assurance that such declines will not recur. The ratings of Moody's and S&P represent the opinions of those agencies as to the quality of the debt securities which they rate. Such ratings are relative and subjective, and are not absolute standards of quality. Unrated debt securities are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. If securities are rated investment grade by one rating organization and below investment grade by the other, a Portfolio's investment adviser may rely on the rating that it believes is more accurate. Each Portfolio's Adviser will consider a security's quality and credit rating when determining whether such security is an appropriate investment. Subject to its investment objective, policies and applicable law, a Portfolio may purchase a security with the lowest rating. Where one of the NRSROs has assigned an investment grade rating to an instrument and others have given it a lower rating, the Portfolios may consider the instrument to be investment grade. The market for lower-rated securities may be thinner and less active than that for higher-rated securities, which can adversely affect the prices at which these securities can be sold, and may make it difficult for a Portfolio to obtain market quotations daily. If market quotations are not available, these securities will be valued by a method that the Portfolios' Boards of Directors believe accurately reflects fair market value. Judgment may play a greater role in valuing lower-rated debt securities than is the case with respect to securities for which a broader range of dealer quotations and last-sale information is available. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Although the prices of lower-rated bonds are generally less sensitive to interest rate changes than are higher-rated bonds, the prices of lower-rated bonds may be more sensitive to adverse economic changes and developments regarding the individual issuer. Although the market for lower-rated debt securities is not new, and the market has previously weathered economic downturns, there has been in recent years a substantial increase in the use of such securities to fund corporate acquisitions and restructurings. Accordingly, the past performance of the market for such securities may not be an accurate indication of its performance during future economic downturns or periods of rising interest rates. When economic conditions appear to be deteriorating, medium- to lower-rated securities may decline in value due to 13 heightened concern over credit quality, regardless of the prevailing interest rates. Investors should carefully consider the relative risks of investing in high yield securities and understand that such securities are not generally meant for short-term investing. Adverse economic developments can disrupt the market for lower-rated securities, and severely affect the ability of issuers, especially highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity which may lead to a higher incidence of default on such securities. Lower-rated securities are especially affected by adverse changes in the industries in which the issuers are engaged and by changes in the financial condition of the issuers. Highly leveraged issuers may also experience financial stress during periods of rising interest rates. In addition, the secondary market for lower- rated securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, a Portfolio could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Therefore, prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating a Portfolio's net asset value. Lower-rated or unrated debt obligations also present risks based on payment expectations. If an issuer calls an obligation for redemption, the Portfolio may have to replace the security with a lower yielding security, resulting in a decreased return for investors. If a Portfolio experiences unexpected net redemptions, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of the Portfolio's investment portfolio and increasing the exposure of the Portfolio to the risks of lower-rated securities. Stripped Securities. Stripped securities are created by separating bonds into their principal and interest components and selling each piece separately (commonly referred to as IOs and POs). The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on a Portfolio's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the Portfolio may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped mortgage-backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting a Portfolio's ability to buy or sell those securities at any particular time. Zero Coupon and Pay-In-Kind 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 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. A Portfolio investing in zero coupon bonds generally accrues income on such securities prior to the receipt of cash payments. Since each Portfolio must distribute substantially all of its income to shareholders to qualify as a regulated investment company under federal income tax law, a Portfolio investing in zero coupon bonds may have to dispose of other securities, including at times when it may be disadvantageous to do so, to generate the cash necessary for the distribution of income attributable to its zero coupon bonds. Pay-in-kind securities have characteristics similar to those of zero coupon securities, but interest on such securities may be paid in the form of obligations of the same type rather than cash. Commercial Paper and Other Short-term Investments Each of the Portfolios may invest or hold cash or other short-term investments, including commercial paper. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. The Portfolios may purchase commercial paper issued pursuant to the private placement exemption in Section 4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to disposition under federal securities laws in that any resale must similarly be made in an exempt transaction. The Portfolios may or may not regard such securities as illiquid, depending on the circumstances of each case. Any Portfolio may also invest in obligations (including certificates of deposit, demand and time deposits and bankers' acceptances) of U.S. banks and savings and loan institutions. While domestic bank deposits are insured by an agency of the U.S. Government, the Portfolios will generally assume positions considerably in excess of the insurance limits. Loan Participations and Assignments The purchase of loan participations and assignments entails special risks. A Portfolio's ability to receive payments of principal and interest and other amounts in connection with loan participations and assignments will depend primarily on the financial condition of the borrower. The failure by the Portfolio to receive scheduled interest or principal payments on a loan participation or assignment would adversely affect the income of the Portfolio and would likely reduce the value of its assets. Because loan participations are not generally rated by independent credit rating agencies, a decision by a Portfolio to invest in a particular loan participation will depend almost exclusively on its Adviser's credit analysis of the borrower. In addition to the other risks associated with investments in debt securities, participations and assignments involve the additional risk that the insolvency of any financial institution interposed between the Portfolio and the borrower could delay or prevent the flow of payments from the borrower on the underlying loan. A Portfolio may have limited rights to enforce the terms of the underlying loan, and the liquidity of loan participations and assignments may be limited. The borrower of a loan in which a Portfolio holds a participation interest may, either at its own election or pursuant to terms of the loan 14 documentation, prepay amounts of the loan from time to time. There is no assurance that the Portfolio will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the original loan participation. Corporate loans in which a Portfolio may purchase a loan participation or assignment are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs, and other corporate activities. The highly leveraged capital structure of the borrowers in certain of these transactions may make such loans especially vulnerable to adverse changes in economic or market conditions. Certain of the loan participations or assignments acquired by a Portfolio may involve unfunded commitments of the lenders or revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the Portfolio would have an obligation to advance its portion of such additional borrowings upon the terms specified in the loan documentation. Indexed Securities and Structured Notes The values of indexed securities and structured notes are linked to currencies, other securities, interest rates, commodities, indices or other financial indicators ("reference instruments"). These instruments differ from other types of debt securities in several respects. The interest rate or principal amount payable at maturity may vary based on changes in one or more specified reference instruments, such as a floating interest rate compared with a fixed interest rate or the currency exchange rates between two currencies (neither of which need be the currency in which the instrument is denominated). An indexed security or structured note may be positively or negatively indexed; that is, its value or interest rate may increase or decrease if the value of the reference instrument increases. Further, the change in the principal amount payable with respect to, or the interest rate of, an indexed security or structured note may be a multiple of the percentage change (positive or negative) in the value of the underlying reference instrument(s). Investment in indexed securities and structured notes involves certain risks, including the credit risk of the issuer and the normal risks of price changes in response to changes in interest rates. Further, in the case of certain indexed securities or structured notes, a decline in the reference instrument may cause the interest rate to be reduced to zero, and any further declines in the reference instrument may then reduce the principal amount payable on maturity. Finally, these securities may be less liquid than other types of securities, and may be more volatile than their underlying reference instruments. Forward Commitments Each Portfolio may enter into commitments to purchase securities on a "forward commitment" basis, including purchases on a "when-issued" basis or a "to be announced" basis. When such transactions are negotiated, certain terms may be fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. Such securities are often the most efficiently priced and have the best liquidity in the bond market. During the period between a commitment and settlement, no payment is made by the purchaser for the securities purchased and, thus, no interest accrues to the purchaser from the transaction. In a "to be announced" transaction, a Portfolio commits to purchase securities for which all specific information is not yet known at the time of the trade, particularly the exact face amount in forward commitment mortgage-backed securities transactions. A Portfolio may sell the securities subject to a forward commitment purchase, which may result in a gain or loss. When a Portfolio purchases securities on a forward commitment basis, it assumes the risks of ownership, including the risk of price fluctuation, at the time of purchase, not at the time of receipt. Purchases of forward commitment securities also involve a risk of loss if the seller fails to deliver after the value of the securities has risen. Depending on market conditions, a Portfolio's forward commitment purchases could cause its net asset value to be more volatile. Each Portfolio may also enter into a forward commitment to sell securities it owns and will generally do so only with the intention of actually delivering the securities. The use of forward commitments enables a Portfolio to hedge against anticipated changes in interest rates and prices. In a forward sale, a Portfolio does not participate in gains or losses on the security occurring after the commitment date. Forward commitments to sell securities also involve a risk of loss if the seller fails to take delivery after the value of the securities has declined. Forward commitment transactions involve additional risks similar to those associated with investments in options and futures contracts. See "Risks Associated with Futures and Options Contracts." It is not expected that any Portfolio's purchases of forward commitments will at any time exceed, in the aggregate, 20% of that Portfolio's total assets. Restricted and Illiquid 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. No securities for which there is not a readily available market ("illiquid securities") will be acquired by any Portfolio if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the Portfolio's net assets (10% of net assets for the Western Asset Money Market Portfolio and the Western Asset Government Money Market Portfolio). Under SEC regulations, certain securities acquired through private placements can be traded freely among qualified purchasers. The SEC has stated that an investment company's board of directors, or its investment adviser acting under authority delegated by the board, may 15 determine that a security eligible for trading under this rule is "liquid." The Portfolios intend to rely on this rule, to the extent appropriate, to deem specific securities acquired through private placement as "liquid." The Boards have delegated to a Portfolio's Adviser the responsibility for determining whether a particular security eligible for trading under this rule is "liquid." Investing in these restricted securities could have the effect of increasing a Portfolio's illiquidity if qualified purchasers become, for a time, uninterested in buying these securities. Restricted securities may be sold only (1) pursuant to SEC Rule 144A or other exemption, (2) in privately negotiated transactions or (3) in public offerings with respect to which a registration statement is in effect under the Securities Act of 1933, as amended. Rule 144A securities, although not registered in the U.S., may be sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. Each Portfolio's Adviser, acting pursuant to guidelines established by its Board of Directors, may determine that some Rule 144A securities are liquid for purposes of limitations on the amount of illiquid investments a Portfolio may own. Where registration is required, a Portfolio 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 Portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell. Illiquid securities may be difficult to value, and a Portfolio may have difficulty disposing of such securities promptly. The Portfolios do not consider foreign 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 U.S. Securities of Other Investment Companies Investments in other investment companies may involve the payment of substantial premiums above the net asset value of such issuers' portfolio securities, and the total return on such investments will be reduced by the operating expenses and fees of such investment companies, including advisory fees. The Portfolios may invest in both closed-end and open-end investment companies. Repurchase Agreements A repurchase agreement is an agreement under which securities are acquired from a securities dealer or bank subject to resale at an agreed upon price and date. The securities are held by a Portfolio as collateral until retransferred and will be supplemented by additional collateral if necessary to maintain a total market value equal to or in excess of the value of the repurchase agreement. The Portfolio bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities. A Portfolio also bears the risk that the proceeds from any sale of collateral will be less than the repurchase price. Repurchase Agreements may be viewed as a loan by a Portfolio. Reverse Repurchase Agreements and Other Borrowing A reverse repurchase agreement is a portfolio management technique in which a Portfolio temporarily transfers possession of a portfolio instrument to another person, such as a financial institution or broker-dealer, in return for cash. At the same time, the Portfolio agrees to repurchase the instrument at an agreed upon time (normally within seven days) and price, including an interest payment. While engaging in reverse repurchase agreements, each Portfolio will maintain cash or securities in a segregated account at its custodian bank with a value at least equal to the Portfolio's obligation under the agreements, adjusted daily. Reverse repurchase agreements may expose a Portfolio to greater fluctuations in the value of its assets and renders the segregated assets unavailable for sale or other disposition. Reverse repurchase agreements may be viewed as a borrowing by a Portfolio. The Portfolios may also enter into dollar roll transactions in which a Portfolio sells a fixed income security for delivery in the current month and simultaneously contracts to purchase substantially similar (same type, coupon and maturity) securities at an agreed upon future time. By engaging in the dollar roll transaction the Portfolio forgoes principal and interest paid on the security that is sold, but receives the difference between the current sales price and the forward price for the future purchase. The Portfolio would also be able to earn interest on the income that is received from the initial sale. The obligation to purchase securities on a specified future date involves the risk that the market value of the securities that a Portfolio is obligated to purchase may decline below the purchase price. In addition, in the event the other party to the transaction files for bankruptcy, becomes insolvent or defaults on its obligation, a Portfolio may be adversely affected. Each Portfolio will limit its investments in reverse repurchase agreements and other borrowing (including dollar roll transactions) to no more than one-third of its total assets. To avoid potential leveraging effects of such borrowing, a Portfolio will not make investments while its borrowing (including reverse repurchase agreements but excluding dollar rolls) is in excess of 5% of its total assets. To avoid potential leveraging effects of dollar rolls, each Portfolio will segregate assets as required by the 1940 Act. The 1940 Act requires a Portfolio to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of at least 300% of the amount borrowed. If the asset coverage should decline below 300% as a result of market fluctuations or for other reasons, a Portfolio may be required to sell some of its holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing may increase the 16 effect on net asset value of any increase or decrease in the market value of the Portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. A Portfolio also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. The Portfolios may enter into reverse repurchase agreements and dollar roll transactions as a method of borrowing. Loans of Portfolio Securities A Portfolio may lend its portfolio securities, provided that cash or equivalent collateral, equal to at least 100% of the market value of the securities loaned, is continuously maintained by the borrower with the Portfolio. During the time securities are on loan, the borrower will pay the Portfolio an amount equivalent to any dividends or interest paid on such securities, and the Portfolio may invest the cash collateral and earn additional income, or it may receive an agreed upon amount of interest income from the borrower who has delivered equivalent collateral. These loans are subject to termination at the option of the Portfolio or the borrower. A Portfolio may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. No Portfolio presently expects to have on loan at any given time securities totaling more than one-third of its net assets. A Portfolio runs the risk that the counterparty to a loan transaction will default on its obligation and that the value of the collateral received may decline before the Portfolio can dispose of it. Duration Duration is a measure of the expected life of a fixed income security on a cash flow basis. Duration takes the time intervals over which the interest and principal payments are scheduled and weights each by the present values of the cash to be received at the corresponding future point in time. For any fixed income security with interest payments occurring prior to the payment of principal, duration is always less than maturity. For example, a current coupon bond with a maturity of 3.5 years will have a duration of approximately three years. In general, the lower the stated or coupon rate of interest of a fixed income security, the longer its duration; conversely, the higher the stated or coupon rate of interest of a fixed income security, the shorter its duration. There may be circumstances under which even duration calculations do not properly reflect the interest rate exposure of a security. For example, floating variable rate securities may have final maturities of ten or more years; however, their interest exposure corresponds to the frequency of the coupon reset. Similarly, many mortgage pass-through securities may have stated final maturities of 30 years, but current prepayment rates are more critical in determining the security's interest rate exposure. In these situations, the Adviser may consider other analytical techniques that incorporate the economic life of a security into its determination of interest rate exposure. Diversification Each Portfolio, other than the Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global Strategic Income Portfolio, intends to remain diversified, as "diversified" is defined under the 1940 Act. Portfolio Turnover The length of time a Portfolio has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a Portfolio is known as "portfolio turnover." As a result of a Portfolio's investment policies, under certain market conditions a Portfolio's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to a Portfolio, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Higher portfolio turnover rates, such as those above 100%, are likely to result in higher brokerage commissions or other transactions costs and could give rise to a greater amount of taxable capital gains. Alternative Investment Strategies At times a Portfolio's Adviser may judge that conditions in the securities markets make pursuing the Portfolio's typical investment strategy inconsistent with the best interests of its shareholders. At such times, the Adviser may temporarily use alternative strategies, primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these defensive strategies, a Portfolio may invest without limit in securities that the Adviser believes present less risk to a Portfolio, including equity securities, debt and fixed income securities, preferred stocks, U.S. Government and agency obligations, cash or money market instruments, or in other securities the Adviser considers consistent with such defensive strategies, such as, but not limited to, options, futures, warrants or swaps. As a result of these strategies, the Portfolios may invest up to 100% of their assets in securities of U.S. issuers. It is impossible to predict when, or for how long, a Portfolio will use these alternative strategies. As a result of using these alternative strategies, a Portfolio may not achieve its investment objective. New Investment Products New types of mortgage-backed and asset-backed securities, derivative instruments and hedging instruments are developed and marketed 17 from time to time. Consistent with its investment limitations, each Portfolio expects to invest in those new types of securities and instruments that its Adviser believes may assist the Portfolio in achieving its investment objective. Investment Policies The investment objective of each of the Western Asset Core, the Western Asset Intermediate and the Western Asset Money Market Portfolio are "fundamental." Except for investment policies designated as fundamental in this Prospectus or the SAI, the investment policies described in this Prospectus and in the SAI are not fundamental policies. Changes to fundamental investment policies require shareholder approval; the Directors may change any non-fundamental investment policy without shareholder approval. Ratings of Debt Obligations Moody's, S&P and NRSROs are private organizations that provide ratings of the credit quality of debt obligations. A Portfolio may consider these ratings in determining whether to purchase, sell or hold a security. Ratings are not absolute assurances of quality. Consequently, securities with the same maturity, interest rate and rating may have different market prices. Credit rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer's current financial condition may be better or worse than the rating indicates. Valuation of Portfolio Shares Net asset value of a Portfolio share is determined daily for each class as of the close of the Exchange, on every day the Exchange is open, by subtracting liabilities attributable to that class, from total assets attributable to that class, and dividing the result by the number of shares of that class outstanding. Pricing will not be done on days when the Exchange is closed. The Exchange currently observes the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. When market quotations for institutional size positions are readily available portfolio securities are valued based upon market quotations. Where such market quotations are not readily available, securities are valued based upon appraisals received from a pricing service using a computerized matrix system or based upon appraisals derived from information concerning the security or similar securities received from recognized dealers in those securities. The methods used by the pricing service and the quality of the valuations so established are reviewed by the Adviser under the general supervision of the Corporation's Board of Directors. The amortized cost method of valuation is used with respect to obligations with 60 days or less remaining to maturity unless the Adviser determines that this does not represent fair value. All other assets are valued at fair value as determined in good faith, by or under the direction of the Corporation's Board of Directors. Premiums received on the sale of put and call options are included in net asset value of each class, and the current market value of options sold by the fund will be subtracted from net assets of each class. Use of the Amortized Cost Method by the Money Market Portfolios Western Asset Government Money Market Portfolio and Western Asset Money Market Portfolio attempt to stabilize the value of a share at $1.00. Net asset value will not be calculated on days when the Exchange is closed. Use of the Amortized Cost Method. The directors have determined that the - --------------------------------- interests of shareholders are best served by using the amortized cost method for determining the value of portfolio instruments. Under this method, portfolio instruments are valued at the acquisition cost, as adjusted for amortization of premium or accumulation of discount, rather than at current market value. The Board of Directors continually assesses the appropriateness of this method of valuation. The Portfolios' use of the amortized cost method of valuing portfolio instruments depends on its compliance with Rule 2a-7 under the 1940 Act. Under that Rule, the Directors must establish procedures reasonably designed to stabilize the net asset value per share, as computed for purposes of distribution and redemption, at $1.00 per share, taking into account current market conditions and each Portfolio's investment objective. Monitoring Procedures. The Portfolios' procedures include monitoring the - ---------------------- relationship between the amortized cost value per share and the net asset value per share based upon available indications of market value. If there is a difference of more than 0.50% between the two, the Directors will take any steps they consider appropriate (such as shortening the dollar-weighted average portfolio maturity) to minimize any material dilution or other unfair results arising from differences between the two methods of determining net asset value. Investment Restrictions. Rule 2a-7 requires the Portfolios to limit investments - ------------------------ to instruments that, (i) in the opinion of the Adviser, present minimal credit risk and (ii) (a) are rated in one of the two highest rating categories by at least two NRSROs (or one, if only one NRSRO has rated the security) or, (b) if unrated, are determined to be of comparable quality by the Adviser, all pursuant to procedures determined by the Board of Directors ("Eligible Securities"). The Portfolios may invest no more than 5% of total assets in securities that are Eligible Securities but have not been rated in the highest short-term ratings category by at least two NRSROs (or by one NRSRO, if only one NRSRO has assigned the obligation a short-term rating) or, if the obligations are unrated, determined by the Adviser to be of comparable quality ("Second Tier Securities"). In addition, the Portfolios will not invest more than 1% of total assets or $1 million 18 (whichever is greater) in the Second Tier Securities of a single issuer. The Rule requires the Portfolios to maintain a dollar-weighted average portfolio maturity appropriate to the objective of maintaining a stable net asset value of $1.00 per share and in any event not more than 90 days. In addition, under the Rule, no instrument with a remaining maturity (as defined in the Rule) of more than 397 days can be purchased by the Portfolios; except that the Portfolios may hold securities with remaining maturities greater than 397 days as collateral for repurchase agreements and other collateralized transactions of short duration. SEC rules permit the Portfolios to treat certain long-term variable or floating rate instruments as having a maturity equal to the time remaining until the next reset of the interest rate or until the principal can be recovered through a demand. Should the disposition of a portfolio security result in a dollar-weighted average portfolio maturity of more than 90 days, the Portfolios will invest available cash to reduce the average maturity to 90 days or less as soon as possible. It is the Portfolios' usual practice to hold portfolio securities to maturity and realize par, unless the Adviser determines that sale or other disposition is appropriate in light of a Portfolio's investment objective. Under the amortized cost method of valuation, neither the amount of daily income nor the net asset value is affected by any unrealized appreciation or depreciation of the portfolio. In periods of declining interest rates, the indicated daily yield on shares of the Portfolios, computed by dividing the annualized daily income on a Portfolio's investment portfolio by the net asset value computed as above, may tend to be higher than a similar computation made by using a method of valuation based upon market prices and estimates. In periods of rising interest rates, the indicated daily yield on shares of the Portfolios computed the same way may tend to be lower than a similar computation made by using a method of calculation based upon market prices and estimates. Management of the Portfolios Directors and Officers The Fund's officers are responsible for the operation of the Fund under the direction of its Board of Directors. The officers and Directors of the Fund and their principal occupations during the past five years are set forth below. An asterisk (*) indicates Interested Directors. Directors and Officers: LM Institutional Fund Advisors I, Inc. The address of each officer and Director of LM Institutional Fund Advisors I, Inc. is 117 East Colorado Blvd., Pasadena, CA 91105. William G. McGagh, 70 (1,4), Chairman of the Board and Director; Consultant, McGagh Associates (corporate financial consulting), January 1989-present; Director of Pacific American Income Shares, Inc. (closed-end investment company). Formerly: Senior Vice-President, Chief Financial Officer and Director of Northrop Grumman Corporation (military aircraft). *Ronald L. Olson, 58 (5), Director; Senior Partner, Munger, Tolles & Olson (a law partnership); Director of Pacific American Income Shares, Inc., Edison International, Rand Corporation and Berkshire Hathaway, Inc. Louis A. Simpson, 63 (1,2,3,4), Director; President and CEO Capital Operations of Government Employees Insurance Company (GEICO Corporation) since May 1993; Vice Chairman of GEICO (1985- 1993); Senior Vice President and Chief Investment Officer of GEICO (1979-1985). Director of Pacific American Income Shares, Inc., Potomac Electric Power Company, MediaOne Group, Inc. and Science Applications International Corporation (SAIC). Formerly: President and CEO of Western Asset. Ronald J. Arnault; 56 (1,2), Director; President of RJA Consultants (energy industry financial consulting); member, Board of Governors of The Music Center of Los Angeles, the Center Theatre Group and Occidental College; Director of Pacific American Income Shares, Inc. Formerly: Executive Vice President, Chief Financial Officer and Director of ARCO. William E. B. Siart, 53 (2,3,4), Director; Chairman of the Board, Walt Disney Concert Hall I, Inc. (since 1998); President and Chief Executive Officer of EXED LLC (1998 - 2000); Member of the Board of Trustees of the University of Southern California; Board of Directors of the Performing Arts Center of Los Angeles County; Director of the Los Angeles Philharmonic; Director of Pacific American Income Shares, Inc. Formerly: Chairman (1995-1996), Chief Executive Officer (1995-1996), President (1990- 1996) of First Interstate Bancorp. John E. Bryson, 56 (3,4), Director; Chairman and Chief Executive Officer of Edison International (since October 1990); Director of Pacific American Income Shares, Inc., The Boeing Company, The Times Mirror Company, the W.M. Keck Foundation, and a trustee of Stanford University. Formerly: Chairman and Chief Executive Officer of Southern California Edison Company (1990 - 1999). Anita L. DeFrantz, 47 (2), Director; President of the Amateur Athletic Foundation of Los Angeles, since, 1987; President of Kids in Sports, since 1994; Vice President of the International Olympic Committee, since 1997. Also, a director of Pacific American Income Shares, Inc., and a board member of the Amateur Athletic Foundation of Los Angeles, since 1987, International Olympic Committee, since 1986, and the United States Olympic Committee Executive Board, since 1977. 19 *Edward A. Taber III, 56 (1), Director; Senior Executive Vice President and Head of Asset Management, Legg Mason, Inc.; Senior Executive Vice President of Legg Mason Wood Walker, Inc; Chairman and Director of Legg Mason Fund Adviser, Inc.; Director of Western Asset Management Company, WAML, Bartlett & Co., Batterymarch Financial Management, Inc., Gray, Seifert & Co., Inc., and GSH & Co., Inc. President and/or Director/Trustee of all Legg Mason retail funds except Legg Mason Tax Exempt Trust. Formerly: Director and Head of Taxable Fixed Income Division, T. Rowe Price Associates (1973-1992). James W. Hirschmann, III, 39, President; Director, President and Chief Executive Officer, Western Asset, March 1999-present; Director of Marketing, Western Asset, April 1989-March 1999; Director and Director of Marketing, Arroyo Seco, Inc. Formerly: Vice-President and Director of Marketing, Financial Trust Corporation (bank holding company), January 1988 - April 1989; Vice-President of Marketing, Atlanta/Sosnoff Capital (investment management company), January 1986 - January 1988. Carl L. Eichstaedt, 40, Vice-President; Portfolio Manager of Western Asset since 1994. Formerly: Senior Partner, Portfolio Manager of Harris Investment Management, 1993-1994; Portfolio Manager of Pacific Investment Management Company, 1992-1993; Director Fixed Income of Security Pacific Investment Managers, 1990-1992; and Vice President of Chemical Securities, Inc., 1986-1990. Keith J. Gardner, 43, Vice-President; Portfolio Manager of Western Asset since 1994. Formerly: Senior Portfolio Manager of Legg Mason, Inc., 1992-1994; Portfolio Manager of T. Rowe Price Associates, Inc., 1985-1992. Scott F. Grannis, 51, Vice-President; Director, Economist, Western Asset, 1989 - present; Director, Supershares Services Corp. (investment company services). Formerly: Vice-President, Leland O'Brien Rubinstein (investment advisory firm), 1986-89. Ilene S. Harker, 45, Vice-President; Director, Compliance and Controls, Western Asset, 1978-present; Vice President, Pacific American Income Shares, Inc., since April 1996; Director, Chief Executive Officer, Secretary and Director of Training & Compliance, Arroyo Seco, Inc. Formerly: Assistant Secretary of the Fund and Secretary of Pacific American Income Shares, Inc., 1993-1996. Randolph L. Kohn, 53, Vice-President; Director, Client Services, Western Asset, 1984-present; Director and Director of Client Services, Arroyo Seco, Inc. S. Kenneth Leech, 46, Vice-President; Director and Chief Investment Officer, Western Asset, May 1990-present. Formerly: Senior Trader of Greenwich Capital, 1988-1990; Fixed Income Manager of The First Boston Corporation (holding company; stock and bond dealers), 1985-1987. Edward A. Moody, 50, Vice-President; Director, Portfolio Manager, Western Asset. Marie K. Karpinski, 51, Vice President and Treasurer; Vice President and Treasurer of all Legg Mason retail funds (open-end investment companies), 1986- present: Vice President and Treasurer of LM Institutional Fund Advisors I, Inc. and LM Institutional Fund Advisors II, Inc.; Assistant Treasurer of Pacific American Income Shares, Inc. (closed-end investment company), 1988-present; Treasurer of Legg Mason Fund Adviser, Inc., March 1986-present; Vice-President of Legg Mason Wood Walker, Incorporated, 1992-present; Assistant Vice-President of Legg Mason Wood Walker, Incorporated, 1989-1992. Steven T. Saruwatari, 34, Assistant Treasurer; Senior Financial Officer, Western Asset, Chief Financial Officer, Arroyo Seco, Inc. Formerly: Controller-Finance for LaSalle Paper Company/Spicers Paper, Inc. (distributor of fine printing papers), June 1991-November 1994; and Senior Auditor for Coopers and Lybrand (international public accounting firm), September 1988 - May 1991. Stephen A. Walsh, 41, Vice-President; Director of Portfolio Management, Western Asset; formerly: Portfolio Manager and Trader of Security Pacific Investment Managers, Inc. (investment management company), 1989-1991. (1) Member of the Executive Committee of the Board. When the full Board is not in session, the Executive Committee may exercise all the powers held by the Board in the management of the business and affairs of the Fund that may be lawfully exercised by the full Board, except the power to declare a dividend, to authorize the issuance of stock, to recommend to stockholders any matter requiring stockholders' approval, to amend the By-Laws, or to approve any merger or share exchange which does not require shareholder approval. (2) Member of the Audit Committee of the Board. The Audit Committee meets with the Fund's independent accountants to review the financial statements of the Fund, the arrangements for special and annual audits, the adequacy of internal controls, the Fund's periodic reporting process, material contracts entered into by the Fund, the services provided by the accountants, any proposed changes in accounting practices or principles, the independence of the accountants; and to report on such matters to the Board. (3) Member of the Nominating Committee of the Board. The Nominating Committee is responsible for the selection and nomination of Disinterested Directors. (4) Member of the Compensation Committee of the Board. The Compensation Committee is responsible for determining the compensation of the Disinterested Directors. 20 (5) Mr. Olson may be deemed an interested person because the law firm in which he is a partner has provided certain services to the Fund and Western Asset. Officers and Directors of the Fund who are affiliated persons of the Manager, the Advisers or Legg Mason receive no salary or fees from the Fund. Each Independent Director of the Fund receives a fee of $12,000 annually for serving as a Director, and a fee of $500 and related expenses per Portfolio for each meeting of the Board of Directors attended by them. The Chairman of the Board receives an additional $5,000 per year for serving in that capacity. The following table provides certain information relating to the compensation of the Fund's Directors and senior executive officers for the fiscal year ended March 31, 2000.
Aggregate Compensation Total Compensation From the Fund and Complex Name of Person and Position From the Fund* Paid to Directors** - ------------------------------------- ------------------ ------------------------- William G. McGagh - Chairman of the Board and Director $18,000 $25,600 Ronald J. Arnault - Director $15,000 $21,300 Ronald L. Olson - Director $15,500 $21,800 Louis A. Simpson - Director $16,000 $23,000 William E. B. Siart - Director $16,000 $22,300 John E. Bryson - Director $15,000 $22,100 Anita L. DeFrantz - Director $16,000 $21,800
*Represents fees paid to each person during the fiscal year ended March 31, 2000. **Represents aggregate compensation paid to each person during the calendar year ended December 31, 1999 for serving as a Director of the Company and of a closed-end investment company advised by Western Asset. LM Institutional Fund Advisors II, Inc., an open-end investment company which offers eight separate Portfolios, is also part of the Fund Complex. Manager and Advisers The Manager. The Manager, a wholly owned subsidiary of Legg Mason, Inc., a financial services holding company, serves as investment manager to the Portfolios of the Fund under separate Investment Management Agreements dated May 26, 1998 between the Manager and the Fund (the "Management Agreement"), (other than the Western Asset Inflation Indexed Bond Portfolio, which is dated _______ ___, 2000). Under the Management Agreement, the Manager is responsible, subject to the general supervision of the Fund's Board of Directors, for the actual management of the Fund's assets, including the responsibility for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objectives and policies described in the Prospectus and this Statement of Additional Information. The Manager also is responsible for the compensation of Directors and officers of the Fund who are employees of the Manager or its affiliates. The Manager receives for its services a fee as described in the Prospectus. As noted below, the Manager has delegated responsibility for the selection of the Fund's investments to the Advisers. Each Portfolio pays all of its other expenses which are not assumed by the Manager. These expenses include, among others, expenses of preparing and printing prospectuses, statements of additional information, proxy statements and reports and of distributing them to existing shareholders, custodian charges, transfer agency fees, organizational expenses, compensation of the Directors who are not "interested persons" of the Manager, or its affiliates, as that term is defined in the 1940 Act, legal and audit expenses, insurance expenses, expenses of registering and qualifying shares of the Portfolios for sale under federal and state law, Rule 12b-1 fees, governmental fees, expenses incurred in connection with membership in investment company organizations, interest expense, taxes and brokerage fees and commissions. The Portfolios also are liable for such nonrecurring expenses as may arise, including litigation to which a Portfolio or the Fund may be a party. The Fund may also have an obligation to indemnify its Directors and officers with respect to litigation. Under the Management Agreement, the Manager will not be liable for any error of judgment or mistake of law or for any loss suffered by the Portfolios in connection with the performance of the Management Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder. The Management Agreement terminates automatically upon assignment and is terminable with respect to any Portfolio at any time without penalty by vote of the Fund's Board of Directors, by vote of a majority of that Portfolio's outstanding voting securities, or by the Manager, on not less than 60 days' notice to the Fund, and may be terminated immediately upon the mutual written consent of the Manager and the Fund. 21 For the Western Asset Core Portfolio, the Manager received $3,054,000, (prior to fees waived of $100,000), $3,113,000, $1,769,000 (prior to fees waived of $30,000), and $2,007,000 (prior to fees waived of $22,000) for the fiscal years ended March 31, 2000 and 1999, the nine month period ended March 31, 1998, and the fiscal year ended June 30, 1997, respectively. For the Western Asset Intermediate Portfolio, the Manager received $1,272,000 (prior to fees waived of $95,000), $1,355,000 (prior to fees waived of $101,000), $663,000 (prior to fees waived of $142,000) and $569,000 (prior to fees waived of $158,000) for the fiscal years ended March 31, 2000 and 1999, the nine month period ended March 31, 1998, and the fiscal year ended June 30, 1997, respectively. For the Western Asset Core Plus Portfolio, the Manager received $760,000 (prior to fees waived of $253,000) and $286,000 (prior to fees waived of $95,000), for the fiscal year ended March 31, 2000 and the initial period ended March 31, 1999, respectively. For the Western Asset Non-U.S. Fixed Income Portfolio, the Manager received $306,000 (prior to fees waived of $188,000) and $191,000 (prior to fees waived of $127,000) for the fiscal year ended March 31, 2000 and the initial period ended March 31, 1999, respectively. Advisers Western Asset. Western Asset, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Western Asset Enhanced Equity Portfolio, the Western Asset Money Market Portfolio, the Western Asset Government Money Market Portfolio, the Western Asset Inflation Indexed Bond Portfolio, the Western Asset Intermediate Portfolio, the Western Asset Intermediate Plus Portfolio, the Western Asset Core Portfolio, the Western Asset Core Plus Portfolio, the Western Asset High Yield Portfolio and the Western Asset Global Strategic Income Portfolio (U.S. portion) under separate Investment Advisory Agreements dated December 29, 1999 between Western Asset and the Manager (the "Western Asset Advisory Agreement") (except for the Western Asset Inflation Indexed Bond Portfolio, which is dated _______ ___, 2000). Under the Western Asset Advisory Agreement, Western Asset is responsible, subject to the general supervision of the Fund's Board of Directors and the Manager, for the actual management of the Portfolios' assets, including the responsibility for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objectives and policies described in the Prospectus and this Statement of Additional Information. Western Asset receives from the Manager for its services an advisory fee as described in the Prospectus. Under the Western Asset Advisory Agreement, Western will not be liable for any error of judgment or mistake of law or for any loss suffered by the Portfolios in connection with the performance of the Western Asset Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder. The Western Asset Advisory Agreement terminates automatically upon assignment and is terminable with respect to any Portfolio at any time without penalty by vote of the Fund's Board of Directors, by vote of a majority of that Portfolio's outstanding voting securities, or by Western Asset, on not less than 60 days' notice, and may be terminated immediately upon the mutual written consent of the parties. WAML. WAML, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Western Asset Non-U.S. Fixed Income Portfolio, and to the non-U.S. portion of the Western Asset Intermediate Plus Portfolio, the Western Asset Core Plus Portfolio and the Western Asset Global Strategic Income Portfolio under separate Investment Advisory Agreements dated December 29, 1999 between the Manager and WAML (the "WAML Advisory Agreement"). Under the WAML Advisory Agreement, WAML is responsible, subject to the general supervision of the Fund's Board of Directors and the Manager, for the actual management of the Portfolio's assets, including the responsibility for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objective and policies described in the Prospectus and this Statement of Additional Information. WAML also is responsible for the compensation of Directors and officers of the Fund who are employees of WAML or its affiliates. WAML receives from the Manager for its services to the Portfolio an advisory fee as described in the Prospectus. Under the WAML Advisory Agreement, WAML will not be liable for any error of judgment or mistake of law or for any loss suffered by the Portfolio in connection with the performance of the WAML Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder. The WAML Advisory Agreement terminates automatically upon assignment and is terminable at any time without penalty by vote of the Fund's Board of Directors, by vote of a majority of the Portfolio's outstanding voting securities, or by WAML, on not less than 60 days' notice, and may be terminated immediately upon the mutual written consent of the parties. Distributors Legg Mason, 100 Light Street, P.O. Box 1476, Baltimore, MD 21203-1476, acts as a distributor of the shares of LM Institutional Fund Advisors I, Inc. pursuant to an Underwriting Agreement with the Fund dated August 24, 1990 and amended May 26, 1998 (the "Underwriting Agreement"). Legg Mason is not obligated to sell any specific amount of Fund shares and receives no compensation pursuant to the Underwriting Agreement. Except as noted in the Prospectus, the Fund's shares are distributed in a continuous offering. The Underwriting Agreement is terminable with respect to any Portfolio without penalty, at any time, by vote of a majority of the Fund's Independent Directors, or by vote of the holders of a majority of the shares of that Portfolio, or by Legg Mason upon 60 days' notice to the Fund. 22 Legg Mason pays certain expenses in connection with the offering of shares of each Portfolio, including any compensation to its financial advisors, the printing and distribution of prospectuses, SAIs and periodic reports used in connection with the offering to prospective investors, and expenses relating to any supplementary sales literature or advertising. The Portfolios bear the expenses of preparing, setting in type and mailing the prospectuses, SAIs and periodic reports to existing shareholders. The Fund has adopted a Plan for each Portfolio which, among other things, permits the Fund to pay Legg Mason fees for its services related to sales and distribution of Financial Intermediary Class shares and the provision of ongoing services to Financial Intermediary Class shareholders. Payments are made only from assets attributable to Financial Intermediary Class shares. Under the Plan, the aggregate fees may not exceed an annual rate of 0.40% (currently limited to 0.25%) of each Portfolio's average daily net assets attributable to Financial Intermediary Class shares. Fees for the Western Asset Money Market Portfolio and the Western Asset Government Money Market Portfolio are additionally currently limited to the annual rate of 0.10% of average daily net assets attributable to Financial Intermediary Class shares. Distribution activities for which such payments may be made include, but are not limited to, compensation to persons who engage in or support distribution and redemption of shares, printing of prospectuses and reports for persons other than existing shareholders, advertising, preparation and distribution of sales literature, overhead, travel and telephone expenses, all with respect to Financial Intermediary Class shares only. Legg Mason may pay all or a portion of the fee to its investment executives. The Plan will continue in effect only so long as it is approved at least annually by the vote of a majority of the Board of Directors, including a majority of the 12b-1 Directors, cast in person at a meeting called for the purpose of voting on the Plan. The Plan may be terminated by a vote of a majority of the 12b-1 Directors or by a vote of a majority of the outstanding voting securities of the Financial Intermediary Class shares. Any change in the Plan that would materially increase the distribution cost to a Portfolio requires shareholder approval; otherwise the Plan may be amended by the Directors, including a majority of the 12b-1 Directors, as previously described. In accordance with Rule 12b-1, the Plan provides that Legg Mason will submit to the Fund's Board of Directors, and the Directors will review, at least quarterly, a written report of any amounts expended pursuant to the Plan and the purposes for which expenditures were made. In addition, as long as the Plan is in effect, the selection and nomination of the Independent Directors will be committed to the discretion of such Independent Directors. There are certain anticipated benefits to shareholders of the Fund that may result from the Plan. For example, the payment of commissions and service fees to Legg Mason and its investment executives could motivate them to improve their sales efforts with respect to each Portfolio's Financial Intermediary shares and to maintain and enhance the level of services they provide to each Portfolio's Financial Intermediary shareholders. These efforts, in turn, could lead to increased sales and reduced redemptions, eventually enabling each Portfolio to achieve economies of scale and lower per share operating expenses. Any reduction in such expenses would serve to offset, at least in part, the additional expenses incurred by each Portfolio in connection with its Plan. Furthermore, the investment management of each Fund could be enhanced, as net inflows of cash from new sales might enable its portfolio manager to take advantage of attractive investment opportunities, and reduced redemptions could eliminate the potential need to liquidate attractive securities positions in order to raise the funds necessary to meet the redemption requests. Those persons listed in "Management of the Portfolios -- Directors and Officers" as holding positions with Legg Mason may be deemed to have an interest in the operation of the Plan. No director of the Fund who is not an interested person of the Fund has an interest in the operation of the Plan. For the fiscal year ended March 31, 2000, the Western Asset Intermediate Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and Western Asset Non-U.S. Fixed Income Portfolio paid Legg Mason $6,000, $2,000, $0 and $0, respectively, in distribution and service fees under the Plan from assets attributable to Financial Intermediary Class shares. The Plan pays a fixed fee rate to Legg Mason each month. Legg Mason, in turn, generally uses the entire amount of this compensation to pay distribution expenses. [During the year ended March 31, 2000, Legg Mason incurred the following expenses with respect to Financial Intermediary Class shares: ]
Expense Intermediate Core Core Plus Non-U.S. Fixed Income - ---------------------------------------------------------------------------------- Advertising - ---------------------------------------------------------------------------------- Printing and mailing prospectuses to prospective shareholders - ---------------------------------------------------------------------------------- Compensation to underwriters - ---------------------------------------------------------------------------------- Compensation to broker-dealers - ---------------------------------------------------------------------------------- Compensation to sales personnel - ---------------------------------------------------------------------------------- Interest, carrying or other financial charges - ---------------------------------------------------------------------------------- Other - ---------------------------------------------------------------------------------- Total Expenses - ----------------------------------------------------------------------------------
Arroyo Seco, Inc. ("Arroyo Seco"), 117 East Colorado Boulevard, Pasadena, CA 91105, a wholly owned subsidiary of Western Asset, is also 23 authorized to offer the shares of LM Institutional Fund Advisors I, Inc. for sale to its customers pursuant to an Agreement dated May 26, 1998. LM Institutional Fund Advisors I, Inc. makes no payments to Arroyo Seco in connection with the offer or sale of the Fund's shares, and Arroyo Seco does not collect any commissions or other fees from customers in connection with the offer or sale of the Fund's shares. Arroyo Seco is not obligated to sell any specific amount of Fund shares. The Agreement is terminable without penalty, at any time, by vote of a majority of the Fund's Directors, a majority of the Fund's Independent Directors, or a majority of the Fund's outstanding shares, or by Arroyo Seco upon 60 days' notice to the Fund. Purchases and Redemptions The Fund reserves the right to modify the mail, telephone or wire redemption services or to terminate the telephone or wire redemption services described in the Prospectus at any time without prior notice to shareholders. The Fund also reserves the right to suspend or postpone redemptions (1) for any period during which the Exchange is closed (other than for customary weekend and holiday closings), (2) when trading in markets the Fund normally utilizes is restricted or an emergency, as defined by rules and regulations of the SEC, exists, making disposal of the Fund's investments or determination of its net asset value not reasonably practicable, or (3) for such other periods as the SEC by regulation or order may permit for the protection of the Fund's shareholders. In the case of any such suspension, an investor may either withdraw the request for redemption or receive payment based upon the net asset value next determined after the suspension is lifted. The Fund agrees to redeem shares of each Portfolio solely in cash up to the lesser of $250,000 or 1% of the relevant Portfolio's net assets during any 90- day period for any one shareholder. In consideration of the best interests of the remaining shareholders, the Fund reserves the right to pay any redemption price exceeding this amount in whole or in part by a distribution in kind of readily marketable securities held by a Portfolio in lieu of cash. It is highly unlikely that shares would ever be redeemed in kind. If shares are redeemed in kind, however, the redeeming shareholder should expect to incur transaction costs upon the disposition of the securities received in the distribution. Exchange Privilege Shareholders in any of the Portfolios are entitled to exchange their shares for shares of the other Portfolios of the Fund or of the portfolios of LM Institutional Fund Advisors II, Inc., provided that such shares are eligible for sale in the shareholder's state of residence, and are being offered at the time. When a shareholder decides to exchange shares of a Portfolio, the Fund's transfer agent will redeem shares of the Portfolio and invest the proceeds in shares of the Portfolio selected. Redemptions of shares of the Portfolio will be made at their net asset value determined on the same day that the request is received in proper order, if received before the close of regular trading on the Exchange. If the request is received by the transfer agent after such close of regular trading, shares will be redeemed at their net asset value determined as of the close of the Exchange on the next day the Exchange is open. There is no charge for the exchange privilege and no sales charge imposed on an exchange, but the Portfolios reserve the right to modify or terminate the exchange privilege at any time. For more information concerning the exchange privilege, or to make an exchange, please contact the Portfolios. Portfolio Transactions and Brokerage Under the various Management Agreements and Advisory Agreements, the Manager and the Advisers are responsible for the execution of the Portfolios' transactions. Each Portfolio's Adviser places all orders for the purchase and the sale of portfolio investments with brokers or dealers selected by it in its discretion. Transactions on stock exchanges and other agency transactions involve the payment by the Portfolio of brokerage commissions. There is generally no stated commission in the case of securities, such as U.S. Government securities, traded in the over-the-counter markets, but the price paid by the Fund usually includes an undisclosed dealer commission or markup. In selecting brokers or dealers, the Advisers must seek the most favorable price (including the applicable dealer spread) and execution for such transactions, subject to the possible payment as described below of higher brokerage commissions or spreads to brokers or dealers who provide research and analysis. The Portfolios may not always pay the lowest commission or spread available. Rather, in placing orders on behalf of the Portfolios, the Advisers will also take into account such factors as size of the order, difficulty of execution, efficiency of the executing broker's or dealer's facilities (including the services described below) and any risk assumed by the executing broker or dealer. Consistent with the policy of obtaining most favorable price and execution, an Adviser may give consideration to research, statistical and other services furnished by brokers or dealers to the Adviser for its use, may place orders with brokers or dealers who provide supplemental investment and market research and securities and economic analysis, and may pay to those brokers or dealers a higher brokerage commission or spread than may be charged by other brokers or dealers. Such research, analysis and other services may be useful to an Adviser in connection with services to clients other than the Portfolios. An Adviser's fee is not reduced by reason of its receiving such brokerage and research services. The Adviser may also consider sales of shares of the Portfolio (or other portfolios or other funds managed by it or its affiliates, to the extent permitted by applicable law) in selecting broker-dealers to execute Portfolio transactions. The Portfolios may use Legg Mason, among others, as broker for agency transactions in listed and over-the-counter securities at commission rates and under circumstances consistent 24 with the policy of best execution. In the prior three fiscal years, the Portfolios did not use Legg Mason as a broker. Some securities considered by an Adviser for purchase by a Portfolio may also be appropriate for other clients served by the Adviser. To the extent the Portfolio and such other clients purchase the same security, transactions in such security will be allocated among the Portfolio and such other clients in a manner considered fair and reasonable by the Adviser. The Portfolios may not buy securities from, or sell securities to, an Adviser or its affiliated persons as principal, except as permitted by the rules and regulations of the SEC. Subject to certain conditions, the Portfolios may purchase securities that are offered in underwritings in which an affiliate of an Adviser is a participant, although the Portfolios may not make such purchases directly from such affiliate. The Advisers will select brokers to execute portfolio transactions. In the over- the-counter market, the Portfolios generally will deal with responsible primary market-makers unless a more favorable execution can otherwise be obtained. Investment decisions for the Portfolios are made independently from those of other funds and accounts advised by the Advisers. However, the same security may be held in the portfolios of more than one fund or account. When two or more accounts simultaneously engage in the purchase or sale of the same security, the prices and amounts will be equitably allocated to each account. In some cases, this procedure may adversely affect the price or quantity of the security available to a particular account. In other cases, however, an account's ability to participate in larger volume transactions may produce better executions and prices. Brokerage commissions paid on transactions were as follows: for the fiscal years ended March 31, 2000 and 1999, the nine month period ended March 31, 1998, and the year ended June 30, 1997, the Western Asset Core Plus Portfolio paid $111,558 and $33,953, respectively; the Western Asset Core Portfolio paid $329,139, $514,272, $11,473 and $150,548, respectively; the Western Asset Intermediate Portfolio paid $89,558, $154,935, $59,910 and $50,835, respectively; and the Western Asset Non-U.S. Fixed Income Portfolio paid $1,890 and $1,717, respectively. No brokerage commissions were paid by any Portfolio to affiliated persons. Codes of Ethics The Fund, the Manager, Legg Mason, Arroyo Seco, Western Asset and WAML have adopted codes of ethics under Rule 17j-1 of the 1940 Act. These codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Fund. Additional Tax Information General Requirements for "Pass-through" Treatment In order to qualify or continue to qualify for treatment as a regulated investment company ("RIC") under the Subchapter M of the Code, each Portfolio must distribute annually to its shareholders at least 90% of its investment company taxable income (consisting generally of net investment income and net short-term capital gain, if any) and must meet several additional requirements. With respect to each Portfolio, these requirements include the following: (1) the Portfolio must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or other income (including but not limited to gains from options or futures) derived with respect to its business of investing in securities; (2) at the close of each quarter of the Portfolio's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies and other securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Portfolio's total assets and not more than 10% of the outstanding voting securities of such issuer; and (3) at the close of each quarter of the Portfolio's taxable year, not more than 25% of its total assets may be invested in securities (other than U.S. Government securities and securities of other regulated investment companies) of any one issuer and two or more issuers which the Portfolio controls and which are engaged in the same, similar or related trades or businesses. By so qualifying, each Portfolio will not be subject to federal income taxes to the extent that its net investment income, net realized short-term capital gains and net realized long-term capital gains are distributed to shareholders. If a Portfolio failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Portfolio would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net long-term capital gains, would be taxable to shareholders as ordinary income. In addition, the Portfolio could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before re-qualifying as a regulated investment company that is accorded special tax treatment. If a Portfolio fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the Portfolio is permitted or so elects), plus any retained amount from the prior year, the Portfolio will be subject to a 4% excise tax on undistributed amounts. A distribution declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in such months will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 if the distribution is paid by the Portfolio during the following January. Such a distribution, therefore, will be taxable to shareholders for the year in which that 25 December 31 falls. Each Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax. Original Issue Discount A Portfolio may purchase debt securities issued with original issue discount. Original issue discount that accrues in a taxable year will be treated as income earned by the Portfolio and therefore an equivalent amount must be distributed to satisfy the distribution requirement and avoid imposition of the 4% excise tax. Periodic adjustments for inflation in the principal value of inflation- indexed bonds also may give rise to original issue discount which is includible in the Portfolio's gross income on a current basis. Because the original issue discount earned by a Portfolio in a taxable year may not be represented by cash income, the Portfolio may have to dispose of other securities and use the proceeds thereof to make distributions in amounts necessary to satisfy those distribution requirements. A Portfolio may realize capital gains or losses from such dispositions, which would increase or decrease the Portfolio's investment company taxable income and/or net capital gain. Miscellaneous Dividends and distributions on a Portfolio's shares are generally subject to federal income tax as described in the Prospectus to the extent they do not exceed the Portfolio's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distribution are likely to occur in respect of shares purchased at a time when a Portfolio's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when a Portfolio's net asset value also reflects unrealized losses. If a Portfolio invests in shares of preferred stock or otherwise holds dividend- paying securities as a result of exercising a conversion privilege, a portion of the dividends from the Portfolio's investment company taxable income (whether paid in cash or reinvested in additional shares) may be eligible for the dividends-received deduction allowed to corporations that meet certain holding period requirements. The eligible portion may not exceed the aggregate dividends received by the Portfolio from U.S. corporations. However, dividends received by a corporate shareholder and deducted by it pursuant to the dividends-received deduction are subject indirectly to the alternative minimum tax. If shares of any Portfolio are sold at a loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any capital gain distributions received on those shares. Dividends and interest received by a Portfolio, and gains realized by a Portfolio on foreign securities, may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Portfolio's securities. Tax conventions between certain countries and the United States may reduce or eliminate these foreign taxes, however, and foreign countries generally do not impose taxes on capital gains in respect of investments by foreign investors. To the extent distributions consist of interest from securities of the U.S. Government and certain of its agencies and instrumentalities, they may be exempt from state and local income taxes. Interest from obligations that are merely guaranteed by the U.S. Government of one of its agencies, such as mortgage participation certificates guaranteed by GNMA, generally is not entitled to this exemption. Although there is no assurance that any such state and local exemptions will be available, shareholders will be advised of the portion of Portfolio distributions that might qualify for such an exemption. If at the end of a Portfolio's fiscal year, more than 50% of the value of its total assets represents securities of foreign corporations, the Portfolio may make an election to treat any foreign taxes paid by it as paid by its shareholders. In this case, shareholders who are U.S. citizens, U.S. corporations and, in some cases, U.S. residents generally will be required to include in U.S. taxable income their pro rata share of such taxes, but may then generally be entitled to claim a foreign tax credit or deduction (but not both) for their share of such taxes. A shareholder's ability to claim a foreign tax credit or deduction in respect of foreign taxes paid by a Portfolio may be subject to certain limitations (including a holding period requirement, applicable to both a Portfolio and its shareholders, imposed by the Code). A Portfolio's transactions in foreign currencies and hedging activities may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in value of the foreign currency concerned. In addition, such activities will likely produce a difference between book income and taxable income. This difference may cause a portion of a Portfolio's income distributions to constitute a return of capital for tax purposes or require a Portfolio to make distribution exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Code could subject a Portfolio to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. A Portfolio may make an election to mark the gains (and to a limited extent losses) in such investments "to the market" as through it had sold and repurchased its holdings in those passive foreign investment companies on the last day of the Portfolio's taxable year. Other Information 26 LMIFA I was incorporated in Maryland on May 16, 1990. Prior to May 29, 1998, LMIFA I was known as "Western Asset Trust, Inc." Each Portfolio is an open-end, diversified investment management company, except for Western Asset Non-U.S. Fixed Income Portfolio and Western Asset Global Strategic Income Portfolio, which are non-diversified companies. The Directors of LMIFA I may, without shareholder approval, create, in addition to the Portfolios, other series of shares representing separate investment portfolios. Any such series may be divided without shareholder approval into two or more classes of shares having such terms as the Directors may determine. Establishment and offering of additional portfolios or classes of shares of a portfolio will not alter the rights of the Fund's shareholders. The rights of the Fund's shareholders cannot be modified by other than a majority vote. LMIFA I has a total of 13.1 billion shares of common stock at par value $0.001. Each share has one vote, with fractional shares voting proportionally. Voting on matters pertinent only to a particular Portfolio, such as the adoption of an investment advisory contract for that Portfolio, is limited to that Portfolio's shareholders. Shares of all classes of a Portfolio will vote together as a single class except when otherwise required by law or as determined by the Directors. Shares are freely transferable, are entitled to dividends as declared by the Directors, and, if a Portfolio were liquidated, would receive the net assets of that Portfolio. Voting rights are not cumulative, and all shares of the Portfolios are fully paid and nonassessable and have no conversion rights. Although no Portfolio intends to hold annual shareholder meetings, it will hold a special meeting of shareholders when the Investment Company Act of 1940 (the "1940 Act") requires a shareholder vote on certain matters (including the election of Directors in certain cases or approval of an advisory contract). When issued, shares are fully paid, non-assessable, redeemable and freely transferable. Shares do not have preemptive rights or subscription rights. In liquidation of a Portfolio, each shareholder is entitled to receive his or her pro rata share of the net assets of that Portfolio. Prior to May 21, 1998, the Western Asset Core Portfolio was known as the Core Portfolio; the Western Asset Intermediate Portfolio was known as the Intermediate Portfolio; and the Western Asset Money Market Portfolio was known as the Money Market Portfolio. Principal Holders of Securities Set forth below is a table which contains the name, address and percentage of ownership of each person who is known by the Fund to own beneficially and of record five percent or more of the outstanding shares of the Western Asset Core Portfolio as of June 30, 2000: % of Ownership as of Name and Address June 30, 2000 - ---------------- ------------- Institutional Class First National Bank of Omaha TTEE ___% One First National Center Omaha, NE 68102-1596 Newspaper and Mail Deliverers' Publishers' Pension Fund ___% 41-18 27th Street Long Island City, NY 11101-3825 The following chart contains the name, address and percentage of ownership of each person who is known by the Fund to own beneficially and of record five percent or more of the outstanding shares of the Western Asset Core Plus Portfolio as of June 30, 2000: % of Ownership as Name and Address of June 30, 2000 - ---------------- ---------------- Institutional Class Thomson Consumer Electronics _____% Pension Plan for Employees Post Office Box 1992 Boston, MA 02105-1992 Appleton Papers Inc. _____% Post Office Box 92956 Chicago, IL 60675-2956 Howard County Community _____% Health Foundation I 10440 Little Patuxent Parkway, Suite 90 Columbia, MD 21044-3629 Blanchard Valley Health _____% Association Pension Plan Post Office Box 160 Westerville, OH 43086-0160 W E Upjohn Unemployment _____% Trustee Corp Post Office Box 4042 Kalamazoo, MI 49003-4042 27 Set forth below is a table which contains the name, address and percentage of ownership of each person who is known by the Fund to own beneficially and of record five percent or more of the outstanding shares of the Western Asset Intermediate Portfolio as of June 30, 2000: % of Ownership as of Name and Address June 30, 2000 - ---------------- ------------- Financial Intermediary Class Link & Co. as Trustee for Various ______% 401-K Expediter Plans Post Office Box 630074 Cincinnati, OH 45263-0001 Institutional Class M A Hanna Master Trust _______% 30 South LaSalle Street Chicago, IL 60603-1006 Anne Arundel County _______% Maryland Master Trust Post Office Box 1992, Mailstop B2 Boston, MA 02105-1992 Northern Trust Company _______% 50 La Salle St. Chicago, IL 60675 Sun Microsystems Savings Trust _______% 209 W. Jackson Boulevard, Suite 700 Chicago, IL 60606-6936 Mt. Sinai Health Care Foundation Post Office Box 94870 Cleveland, OH 44101-4870 _______% The following chart contains the name, address and percentage of ownership of each person who is known by the Fund to own beneficially and of record five percent or more of the outstanding shares of the Western Asset Non-U.S. Fixed Income Portfolio as of June 30, 2000: % of Ownership as of Name and Address June 30, 2000 - ---------------- ------------- Institutional Class Treasurer of the State of Connecticut _______% One Enterprise Drive North Quincy, MA 02171-2126 Booth & Co./Annuity Board of _______% Southern Baptist Convention Post Office Box 92923 C-IN Chicago, IL 60675-2923 United Airline Pilots _______% 50 South LaSalle Street Chicago, IL 60603-1006 [____________________, [form of organization], and ____________, [form of organization], may be deemed to control the ________ Portfolio because each owns more than 25% of the outstanding voting securities of such Portfolio. [______ may be deemed to control _____________.] The Officers and Directors of the Portfolios own in the aggregate less than 1% of the outstanding shares of each Portfolio. ] The Manager owns 100% of the Western Asset Government Money Market, Money Market, Intermediate Plus, High Yield, Global Strategic Income, Enhanced Equity and Inflation Indexed Bond Portfolio. The Manager may be deemed to control each such Portfolio because it owns more than 25% of the outstanding voting securities of such Portfolio. Performance Information Each Portfolio may, from time to time, include its total return in marketing materials or reports to shareholders or prospective investors. 28 Quotations of average annual total return for a class of shares of a Portfolio will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in that class of shares over periods of one, five and ten years (up to the life of the class), calculated pursuant to the following formula: P (1 + T)(exponent n) = ERV (where P = a hypothetical initial payment of $1,000, T = the average annual total return, n = number of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period). All total return figures reflect the deduction of a proportional share of Portfolio expenses on an annual basis and assume that all dividends and other distributions are reinvested when paid. The performance of each class of a Portfolio will differ because each class is subject to different expenses. The performance figures for the Portfolios shown below represent performance of the only classes of shares in existence throughout the relevant periods for each Portfolio. The Western Asset Core Portfolio's Institutional Class total returns and current yield as of March 31, 2000 were as follows:
Average Current Annual Yield: 6.31% Total Return One Year 1.99% Five Years 7.32% Life of Portfolio(A) 8.65% (A) Portfolio's inception - September 4, 1990. The Western Asset Core Portfolio's Financial Intermediary Class total return and current yield as of March 31, 2000 were as follows: Current Cumulative Yield: 6.48% Total Return Life of Portfolio(A) 1.97% (A) Portfolio's inception - July 21, 1999. The Western Asset Intermediate Portfolio's total returns and current yield as of March 31, 2000 were as follows: Average Current Annual Yield: 6.36% Total Return One Year 2.49% Five Years 6.77% Life of Portfolio(A) 6.70% (A) Portfolio's inception - July 1, 1994. The Western Asset Core Plus Portfolio's total returns and current yield as of March 31, 2000 were as follows: Average Current Annual Yield: 6.83% Total Return One Year 1.95% Life of Portfolio(A) 2.63% (A) Portfolio's inception - July 8, 1998. The Western Asset Non-U.S. Fixed Income Portfolio's total returns and current yield as of March 31, 2000 were as follows: Average Current Annual Yield: 6.54% Total Return One Year 0.57% Life of Portfolio(A) 3.69% (A) Portfolio's inception - July 15, 1998.
The yield shown for the Portfolios is the 30-day current yield as of March 31, 2000. The current annualized yield for the Money Market Portfolios is based upon a specified seven-day period and is computed by determining the net change in the value of a hypothetical account in the Portfolio. The net change in the value of the account includes the value of dividends and of additional shares purchased with dividends, but does not include realized gains and losses or unrealized appreciation and depreciation. In addition, the Money Market Portfolios may use a compound effective annualized yield quotation which is calculated as prescribed by SEC regulations, by adding one to the base period return (calculated as prescribed above), raising the sum to a power equal to 365 divided by 7, and subtracting one. Each Portfolio's performance may fluctuate daily depending upon such factors as the average maturity of its securities, changes in investments, changes in interest rates and variations in operating expenses. Therefore, current performance does not provide a basis for 29 determining future performance. The fact that a Portfolio's performance will fluctuate and that shareholders' principal is not guaranteed or insured should be considered in comparing the Portfolio's performance with the performance of fixed-income investments. In comparing the performance of a Portfolio to other investment vehicles, consideration should be given to the investment policies of each, including the types of investments owned, lengths of maturities of the portfolio, the method used to compute the performance and whether there are any special charges that may reduce the yield. From time to time each Portfolio may compare the performance of a class of shares in advertising and sales literature to the performance of other investment companies, groups of investment companies or various market indices. One such market index is the S&P 500, a widely recognized, unmanaged index composed of the capitalization-weighted average of the prices of 500 of the largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of all dividends. It does not take into account of the costs of investing or the tax consequences of distributions. The Portfolios invest in many securities that are not included in the S&P 500. Each Portfolio may also cite rankings and ratings, and compare the return of a class of shares with data published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Wiesenberger Investment Company Services, Value Line, Morningstar, and other services or publications that monitor, compare and/or rank the performance of investment companies. Each Portfolio may also refer in such materials to mutual fund performance rankings, ratings, comparisons with funds having similar investment objectives, and other mutual funds reported in independent periodicals, including, but not limited to, FINANCIAL WORLD, MONEY MAGAZINE, FORBES, BUSINESS WEEK, BARRON'S, FORTUNE, THE KIPLINGER LETTERS, THE WALL STREET JOURNAL, and THE NEW YORK TIMES. Each Portfolio may compare the investment return of a class of shares to the return on certificates of deposit and other forms of bank deposits, and may quote from organizations that track the rates offered on such deposits. Bank deposits are insured by an agency of the federal government up to specified limits. In contrast, Portfolio shares are not insured, the value of Portfolio shares may fluctuate, and an investor's shares, when redeemed, may be worth more or less than the investor originally paid for them. Unlike the interest paid on many certificates of deposit, which remains at a specified rate for a specified period of time, the return of each class of shares will vary. Portfolio advertisements may reference the history of Legg Mason, Inc. and its affiliates, the education and experience of the portfolio manager, and the fact that the portfolio manager engages in a particular style of investing (e.g., growth or value). In advertising, each Portfolio may illustrate hypothetical investment plans designed to help investors meet long-term financial goals, such as saving for a child's college education or for retirement. Sources such as the Internal Revenue Service, the Social Security Administration, the Consumer Price Index and Chase Global Data and Research may supply data concerning interest rates, college tuitions, the rate of inflation, Social Security benefits, mortality statistics and other relevant information. Each Portfolio may use other recognized sources as they become available. Each Portfolio may use data prepared by Ibbotson Associates of Chicago, Illinois ("Ibbotson") to compare the returns of various capital markets and to show the value of a hypothetical investment in a capital market. Ibbotson relies on different indices to calculate the performance of common stocks, corporate and government bonds and Treasury bills. Each Portfolio may illustrate and compare the historical volatility of different portfolio compositions where the performance of stocks is represented by the performance of an appropriate market index, such as the S&P 500, and the performance of bonds is represented by a nationally recognized bond index, such as the Lehman Brothers Long-Term Government Bond Index or the Lehman Brothers Aggregate Bond Index. Each Portfolio may also include in advertising biographical information on key investment and managerial personnel. Each Portfolio may advertise examples of the potential benefits of periodic investment plans, such as dollar cost averaging, a long-term investment technique designed to lower average cost per share. Under such a plan, an investor invests in a mutual fund at regular intervals a fixed dollar amount thereby purchasing more shares when prices are low and fewer shares when prices are high. Although such a plan does not guarantee profit or guard against loss in declining markets, the average cost per share could be lower than if a fixed number of shares were purchased at the same intervals. Investors should consider their ability to purchase shares through low price levels. Each Portfolio may discuss Legg Mason, Inc.'s tradition of service. Since 1899, Legg Mason, Inc. and its affiliated companies have helped investors meet their specific investment goals and have provided a full spectrum of financial services. Legg Mason, Inc. affiliates serve as investment advisers for private accounts and mutual funds with assets of more than $110 billion as of March 31, 2000. In advertising, each Portfolio may discuss the advantages of saving through tax- deferred retirement plans or accounts, including the advantages and disadvantages of "rolling over" a distribution from a retirement plan into an IRA, factors to consider in determining whether you qualify for such a rollover, and the other options available. These discussions may include graphs or other illustrations that compare the growth of a hypothetical tax-deferred investment to the after-tax growth of a taxable investment. Custodian, Transfer Agent and Dividend-Disbursing Agent 30 State Street Bank and Trust Company ("State Street"), P.O. Box 1790, Boston, Massachusetts 02105, serves as custodian of the Fund's assets. As such, State Street holds in safekeeping certificated securities and cash belonging to the Fund and, in such capacity, is the registered owner of securities in book-entry form belonging to the Fund. Upon instruction, State Street receives and delivers cash and securities of the Fund in connection with Portfolio transactions and collects all dividends and other distributions made with respect to Portfolio portfolio securities. State Street also maintains certain accounts and records of the Fund. State Street also calculates the total net asset value, total net income and net asset value per share of each Portfolio on a daily basis (and as otherwise may be required by the 1940 Act) and performs certain accounting services for all Portfolios of the Fund. Boston Financial Data Services, Inc., P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and dividend-disbursing agent and administrator of various shareholder services. Shareholders who request an historical transcript of their account will be charged a fee based upon the number of years researched. The Fund reserves the right, upon 60 days' written notice, to make other charges to investors to cover administrative costs. Independent Accountants PricewaterhouseCoopers LLP have been selected to serve as the Fund's independent accountants. PricewaterhouseCoopers LLP conducts an annual audit of the Fund, assists in the preparation of each Portfolio's federal and state income tax returns and consults with the Fund as to matters of accounting and federal and state income taxation. The financial highlights included in the Prospectus and incorporated by reference into this Statement of Additional Information and the financial statements incorporated by reference into the Prospectus and this Statement of Additional Information have been so included and incorporated in reliance upon the report of PricewaterhouseCoopers LLP, given on their authority as experts in auditing and accounting. Legal Counsel Ropes & Gray, Boston, MA, serves as legal counsel to the Fund. Financial Statements The report of independent accountants, financial statements and financial highlights for the fiscal year ended March 31, 2000 for each of the Western Asset Intermediate Portfolio, the Western Asset Core Portfolio, the Western Asset Core Plus Portfolio and the Western Asset Non-U.S. Fixed Income Portfolio included in the Portfolios' Annual Reports are hereby incorporated by reference into this Statement of Additional Information. The audited Statement of Assets and Liabilities as of March 31, 2000 for the ______________ Portfolio and the Report of Independent Accountants related thereto, are shown on the following pages. LM Institutional Fund Advisors I, Inc. Statement of Assets and Liabilities March 31, 2000 [To be Supplied] Report of Independent Accountants [To be Supplied] 31 Appendix A Ratings of Securities Description of Moody's Investors Service, Inc. ("Moody's") corporate bond - -------------------------------------------------------------------------- ratings: - --------- Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge". Interest payments are protected by a large or exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa-Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated A possess many favorable investment attributes and are to be considered upper- medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa-Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba-Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Description of Standard & Poor's corporate bond ratings: AAA-This is the highest rating assigned by Standard & Poor's to an obligation and indicates an extremely strong capacity to pay principal and interest. AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A-Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB-Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. Description of Moody's preferred stock ratings: - ------------------------------------------------ aaa-An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stock. aa-An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. a-An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater 1 than in the "aaa" and "aa" classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. baa-An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. ba-An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. Description of Moody's Short-Term Debt Ratings - ----------------------------------------------- Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a superior capacity for repayment of short-term promissory obligations. P-1 repayment capacity will normally be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; well- established access to a range of financial markets and assured sources of alternate liquidity. Prime-2. Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Description of Standard & Poor's Commercial Paper Ratings - ---------------------------------------------------------- A. Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2, and 3 to indicate the relative degree of safety. A-1. This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2. Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for the issues designated "A-1". 2 PART C. OTHER INFORMATION Item 23. Exhibits
(a) (1) Articles of Incorporation -- (1) (2) Articles of Amendment and Restatement -- filed herewith (3) Articles Supplementary -- filed herewith (4) Articles Supplementary -- (4) (b) Bylaws - filed herewith (c) Instruments Defining Rights of Security Holders -- None (d) (1) Investment Management Agreement -- (2), except as noted below (i) Western Asset Government Money Market Portfolio (ii) Western Asset Money Market Portfolio (iii) Western Asset Core Portfolio (iv) Western Asset Core Plus Portfolio (v) Western Asset Intermediate Portfolio (vi) Western Asset Intermediate Plus Portfolio (vii) Western Asset High Yield Portfolio (viii) Western Asset Non-U.S. Fixed Income Portfolio (ix) Western Asset Global Strategic Income Portfolio (x) Western Asset Enhanced Equity Portfolio (xi) Western Asset Inflation Indexed Bond Portfolio -- (4) (2) Investment Advisory Agreement -- filed herewith, except as noted below (i) Western Asset Government Money Market Portfolio (ii) Western Asset Money Market Portfolio (iii) Western Asset Core Portfolio (iv) Western Asset Core Plus Portfolio (v) Western Asset Intermediate Portfolio (vi) Western Asset Intermediate Plus Portfolio (vii) Western Asset High Yield Portfolio (viii) Western Asset Non-U.S. Fixed Income Portfolio (ix) Western Asset Global Strategic Income Portfolio (x) Western Asset Enhanced Equity Portfolio (xi) Western Asset Core Plus Portfolio (xii) Western Asset Intermediate Plus Portfolio (xiii) Western Asset Global Strategic Income Portfolio (xiv) Western Asset Inflation Indexed Bond Portfolio -- (4) (e) (1) (i) Underwriting Agreement -- (2) (ii) Amendment to Underwriting Agreement -- (4) (2) (i) Broker Agreement -- filed herewith (ii) Amendment to Broker Agreement - (4) (f) Bonus or profit sharing contracts -- none (g) (1) Custodian Agreement -- (1) (2) Amendment to Custodian Agreement -- (1) (3) Amendment to Custodian Agreement -- (1) (4) Amendment to Custodian Agreement -- (4) (h) (1) Transfer Agent Agreement -- (1) (2) Amendment to Transfer Agent Agreement -- (4)
(i) Opinion of counsel -- (1), (2) and (4) (j) Other opinions, appraisal, rulings and related consents - (4) (k) Financial statements omitted from Item 22 -- not applicable (l) Agreement for providing initial capital -- (1) (m) Plan pursuant to Rule 12b-1 -- (2), except as noted below (1) Western Asset Government Money Market Portfolio (2) Western Asset Money Market Portfolio (3) Western Asset Core Portfolio (4) Western Asset Core Plus Portfolio (5) Western Asset Intermediate Portfolio (6) Western Asset Intermediate Plus Portfolio (7) Western Asset High Yield Portfolio (8) Western Asset Non-U.S. Fixed Income Portfolio (9) Western Asset Global Strategic Income Portfolio (10) Western Asset Enhanced Equity Portfolio (11) Western Asset Inflation Indexed Bond Portfolio -- (4) (n) (1) Rule 18f-3 Plan -- (3) (2) Amendment to Rule 18f-3 Plan -- (4) (o) Power of Attorney -- (3), and filed herewith (p) Code of Ethics (1) The Fund, Manager and LMWW -- filed herewith (2) Western Asset and Arroyo Seco -- filed herewith (3) WAML -- (4) - --------------------------------------------------------- (1) Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No. 15 to the Registration Statement, SEC File No. 33-34929 filed October 30, 1997. (2) Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No. 18 to the Registration Statement, SEC File No. 33-34929 filed May 29, 1998. (3) Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No. 19 to the Registration Statement, SEC File No. 33-34929 filed June 2, 1999. (4) To be filed by amendment. Item 24. Persons Controlled by or under Common Control with Registrant None Item 25. Indemnification This Item is incorporated by reference to Item 25 of Part C of Post-Effective Amendment No. 20 to the Registration Statement, SEC File No. 33-34929 filed July 30, 1999. Item 26. Business and Other Connections of Investment Adviser I. LM Institutional Advisors, Inc. ("LMIA") is the manager for all Portfolios in LMIFA I. LMIA's business is summarized under the caption "Manager, Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement, which summary is incorporated herein by reference. Other business, profession, vocation or employment of a substantial nature in which each director or officer of LMIA is or has been, at any time during the past two fiscal years, engaged for his own account or in the capacity of director, officer, employee, partner or trustee is as follows:
Name Position with LMIA Business and Other Connections Andrew J. Bowden Vice President, Secretary and None Director W. Curtis Livingston, III Director None Joseph L. Orlando President None Marie K. Karpinski Vice President and Treasurer None William H. Miller, III Director None Edward A. Taber, III Chairman and Director None
II. Western Asset Management Company ("Western") is the investment adviser for the Western Asset Inflation Indexed Bond Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset Enhanced Equity Portfolio, Western Asset Money Market Portfolio, Western Asset Government Money Market Portfolio, Western Asset High Yield Portfolio and Western Asset Global Strategic Income Portfolio. Western's business is summarized under the caption "Manager, Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement, which summary is incorporated herein by reference. Other business, profession, vocation or employment of a substantial nature in which each director or officer of Western is or has been, at any time during the past two fiscal years, engaged for his own account or in the capacity of director, officer, employee, partner or trustee is as follows:
Name Position with Western Business and Other Connections James W. Hirschmann, III Director, President and Chief None Executive Officer S. Kenneth Leech Director and Managing Director, None Chief Investment Officer W. Curtis Livingston, III Director and Chairman None Raymond A. Mason Director None Timothy C. Scheve Director None Elisabeth N. Spector Director None Edward A. Taber, III Director None Ilene S. Harker Secretary and Managing Director, Administration & Controls None Randolph L. Kohn Managing Director, Client Services None Stephen A. Walsh Managing Director, Senior Portfolio None Manager Steven T. Saruwatari Senior Accounting Officer None
III. Western Asset Management Company Limited ("WAML") is investment adviser to the Western Asset Non-U.S. Fixed Income Portfolio and to the non-U.S. portion of the Western Asset Core Plus Portfolio, the Western Asset Intermediate Plus Portfolio and the Western Asset Global Strategic Income Portfolio. WAML's business is summarized under the caption "Manager, Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement, which summary is incorporated herein by reference. Other business, profession, vocation or employment of a substantial nature in which each director or officer of WAML is or has been, at any time during the past two fiscal years, engaged for his own account or in the capacity of director, officer, employee, partner or trustee is as follows:
Name Position with WAML Business and Other Connections James W. Hirschmann, III Managing Director and Director None Gavin L. James Director and Senior Executive Officer None Michael B. Zelouf Executive Director of Fixed Income None S. Kenneth Leech Director None Raymond A. Mason Director None Timothy C. Scheve Director None Elisabeth A. Spector Director None Edward A. Taber, III Director None Trever K. Owens Director Global Investment Support None Suzanne Taylor-King Finance Officer None Mary Ann Cleary Compliance Officer and Company None Secretary
Item 27. Principal Underwriters ---------------------- (a) Legg Mason Cash Reserve Trust Legg Mason Income Trust, Inc. Legg Mason Tax-Free Income Fund Legg Mason Value Trust, Inc. Legg Mason Total Return Trust, Inc. Legg Mason Special Investment Trust, Inc. Legg Mason Focus Trust, Inc. Legg Mason Global Trust, Inc. Legg Mason Investors Trust, Inc. Legg Mason Light Street Trust, Inc. Legg Mason Investment Trust, Inc. LM Institutional Fund Advisors I, Inc. LM Institutional Fund Advisors II, Inc. (b) The following table sets forth information concerning each director and officer of the Registrant's principal underwriter, Legg Mason Wood Walker, Incorporated ("LMWW").
Name and Principal Business Position and Offices with Positions and Offices with Address* Underwriter - LMWW Registrant - --------------------------------------------------------------------------------------------------------------------- Raymond A. Mason Chairman of the Board and Director None James W. Brinkley President, Chief Operating Officer None and Director Edmund J. Cashman, Jr. Senior Executive Vice President and None Director Richard J. Himelfarb Senior Executive Vice President and None Director
Name and Principal Business Position and Offices with Positions and Offices with Address* Underwriter - LMWW Registrant - --------------------------------------------------------------------------------------------------------------------- Edward A. Taber III Senior Executive Vice President Director Robert G. Donovan Executive Vice President None Robert A. Frank Executive Vice President None Robert G. Sabelhaus Executive Vice President None Timothy C. Scheve Executive Vice President and None Treasurer and Director Manoochehr Abbaei Senior Vice President None Charles A. Bacigalupo Senior Vice President and Secretary None F. Barry Bilson Senior Vice President None D. Stuart Bowers Senior Vice President None W. William Brab Senior Vice President None Deepak Chowdhury Senior Vice President None Thomas M. Daly, Jr. Senior Vice President None Jeffrey W. Durkee Senior Vice President None Harry M. Ford, Jr. Senior Vice President None Dennis A. Green Senior Vice President None Thomas E. Hill Senior Vice President None 218 N. Washington Street Suite 31 Easton, MD 21601 Arnold S. Hoffman Senior Vice President None 1735 Market Street Philadelphia, PA 19103 Carl Hohnbaum Senior Vice President None 2500 CNG Tower 625 Liberty Avenue Pittsburgh, PA 15222
Name and Principal Business Position and Offices with Positions and Offices with Address* Underwriter - LMWW Registrant - --------------------------------------------------------------------------------------------------------------------- William B. Jones, Jr. Senior Vice President None 1747 Pennsylvania Avenue, N.W. Washington, D.C. 20006 Theodore S. Kaplan Senior Vice President None Laura L. Lange Senior Vice President None Horace M. Lowman, Jr. Senior Vice President and Asst. None Secretary Marvin H. McIntyre Senior Vice President None 1747 Pennsylvania Avenue, N.W. Washington, D.C. 20006 Thomas P. Mulroy Senior Vice President None Jonathan M. Pearl Senior Vice President None Mark I. Preston Senior Vice President None Robert F. Price Senior Vice President and General None Counsel Thomas L. Souders Senior Vice President and Chief None Financial Officer Elisabeth N. Spector Senior Vice President None Joseph A. Sullivan Senior Vice President None Richard L. Baker Vice President None William H. Bass, Jr. Vice President None Nathan S. Betnun Vice President None John C. Boblitz Vice President None Andrew J. Bowden Vice President and Deputy General None Counsel Edwin J. Bradley, Jr. Vice President None Carol A. Brown Vice President None Scott R. Cousino Vice President None Thomas W. Cullen Vice President None Charles J. Daley, Jr. Vice President and Controller None
Name and Principal Business Position and Offices with Positions and Offices with Address* Underwriter - LMWW Registrant - --------------------------------------------------------------------------------------------------------------------- Norman C. Frost, Jr. Vice President None James E. Furletti Vice President None John R. Gilner Vice President None Daniel R. Greller Vice President None Richard A. Jacobs Vice President None C. Gregory Kallmyer Vice President None 56 West Main Street Newark, DE 19702 Kurt A. Lalomia Vice President None Edward W. Lister, Jr. Vice President None Theresa McGuire Vice President None Julia A. McNeal Vice President None Gregory B. McShea Vice President None Edward P. Meehan Vice President None 12021 Sunset Hills Road Suite 100 Reston, VA 20190 Thomas C. Merchant Vice President and Assistant None General Counsel Paul Metzger Vice President None Mark C. Micklem Vice President None 1747 Pennsylvania Ave., N.W. Washington, DC 20006 John A. Moag, Jr. Vice President None Hance V. Myers, III Vice President None 1100 Poydras St. New Orleans, LA 70163 Ann O'Shea Vice President None Robert E. Patterson Vice President and Deputy General None Counsel Gerard F. Petrik, Jr. Vice President None
Name and Principal Business Position and Offices with Positions and Offices with Address* Underwriter - LMWW Registrant - --------------------------------------------------------------------------------------------------------------------- Douglas F. Pollard Vice President None Judith L. Ritchie Vice President None Thomas E. Robinson Vice President None Theresa M. Romano Vice President None James A. Rowan Vice President None 1747 Pennsylvania Avenue, N.W. Washington, D.C. 20006 Douglas M. Schmidt Vice President None B. Andrew Schmucker Vice President None 1735 Market Street Philadelphia, PA 19103 Robert W. Schnakenberg Vice President None Henry V. Sciortino Vice President None 1735 Market St. Philadelphia, PA 19103 Chris A. Scitti Vice President None Eugene B. Shephard Vice President None 1111 Bagby St. Houston, TX 77002-2510 Lawrence D. Shubnell Vice President None Jane Soybelman Vice President None Alexsander M. Stewart Vice President None L. Kay Strohecker Vice President None Joseph E. Timmins III Vice President None Joyce Ulrich Vice President None William A. Verch Vice President None Sheila M. Vidmar Vice President and Deputy General None Counsel Lewis T. Yeager Vice President None Carol Converso-Burton Assistant Vice President None
Name and Principal Business Position and Offices with Positions and Offices with Address* Underwriter - LMWW Registrant - --------------------------------------------------------------------------------------------------------------------- Diana L. Deems Assistant Vice President and None Assistant Controller Ronald N. McKenna Assistant Vice President None Suzanne E. Peluso Assistant Vice President None Lauri F. Smith Assistant Vice President None Janet B. Straver Assistant Vice President None Leslee Stahl Assistant Secretary None
*All addresses are 100 Light Street, Baltimore, Maryland 21202, unless otherwise indicated. The following table sets forth information concerning each director and officer of Arroyo Seco, Inc.
Name and Principal Business Position and Offices with Position and Offices with Address** Underwriter - Registrant Arroyo Seco, Inc. Ilene S. Harker Director, Chief Executive Officer, Vice President Secretary and Director of Training & Compliance James W. Hirschmann Director and Director of Marketing President Randolph L. Kohn Director and Director of Client Vice President Services Steven T. Saruwatari Chief Financial Officer Assistant Treasurer W. Curtis Livingston, III Director None
**All addresses are 117 East Colorado Boulevard, Pasadena, California 91105, unless otherwise indicated. (c) The Registrant has no principal underwriter who is not an affiliated person of the Registrant or an affiliated person of such an affiliated person. Item 28. Location of Accounts and Records State Street Bank and Trust Company P.O. Box 1713 Boston, Massachusetts 02105 Item 29. Management Services -- none Item 30. Undertakings -- none SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, LM Institutional Fund Advisors I, Inc., has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pasadena and State of California, on the 15th day of May, 2000. LM INSTITUTIONAL FUND ADVISORS I, INC. By: /s/ James W. Hirschman ---------------------------- James W. Hirschman* President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/James W. Hirschman President May 15, 2000 - ------------------------ James W. Hirschman* /s/ Edward A. Taber, III Director May 15, 2000 - ------------------------ Edward A. Taber, III* /s/ John E. Bryson Director May 15, 2000 - ----------------------- John E. Bryson* /s/ Ronald J. Arnault Director May 15, 2000 - ------------------------ Ronald J. Arnault* /s/ William G. McGagh Director May 15, 2000 - ----------------------- William G. McGagh* /s/ Ronald L. Olson Director May 15, 2000 - ----------------------- Ronald L. Olson* /s/ Louis A. Simpson Director May 15, 2000 - ----------------------- Louis A. Simpson* /s/ William E. B. Siart Director May 15, 2000 - ------------------------ /s/ William E. B. Siart*
/s/ Anita L. DeFrantz Director May 15, 2000 - ----------------------- Anita L. DeFrantz* /s/ Marie K. Karpinski Treasurer May 15, 2000 - ----------------------- Marie K. Karpinski* * By: /s/ Ilene Harker ------------------ Ilene Harker Attorney-in-Fact Pursuant to Powers of Attorney previously filed and for Herself
Exhibit Index - ------------- Exhibit 23(a)(2) - Articles of Amendment and Restatement Exhibit 23(a)(3) -- Articles Supplementary Exhibit 23(b) -- Bylaws Exhibit 23(d)(2) -- Investment Advisory Agreements Exhibit 23(d)(2)(i) Western Asset Government Money Market Portfolio Exhibit 23(d)(2) (ii) Western Asset Money Market Portfolio Exhibit 23(d)(2) (iii) Western Asset Core Portfolio Exhibit 23(d)(2) (iv) Western Asset Core Plus Portfolio Exhibit 23(d)(2) (v) Western Asset Intermediate Portfolio Exhibit 23(d)(2) (vi) Western Asset Intermediate Plus Portfolio Exhibit 23(d)(2) (vii) Western Asset High Yield Portfolio Exhibit 23(d)(2) (viii) Western Asset Non-U.S. Fixed Income Portfolio Exhibit 23(d)(2) (ix) Western Asset Global Strategic Income Portfolio Exhibit 23(d)(2) (x) Western Asset Enhanced Equity Portfolio Exhibit 23(d)(2) (xi) Western Asset Core Plus Portfolio Exhibit 23(d)(2) (xii) Western Asset Intermediate Plus Portfolio Exhibit 23(d)(2) (xiii) Western Asset Global Strategic Income Portfolio Exhibit 23(e)(2)(i) -- Broker Agreement Exhibit 23(o) -- Power of Attorney Exhibit 23(p) -- Code of Ethics Exhibit 23(p)(1) - The Fund, Manager and LMWW Exhibit 23(p)(2) - Western Asset and Arroyo Seco EX-23.A.2 2 EXHIBIT 23(A)(2) Exhibit 23(a)(2) ---------------- WESTERN ASSET TRUST, INC. ------------------------- ARTICLES OF AMENDMENT AND RESTATEMENT FIRST: Western Asset Trust, Inc., a Maryland corporation (the ----- "Corporation"), desires to amend and restate its charter as currently in effect and as hereinafter amended. SECOND: The following provisions are all the provisions of the ------ charter currently in effect and as hereinafter amended: ARTICLE I INCORPORATOR The undersigned, Arthur C. Delibert, whose address is South Lobby - Ninth Floor, 1800 M Street, N.W., Washington, D.C. 20036, being at least 18 years of age, does hereby form a corporation under the general laws of the State of Maryland. ARTICLE II NAME The name of the corporation (the "Corporation") is: LM Institutional Fund Advisors I, Inc. ARTICLE III PURPOSE The Corporation is formed for the purpose of carrying on any lawful business, which may include acting as an open-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"), and exercising and generally enjoying all of the powers, rights and privileges granted to, or conferred upon, corporations by the general laws of the State of Maryland now or hereafter in force. ARTICLE IV PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT The address of the principal office of the Corporation in the State of Maryland is c/o Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland 21202. The name of the resident agent of the Corporation in the State of Maryland is Charles A. Bacigalupo, whose address is c/o Legg Mason Wood Walker, Incorporated, 23rd Floor, 100 Light Street, Baltimore, Maryland 21202. The resident agent is a citizen of and resides in the State of Maryland. -2- ARTICLE V PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS Section 5.1 Number of Directors. The business and affairs of ------------------- the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation shall be ten, which number may be increased or decreased pursuant to the Bylaws, but shall never be less than the minimum number required by the Maryland General Corporation Law. The names of the directors who are currently in office and who shall serve until the next meeting of stockholders and until their successors are duly elected and qualified are: Ronald J. Arnault John E. Bryson Anita L. DeFrantz Richard C. Gilman W. Curtis Livingston William G. McGagh Ronald L. Olson Louis A. Simpson William E.B. Siart Edward A. Taber, III Section 5.2 Removal of Directors. Any director, or the entire -------------------- Board of Directors, may be removed from office at any -3- time, but, to the extent not otherwise prohibited by the 1940 Act, only for cause and then only by the affirmative vote of the holders of at least a majority of the votes entitled to be cast in the election of directors. For the purpose of this paragraph, "cause" shall mean with respect to any particular director (a) conviction of a felony, (b) a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to the Corporation through bad faith or active and deliberate dishonesty, or (c) the barring or prohibition of such director from serving as a director of a registered investment company under Section 9 of the 1940 Act. Section 5.3 Voting Requirements. Any action which would ------------------- otherwise require the affirmative vote of the holders of shares entitled to cast greater than a majority of all the votes entitled to be cast on the matter pursuant to the Corporations and Associations Article of the Annotated Code of Maryland shall be effective and valid if taken or approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter. Section 5.4 Quorum. At any meeting of stockholders, holders ------ of thirty percent (30%) of all the votes entitled to be cast at such meeting, present in person or represented by proxy, -4- shall constitute a quorum. If any matter is to be voted on by an individual series or class of stock, then holders of thirty percent (30%) of all the votes entitled to be cast by such series or class at such meeting, present in person or represented by proxy, shall constitute a quorum as to each such series or class. Section 5.5 Authorization by Board of Stock Issuance. The ---------------------------------------- Board of Directors may authorize the issuance from time to time of shares of stock of the Corporation of any series or class, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any series or class, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the charter or the Bylaws. Section 5.6 Preemptive Rights. Except as may be provided by ----------------- the Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Section 6.5 or as may otherwise be provided by contract, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or any other -5- security of the Corporation which it may issue or sell. Section 5.7 Determinations by Board. The determination as to ----------------------- any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the charter and in the absence of actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: (a) the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, the redemption of its stock or the payment of other distributions on its stock; (b) the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; (c) the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); (d) the value, or any sale, bid or asked price to be applied in determining the value, of any security or other asset owned or -6- held by the Corporation; (e) any matter relating to the sale, purchase and/or other acquisition or disposition of securities or other assets of the Corporation; and (f) any other matter relating to the business and affairs of the Corporation. Shares of stock of the Corporation are issued and sold on the condition and understanding that any and all determinations shall be binding as aforesaid. Section 5.8 Management or Investment Advisory Agreements. -------------------------------------------- Except to the extent otherwise prohibited by applicable law, the Corporation may enter into any management or investment advisory contract or underwriting contract or any other type of contract with, and may otherwise engage in any transaction or do business with, any person, firm or corporation or any subsidiary or other affiliate of any such person, firm or corporation, and may authorize such person, firm or corporation or such subsidiary or other affiliate to enter into any other contracts or arrangements with any other person, firm or corporation which relate to the Corporation or the conduct of its business, notwithstanding that any directors or officers of the Corporation are or may subsequently become partners, directors, officers, stockholders or employees of such person, firm or corporation or of such subsidiary or other affiliate or may have -7- a material financial interest in any such contract, transaction or business; and except to the extent otherwise provided by applicable law, no such contract, transaction or business shall be invalidated or voidable, or in any way affected thereby, nor shall any of such directors or officers of the Corporation be liable to the Corporation or to any stockholder or creditor thereof or to any other person for any loss incurred solely because of the entering into and performance of such contract or the engaging in such transaction or business or the existence of such material financial interest therein, provided that such relationship to such person, firm or corporation or such subsidiary or affiliate or such material financial interest was disclosed or otherwise known to the Board of Directors prior to the Corporation's entering into such contract or engaging in such transaction or business, and in the case of directors of the Corporation, that Section 2-419 of the Maryland General Corporation Law has been satisfied. Section 5.9 Independent and Disinterested Directors. A --------------------------------------- director of the Corporation who with respect to the Corporation is not an interested person, as defined by the 1940 Act, shall be deemed to be independent and disinterested when making any determination or taking any action as a director of the Corporation. -8- ARTICLE VI STOCK Section 6.1 Authorized Shares. The Corporation has authority ----------------- to issue 13,100,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), which shares shall be classified in the following series (portfolios): 1,000,000,000 are designated as shares of the Western Asset Enhanced Equity Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 2,000,000,000 are designated as shares of the Western Asset Money Market Portfolio (of which 1,000,000,000 are designated as shares of the Institutional Class and 1,000,000,000 are designated as shares of the Financial Intermediary Class), 2,000,000,000 are designated as shares of the Western Asset Government Money Market Portfolio (of which 1,000,000,000 are designated as shares of the Institutional Class and 1,000,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Limited Duration Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Intermediate Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and -9- 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Intermediate Plus Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Core Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Core Plus Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset High Yield Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Non-U.S. Fixed Income Portfolio (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 1,000,000,000 are designated as shares of the Western Asset Global Strategic Income Portfolio -10- (of which 500,000,000 are designated as shares of the Institutional Class and 500,000,000 are designated as shares of the Financial Intermediary Class), 50,000,000 are designated as shares of the International Securities Portfolio, 10,000,000 are designated as shares of the Corporate Securities Portfolio, 10,000,000 are designated as shares of the Mortgage Securities Securities Portfolio, 10,000,000 are designated as shares of the Short Duration Portfolio and 10,000,000 are designated as shares of the Long Duration Portfolio. The aggregate par value of all authorized shares of stock having par value is $13,100,000. The Board of Directors may classify any unissued shares of Common Stock from time to time in one or more series or classes of stock. The Board of Directors may reclassify any previously classified but unissued shares of any series or class of stock from time to time in one or more series or classes of stock. Section 6.2 Voting Rights. Each holder of a whole share of ------------- stock of the Corporation shall be entitled to one vote as to any matter on which such share of stock is entitled to vote and each fractional share of stock of the Corporation shall be entitled to a proportionate fractional vote. On any matter submitted to a vote of stockholders, all stockholders of the Corporation then entitled to vote shall, except as otherwise -11- provided in the Bylaws, vote together as a single class without regard to series or classes of shares of stock, except (a) when required by the 1940 Act or when the Board of Directors shall have determined that the matter affects one or more series or classes of shares of stock materially differently, such shares of stock shall be voted by individual series or class in addition to any other vote that may be required by law; and (b) when the Board of Directors has determined that the matter affects only the interests of one or more series or classes of shares of stock, then only holders of shares of stock of such series or classes shall be entitled to vote thereon in addition to any other vote that may be required by law. Section 6.3 Fractional Shares; Issuance of Units. The Board ------------------------------------ of Directors may, but is not obligated to, issue fractional shares of stock of the Corporation, whether now or hereafter authorized, and any fractional shares so issued shall entitle the holder thereof to exercise voting rights, receive dividends and participate in the distribution of assets of the Corporation in the event of liquidation or dissolution to the extent of the proportionate interest represented by such fractional shares. The Corporation is not obligated to issue stock certificates evidencing fractional shares. Notwithstanding -12- any other provision of the charter or the Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit. Section 6.4 Assets Belonging to Each Series; Allocations. -------------------------------------------- 6.4.1 All consideration received by the Corporation for the issuance or sale of shares of a particular series, together with all income, earnings, profits and proceeds thereon, shall irrevocably belong to such series for all purposes, subject only to the rights of creditors, and are herein referred to as "assets belonging to" such series. 6.4.2 The assets belonging to each series shall be charged with the liabilities of the Corporation in respect of such series, and with such series' respective share of the general liabilities of the Corporation, in the latter case in the proportion that the net asset value of such series bears to the net asset value of all series. The determination of the -13- Board of Directors shall be conclusive as to the allocation of liabilities, including accrued expenses and reserves, to each series. 6.4.3 Dividends or distributions on shares of any series, whether payable in stock, cash or other property, shall be paid only out of earnings, surplus or other assets belonging to such series and may vary among the classes of a series. 6.4.4 In the event of the liquidation or dissolution of any series of stock of the Corporation, stockholders of such series shall be entitled to receive out of the assets of such series available for distribution to stockholders the assets belonging to such series; and the assets so distributable to the stockholders of such series shall be distributed among such stockholders based on relative net asset value or such other fair and equitable method as the Board of Directors may determine. 6.4.5 The assets of a series or class of stock of the Corporation may be invested together with the assets belonging to another currently existing or hereafter created series or class of stock of the Corporation. The Board of Directors shall have the authority to allocate, or cause to be -14- allocated, a series' assets, liabilities, income or expenses to one or more classes of such series, in such amounts and at such times as the Board of Directors (or their designees) shall determine. Any such allocation shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock. Section 6.5 Classified or Reclassified Shares. Prior to --------------------------------- issuance of classified or reclassified shares of any series or class, the Board of Directors by resolution shall: (a) designate that series or class to distinguish it from all other series and classes of stock of the Corporation; (b) specify the number of shares to be included in the series or class; (c) set or change, subject to the provisions of Article VII and subject to the express terms of any series or class of stock of the Corporation outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each series or class; and (d) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland (the "SDAT"). Any of the terms of any series or class of stock set or changed pursuant to clause (c) of this Section 6.5 may be made dependent -15- upon facts or events ascertainable outside the charter (including determinations by the Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such series or class of stock is clearly and expressly set forth in the articles supplementary filed with the SDAT. Section 6.6 Dividends and Distributions. The holders of the --------------------------- Corporation's stock of record as of a date determined by the Board of Directors from time to time shall be entitled, from funds or other assets legally available therefor, to dividends and distributions, including distributions of capital gains, in such amounts and at such times as may be determined by the Board of Directors. Any such dividends or distributions may be declared payable in cash, property or shares of the Corporation's stock, as determined by the Board of Directors or pursuant to a standing resolution or program adopted or approved by the Board of Directors. Dividends and distributions may be declared with such frequency, including daily, as the Board of Directors may determine and in any reasonable manner, including by standing resolution, by resolutions adopted only once or with such frequency as the Board -16- of Directors may determine, or by formula or other similar method of determination, whether or not the amount of the dividend or distribution so declared can be calculated at the time of such declaration. The Board of Directors may establish payment dates for such dividends and distributions on any basis, including payment that is less frequent than the effectiveness of such declarations. The Board of Directors shall have the sole discretion to designate for such dividends and distributions amounts sufficient to enable the Corporation to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended, or any successor or comparable statute, and the regulations promulgated thereunder, and to avoid liability of the Corporation for federal income tax in respect of a given year and to make other appropriate adjustments in connection therewith. Nothing in the foregoing sentence shall limit the authority of the Board of Directors to designate greater or lesser amounts for such dividends or distributions. Section 6.7 Redemptions. ----------- 6.7.1 The Board of Directors shall authorize the Corporation, to the extent it has funds or other property legally available therefor and subject to such reasonable conditions as the directors may determine, to permit each holder -17- of shares of stock of the Corporation to require the Corporation to redeem all or any number of the shares of stock outstanding in the name of such holder on the books of the Corporation, at the net asset value of such shares, less any fees or charges as the Board of Directors may establish from time to time. Notwithstanding the foregoing, the Board of Directors may suspend the right of holders of shares of stock of the Corporation to require the Corporation to redeem such shares or to receive payment for redeemed shares for such periods and to the extent permitted by, or in accordance with, the 1940 Act or any rule or regulation of the Securities and Exchange Commission promulgated thereunder. The Board of Directors may, in the absence of a ruling by a responsible regulatory official, terminate such suspension at such time as the Board of Directors, in its sole discretion, shall deem reasonable, such determination to be conclusive. 6.7.2 Without limiting the generality of the foregoing, the Board of Directors may authorize the Corporation, at its option, to redeem shares of stock of the Corporation owned by any stockholder under circumstances deemed appropriate by the Board of Directors in its sole discretion from time to time, such circumstances including but not limited to (a) failure to provide -18- the Corporation with a tax identification number, (b) failure to maintain ownership of a specified minimum number or value of shares of any series or class of stock of the Corporation, and (c) failure to maintain the characteristics or qualifications established by the Board of Directors for a particular series or class of stock of the Corporation, such redemption to be effected at such price, at such time and subject to such conditions as may be required or permitted by applicable law. 6.7.3 Payment for redeemed shares of stock of the Corporation shall be made in cash unless, in the opinion of the Board of Directors, which shall be conclusive, conditions exist which make it necessary or desirable for the Corporation to make payment wholly or partially in securities or other property or assets of the Corporation. Payment made wholly or partially in securities or other property or assets may be delayed to such reasonable extent, not inconsistent with applicable law, as is reasonably necessary under the circumstances. No stockholder shall have the right, except as determined by the Board of Directors, to have his shares redeemed in such securities, property or other assets. 6.7.4 All rights of a stockholder with respect to a share redeemed, including the right to receive -19- dividends and distributions with respect to such share, shall cease as of the date on which the redemption price to be paid for such shares is fixed in accordance with applicable law, except the right of such stockholder to receive payment for such shares as provided herein. 6.7.5 Shares of stock of the Corporation which have been redeemed shall constitute authorized but unissued shares of stock of such series or class so redeemed. Section 6.8 Charter and Bylaws. All persons who shall acquire ------------------ stock in the Corporation shall acquire the same subject to the provisions of the charter and the Bylaws. Except as may be otherwise provided herein, all provisions of the charter relating to shares of stock of the Corporation shall apply to shares of and to the holders of shares of all series or classes of stock of the Corporation, whether now or hereafter classified or reclassified. ARTICLE VII AMENDMENTS The Corporation reserves the right from time to time to make any amendment to its charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in this charter, of any shares of -20- outstanding stock. All rights and powers conferred by the charter on stockholders, directors and officers are granted subject to this reservation. ARTICLE VIII LIMITATION OF LIABILITY To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, but subject to the limits contained in the 1940 Act and the Bylaws, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article VIII, nor the adoption or amendment of any other provision of the charter or Bylaws inconsistent with this Article VIII, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. ARTICLE IX INDEMNIFICATION AND ADVANCE OF EXPENSES Section 9.1 Directors. To the maximum extent permitted by --------- Maryland law in effect from time to time, but subject to the limits on indemnification contained in the 1940 -21- Act and the Bylaws, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director of the Corporation or (b) any individual who, while a director of the Corporation and at the request of the Corporation, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former director of the Corporation. The Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above. Section 9.2 Officers. The Corporation shall have the power, -------- to the maximum extent permitted by Maryland law in effect from time to time, but subject to the limits on -22- indemnification contained in the 1940 Act and the Bylaws, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former officer of the Corporation or (b) any individual who, while an officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former officer of the Corporation. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Section 9.3 Amendment. Neither the amendment nor repeal of --------- this Article, nor the adoption or amendment of any other provision of the charter or Bylaws of the Corporation inconsistent with this Article, shall apply to or affect in any -23- respect the applicability of the preceding sections with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. THIRD: The amendment to and restatement of the charter as ----- hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law. FOURTH: The current address of the principal office of the ------ Corporation is as set forth in Article IV of the foregoing amendment and restatement of the charter. FIFTH: The name and address of the Corporation's current ----- resident agent is as set forth in Article IV of the foregoing amendment and restatement of the charter. SIXTH: The number of directors of the Corporation and the ----- names of those currently in office are as set forth in Article V of the foregoing amendment and restatement of the charter. SEVENTH: The total number of shares of stock which the ------- Corporation had authority to issue immediately prior to this amendment and restatement of the charter was 5,000,000,000 shares, $.001 par value per share. The aggregate par value of all authorized shares of stock having par value was $5,000,000. -24- EIGHTH: The total number of shares of stock which the ------ Corporation has authority to issue pursuant to the foregoing amendment and restatement of the charter is 13,100,000,000 shares of Common Stock, $.001 par value per share. The aggregate par value of all authorized shares of stock having par value is $13,100,000. NINTH: The undersigned Vice President acknowledges these ----- Articles of Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned Vice President acknowledges that to the best of her knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its Vice President and attested to by its Secretary on this 28th day of May, 1998. ATTEST: WESTERN ASSET TRUST, INC. By: (SEAL) - -------------------------- --------------------- Donna Barnes, Secretary Ilene S. Harker, Vice President -25- EX-23.A.3 3 EXHIBIT 23(A)(3) Exhibit 23(a)(3) ---------------- LM INSTITUTIONAL FUND ADVISORS I, INC. ARTICLES SUPPLEMENTARY LM Institutional Fund Advisors I, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to Sections 2-105(a)(9) and 2-208 of the Maryland General ----- Corporation Law (the "MGCL"), the Board of Directors of the Corporation (the "Board"), by resolutions duly adopted at a meeting held on February 16, 2000, reclassified (a) 1,000,000,000 authorized but unissued shares of the Western Asset Limited Duration Portfolio, (b) 50,000,000 authorized but unissued shares of the International Securities Portfolio, (c) 10,000,000 authorized but unissued shares of the Corporate Securities Portfolio, (d) 10,000,000 authorized but unissued shares of the Mortgage Securities Portfolio, (e) 10,000,000 authorized but unissued shares of the Short Duration Portfolio and (f) 10,000,000 authorized but unissued shares of the Long Duration Portfolio as shares of Common Stock, $.001 par value per share, with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of shares of Common Stock, $.001 par value per share, of the Corporation, as set forth in ARTICLE VI of the charter of the Corporation (the "Charter") and in any other provisions of the Charter relating to stock of the Corporation generally. SECOND: As of the filing of these Articles Supplementary, the Corporation ------ shall have authority to issue 13,100,000,000 shares of Common Stock, $.001 par value per share, having an aggregate par value of $13,100,000. These shares are classified as follows: Class Number - ----- ------ Western Asset Enhanced Equity Portfolio Institutional Class 500,000,000 Western Asset Enhanced Equity Portfolio Financial Intermediary Class 500,000,000 Western Asset Money Market Portfolio Institutional Class 1,000,000,000 Western Asset Money Market Portfolio Financial Intermediary Class 1,000,000,000 Class Number - ----- ------ Western Asset Government Money Market Portfolio Institutional Class 1,000,000,000 Western Asset Government Money Market Portfolio Financial Intermediary Class 1,000,000,000 Western Asset Intermediate Portfolio Institutional Class 500,000,000 Western Asset Intermediate Portfolio Financial Intermediary Class 500,000,000 Western Asset Intermediate Plus Portfolio Institutional Class 500,000,000 Western Asset Intermediate Plus Portfolio Financial Intermediary Class 500,000,000 Western Asset Core Portfolio Institutional Class 500,000,000 Western Asset Core Portfolio Financial Intermediary Class 500,000,000 Western Asset Core Plus Portfolio Institutional Class 500,000,000 Western Asset Core Plus Portfolio Financial Intermediary Class 500,000,000 Western Asset High Yield Portfolio Institutional Class 500,000,000 Western Asset High Yield Portfolio Financial Intermediary Class 500,000,000 Western Asset Non-U.S. Fixed Income Portfolio Institutional Class 500,000,000 Western Asset Non-U.S. Fixed Income Portfolio Financial Intermediary Class 500,000,000 Western Asset Global Strategic Income Portfolio Institutional Class 500,000,000 Western Asset Global Strategic Income Portfolio Financial Intermediary Class 500,000,000 Common Stock (without further classification) 1,100,000,000 2 THIRD: The shares of the Western Asset Limited Duration Portfolio, the ----- International Securities Portfolio, the Corporate Securities Portfolio, the Mortgage Securities Portfolio, the Short Duration Portfolio and the Long Duration Portfolio have been reclassified by the Board under the authority granted to it in the Charter. FOURTH: The undersigned President of the Corporation acknowledges these ------ Articles Supplementary to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be executed under seal in its name and on its behalf by its President and attested to by its Secretary on March 10, 2000. ATTEST: LM INSTITUTIONAL FUND ADVISORS I, INC. By: (SEAL) - ------------------------- -------------------- Secretary President 3 EX-23.B 4 EXHIBIT 23(B) Exhibit 23(b) ------------- LM INSTITUTIONAL FUND ADVISORS I, INC. -------------------------------------- BYLAWS ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal office of the ---------------- Corporation shall be located at such place or places as the Board of Directors may designate. Section 2. ADDITIONAL OFFICES. The Corporation may have ------------------ additional offices at such places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. PLACE. All meetings of stockholders shall be held ----- at the principal office of the Corporation or at such other place within the United States as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETING. Subject to this Article II, an -------------- annual meeting of stockholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held at such time and place as the Board of Directors shall select. The Corporation shall not be required to hold an annual meeting of its stockholders in any year in which the election of directors is not required to be acted upon under the Investment Company Act of 1940, as amended (the "1940 Act"). Section 3. SPECIAL MEETINGS. The president, chief executive ---------------- officer or Board of Directors may call special meetings of the stockholders. Special meetings of stockholders shall also be called by the secretary of the Corporation upon the written request of the holders of shares entitled to cast not less than ten percent (10%) of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation by such stockholders of such costs, the secretary shall give notice to each stockholder entitled to notice of the meeting. Unless requested by the stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding twelve months. Section 4. NOTICE. Not less than ten nor more than 90 days ------ before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. Section 5. SCOPE OF NOTICE. Any business of the Corporation may --------------- be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. Section 6. ORGANIZATION. At every meeting of stockholders, the ------------ chairman of the board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present shall conduct the meeting in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his absence, an -2- assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman shall act as secretary. Section 7. QUORUM. At any meeting of stockholders, the presence ------ in person or by proxy of stockholders entitled to cast thirty percent (30%) of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 8. VOTING. Unless otherwise provided in the charter, ------ each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for each share of stock outstanding (and fractional votes for fractional shares of stock outstanding) in such holder's name on the record of stockholders of the Corporation as of the record date or if such record date shall not have been so fixed, then at the later of (i) the close of business on the day on which notice of the meeting is mailed or (ii) the thirtieth day before the meeting. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Corporation. Section 9. PROXIES. A stockholder may cast the votes entitled to ------- be cast by the shares of the stock owned of record by him either in person or by proxy executed in writing by the stockholder or by his duly authorized agent. Such proxy shall be -3- filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the ---------------------------------- Corporation registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his name as such fiduciary, either in person or by proxy. Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification. -4- Section 11. INSPECTORS. At any meeting of stockholders, the ---------- chairman of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. ----------- Section 12. VOTING BY BALLOT. Voting on any question or ---------------- in any election may be viva voce unless the presiding officer shall order or --------- any stockholder shall demand that voting be by ballot. Section 13. TELEPHONE MEETINGS. Stockholders may participate in ------------------ a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. -5- Section 14. INFORMAL ACTION BY STOCKHOLDERS. Except to the ------------------------------- extent otherwise specifically prohibited by applicable law, any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if the following are filed with the records of stockholders meetings: (a) a written consent which sets forth such action and is signed by each stockholder entitled to vote on the matter; and (b) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. ARTICLE III DIRECTORS Section 1. GENERAL POWERS. The business and affairs of the -------------- Corporation shall be managed under the direction of its Board of Directors. Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular --------------------------------- meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. Directors shall be elected annually, by written ballot at the annual meeting of stockholders of the Corporation or a special meeting held for that purpose; provided, however, that if no annual meeting of the stockholders is required to be held pursuant to Section 2 of Article II of these Bylaws, directors shall be elected at the next annual meeting held. The term of office of each director shall be from the time of his election and qualification until the election of directors next succeeding his election and until his successor shall have been elected and shall have qualified. Section 3. ANNUAL AND REGULAR MEETINGS. The Board of --------------------------- Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of annual or regular meetings of the Board of Directors without other notice than such resolution. -6- Section 4. SPECIAL MEETINGS. Special meetings of the Board of ---------------- Directors may be called by or at the request of the chairman of the board, president or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. Section 5. NOTICE. Notice of any special meeting of the Board of ------ Directors shall be delivered personally or by telephone, facsimile transmission, United States mail or courier to each director at his business or residence address. Notice by personal delivery, by telephone or a facsimile transmission shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting and shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be deemed to be given when the director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws. Section 6. QUORUM. A majority of the directors shall constitute ------ a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Corporation or these Bylaws, the vote of a majority of a particular group of directors is required for action, a quorum must also include a majority of such group. The directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. -7- Section 7. VOTING. The action of the majority of the directors ------ present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute or the charter. Section 8. TELEPHONE MEETINGS. Directors may participate in a ------------------ meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 9. INFORMAL ACTION BY DIRECTORS. Except to the ---------------------------- extent otherwise specifically prohibited by applicable law, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each director and such written consent is filed with the minutes of proceedings of the Board of Directors. Section 10. VACANCIES. If for any reason any or all the --------- directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Any vacancy on the Board of Directors for any cause other than an increase in the number of directors shall be filled by a majority of the remaining directors, even if such majority is less than a quorum. Any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority vote of the entire Board of Directors. Any individual so elected as director shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified. Section 11. COMPENSATION. Directors shall not receive any stated ------------ salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be -8- construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Section 12. LOSS OF DEPOSITS. No director shall be liable for ---------------- any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited. Section 13. SURETY BONDS. The Board of Directors may require any ------------ officer or agent of the Corporation to execute a bond (including, without limitation, any bond required by the 1940 Act and the rules and regulations of the Securities and Exchange Commission) to the Corporation in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his duties to the Corporation, including responsibility for negligence and for the accounting of any of the Corporation's property, funds or securities that may come into his hands. Section 14. RELIANCE. Each director, officer, employee and agent -------- of the Corporation shall, in the performance of his duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director. Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND ---------------------------------------------------- AGENTS. The directors shall have no responsibility to devote their full time to - ------ the affairs of the Corporation. Any director or officer, employee or agent of the Corporation, in his personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to or in addition to or in competition with those of or relating to the Corporation. -9- ARTICLE IV COMMITTEES Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of --------------------------------- Directors may appoint from among its members an Executive Committee, an Audit Committee and other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors. Section 2. POWERS. The Board of Directors may delegate to ------ committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law. Section 3. MEETINGS. Notice of committee meetings shall be given -------- in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or any two members of any committee may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings. Section 4. TELEPHONE MEETINGS. Members of a committee of the ------------------ Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or ----------------------------- permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. Section 6. VACANCIES. Subject to the provisions hereof, the --------- Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. -10- ARTICLE V OFFICERS Section 1. GENERAL PROVISIONS. The officers of the Corporation ------------------ shall include a president, a secretary and a treasurer and may include a chief executive officer, a chairman of the board, a vice chairman of the board, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors, except that the chief executive officer may appoint one or more vice presidents, assistant secretaries and assistant treasurers. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of president, treasurer and secretary. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent. Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the ----------------------- Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation. -11- Section 3. VACANCIES. A vacancy in any office may be filled --------- by the Board of Directors for the balance of the term. Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may ----------------------- designate a chief executive officer. In the absence of such designation, the president shall be the chief executive officer of the Corporation. The president shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. Section 5. CHIEF OPERATING OFFICER. The Board of Directors may ----------------------- designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may ----------------------- designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 7. CHAIRMAN OF THE BOARD. The Board of Directors may --------------------- designate a chairman of the board. The chairman of the board shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. The chairman of the board shall perform such other duties as may be assigned to him by the Board of Directors. Section 8. PRESIDENT. The president or chief executive officer, --------- as the case may be, shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief executive officer by the Board of Directors, the president shall be the chief executive officer. He may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. Section 9. VICE PRESIDENTS. In the absence of the president or --------------- in the event of a vacancy in such office, the vice -12- president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. Section 10. SECRETARY. The secretary shall (a) keep the minutes --------- of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; and (c) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Board of Directors. Section 11. TREASURER. The treasurer shall have the custody of --------- the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. In the absence of a designation of a chief financial officer and/or a principal accounting officer by the Board of Directors, the treasurer shall be the chief financial officer and/or the principal accounting officer of the Corporation. Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The ---------------------------------------------- assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Board of Directors. Section 13. SALARIES. The salaries and other compensation of the -------- officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director. -13- ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. CONTRACTS. The Board of Directors may authorize any --------- officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Section 2. CHECKS AND DRAFTS. All checks, drafts or other ----------------- orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors. ARTICLE VII STOCK Section 1. CERTIFICATES. Stock certificates shall not be issued ------------ unless authorized by the Board of Directors. At the time of issue or transfer of uncertificated shares of stock of the Corporation, the Corporation shall send to the stockholder thereof a written statement of the information required on certificates by Section 2-211 of the Maryland General Corporation Law. Section 2. TRANSFERS. Transfers of shares of stock of the --------- Corporation shall be made on the books of the Corporation by the holder of record thereof (in person or by his attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the secretary of the Corporation) (a) if a stock certificate has been issued, upon surrender to the Corporation or the transfer agent of the Corporation of the stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, or (b) if a stock certificate has not been issued, upon the receipt of all necessary documentation as determined by the appropriate officer(s) of the Corporation. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other -14- person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Notwithstanding the foregoing, transfers of shares of any series or class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein. Section 3. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. -------------------------------------------------- The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, -15- except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein. Section 4. STOCK LEDGER. The Corporation shall maintain at its ------------ principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each series or class held by such stockholder. Section 5. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of ----------------------------------- Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit. -16- ARTICLE VIII ACCOUNTING YEAR The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution. ARTICLE IX DISTRIBUTIONS Section 1. AUTHORIZATION. Dividends and other distributions upon ------------- the stock of the Corporation may be authorized and declared by the Board of Directors, subject to the provisions of law and the charter of the Corporation. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the charter. Section 2. CONTINGENCIES. Before payment of any dividends or ------------- other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INVESTMENT POLICY Subject to the provisions of the charter of the Corporation, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion. -17- ARTICLE XI SEAL Section 1. SEAL. The Board of Directors may authorize the ---- adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words "Incorporated Maryland." The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. Section 2. AFFIXING SEAL. Whenever the Corporation is permitted ------------- or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. ARTICLE XII INDEMNIFICATION AND ADVANCE OF EXPENSES Section 1. INDEMNIFICATION PROCEDURE. The Corporation shall ------------------------- indemnify its directors, officers, employees and agents as permitted by, and pursuant to, Article IX of the charter of the Corporation and the Maryland General Corporation Law. With respect to any person potentially entitled to or claiming indemnification under this Article, the Board of Directors shall determine, or shall cause to be determined, in a manner consistent with the Maryland General Corporation Law, whether the standards required by Article IX have been met. If it is determined that the standards required by Article IX have been met, indemnification shall be made only following: (a) a final decision on the merits by a court or other body before whom a proceeding was brought that the person to be indemnified ("indemnitee") was not liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of duties as described in Section 17(h) of the 1940 Act ("disabling conduct"), or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of disabling conduct by (i) the vote of a majority of a quorum of directors who are neither "interested persons" of the Corporation as defined in Section 2(a)(19) of the 1940 Act nor parties to the proceeding ("disinterested, non-party directors"), or (ii) an independent legal counsel in a written opinion. -18- Section 2. ADVANCES. As permitted by, and pursuant to, -------- Article IX of the charter of the Corporation and the Maryland General Corporation Law, reasonable expenses incurred by a director, officer, employee or agent of the Corporation who is a party to a proceeding may be paid or reimbursed by the Corporation in advance of the final disposition of the proceeding but only upon receipt by the Corporation of (a) a written affirmation by the person requesting the advance or reimbursement of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met; and (b) a written undertaking by or on behalf of such person to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following conditions must be met: (x) the person requesting the advance or reimbursement shall provide a security for his undertaking, (y) the Corporation shall be insured against losses arising by reason of any lawful advances, or (z) a majority of a quorum of the disinterested, non-party directors of the Corporation, or an independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Corporation at the time the advance or reimbursement is proposed to be made, that there is reason to believe that the person requesting the advance or reimbursement ultimately will be found entitled to indemnification. ARTICLE XIII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. -19- ARTICLE XIV AMENDMENT OF BYLAWS Section 1. GENERAL. Except as provided in Section 2 of this ------- Article XIV, all Bylaws of the Corporation, whether adopted by the Board of Directors or the stockholders, shall be subject to amendment, alteration or repeal, and new Bylaws may be made, by the affirmative vote of a majority of either: (a) the holders of record of the outstanding shares of stock of the Corporation entitled to vote, at any meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new Bylaw; or (b) the directors, at any regular or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new Bylaw. Section 2. BY STOCKHOLDERS ONLY. -------------------- (a) No amendment of any Section of these Bylaws shall be made except by the stockholders of the Corporation if the Bylaws provide that such Section may not be amended, altered or repealed except by the stockholders. (b) From and after the issuance of any shares of capital stock of the Corporation, no amendment of this Article XIV shall be made except by the stockholders of the Corporation. -20- EX-23.D.2.I 5 EXHIBIT 23(D)(2)(I) Exhibit 23(d)(2)(i) ------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Government Money Market Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.20% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the -4- continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- ----------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- ----------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- ----------------------------------- -6- EX-23.D.2.II 6 EXHIBIT 23(D)(2)(II) Exhibit 23(d)(2)(ii) -------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Money Market Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.20% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the -4- continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: --------------------- ------------------------------------ WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: --------------------- ------------------------------------ The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: --------------------- ------------------------------------ -6- EX-23.D.2.III 7 EXHIBIT 23(D)(2)(III) Exhibit 23(d)(2)(iii) --------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Core Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.45% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the -4- Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- ------------------------------------ WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- ------------------------------------ The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- ------------------------------------ -6- EX-23.D.2.IV 8 EXHIBIT 23(D)(2)(IV) Exhibit 23(d)(2)(iv) -------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Core Plus Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.45% of the average daily net assets of the Fund that Western manages. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date -4- of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.V 9 EXHIBIT 23(D)(2)(V) Exhibit 23(d)(2)(v) ------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Intermediate Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.40% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the -4- continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.VI 10 EXHIBIT 23(D)(2)(VI) Exhibit 23(d)(2)(vi) -------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Intermediate Plus Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.40% of the average daily net assets of the Fund that Western manages. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date -4- of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.VII 11 EXHIBIT 23(D)(2)(VII) Exhibit 23(d)(2)(vii) --------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset High Yield Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.55% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the -4- continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.VIII 12 EXHIBIT 23(D)(2)(VIII) Exhibit 23(d)(2)(viii) ---------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Global Management Limited ("WAGM"), a corporation organized under the laws of the United Kingdom, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain WAGM to provide certain investment advisory services in connection with the Manager's management of Western Asset Non-U.S. Fixed Income Portfolio ("Fund"), a series of the Corporation; and WHEREAS, WAGM is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints WAGM as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. WAGM accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished WAGM with copies --------------------- of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and WAGM as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish WAGM from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, WAGM shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. WAGM shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. WAGM will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, WAGM shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, WAGM, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to WAGM in writing, WAGM shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to WAGM or any affiliated person of WAGM an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if WAGM determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or WAGM's overall responsibilities with respect to the Fund and to other clients of WAGM and any affiliated person of WAGM as to which WAGM or any affiliated person of WAGM exercises investment discretion. WAGM shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by WAGM. (b) WAGM will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with WAGM (or with any affiliated person of WAGM) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. WAGM's services hereunder are not deemed to ---------------------- be exclusive, and WAGM shall be free to render similar services to others. It is understood that persons employed by WAGM to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of WAGM or any affiliate of WAGM to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, WAGM hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. WAGM further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, WAGM will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which WAGM will render to the Manager ------------ and the Fund under this Agreement, the Manager will pay WAGM a fee, computed daily and paid monthly, at an annual rate of 0.45% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to WAGM hereunder shall be paid promptly to WAGM by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of WAGM, or reckless disregard of its obligations and duties hereunder, WAGM shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and WAGM, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the -4- continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, WAGM may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to WAGM, and WAGM may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from WAGM at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "WAGM." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "WAGM" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET GLOBAL MANAGEMENT LIMITED Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.IX 13 EXHIBIT 23(D)(2)(IX) Exhibit 23(d)(2)(ix) -------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Global Strategic Income Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.45% of the average daily net assets of the Fund that Western manages. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date -4- of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.X 14 EXHIBIT 23(D)(2)(X) Exhibit 23(d)(2)(x) ------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Management Company ("Western"), a California corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain Western to provide certain investment advisory services in connection with the Manager's management of Western Asset Enhanced Equity Portfolio ("Fund"), a series of the Corporation; and WHEREAS, Western is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints Western as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. Western accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished Western with --------------------- copies of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and Western as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish Western from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, Western shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. Western shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. Western will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, Western shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, Western, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to Western in writing, Western shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to Western or any affiliated person of Western an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if Western determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or Western's overall responsibilities with respect to the Fund and to other clients of Western and any affiliated person of Western as to which Western or any affiliated person of Western exercises investment discretion. Western shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by Western. (b) Western will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with Western (or with any affiliated person of Western) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. Western's services hereunder are not deemed ---------------------- to be exclusive, and Western shall be free to render similar services to others. It is understood that persons employed by Western to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of Western or any affiliate of Western to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, Western hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. Western further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, Western will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which Western will render to the ------------ Manager and the Fund under this Agreement, the Manager will pay Western a fee, computed daily and paid monthly, at an annual rate of 0.55% of the average daily net assets of the Fund. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to Western hereunder shall be paid promptly to Western by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of Western, or reckless disregard of its obligations and duties hereunder, Western shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and Western, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or Western, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the -4- continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, Western may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to Western, and Western may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or Western. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from Western at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "Western." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "Western" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET MANAGEMENT COMPANY Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.XI 15 EXHIBIT 23(D)(2)(XI) Exhibit 23(d)(2)(xi) -------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Global Management Limited ("WAGM"), a United Kingdom corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain WAGM to provide certain investment advisory services in connection with the Manager's management of Western Asset Core Plus Portfolio ("Fund"), a series of the Corporation; and WHEREAS, WAGM is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints WAGM as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. WAGM accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished WAGM with copies --------------------- of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and WAGM as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish WAGM from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, WAGM shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. WAGM shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. WAGM will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, WAGM shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, WAGM, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to WAGM in writing, WAGM shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to WAGM or any affiliated person of WAGM an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if WAGM determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or WAGM's overall responsibilities with respect to the Fund and to other clients of WAGM and any affiliated person of WAGM as to which WAGM or any affiliated person of WAGM exercises investment discretion. WAGM shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by WAGM. (b) WAGM will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with WAGM (or with any affiliated person of WAGM) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. WAGM's services hereunder are not deemed to ---------------------- be exclusive, and WAGM shall be free to render similar services to others. It is understood that persons employed by WAGM to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of WAGM or any affiliate of WAGM to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, WAGM hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. WAGM further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, WAGM will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which WAGM will render to the Manager ------------ and the Fund under this Agreement, the Manager will pay WAGM a fee, computed daily and paid monthly, at an annual rate of 0.45% of the average daily net assets of the Fund that WAGM manages. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to WAGM hereunder shall be paid promptly to WAGM by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of WAGM, or reckless disregard of its obligations and duties hereunder, WAGM shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and WAGM, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date -4- of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, WAGM may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to WAGM, and WAGM may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from WAGM at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "WAGM." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "WAGM" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET GLOBAL MANAGEMENT LIMITED Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.XII 16 EXHIBIT 23(D)(2)(XII) Exhibit 23(d)(2)(xii) --------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Global Management Limited ("WAGM"), a United Kingdom corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain WAGM to provide certain investment advisory services in connection with the Manager's management of Western Asset Intermediate Plus Portfolio ("Fund"), a series of the Corporation; and WHEREAS, WAGM is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints WAGM as investment ----------- adviser for the Fund for the period and on the terms set forth in this Agreement. WAGM accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished WAGM with copies --------------------- of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and WAGM as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish WAGM from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, WAGM shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. WAGM shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. WAGM will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, WAGM shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, WAGM, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to WAGM in writing, WAGM shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to WAGM or any affiliated person of WAGM an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if WAGM determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or WAGM's overall responsibilities with respect to the Fund and to other clients of WAGM and any affiliated person of WAGM as to which WAGM or any affiliated person of WAGM exercises investment discretion. WAGM shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by WAGM. (b) WAGM will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with WAGM (or with any affiliated person of WAGM) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. WAGM's services hereunder are not deemed to ---------------------- be exclusive, and WAGM shall be free to render similar services to others. It is understood that persons employed by WAGM to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of WAGM or any affiliate of WAGM to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, WAGM hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. WAGM further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, WAGM will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which WAGM will render to the Manager ------------ and the Fund under this Agreement, the Manager will pay WAGM a fee, computed daily and paid monthly, at an annual rate of 0.40% of the average daily net assets of the Fund that WAGM manages. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to WAGM hereunder shall be paid promptly to WAGM by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of WAGM, or reckless disregard of its obligations and duties hereunder, WAGM shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and WAGM, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date -4- of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, WAGM may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to WAGM, and WAGM may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from WAGM at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "WAGM." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "WAGM" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET GLOBAL MANAGEMENT LIMITED Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.D.2.XIII 17 EXHIBIT 23(D)(2)(XIII) Exhibit 23(d)(2)(xiii) ---------------------- ADVISORY AGREEMENT AGREEMENT made this 29th day of December, 1999, by and between LM Institutional Advisors, Inc. ("Manager"), a Maryland corporation, and Western Asset Global Management Limited ("WAGM"), a United Kingdom corporation, each of which is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS, the Manager is the manager of certain of the series of LM Institutional Fund Advisors I, Inc. (the "Corporation"), an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Manager wishes to retain WAGM to provide certain investment advisory services in connection with the Manager's management of Western Asset Global Strategic Income Portfolio ("Fund"), a series of the Corporation; and WHEREAS, WAGM is willing to furnish such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. Appointment. The Manager hereby appoints WAGM as investment adviser ----------- for the Fund for the period and on the terms set forth in this Agreement. WAGM accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Delivery of Documents. The Manager has furnished WAGM with copies --------------------- of each of the following: (a) The Corporation's Articles of Incorporation and all amendments thereto (such Articles of Incorporation, as presently in effect and as they shall from time to time be amended, are herein called the "Articles"); (b) The Corporation's By-Laws and all amendments thereto (such By-Laws, as presently in effect and as they shall from time to time be amended, are herein called the "By-Laws"); (c) Resolutions of the Corporation's Board of Directors (the "Directors") authorizing the appointment of the Manager as the manager and WAGM as investment adviser and approving the Investment Management Agreement between the Manager and the Corporation -1- with respect to the Fund dated May 26, 1998 (the "Management Agreement") and this Agreement; (d) The Corporation's most recently filed Post-Effective Amendment to its Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act, including all exhibits thereto, relating to shares of common stock of the Fund, par value $.001 per share; (e) The Fund's most recent prospectus (such prospectus, as presently in effect, and all amendments and supplements thereto are herein called the "Prospectus"); and (f) The Fund's most recent statement of additional information (such statement of additional information, as presently in effect, and all amendments and supplements thereto are herein called the "Statement of Additional Information"). The Manager will furnish WAGM from time to time with copies of all amendments of or supplements to the foregoing. 3. Investment Advisory Services. (a) Subject to the supervision of the ---------------------------- Directors and the Manager, WAGM shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the Fund's investment objectives, policies, and restrictions as stated in the Fund's current Prospectus and Statement of Additional Information. WAGM shall as requested by the Manager determine from time to time what securities or other property will be purchased, retained or sold by the Fund, and shall implement those decisions, all subject to the provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of the Securities and Exchange Commission, and other applicable federal and state law, as well as the investment objectives, policies, and restrictions of the Fund, as each of the foregoing may be amended from time to time. WAGM will as requested by the Manager place orders pursuant to its investment determinations for the Fund either directly with the issuer or with any broker, dealer or futures commission merchant (collectively, a "broker"). In the selection of brokers and the placing of orders for the purchase and sale of portfolio investments for the Fund, WAGM shall seek to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, WAGM, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into consideration market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Directors may determine and communicate to WAGM in writing, WAGM shall not be -2- deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker that provides brokerage and research services to WAGM or any affiliated person of WAGM an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if WAGM determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or WAGM's overall responsibilities with respect to the Fund and to other clients of WAGM and any affiliated person of WAGM as to which WAGM or any affiliated person of WAGM exercises investment discretion. WAGM shall also perform such other functions of management and supervision as may be requested by the Manager and agreed to by WAGM. (b) WAGM will as requested by the Manager oversee the maintenance of all books and records with respect to the investment transactions of the Fund in accordance with all applicable federal and state laws and regulations, and will furnish the Directors with such periodic and special reports as the Directors or the Manager reasonably may request. (c) The Corporation hereby agrees that any entity or person associated with WAGM (or with any affiliated person of WAGM) which is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Fund which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) thereunder, and the Corporation hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise. 4. Services Not Exclusive. WAGM's services hereunder are not deemed to ---------------------- be exclusive, and WAGM shall be free to render similar services to others. It is understood that persons employed by WAGM to assist in the performance of its duties hereunder might not devote their full time to such service. Nothing herein contained shall be deemed to limit or restrict the right of WAGM or any affiliate of WAGM to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 5. Books and Records. In compliance with the requirements of Rule 31a-3 ----------------- under the 1940 Act, WAGM hereby agrees that all books and records which it maintains for the Fund are property of the Fund and further agrees to surrender promptly to the Fund or its agents any of such records upon the Fund's request. WAGM further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records required to be maintained by Rule 31a-1 under the 1940 Act. 6. Expenses. During the term of this Agreement, WAGM will pay all -------- expenses incurred by it in connection with its activities under this Agreement other than the cost of securities and other property (including brokerage commissions, if any) purchased for the Fund. -3- 7. Compensation. For the services which WAGM will render to the Manager ------------ and the Fund under this Agreement, the Manager will pay WAGM a fee, computed daily and paid monthly, at an annual rate of 0.45% of the average daily net assets of the Fund that WAGM manages. The average daily net assets of the Fund shall in all cases be based only on business days and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Corporation. Fees due to WAGM hereunder shall be paid promptly to WAGM by the Manager following its receipt of fees from the Fund. If this Agreement is terminated as of any date not the last day of a calendar month, a final fee shall be paid promptly after the date of termination and shall be based on the percentage of days of the month during which the contract was still in effect. 8. Limitation of Liability. In the absence of willful misfeasance, bad ----------------------- faith or gross negligence on the part of WAGM, or reckless disregard of its obligations and duties hereunder, WAGM shall not be subject to any liability to the Manager, the Fund or any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 9. Definitions. As used in this Agreement, the terms "assignment," ----------- "interested person," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions and interpretations as may be granted by the Securities and Exchange Commission by any rule, regulation or order; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 10. Term. This Agreement shall become effective upon its execution, ---- and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 12) until terminated as follows: a. The Corporation may at any time terminate this Agreement by not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager and WAGM, or b. If (i) the Directors or the shareholders of the Fund by vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Agreement, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date -4- of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, WAGM may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder, or c. The Manager may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to WAGM, and WAGM may at any time terminate this Agreement by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Manager. Action by the Corporation under paragraph (a) of this Section 10 may be taken either (i) by vote of a majority of the Directors, or (ii) by the vote of a majority of the outstanding voting securities of the Fund. 11. Further Actions. Each party agrees to perform such further acts --------------- and execute such further documents as are necessary to effectuate the purposes hereof. 12. No Assignment; Amendments. This Agreement shall terminate ------------------------- automatically in the event of its assignment or in the event that the Management Agreement shall have terminated for any reason. Any termination of this Agreement pursuant to Section 10 shall be without the payment of any penalty. This Agreement shall not be amended unless such amendment is approved by the vote of a majority of the outstanding voting securities of the Fund (provided that such shareholder approval is required by the 1940 Act and the rules and regulations thereunder, giving effect to any interpretations of the Securities and Exchange Commission and its staff) and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Directors who are not interested persons of the Corporation, the Manager or WAGM. 13. Miscellaneous. This Agreement embodies the entire agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Should any part of this Agreement be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors. 14. Non-Exclusive Right. In the event this Agreement is terminated or ------------------- upon written notice from WAGM at any time, the Corporation hereby agrees that it will eliminate from the Fund's name any reference to the name of "WAGM." The Corporation, on behalf of the Fund, shall have the non-exclusive use of the name "WAGM" in whole or in part only so long as this Agreement is effective or until such notice is given. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written. LM INSTITUTIONAL ADVISORS, INC. Attest: By: By: -------------------- -------------------------------- WESTERN ASSET GLOBAL MANAGEMENT LIMITED Attest: By: By: -------------------- -------------------------------- The foregoing is accepted by: LM INSTITUTIONAL FUND ADVISORS I, INC. Attest: By: By: -------------------- -------------------------------- -6- EX-23.E.2.I 18 EXHIBIT 23(E)(2)(I) Exhibit 23(e)(2)(i) ------------------- AGREEMENT This AGREEMENT is made as of the 26th day of May, 1998, by and between LM Institutional Fund Advisors I, Inc., a Maryland corporation (the "Corporation"), and Arroyo Seco, Inc., a California corporation (the "Broker"). WHEREAS, the Corporation has filed a registration statement with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities Act of 1933, as amended (the "1933 Act"), and has registered certain of its securities under the provisions of various state securities laws; and WHEREAS, the Corporation offers for public sale securities in each series listed on Schedule A hereto (each a "Series"), may offer securities of other series for public sale from time to time, and may offer each Series in one or more classes of shares; and WHEREAS, the Broker, a wholly-owned subsidiary of Western Asset Management Company, the investment adviser to certain of the Series, wishes to offer the Corporation's securities for sale to its customers; and WHEREAS, the Corporation desires to authorize the Broker to offer the Corporation's securities for sale, subject to certain terms and conditions set forth in this Agreement, and without any payment by the Corporation; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed as follows: 1. The Broker is hereby authorized to offer to its customers the securities of the Corporation (the "Shares") for sale. Any such offer or sale shall comply in full with the terms set forth in the then effective Prospectus or Statement of Additional Information of the Corporation or the applicable Series. The Broker shall comply with all applicable federal and state laws, and rules promulgated by self-regulatory organizations. The Corporation shall not make any payment to the Broker in connection with the offer or sale of Shares or any other service provided hereunder. 2. The public offering price of the Shares shall be the net asset value per share (as determined by the Corporation) of the outstanding Shares of the relevant class of the Series. The Broker shall not collect any commission or other fee in connection with the offer or sale of the Shares. 3. The Broker shall transmit any funds received from the Broker's customers to the Corporation's transfer agent by wire transfer no later than the next business day following placement of an order to purchase Shares. 4. In connection with sales and offers of Shares, the Broker shall give only such information and make only such statements or representations as are contained in the Prospectus, Statement of Additional Information, or in information furnished in writing to the Broker by the Corporation, and the Corporation shall not be responsible in any way for any other information, statements or representations given or made by the Broker or its representatives or agent. As used in this Agreement, the terms "Prospectus" and "Statement of Additional Information" shall mean, respectively, the form of prospectus and statement of additional information filed by the Corporation with the Securities and Exchange Commission as part of its registration statement or otherwise under the 1940 Act and the 1933 Act, as amended from time to time ("Registration Statement"). 5. The Broker will only place purchase orders for Shares registered under the 1940 Act and the 1933 Act, and qualified (or exempt from qualification requirements) for sale in the state where the customer resides. The Corporation shall advise the Broker immediately if any such registration or qualification is terminated or suspended. 6. The Corporation reserves the right at any time to withdraw all offerings of the Shares or any or all Series by written notice to the Broker at its principal office. 7. The Broker agrees to act as agent for the Corporation to receive and transmit promptly to the Corporation's transfer agent requests for redemption of Shares. 8. The Corporation agrees to set forth in its Prospectus the name of the Broker and a telephone number provided by the Broker, and therein to indicate that the Broker will sell Shares of the Corporation at no additional cost to the prospective shareholder. 9. The Corporation shall at its own expense provide all customers of the Broker who become shareholders in the Corporation all materials provided to all shareholders of record in the Corporation, including without limitation annual reports and updated Prospectuses. 10. The Broker shall maintain records of expenditures separate and apart from those of Western Asset Management Company. The Corporation shall be entitled to examine such records at any time, or from time to time, for the purpose of excluding such expenditures from any determination of the fees to be paid by the Corporation to Western Asset Management Company for investment advisory services. 11. The Broker is an independent contractor and shall be an agent for the Corporation only in respect to the sale and redemption of the Shares. 12. The services of the Broker to the Corporation under this Agreement are not to be deemed exclusive. The Broker shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby. The Corporation shall be free, in its sole discretion, to distribute its own Shares to prospective investors, to make agreements with other broker- dealers with respect to distribution of Shares, and to repurchase its Shares from investors, without utilizing or notifying the Broker. -2- 13. The Corporation is responsible for (i) the compliance of each Prospectus, or other material provided by the Corporation to the Broker for distribution to its customers, will all applicable laws, rules and regulations, (ii) the registration or qualification of all Shares under all applicable federal and state laws, except to the extent the failure to so comply by the Corporation is caused by the Broker's failure to comply with applicable laws, rules and regulations or its failure to satisfy applicable terms of this Agreement. 14. Subject to paragraphs 15, 16 and 17 below, this Agreement shall remain in effect for one year from the date of its execution and from year to year thereafter. 15. This Agreement shall automatically terminate in the event of its assignment and may be terminated at any time with respect to some or all of the Series without the payment of any penalty by the Corporation or by the Broker on sixty (60) days' written notice to the other party. The Corporation may effect such termination by action of its executive officers or by a vote of (i) a majority of its directors, (ii) a majority of its directors who are not interested persons of the Corporation and who have no direct or indirect financial interest in the operation of this Agreement or any agreement between the Corporation and Western Asset Management Company (the "Disinterested Directors"), or (iii) a majority of the outstanding voting securities of the Corporation or the relevant Series, as the case may be. 16. This Agreement shall be submitted for approval to the Corporation's Board of Directors at least annually and shall continue in effect only so long as specifically approved at least annually (i) by a majority vote of the Corporation's Board of Directors, and (ii) by a vote of the majority of the Disinterested Directors, cast in person at a meeting called for the purpose of voting on such approval. 17. The effectiveness of this Agreement is specifically conditioned on the Broker: (i) being accepted for Membership into the National Association of Securities Dealers, Inc. ("NASD"), and (ii) registering as a broker or dealer in no less than twenty (20) states or territories. In the event that the Broker's membership in the NASD is suspended or terminated, or if the Broker shall be registered at any time in fewer than twenty (20) states or territories, this Agreement shall automatically terminate upon the occurrence of such event. 18. As used in this Agreement, the terms "assignment", "interested persons", and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions as may be granted by the Securities and Exchange Commission by any rule, regulation or order. -3- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunder duly authorized as of the date first set forth above. Attest: LM INSTITUTIONAL FUND ADVISOR I, INC. By: By: --------------------- ------------------------------------ Attest: ARROYO SECO, INC. By: By: --------------------- ------------------------------------ -4- SCHEDULE A Series of LM INSTITUTIONAL FUND ADVISORS I, INC. to which Agreement Applies
Portfolio and Class* Date Subject to Agreement - -------------------- ------------------------- Western Asset Core Portfolio May 26, 1998 Western Asset Core Plus Portfolio May 26, 1998 Western Asset Non-U.S. Fixed Income Portfolio May 26, 1998 Western Asset Intermediate Portfolio May 26, 1998 Western Asset Intermediate Plus Portfolio May 26, 1998 Western Asset Limited Duration Portfolio May 26, 1998 Western Asset Enhanced Equity Portfolio May 26, 1998 Western Asset Money Market Portfolio May 26, 1998 Western Asset U.S. Government Money Market Portfolio May 26, 1998 Western Asset High Yield Portfolio May 26, 1998 Western Asset Global Strategic Income Portfolio May 26, 1998 International Securities Portfolio May 26, 1998
*Unless otherwise indicated, each Portfolio listed includes all Classes offered by that Portfolio. Each Portfolio, other than the International Securities Portfolio, is authorized to be issued in two classes, the Institutional Class and the Financial Intermediary Class. EX-23.O 19 EXHIBIT 23(O) Exhibit 23(o) ------------- LM INSTITUTIONAL FUND ADVISORS I, INC. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that James W. Hirschman constitutes and appoints Lisa G. Hathaway and Ilene S. Harker, as his true and lawful attorneys- in-fact and agents, each acting alone, with full powers of substitution, for him in his name, place and stead, in any and all capacities, to sign any or all post-effective amendments to this Registration Statement of LM Institutional Fund Advisors I, Inc., and to file the same, with all exhibits thereto, and all other documents in connection therewith (File Nos. 33-34929 and 811-06110) granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or her substitute may lawfully do or cause to be done by virtue hereof. Signature Title Date - --------- ----- ---- /s/ James W. Hirschman President April 12, 2000 - ---------------------- James W. Hirschman EX-23.P.1 20 EXHIBIT 23(P)(1) Exhibit 23(p)(1) ---------------- [LEGG MASON LOGO] LEGG MASON FUNDS CODE OF ETHICS Dated: April 1, 2000 TABLE OF CONTENTS Topic Page ----- ---- I. Introduction 1 A. Individuals and Entities Covered by the Code 1 B. Fiduciary Duty 1 1. The Funds Come First 1 2. Avoid Taking Advantage 1 3. Comply with the Code 1 C. Application of the Code to Independent Fund Directors 1 II. Personal Securities Transactions 2 A. Preclearance Requirements for Access Persons 2 1. General Requirement 2 2. Trade Authorization Request Forms 2 3. Review of Form 2 4. Length of Trade Authorization Approval 3 5. No Explanation Required for Refusals 3 B. Execution of Personal Securities Transactions 3 C. Prohibited Transactions 3 1. Always Prohibited Securities Transactions 3 a. Inside Information 3 b. Market Manipulation 4 c. Others 4 2. Generally Prohibited Securities Transactions 4 a. Initial Public Offerings (Investment Personnel only) 4 b. One Day Blackout (all Access Persons) 4 c. Seven-Day Blackout (Portfolio Managers only) 4 d. 60-Day Blackout (Investment Personnel only) 4 e. Private Placements (Investment Personnel only) 5 D. Exemptions 5 1. Exemptions from Preclearance and Treatment as a Prohibited Transaction 5 a. Mutual Funds 5 b. No Knowledge 5 c. Legg Mason, Inc. Stock 6 d. Certain Corporate Actions 6 e. Systematic Investment Plans 6 f. Option-Related Activity 6 g. Commodities, Futures, and Options on Futures 6 h. Rights 6 i. Miscellaneous 6 2. Exemption from Treatment as a Prohibited Transaction 7 a. Employer of Access Person Does Not Make Investment Decisions For the Relevant Fund 7 b. De Minimis Transactions 7 i. Equity Securities 7 ii. Fixed Income Securities 7 c. Options on Broad-Based Indices 7 E. Reporting Requirements 8 1. Initial and Periodic Disclosure of Personal Holdings by Access Persons 8 2. Transaction and Periodic Statement Reporting Requirements 8 3. Independent Fund Directors 8 4. Disclaimers 9 5. Availability of Reports 9 III. Fiduciary Duties 9 A. Confidentiality 9 B. Gifts 9 1. Accepting Gifts 9 2. Solicitation of Gifts 10 3. Giving Gifts 10 C. Corporate Opportunities 10 D. Undue Influence 10 E. Service as a Director 10 IV. Compliance with the Code of Ethics 11 A. Code of Ethics Review Committee 11 1. Membership, Voting and Quorum 11 2. Investigating Violations of the Code 11 3. Annual Reports 11 B. Remedies 12 1. Sanctions 12 2. Sole Authority 12 3. Review 12 C. Exceptions to the Code 12 D. Inquiries Regarding the Code 13 V. Definitions 13 "Access Person" 13 "Appropriate Compliance Department" 13 "Batterymarch" 14 "Beneficial Interest" 14 "Brandywine" 14 "Code" 15 "Equivalent Security" 15 "Fund Adviser" 15 "Gray Seifert" 15 "Immediate Family" 15 "Independent Fund Director" 15 "Investment Personnel" and "Investment Person" 15 "Legal and Compliance Department" 15 "Legg Mason Fund" and "Fund" 16 "Lombard Odier" 16 "Portfolio Manager" 16 "Preclearance Officer" 16 "Securities Transaction" 16 "Security" 16 "Western Asset" 16 "Western Asset Limited" 16 VI. Appendices to the Code 16 Appendix 1 - Contact Persons and List of Legg Mason Funds i Appendix 2 - Acknowledgement of Receipt of Code of Ethics and Personal Holdings Report iii Appendix 3 - Trade Authorization Request for Access Persons v Appendix 4 - Certification of Access Person's Designee vi Appendix 5 - Acknowledgement of Receipt of Code of Ethics (Independent Fund Directors) vii Appendix 6 - Form Letter to Broker, Dealer or Bank viii Appendix 7 - Certification of No Beneficial Interest ix I. INTRODUCTION ------------ A. Individuals and Entities Covered by the Code. Unless the use of -------------------------------------------- another Code of Ethics has been approved in writing by the Legal and Compliance Department, all Access Persons/1/ are subject to the provisions of this Code. (See Section I.C. for information regarding the application of the Code to --- Independent Fund Directors). B. Fiduciary Duty. The Code is based on the principle that Access Persons -------------- owe a fiduciary duty to the Legg Mason Funds and must avoid activities, interests and relationships that might interfere with making decisions in the best interests of any of the Funds. As fiduciaries, Access Persons must at all times comply with the following principles: 1. The Funds Come First. Access Persons must scrupulously avoid -------------------- serving their personal interests ahead of the interests of the Legg Mason Funds. An Access Person may not induce or cause a Fund to take action, or not to take action, for the Access Person's personal benefit, rather than for the benefit of the Fund. For example, an Access Person would violate this Code by causing a Fund to purchase a Security the Access Person owned for the purpose of increasing the price of that Security. 2. Avoid Taking Advantage. Access Persons may not use their ---------------------- knowledge of open, executed, or pending portfolio transactions to profit by the market effect of such transactions. Receipt of investment opportunities, perquisites, or gifts from persons seeking business with a Legg Mason Fund or a Fund Adviser could call into question the exercise of an Access Person's independent judgment. 3. Comply With the Code. Doubtful situations should be resolved in -------------------- favor of the Legg Mason Funds. Technical compliance with the Code's procedures will not automatically insulate from scrutiny any Securities Transactions that indicate an abuse of fiduciary duties. C. Application of the Code to Independent Fund Directors. This Code ----------------------------------------------------- applies to Independent Fund Directors and requires Independent Fund Directors to report certain Securities Transactions in which they have a Beneficial Interest to the Legal and Compliance Department in accordance with Section II.E.4. However, provisions of the Code requiring preclearance of trades (Section II.A.), execution of personal trades through Legg Mason (Section II.B.), prohibited transactions (Section II.C.), disclosure of personal holdings, - ---------------- /1/ Capitalized words are defined in Section V (Definitions). 1 transactions and accounts (Sections II.E.1, and 2), receipt of gifts (Section III.B.), and restrictions on serving as a director of a publicly-traded company (Section III.E.) do not apply to Independent Fund Directors. II. PERSONAL SECURITIES TRANSACTIONS -------------------------------- A. Preclearance Requirements for Access Persons. --------------------------------------------- 1. General Requirement. Except for the transactions specified in ------------------- Section II.D.1, any Securities Transaction in which an Access Person has or acquires a Beneficial Interest must be precleared with a Preclearance Officer. 2. Trade Authorization Request Forms. Prior to entering an order --------------------------------- for a Securities Transaction that requires preclearance, the Access Person must complete a Trade Authorization Request form (Appendix 3) and submit the completed form to a Preclearance Officer. The form requires Access Persons to provide certain information and to make certain representations. In the event an Access Person is unable to complete a Trade Authorization Request form, the Access Person may designate another individual to complete the form on his or her behalf. The Access Person's designee should complete the Trade Authorization Request form and the Certification of Access --- Person's Designee (Appendix 4) and submit both forms to a Preclearance Officer. Proposed Securities Transactions of a Preclearance Officer that require preclearance must be submitted to another Preclearance Officer. 3. Review of Form. After receiving a completed Trade Authorization -------------- Request form, a Preclearance Officer will (a) review the information set forth in the form, (b) review information regarding past, pending, and contemplated transactions by any relevant Fund, as necessary, and (c) as soon as reasonably practicable, determine whether to authorize the proposed Securities Transaction. The granting of authorization, and the date and time that authorization was granted, must be reflected on the form. The Preclearance Officer should keep one copy of the completed form for the Appropriate Compliance Department and provide one copy to the Access Person seeking authorization. 2 No order for a securities transaction for which preclearance authorization is required may be placed prior to the receipt of written authorization of the transaction by a preclearance ------- officer. Verbal approvals are not permitted. 4. Length of Trade Authorization Approval. The authorization -------------------------------------- provided by a Preclearance Officer is effective until the earlier of (1) its revocation, (2) the close of business on the trading day after the authorization is granted (for example, if authorization is provided on a Monday, it is effective until the close of business on Tuesday), or (3) the moment the Access Person learns that the information in the Trade Authorization Request form is not accurate. If the order for the Securities Transaction is not placed within that period, a new authorization must be obtained before the Securities Transaction is placed. If the Securities Transaction is placed but has not been executed before the authorization expires (as, for example, in the case of a limit order), no new authorization is necessary unless the person placing the original order for the Securities Transaction amends it in any way, or learns that the information in the Trade Authorization Request form is not accurate. 5. No Explanation Required for Refusals. In some cases, a ------------------------------------ Preclearance Officer may refuse to authorize a Securities Transaction for a reason that is confidential. Preclearance Officers are not required to give an explanation for refusing to authorize any Securities Transaction. B. Execution of Personal Securities Transactions. Unless an exception is --------------------------------------------- provided in writing by the Legal and Compliance Department, all transactions in Securities subject to the preclearance requirements shall be executed through Legg Mason Wood Walker, Incorporated. Notwithstanding the foregoing, transactions in Securities subject to the preclearance requirements effected by employees of Batterymarch, Brandywine, Gray Seifert, Lombard Odier, Western Asset, and Western Asset Limited may be executed through any broker, dealer, bank, or mutual fund so long as the requirements of Section II.E.2. (Transaction Reporting Requirements) are met. C. Prohibited Transactions. ----------------------- 1. Always Prohibited Securities Transactions. The following ----------------------------------------- Securities Transactions are prohibited and will not be authorized under any circumstances: a. Inside Information. Any transaction in a Security by an ------------------ individual who possesses material nonpublic information regarding the Security or the issuer of the Security; 3 b. Market Manipulation. Transactions intended to raise, lower, ------------------- or maintain the price of any Security or to create a false appearance of active trading; c. Others. Any other transaction deemed by the Preclearance ------ Officer to involve a conflict of interest, possible diversions of corporate opportunity, or an appearance of impropriety. 2. Generally Prohibited Securities Transactions. Unless exempted by -------------------------------------------- Section II.D, the following Securities Transactions are prohibited and will not be authorized by a Preclearance Officer absent exceptional circumstances. The prohibitions apply only to the categories of Access Persons specified. a. Initial Public Offerings (Investment Personnel only). Any ----------------------------------------------------- purchase of a Security by Investment Personnel in an initial public offering (other than a new offering of a registered open-end investment company); b. One Day Blackout (all Access Persons). Any purchase or sale ------------------------------------- of a Security by an Access Person on any day during which any Fund has a pending buy or sell order, or has effected a buy or sell transaction, in the same Security (or Equivalent Security); c. Seven-Day Blackout (Portfolio Managers only). Any purchase -------------------------------------------- or sale of a Security by a Portfolio Manager within seven calendar days of a purchase or sale of the same Security (or Equivalent Security) by a Fund managed by that Portfolio Manager. For example, if a Fund trades a Security on day one, day eight is the first day the Portfolio Manager may trade that Security for an account in which he or she has a Beneficial Interest; d. 60-Day Blackout (Investment Personnel only). (1) Purchase -------------------------------------------- of a Security in which an Investment Person thereby acquires a Beneficial Interest within 60 days of a sale of the Security (or an Equivalent Security) in which such Investment Person had a Beneficial Interest, and (2) sale of a Security in which an Investment Person has a Beneficial Interest within 60 days of a purchase of the Security (or an Equivalent Security) in which such Investment Person had a Beneficial Interest, if, in either case, a Fund held the same Security at any time during the 60 days; unless the Investment Person agrees to give up all profits 4 on the transaction to a charitable organization specified in accordance with Section IV.B.I. Of course, Investment Personnel must place the interests of the Funds first; they may not avoid or delay purchasing or selling a security for a Fund in order to profit personally; and e. Private Placements (Investment Personnel only). Acquisition ---------------------------------------------- of a Beneficial Interest in Securities in a private placement by Investment Personnel is strongly discouraged. A Preclearance Officer will give permission only after considering, among other facts, whether the investment opportunity should be reserved for a Fund and whether the opportunity is being offered to the person by virtue of the person's position as an Investment Person. Investment Personnel who have acquired a Beneficial Interest in Securities in a private placement are required to disclose their Beneficial Interest to the Appropriate Compliance Department. If the Investment Person is subsequently involved in a decision to buy or sell a Security (or an Equivalent Security) from the same issuer for a Fund, then the decision to purchase or sell the Security (or an Equivalent Security) must be independently authorized by a Portfolio Manager with no personal interest in the issuer. D. Exemptions. ---------- 1. Exemptions from Preclearance and Treatment as a Prohibited ---------------------------------------------------------- Transaction. The following Securities Transactions are exempt ----------- from the preclearance requirements set forth in Section II.A. and the prohibited transaction restrictions set forth in Section II.C.: a. Mutual Funds. Any purchase or sale of a Security issued by ------------ any registered open-end investment companies (including but not limited to the Legg Mason Funds); b. No Knowledge. Securities Transactions where the Access ------------ Person has no knowledge of the transaction before it is completed (for example, Securities Transactions effected for an Access Person by a trustee of a blind trust, or discretionary trades involving an investment partnership or investment club, in connection with which the Access Person is neither consulted nor advised of the trade before it is executed); 5 c. Legg Mason, Inc. Stock. Any purchase or sale of Legg Mason, ---------------------- Inc. stock. d. Certain Corporate Actions. Any acquisition of Securities ------------------------- through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin- offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of Securities; e. Systematic Investment Plans. Any acquisition of a security --------------------------- pursuant to a systematic investment plan that has previously been approved pursuant to the Code. A systematic investment plan is one pursuant to which a prescribed investment will be made automatically on a regular, predetermined basis without affirmative action by the Access Person. f. Options-Related Activity. Any acquisition or disposition of ------------------------ a security in connection with an option-related Securities Transaction that has been previously approved pursuant to the Code. For example, if an Access Person receives approval to write a covered call, and the call is later exercised, the provisions of Sections II.A. and II.C. are not applicable to the sale of the underlying security. g. Commodities, Futures, and Options on Futures. Any Securities -------------------------------------------- Transaction involving commodities, futures (including currency futures and futures on securities comprising part of a broad-based, publicly traded market based index of stocks) and options on futures. h. Rights. Any acquisition of Securities through the exercise ------ of rights issued by an issuer pro rata to all holders of a --- ---- class of its Securities, to the extent the rights were acquired in the issue; and i. Miscellaneous. Any transaction in the following: ------------- (1) bankers acceptances, (2) bank certificates of deposit, (3) commercial paper, (4) repurchase agreements, (5) Securities that are direct obligations of the U.S. Government, and (6) other Securities as may from time to time be designated in writing by the Code of Ethics Review Committee on the ground that the risk of abuse is minimal or non-existent. 6 2. Exemption from Treatment as a Prohibited Transaction. The ---------------------------------------------------- following Securities Transactions are exempt from the prohibited transaction restrictions that are set forth in Section II.C. They are not exempt from the preclearance requirements set forth in Section II.A: a. Employer of Access Person Does Not Make Investment Decisions ------------------------------------------------------------ For the Relevant Fund. The prohibitions in Sections --------------------- II.C.2.b, c, and d are not applicable to any Securities Transaction effected by an Access Person if the employer of the Access Person is not the Fund Adviser that makes investment decisions for the relevant Fund. For example, an employee of Western Asset may effect a Securities Transaction without regard to transactions that are open, executed, or pending for a Fund managed by Batterymarch so long as the Western Asset employee does not have actual knowledge of any open, executed, or pending transactions for the Fund managed by Batterymarch. A Security Transaction effected by an Access Person who has actual knowledge of an open, executed, or pending portfolio transaction by any Fund is not exempt from the prohibitions of Sections II.C.2.b, c, and d. Employees of more than one Fund Adviser must take into account the transactions of Funds managed by each of their employers. b. De Minimis Transactions. The prohibitions in Section ----------------------- II.C.2.b and c are not applicable to the following transactions: i. Equity Securities. Any equity Security Transaction, or ----------------- series of related transactions, effected over a thirty (30) calendar day period, involving 1000 shares or less in the aggregate if the issuer of the Security is listed on the New York Stock Exchange or has a market capitalization in excess of $1 billion. ii. Fixed-Income Securities. Any fixed income Security ----------------------- Transaction, or series of related transactions, effected over a thirty (30) calendar day period, involving $100,000 principal amount or less in the aggregate. c. Options on Broad-Based Indices. The prohibitions in Section ------------------------------ II.C.2. b, c, and d are not applicable to any Securities Transaction involving options on certain broad-based indices designated by the Legal and Compliance Department. The 7 broad-based indices designated by the Legal and Compliance Department may be changed from time to time and presently consist of the S&P 500, the S&P 100, NASDAQ 100, Nikkei 300, NYSE Composite, and Wilshire Small Cap indices. E. Reporting Requirements ---------------------- 1. Initial and Periodic Disclosure of Personal Holdings by Access -------------------------------------------------------------- Persons. Within ten (10) days of being designated as an Access ------- Person and thereafter on an annual basis (during the month of April), an Access Person (except an Independent Fund Director) must acknowledge receipt and review of the Code and disclose all Securities in which such Access Person has a Beneficial Interest on the Acknowledgement of Receipt of Code of Ethics and Personal Holdings Report (Appendix 2). 2. Transaction and Periodic Statement Reporting Requirements. An --------------------------------------------------------- Access Person (except an Independent Fund Director) must arrange for the Appropriate Compliance Department to receive directly from any broker, dealer, or bank that effects any Securities Transaction in which the Access Person has or acquires a Beneficial Interest, duplicate copies of each confirmation for each such transaction and periodic statements for each account in which such Access Person has a Beneficial Interest. Unless a written exception is granted by a Preclearance Officer, an Access Person must also arrange for the Appropriate Compliance Department to receive directly from any mutual fund that effects any Securities Transaction in which the Access Person has or acquires a Beneficial Interest duplicate copies of periodic statements for each account in which such Access Person has a Beneficial Interest. Attached as Appendix 6 is a form of letter that may be used to request such documents from such entities. If an Access Person opens an account at a broker, dealer, bank, or mutual fund that has not previously been disclosed, the Access Person must immediately notify the Appropriate Compliance Department in writing of the existence of the account and make arrangements to comply with the requirements set forth herein. If an Access Person is not able to arrange for duplicate confirmations and periodic statements to be sent, the Access Person must immediately notify the Appropriate Compliance Department. 3. Independent Fund Directors. Within ten (10) days of being -------------------------- designated 8 an Independent Fund Director and thereafter on an annual basis, an Independent Fund Director must acknowledge receipt and review of the Code of Ethics on the Acknowledgement of Receipt of Code of Ethics (Appendix 5). Each Independent Fund Director must also report to the Appropriate Compliance Department any Securities Transaction in which the Independent Fund Director has or acquires a Beneficial Interest if the Independent Fund Director knew, or in the ordinary course of fulfilling his or her duty as a director of a Fund should have known, that during the 15-day period immediately preceding or after the date of the transaction such Security (or an Equivalent Security) was or would be purchased or sold by the Fund, or such purchase or sale was or would be considered by the Fund. 4. Disclaimers. Any report of a Securities Transaction for the ----------- benefit of a person other than the individual in whose account the transaction is placed may contain a statement that the report should not be construed as an admission by the person making the report that he or she has any direct or indirect beneficial ownership in the Security to which the report relates. 5. Availability of Reports. All information supplied pursuant to ----------------------- this Code may be made available for inspection to the Board of Directors of each Fund Adviser employing the Access Person, the Board of Directors of each Legg Mason Fund, the Chairman of the Board and the Vice Chairman of Legg Mason, Inc., the Code of Ethics Review Committee, the Legal and Compliance Department, Preclearance Officers, the Access Person's department manager (or designee), any party to which any investigation is referred by any of the foregoing, the Securities Exchange Commission, any self-regulatory organization of which Legg Mason Wood Walker, Incorporated is a member, any state securities commission, and any attorney or agent of the foregoing or of the Legg Mason Funds. III. FIDUCIARY DUTIES ---------------- A. Confidentiality. Access Persons are prohibited from revealing --------------- information relating to the investment intentions, activities or portfolios of the Funds, except to persons whose responsibilities require knowledge of the information. B. Gifts. The following provisions on gifts apply to all Investment ----- Personnel. 1. Accepting Gifts. On occasion, because of their position with the --------------- Legg 9 Mason Funds, Investment Personnel may be offered, or may receive without notice, gifts from clients, brokers, vendors, or other persons not affiliated with such entities. Acceptance of extraordinary or extravagant gifts is not permissible. Any such gifts must be declined or returned in order to protect the reputation and integrity of the Legg Mason Funds and the Fund Advisers. Gifts of a nominal value (i.e., gifts whose reasonable ---- value is no more than $100 a year), and customary business meals, entertainment (e.g., sporting events), and promotional items ---- (e.g., pens, mugs, T-shirts) may be accepted. ---- If an Investment Person receives any gift that might be prohibited under this Code, the Investment Person must immediately inform the Appropriate Compliance Department. 2. Solicitation of Gifts. Investment Personnel may not solicit --------------------- gifts or gratuities. 3. Giving Gifts. Investment Personnel may not personally give gifts ------------ with an aggregate value in excess of $100 per year to persons associated with securities or financial organizations, including exchanges, other member organizations, commodity firms, news media, or clients of the firm. C. Corporate Opportunities. Access Persons may not take personal ----------------------- advantage of any opportunity properly belonging to any Fund or Fund Adviser. For example, an Investment Person should not acquire a Beneficial Interest in a Security of limited availability without first offering the opportunity to purchase such Security to the Fund Adviser for the relevant Fund. D. Undue Influence. Access Persons may not cause or attempt to cause any --------------- Fund to purchase, sell or hold any Security in a manner calculated to create any personal benefit to the Access Person. If an Access Person stands to benefit materially from an investment decision for a Fund, and the Access Person is making or participating in the investment decision, then the Access Person must disclose the potential benefit to those persons with authority to make investment decisions for the Fund (or, if the Access Person in question is a person with authority to make investment decisions for the Fund, to the Appropriate Compliance Department). The person to whom the Access Person reports the interest, in consultation with the Appropriate Compliance Department, must determine whether or not the Access Person will be restricted in making or participating in the investment decision. E. Service as a Director. No Investment Person may serve on the board of --------------------- directors of a publicly-held company (other than the Fund Advisers, their affiliates, and the Funds) absent prior written authorization by the Code of Ethics Review Committee. This 10 authorization will rarely, if ever, be granted and, if granted, will normally require that the affected Investment Person be isolated, through a Chinese Wall or other procedures, from those making investment decisions related to the issuer on whose board the Investment Person sits. IV. COMPLIANCE WITH THE CODE OF ETHICS ---------------------------------- A. Code of Ethics Review Committee ------------------------------- 1. Membership, Voting and Quorum. The Code of Ethics Review ----------------------------- Committee is comprised of the individuals identified in Appendix 1. The Committee shall vote by majority vote with two members serving as a quorum. Vacancies may be filled and, in the case of extended absences or periods of unavailability, alternates may be selected, by a majority vote of the remaining members of the Committee; provided, however, that at least one member of the -------- ------- Committee shall also be a member of the Legal and Compliance Department. 2. Investigating Violations of the Code. The Appropriate Compliance ------------------------------------ Department is responsible for investigating any suspected violation of the Code and shall report the results of each investigation to the Code of Ethics Review Committee. The Code of Ethics Review Committee is responsible for reviewing the results of any investigation of any reported or suspected violation of the Code. Any violation of the Code by an Access Person will be reported to the Boards of Directors of the relevant Legg Mason Funds no less frequently than each quarterly meeting. 3. Annual Reports. The Code of Ethics Review Committee will review -------------- the Code at least once a year, in light of legal and business developments and experience in implementing the Code, and will report to the Board of Directors of each Legg Mason Fund: a. Summarizing existing procedures concerning personal investing and any changes in the procedures made during the past year; b. Identifying any violation requiring significant remedial action during the past year; and c. Identifying any recommended changes in existing restrictions or procedures based on its experience under the Code, evolving 11 industry practices, or developments in applicable laws or regulations. B. Remedies -------- 1. Sanctions. If the Code of Ethics Review Committee determines --------- that an Access Person has committed a violation of the Code, the Committee may impose sanctions and take other actions as it deems appropriate, including a letter of caution or warning, suspension of personal trading rights, suspension of employment (with or without compensation), fine, civil referral to the Securities and Exchange Commission, criminal referral, and termination of the employment of the violator for cause. The Code of Ethics Review Committee may also require the Access Person to reverse the transaction in question and forfeit any profit or absorb any loss associated or derived as a result. The amount of profit shall be calculated by the Code of Ethics Review Committee and shall be forwarded to a charitable organization selected by the Code of Ethics Review Committee. No member of the Code of Ethics Review Committee may review his or her own transaction. 2. Sole Authority. The Code of Ethics Review Committee has sole -------------- authority, subject to the review set forth in Section IV.B.3 below, to determine the remedy for any violation of the Code, including appropriate disposition of any monies forfeited pursuant to this provision. Failure to promptly abide by a directive to reverse a trade or forfeit profits may result in the imposition of additional sanctions. 3. Review. Whenever the Code of Ethics Review Committee determines ------ that an Access Person has committed a violation of this Code that merits remedial action, it will report no less frequently than quarterly to the Boards of Directors of the applicable Legg Mason Funds, information relating to the investigation of the violation, including any sanctions imposed. The Boards of Directors of the relevant Legg Mason Funds may modify such sanctions as they deem appropriate. Such Boards shall have access to all information considered by the Code of Ethics Review Committee in relation to the case. The Code of Ethics Review Committee may determine whether or not to delay the imposition of any sanctions pending review by the applicable Board of Directors. C. Exceptions to the Code. Although exceptions to the Code will rarely, ---------------------- if ever, be granted, the Appropriate Compliance Department may grant exceptions to the requirements of the Code on a case by case basis if the Appropriate Compliance Department finds that the proposed conduct involves negligible opportunity for abuse. All such exceptions must be in 12 writing and must be reported as soon as practicable to the Code of Ethics Review Committee and to any relevant Funds' Board of Directors at their next regularly scheduled meeting after the exception is granted. D. Inquiries Regarding the Code. The Appropriate Compliance Department ---------------------------- will answer any questions about this Code or any other compliance-related matters. V. DEFINITIONS ------------ When used in the Code, the following terms have the meanings set forth below: "Access Person" means: ------------- (1) every director or officer of a Legg Mason Fund or a Fund Adviser; (2) every employee of a Fund Adviser (or employee of a company in a control relationship with any of the foregoing), who in connection with his or her regular functions, makes, participates in, or obtains information regarding the purchase or sale of a Security by a Fund; (3) every natural person in a control relationship with a Legg Mason Fund or a Fund Adviser who obtains information concerning recommendations made to a Fund with regard to the purchase or sale of a Security, prior to its dissemination or prior to the execution of all resulting trades; (4) any director, officer or employee of Legg Mason Wood Walker, Incorporated who in the ordinary course of his or her business makes, participates in or obtains information regarding the purchase or sale of Securities for any of the Legg Mason Funds, or whose functions or duties as a part of the ordinary course of his or her business relate to the making of any recommendation to such investment company concerning the purchase or sale of Securities; and (5) such other persons as the Legal and Compliance Department shall designate. Any uncertainty as to whether an individual is an Access Person should be brought to the attention of the Legal and Compliance Department. Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of "Access Person" found in Rule 17j-1(e) (1) promulgated under the Investment Company Act of 1940, as amended. "Appropriate Compliance Department" for an employee means the compliance --------------------------------- department of that employee's immediate employer. For dual employees, the compliance 13 department of one employer will be designated as the Appropriate Compliance Department. "Batterymarch" means Batterymarch Financial Management, Inc. ------------ "Beneficial Interest" means the opportunity, directly or indirectly, ------------------- through any contract, arrangement, understanding, relationship or otherwise, to profit, or share in any profit derived from, a transaction in the subject Securities. An Access Person is deemed to have a Beneficial Interest in the following: (1) any Security owned individually by the Access Person; (2) any Security owned jointly by the Access Person with others (for example, joint accounts, spousal accounts, UTMA accounts, partnerships, trusts and controlling interests in corporations); and (3) any Security in which a member of the Access Person's Immediate Family has a Beneficial Interest if: a. the Security is held in an account over which the Access Person has decision making authority (for example, the Access Person acts as trustee, executor, or guardian); or b. the Security is held in an account for which the Access Person acts as a broker or investment adviser representative. In addition, an Access Person is presumed to have a Beneficial Interest in any Security in which a member of the Access Person's Immediate Family has a Beneficial Interest if the Immediate Family member resides in the same household as the Access Person. This presumption may be rebutted if the Access Person is able to provide the Legal and Compliance Department with satisfactory assurances that the Access Person has no material Beneficial Interest in the Security and exercises no control over investment decisions made regarding the Security. Access Persons may use the form attached as Appendix 7 (Certification of No Beneficial Interest) in connection with such requests. Any uncertainty as to whether an Access Person has a Beneficial Interest in a Security should be brought to the attention of the Legal and Compliance Department. Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of "beneficial owner" found in Rules 16a-1(a) (2) and (5) promulgated under the Securities Exchange Act of 1934, as amended. "Brandywine" means Brandywine Asset Management, Inc. ---------- 14 "Code" means this Code of Ethics, as amended. ---- "Equivalent Security" means any Security issued by the same entity as the ------------------- issuer of a subject Security, including options, rights, stock appreciation rights, warrants, preferred stock, restricted stock, phantom stock, bonds, and other obligations of that company or security otherwise convertible into that security. Options on securities are included even if, technically, they are issued by the Options Clearing Corporation or a similar entity. "Fund Adviser" means any entity that acts as a manager, adviser or sub- ------------ adviser to a Legg Mason Fund, including, but not limited to, Bartlett & Co., Batterymarch Financial Management, Inc., Brandywine Asset Management, Inc., Gray, Seifert & Co., Inc., Legg Mason Capital Management, Inc., Legg Mason Fund Adviser, Inc., LM Institutional Advisors, Inc., LMM LLC, Lombard Odier International Portfolio Management Limited, Western Asset Management Company, and Western Asset Management Company Limited. "Gray Seifert" means Gray, Seifert & Co., Inc. ------------ "Immediate Family" of an Access Person means any of the following persons: ---------------- child grandparent son-in-law stepchild spouse daughter-in-law grandchild sibling brother-in-law parent mother-in-law sister-in-law stepparent father-in-law Immediate Family includes adoptive relationships and other relationships (whether or not recognized by law) that the Legal and Compliance Department determines could lead to the possible conflicts of interest, diversions of corporate opportunity, or appearances of impropriety which this Code is intended to prevent. "Independent Fund Director" means an independent director of a Legg Mason ------------------------- Fund. "Investment Personnel" and "Investment Person" mean each Portfolio Manager -------------------- ----------------- and any Access Person who, in connection with his or her regular functions or duties, provides information and advice to a Portfolio Manager or who helps execute a Portfolio Manager's decisions. "Legal and Compliance Department" means the Legal and Compliance Department ------------------------------- of Legg Mason Wood Walker, Incorporated and the persons designated in Appendix 1, as such Appendix shall be amended from time to time. See also "Appropriate Compliance Department." 15 "Legg Mason Fund" and "Fund" mean an investment company registered under --------------- ---- the Investment Company Act of 1940 (or a portfolio or series thereof, as the case may be) that is sponsored by Legg Mason, including, but not limited to, the funds listed in Appendix 1. "Lombard Odier" means Lombard Odier International Portfolio Management ------------- Limited. "Portfolio Manager" means a person who has or shares principal day-to-day ----------------- responsibility for managing the portfolio of a Fund. "Preclearance Officer" means the person designated as a Preclearance -------------------- Officer in Appendix 1 hereof or such person's designee. "Securities Transaction" means a purchase or sale of Securities in which an ---------------------- Access Person has or acquires a Beneficial Interest. "Security" includes stock, notes, bonds, debentures, and other evidences of -------- indebtedness (including loan participations and assignments), limited partnership interests, investment contracts, and all derivative instruments of the foregoing, such as options and warrants. "Security" does not include futures or options on futures, but the purchase and sale of such instruments are nevertheless subject to the reporting requirements of the Code. "Western Asset" means Western Asset Management Company. ------------- "Western Asset Limited" means Western Asset Management Company Limited. --------------------- VI. APPENDICES TO THE CODE ---------------------- The following appendices are attached to and are a part of the Code: Appendix 1. Contact Persons and List of Legg Mason Funds; -------------------------------------------- Appendix 2. Acknowledgement of Receipt of Code of Ethics and Personal --------------------------------------------------------- Holdings Report; --------------- Appendix 3. Trade Authorization Request for Access Persons; ---------------------------------------------- Appendix 4. Certification of Access Person's Designee; ----------------------------------------- Appendix 5. Acknowledgement of Receipt of Code of Ethics (Independent Fund -------------------------------------------------------------- Directors); ---------- Appendix 6. Form Letter to Broker, Dealer, Bank, or Mutual Fund. --------------------------------------------------- Appendix 7. Certification of No Beneficial Interest. ---------------------------------------- Appendix 1 CONTACT PERSONS AND LIST OF LEGG MASON FUNDS PRECLEARANCE OFFICERS Andrew J. Bowden Neil P. O'Callaghan Suzanne E. Peluso Jennifer W. Murphy (Legg Mason Fund Adviser, Inc.) Philip E. Sachs (Legg Mason Capital Management, Inc.) Ilene S. Harker (Western Asset Management Company) Francis X. Tracy (Batterymarch Financial Management, Inc.) Thomas A. Steele (Bartlett & Co.) Denise Justice (Bartlett & Co.) DESIGNEES OF PRECLEARANCE OFFICER Nancy E. McColgan (Legg Mason Capital Management, Inc.) Nancy Dennin (Legg Mason Fund Adviser, Inc.) Jean C. Collins (Bartlett & Co.) Donna Preishoff (Bartlett & Co.) LEGAL AND COMPLIANCE DEPARTMENT Andrew J. Bowden Neil P. O'Callaghan Frank R. Walker Jr. CODE OF ETHICS REVIEW COMMITTEE Andrew J. Bowden Edward A. Taber, III Neil P. O'Callaghan Philip E. Sachs Jennifer W. Murphy LEGG MASON FUNDS Bartlett Basic Value Fund Bartlett Value International Fund Batterymarch Emerging Markets Portfolio i Batterymarch International Equity Portfolio Batterymarch U.S. MidCapitalization Equity Portfolio Batterymarch U.S. Small Capitalization Equity Portfolio Legg Mason American Leading Companies Trust Legg Mason Balanced Trust Legg Mason Cash Reserve Trust Legg Mason Classic Valuation Fund Legg Mason Emerging Markets Trust Legg Mason Europe Fund Legg Mason Financial Services Fund Legg Mason Focus Trust Legg Mason Global Income Trust Legg Mason High Yield Portfolio Legg Mason International Equity Trust Legg Mason Investment Grade Income Portfolio Legg Mason Market Neutral Trust Legg Mason Maryland Tax-Free Income Trust Legg Mason Opportunity Trust Legg Mason Pennsylvania Tax-Free Income Trust Legg Mason Special Investment Trust, Inc. Legg Mason Tax Exempt Trust, Inc. Legg Mason Tax-Free Intermediate-Term Income Trust Legg Mason Total Return Trust, Inc. Legg Mason U.S. Government Intermediate-Term Portfolio Legg Mason U.S. Government Money Market Portfolio Legg Mason U.S. Small-Cap Value Trust Legg Mason Value Trust, Inc. LM Balanced Institutional Portfolio LM Value Institutional Portfolio LM Special Investment Institutional Portfolio LM Total Return Institutional Portfolio Western Asset Core Portfolio Western Asset Core Plus Portfolio Western Asset Enhanced Equity Portfolio Western Asset Global Strategic Income Portfolio Western Asset Government Money Market Portfolio Western Asset High Yield Portfolio Western Asset Intermediate Portfolio Western Asset Intermediate Plus Portfolio Western Asset Money Market Portfolio Western Asset Non-U.S. Fixed Income Portfolio ii Appendix 2 ACKNOWLEDGEMENT OF RECEIPT OF CODE OF ETHICS AND PERSONAL HOLDINGS REPORT I acknowledge that I have received the Code of Ethics dated April 1, 2000 and represent that: 1. I have read the Code of Ethics and I understand that it applies to me and to all Securities in which I have or acquire any Beneficial Interest. I have read the definition of "Beneficial Interest" and understand that I may be deemed to have a Beneficial Interest in Securities owned by members of my Immediate Family and that Securities Transactions effected by members of my Immediate Family may therefore be subject to this Code. 2. In accordance with Section II.A. of the Code, I will obtain prior written authorization for all Securities Transactions in which I have or acquire a Beneficial Interest, except for transactions exempt from preclearance under Section II.D.1 of the Code. 3. In accordance with Section II.E.2. of the Code of Ethics, I will report all non-exempt Securities Transactions in which I have or acquire a Beneficial Interest. 4. I agree to disgorge and forfeit any profits on prohibited transactions in accordance with the requirements of the Code. 5. I will comply with the Code of Ethics in all other respects. 6. In accordance with Section II.E.1. of the Code, the following is a list of all Securities in which I have a Beneficial Interest: /1/ Provide the information requested below for each account that you maintain with a broker, dealer, bank, or mutual fund. Indicate "None" if appropriate.
NAME OF BROKER, DEALER, BANK, OR MUTUAL FUND ACCOUNT TITLE ACCOUNT NUMBER - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(Attach a separate sheet if necessary) /2/ Attach the most recent account statement for each account identified above that is not maintained at Legg Mason Wood Walker, Incorporated. --- (4/1/00) iii /3/ If you own Beneficial Interests in Securities that are not listed on an --- attached account statement or in an account maintained at Legg Mason Wood Walker, Incorporated, list them below. Include private equity investments. Indicate "None" if appropriate.
NAME OF ACCOUNT ACCOUNT NAME OF SECURITY NUMBER OF BROKER, DEALER, TITLE NUMBER SHARES/PRINCIPAL BANK, OR AMOUNT MUTUAL FUND - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(Attach separate sheet if necessary) 7. (Investment Personnel Only) In accordance with Section III.E. of the Code, the following is a list of publicly-held companies (other than Fund Advisers, their affiliates, and the Funds) on which I serve as a member of the board of directors. Indicate "NA" or "None" if appropriate.
NAME OF COMPANY BOARD MEMBER SINCE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
8. I certify that the information on this form is accurate and complete. - ---------------------------------- Access Person's Name - ---------------------------------- ------------------------------ Access Person's Signature Date (4/1/00) iv Appendix 3 TRADE AUTHORIZATION REQUEST FOR ACCESS PERSONS 1. Name of Access Person: ----------------------------------- 2. Account Title: ----------------------------------- 3. Account Number: ----------------------------------- 4. Name of Security: ----------------------------------- 5. Maximum number of shares or units to be purchased or sold or amount of bond: ----------------------------------- 6. Name and phone number of broker to effect transaction: -----------------------------------
7. Check applicable boxes: Purchase [ ] Sale [ ] Market Order [ ] Limit Order [ ]
9. In connection with the foregoing transaction, I hereby make the following representations and warranties: (a) I do not possess any material nonpublic information regarding the Security or the issuer of the Security. (b) I am not aware that any Legg Mason Fund has an open order to buy or sell the Security or an Equivalent Security. (c) By entering this order, I am not using knowledge of any open, executed, or pending transaction by a Legg Mason Fund to profit by the market effect of such Fund transaction. (d) (Investment Personnel Only). The Security is not being acquired in an initial public offering. (e) (Investment Personnel Only). The Security is not being acquired in a private placement or, if it is, I have reviewed Section II.C.3. of the Code and have attached hereto a written explanation of such transaction. (f) (Investment Personnel Only). If I am purchasing the Security, and if the same or an Equivalent Security has been held within the past 60 days by any Fund managed by my immediate employer, I have not directly or indirectly (through any member of my Immediate Family, any account in which I have a Beneficial Interest or otherwise) sold the Security or an Equivalent Security in the prior 60 days. (g) (Investment Personnel Only). If I am selling the Security, and if the same or an Equivalent Security has been held within the past 60 days by any Fund managed by my immediate employer, I have not directly or indirectly (through any member of my Immediate Family, any account in which I have a Beneficial Interest or otherwise) purchased the Security or an Equivalent Security in the prior 60 days. (h) I believe that the proposed trade fully complies with the requirements of the Code. - ----------------------------------------- ------------------ ---------------- Access Person's Signature Date Time TRADE AUTHORIZATION (to be completed by Preclearance Officer) - ----------------------------------------- ------------------ ---------------- Authorized By Date Time v Appendix 4 CERTIFICATION OF ACCESS PERSON'S DESIGNEE The undersigned hereby certifies that the Access Person named on the attached Trade Authorization Request for Access Persons (a) directly instructed me to complete the attached form on his or her behalf, (b) to the best of my knowledge, was out of the office at the time of such instruction and has not returned, and (c) confirmed to me that the representations and warranties contained in the attached Form are accurate. -------------------------------- Access Person's Designee -------------------------------- Print Name -------------------------------- Date (4/1/00) vi Appendix 5 ACKNOWLEDGEMENT OF RECEIPT OF CODE OF ETHICS (Independent Fund Directors) I acknowledge that I have received the Code of Ethics dated April 1, 2000 and represent that: 1. I have read the Code of Ethics and I understand that it applies to me and to all Securities in which I have or acquire any Beneficial Interest. I have read the definition of "Beneficial Interest" and understand that I may be deemed to have a Beneficial Interest in Securities owned by members of my Immediate Family and that Securities Transactions effected by members of my Immediate Family may therefore be subject to this Code. 2. I will report all Securities Transactions required to be reported under Section II.E.3 of the Code in which I have or acquire a Beneficial Interest. 3. I will comply with applicable provisions of the Code of Ethics in all other respects. ------------------------------------ Director's Signature ------------------------------------ Print Name ------------------------------------ Dated (4/1/00) vii Appendix 6 FORM OF LETTER TO BROKER, DEALER, BANK, OR MUTUAL FUND (Date) (Name and Address) Subject: Account # ----------------------- Dear : ------------------- My employer, , is an investment adviser ----------------------------------- to, or principal underwriter of, an investment company. Pursuant to my employer's Code of Ethics and Rule 17j-1 under the Investment Company Act of 1940, please send duplicate confirmations of individual transactions as well as duplicate periodic statements for the referenced account directly to: (Name and Address of Individual Responsible for Reviewing Periodic Holdings and Transaction Reports) Thank you for your cooperation. If you have any questions, please contact me or (Name of Individual Responsible for Reviewing Periodic Holdings and Transaction Reports) at . ------------------------------- Sincerely, (Name of Access Person) (4/1/00) viii Appendix 7 CERTIFICATION OF NO BENEFICIAL INTEREST I have read the Code of Ethics and I understand that it applies to me and to all Securities in which I have or acquire any Beneficial Interest. I have read the definition of "Beneficial Interest" and understand that I may be deemed to have a Beneficial Interest in Securities owned by members of my Immediate Family and that Securities Transactions effected by members of my Immediate Family may therefore be subject to this Code. The following accounts are maintained by one or more members of my Immediate Family who reside in my household:
Brokerage Firm Relationship of Immediate (Include Legg Mason Account Name Family Member Account Number Accounts) - ------------ ------------------------- -------------- --------------------
I certify that with respect to each of the accounts listed above (initial appropriate boxes): [ ] I do not own individually or jointly with others any of the securities held in the account. [ ] I do not possess or exercise decision making authority over the account. [ ] I do not act as a broker or investment adviser representative for the account. I agree that I will notify the Legal and Compliance Department immediately if any of the information I have provided in this certification becomes inaccurate or incomplete. -------------------------------- Access Person's Designee -------------------------------- Print Name -------------------------------- Date (4/1/00) ix EX-23.P.2 21 EXHIBIT 23(P)(2) Exhibit 23(p)(2) ---------------- CODE OF ETHICS ARROYO SECO, INC. PACIFIC AMERICAN INCOME SHARES WESTERN ASSET MANAGEMENT COMPANY LM INSTITUTIONAL FUND ADVISORS I A. STATEMENT OF GENERAL PRINCIPLES ------------------------------- 1. All Access Persons that are affiliated with Western Asset are fiduciaries to the Accounts and Funds managed by the Companies. All such Access Persons are also fiduciaries to Fund shareholders. Accordingly, Access Persons shall place the interests of the Accounts and Funds first. 2. Access Persons must scrupulously avoid serving their personal interests ahead of the interests of the Accounts and Funds. Each Access Person shall handle his or her activities and personal securities transactions in such a manner as to avoid any actual or potential conflict of interest or any abuse of his or her position of trust and responsibility. No Access Person shall take inappropriate advantage of his or her position. 3. All Access Persons shall act in accordance with both the letter and the spirit of this Code. Technical compliance with the Code's procedures will not automatically insulate from scrutiny activity that may indicate an abuse of fiduciary duties. 4. It will be considered a violation of this Code to do indirectly that which is prohibited directly. For example, it will be considered a violation of this Code to do indirectly through options, futures or other derivatives that which is prohibited directly through transactions in securities themselves. 5. This Code is to be interpreted consistent with the Securities and Exchange Commission's rules governing codes of ethics. 6. Directors of the Funds (who are not employees of Western Asset) will only be subject to the Reporting requirements outlined in Section E.5., but will not be subject to the Pre-Clearance requirements of Section B, the Prohibited Transaction requirements of Section C or the provisions of Section F. 7. Notwithstanding any other provision of this Code to the contrary, Access Persons of the Companies who are also employed principally by affiliates of Western Asset Management Company and Arroyo Seco, Inc. and who are subject to the Legg Mason, Inc. Code of Ethics (the "Legg Mason Code") shall not be subject to this Code (other than as provided in the following sentence), but rather shall be subject to the provisions of the Legg Mason Code. The Legg Mason Code is hereby incorporated by reference into, and made a part of, this Code. B. PRE-CLEARANCE ------------- 1. Except for the transactions set forth in Section D below, any Securities Transaction which an Access Person has a direct or indirect Beneficial Interest must be pre-cleared with a Pre-Clearance Officer. 2. Pre-Clearance Procedures - Prior to entering an order for a Securities ------------------------ Transaction that requires pre-clearance, the Access Person must complete, in writing, a Trade Authorization Request form and submit the completed form to a Pre-Clearance Officer. Proposed Securities Transactions of a Pre- Clearance Officer that require pre-clearance must be submitted to another Pre-Clearance Officer. In the event an Access Person is unable to complete a Trade Authorization Request form, the Access Person requesting Pre- Clearance may designate someone else to complete the Form on his or her behalf in order to obtain proper authorization. 3. Length of Trade Authorization Approval - The authorization provided by the -------------------------------------- Pre-Clearance Officer is effective until the earlier of (1) its revocation, (2) the close of business on the trading day after the authorization is granted, or (3) the Access Person learns that the information in the Trade Authorization Request Form is not accurate. If the order for the Securities Transaction is not placed within that period, a new authorization must be obtained before the Securities Transaction is placed. If a Securities Transaction is placed but has not been executed before the authorization expires (e.g. a limit order), no new authorization is necessary unless the person placing the order amends it in any way. C. PROHIBITED TRANSACTIONS ----------------------- 1. Always Prohibited Securities Transactions - The following Securities ----------------------------------------- Transactions are prohibited and will not be authorized under any circumstances: a. Inside Information - Any transaction in a Security by an individual who ------------------ possesses material nonpublic information regarding the Security or the issuer of the Security; b. Market Manipulation - Transactions intended to raise, lower, or maintain ------------------- the price of any Security or to create a false appearance of active trading; c. Others - Any other transaction deemed by the Pre-Clearance Officer to ------ involve a conflict of interest, possible diversions of corporate opportunity, or an appearance of impropriety. 2. Generally Prohibited Securities Transactions - Unless exempted by Section D, -------------------------------------------- the following Securities Transactions are prohibited and will not be authorized by the Pre-Clearance Officer absent exceptional circumstances. The prohibitions apply only to the categories of Access Persons specified. a. Initial Public Offerings (Investment Persons Only) - Investment Persons -------------------------------------------------- shall not acquire any Securities in an Initial Public Offering. b. Limited Offerings (Investment Persons Only) - Investment Persons shall ------------------------------------------- not acquire any Securities in a Limited Offering without written prior approval from the Code of Ethics Committee. This prior approval shall take into account among other factors, whether the investment opportunity should be reserved for the Funds or Accounts, and whether the opportunity is being offered to the Investment Person by virtue of his or relationship with the Companies. An Investment Person who has been authorized to acquire securities in a limited offering shall disclose that investment when he or she plays a part in any subsequent consideration by the Fund, Accounts or the Companies of an investment in the issuer. In such circumstances, the decision to purchase Securities of the issuer shall be subject to an independent review by persons with no personal interest in the issuer. c. One-Day Blackout Period - No Access Person shall execute a ----------------------- Securities Transaction in a Security on any day during which an Account or Fund has placed or executed a purchase or sell order on the same Security. d. Seven-Day Blackout Period (Portfolio Managers Only) - Portfolio --------------------------------------------------- Managers may not purchase or sell Securities for their own account within seven calendar days of a purchase or sale of the same Securities (or Equivalent Securities) by an Account or Fund managed by that Portfolio Manager. e. 60-Day Blackout Period (Investment Persons Only) - Investment ------------------------------------------------- Persons may not (for their own beneficial interest) purchase a Security within 60 days of the sale of the same Security; nor may an Investment Person sell a Security within 60 days of a purchase of the same Security if, in either case, at any time during the 60 days the Security was held by an Account or Fund managed by the Companies. D. EXEMPTIONS ---------- 1. Exemption from Pre-Clearance and Treatment as a Prohibited Transaction - ---------------------------------------------------------------------- The following Securities Transactions are exempt from the pre-clearance requirements of Section B and the prohibited transaction restrictions of Section C. a. Mutual Funds - Any purchase or sale of a Security issued by any ------------ registered open-end investment company; b. No Knowledge - Securities Transactions where the Access Person has no ------------ knowledge of the transaction before it is completed (for example a transaction effected by a Trustee of a blind trust or discretionary trades involving an investment partnership or investment club, in connection with which the Access Person is neither consulted nor advised of the trade before it is executed); c. Certain Corporate Actions - Any acquisition of Securities, through stock ------------------------- dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, exercise of rights or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of Securities; d. Options-Related Activity - Any acquisition or disposition of a Security ------------------------ in connection with an option-related Securities Transaction that has been previously approved. For example, if an Access Person receives approval to write a covered call, and the call is later exercised, the provisions of Section B and C are not applicable to the sale of the underlying Security. e. Commodities, Futures and Options on Futures - Any Securities Transaction ------------------------------------------- involving commodities, futures (including currency futures and futures on securities comprising part of a broad-based, publicly traded market based index of stocks) and options on futures. f. Miscellaneous - Any transaction in the following: ------------- . Bankers Acceptances, . Bank Certificates of Deposit, . Commercial Paper, . Repurchase Agreements, . Securities that are direct obligations of the U.S. Government, . Other securities as may from time to time be designated in writing by the Code of Ethics Committee on the grounds that the risk of abuse is minimal or non-existent. The Securities listed above are not exempt from the reporting requirements set forth in Section E. 2. Exemption from Treatment as a Prohibited Transaction - The following ---------------------------------------------------- Securities Transactions are exempt from the prohibited transaction restrictions of Section C. a. Options on Broad-Based Indices - The prohibitions in Section C are not ------------------------------ applicable to any Securities Transaction involving options on certain broad-based indices designated by the Code of Ethics Committee. The broad-based indices designated may be changed from time-to-time and presently consist of the S&P 500, the S&P 100, NASDAQ 100, Nikkei 300, NYSE Composite and Wilshire Small Cap indices. b. Sovereign debt of Non-U.S. Governments - The prohibitions in Section C -------------------------------------- are not applicable to any Securities Transactions involving Sovereign debt of Non-U.S. governments with an issue size greater than $1 billion and issued in either the home currency or U.S. dollars. E. REPORTING --------- 1. Initial Reports - All Access Persons (except Disinterested Fund Directors), --------------- within ten (10) days of being designated an Access Person, must disclose all Covered Securities in which they have a direct or indirect Beneficial Interest. Such report must include the title, number of shares and principal amount of each Covered Security. Access Persons must also report all brokerage accounts in which they have a direct or indirect Beneficial Interest. Initial reports must be signed and dated by the Access Person. 2. Monthly Reports - All employees of the Companies shall submit to the --------------- Compliance Department, within 10 days after month end, a report of all Securities Transactions during the previous month. The report shall state the title and number of shares, the principal amount of the security involved, the interest rate and maturity date if applicable, the date and nature of the transaction, the price at which the transaction was effected and the name of the broker, dealer or bank with or through whom the transaction was effected. The report shall also include the date it was submitted by the employee. Access Persons who have reported Securities Transactions through duplicate copies of broker confirmations and statements are not required to file a monthly report. In addition, all employees of the Companies shall submit a report of any Securities account established during the month for the direct or indirect benefit of the employee. The report shall include the name of the broker, dealer or bank with whom the employee established the account, the date the account was established and the date the report was submitted to the Compliance Department. 3. Annual Reports - All Access Persons shall provide annually a list of all -------------- Covered Securities in which they have a direct or indirect Beneficial Interest. The list shall include the title, number of shares and principal amount of each Covered Security. In addition, each Access Person must report to the Compliance Department the account number, account name and brokerage firm of each Securities account in which the Access Person has a direct or indirect Beneficial Interest. The information in the annual report must be current as of a date no more than 30 days before the report is submitted and the annual report must include the date it was submitted to the Compliance Department. Annually all Access Persons shall certify that they have complied with the requirements of this Code and that they have disclosed or reported all Securities Transactions required to be disclosed or reported pursuant to the requirements of this Code. 4. Confirmations and Statements - All Access Persons must arrange for the ---------------------------- Compliance Department to receive directly from any broker, dealer or bank duplicate copies of confirmations for Securities Transactions and periodic statements for each brokerage account in which the Access Person has a direct or indirect Beneficial Interest. The foregoing does not apply to transactions and holdings in registered open-end investment companies. 5. Directors Reports (for Directors of Pacific American Income Shares and LM ----------------- Institutional Fund Advisors I): a. Disinterested Directors - Access Persons who are Disinterested ----------------------- Directors are not required to make a report regarding Securities Transactions except where such director knew or, in the ordinary course of fulfilling his or her official duties as a director of Pacific American Income Shares or LM Institutional Fund Advisors I, should have known that during the 15-day period immediately preceding or after the date of the transaction in a Security by the director, such Security is or was purchased or sold by the relevant Fund or such purchase or sale is or was considered by the relevant Fund or its Advisers. b. Interested Directors - Access Persons who are Interested Directors are -------------------- required to make the following reports: i. Initial Reports (See Paragraph E.1.) ii. Quarterly Reports: No later than 10 days after the end of each calendar quarter the following information must be reported: - Transaction Report for Covered Securities including: Date of ------------------ each transaction, full security description (including interest rate and maturity), number of shares and principal amount, nature of transaction, price at which transaction effected, broker, dealer or bank through which transaction affected and date report is submitted. - Account Report including: Any new account established by the -------------- Director in which any Securities were held during the quarter for the direct or indirect benefit of the Director. Such report to also include the name of the broker, dealer or bank with whom the Director established the account, the date the account was established and the date the report is submitted. iii. Annual Reports (See Paragraph E.3.) F. FIDUCIARY DUTIES ---------------- 1. Confidentiality - Access Persons are prohibited from revealing information --------------- relating to the investment intentions, activities or portfolios of the Accounts or Funds, except to persons whose responsibilities require knowledge of the information. 2. Gifts: On occasion, because of their position with Western Asset, Access ----- Persons may be offered, or may receive without notice, gifts from clients, vendors or other persons not affiliated with the firm. Acceptance of extraordinary or extravagant gifts is not permissible. Any such gifts must be declined or returned in order to protect the reputation of the firm. Gifts of nominal value (i.e., gifts whose reasonable value is no more than $100 per year), and customary business meals, entertainment (e.g. sporting events), and promotional items (e.g. pens, mugs, T-shirts) may be accepted. If an Access Person receives any gift that might be prohibited under this Code, the Access Person must immediately inform the Compliance Department. An Access Person may not personally give any gift with a value in excess of $100 per year to persons associated with securities or financial organizations, including clients of the firm. 3. Service as a Director: No Investment Person may serve on the board of ---------------------- directors of any publicly traded company without prior written authorization from the Code of Ethics Committee. If the Committee authorizes board service, it shall do so subject to appropriate safeguards, including in most cases "Chinese Walls" or other procedures to isolate the Investment Person from the making of investment decisions related to the company on whose board the Investment Person serves. 3. Remedies and Sanctions: If the Code of Ethics Committee determines that ----------------------- an employee of the Companies or an Access Person has committed a violation of the Code, the Committee may impose sanctions and take other actions as it deems appropriate. G. DEFINITIONS ----------- 1. "Access Persons" means (a) all officers of the Companies, all directors of --------------- Arroyo Seco, Inc. and Western Asset Management Company, and all directors of Pacific American Income Shares and LM InstitutionalFund Advisors I who are not interested persons of such company as that term is defined in the Investment company Act of 1940; (b) all employees of the Companies who, in connection with their regular functions or duties, make, participate in, or obtain information, regarding the purchase or sale of a Security by an Account or Fund or whose functions relate to the making of any recommendations with respect to the purchases or sales; (c) any natural person in a control relationship to the Companies who obtains information concerning recommendations made to an Account or Fund with regard to the purchase or sale of a security and (d) such other persons as the Compliance Department shall designate. 2. "Account" means any portfolio managed by Western Asset Management Company. --------- 3. "Beneficial Interest" shall have the meaning given to it for purposes of --------------------- Rule 17j-1 and shall include the opportunity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to profit, or share in any profit derived from, a transaction in the subject Securities. An Access Person is deemed to have a Beneficial Interest in the following: a. any Security owned individually by the Access Person; b. any Security owned jointly by the Access Person with others (for example, joint accounts, spousal accounts, UTMA accounts, partnerships, trusts and controlling interests in corporations); and c. any Security in which a member of the Access Person's Immediate Family has a Beneficial Interest if the Security is held in an account over which the Access Person has decision making authority (for example, the Access Person acts as trustee, executor, or guardian). In addition, an Access Person is presumed to have a Beneficial Interest in any Security in which a member of the Access Person's Immediate Family has a Beneficial Interest if the Immediate Family member resides in the same household as the Access Person. This presumption may be rebutted if the Access Person is able to provide the Compliance Department with satisfactory assurances that the Access Person has no material Beneficial Interest in the Security and exercises no control over investment decisions made regarding the Security. Access Persons may use the form attached (Certification of No Beneficial Interest) in connection with such requests 4. "Companies" means Arroyo Seco Inc., Pacific American Income Shares, Western ----------- Asset Management Company and LM Institutional Fund Advisors I. 5. "Covered Security" means any security defined below except covered security ------------------ does not include direct obligations of the U.S. Government, bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments including repurchase agreements and shares issued by open-end Funds. 6. "Equivalent Security" means any Security issued by the same entity as the --------------------- issuer of a subject Security that may be convertible into that Security. (e.g. options, rights, stock appreciation rights, warrants, preferred stock, restricted stock, phantom stock, convertible bonds) 7. "Fund" means any investment company registered under the Investment Company ------ Act of 1940 managed by Western Asset Management Company. 8. "Immediate Family" of an Access Person means any of the following persons ------------------ who reside in the same household as the Access Person: child grandparent son-in-law stepchild spouse daughter-in-law grandchild sibling brother-in-law parent mother-in-law sister-in-law stepparent father-in-law
9. "Initial Public Offering" means an offering of securities registered under ------------------------- the Securities Act of 1933, the issuer of which immediately before registration was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange act of 1934. 10. "Director" means a director of Pacific American Income Shares or LM ---------- Institutional Fund Advisors I. 11. "Investment Person" means any employee of the Companies who, in connection ------------------- with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of Securities for an Account or Fund. 12. "Limited Offering" means an offering that is exempt from registration ------------------ under the securities Act of 1933 pursuant to section 4(2) or 4(6) or 77d(6) or pursuant to rule 504, rule 505, or rule 506 under the Securities Act of 1933. 13. "Portfolio Manager" means a person who has or shares principal day-to-day ------------------- responsibility for managing an Account or Fund. 14. "Pre-Clearance Officer" means the persons designated as Pre-Clearance ----------------------- Officers by the Code of Ethics Committee. 15. "Security" means any security (as that term is defined under the Investment ---------- Company Act of 1940) and any financial instrument related to a security, including options on securities, futures contracts, options on futures contracts and any other derivative. 16. "Securities Transaction" means a purchase or sale of Securities in which an ------------------------ Access Person or a member of his or her Immediate Family has or acquires a Beneficial Interest, including the writing of an option to purchase or sell the Security. 17. "Western Asset Code of Ethics Committee" ("Code of Ethics Committee") --------------------------------------------------------------------- Members of the Western Asset Code of Ethics Committee shall be designated by the Western Asset Executive Committee. [LEGG MASON LOGO] LEGG MASON FUNDS CODE OF ETHICS Dated: April 1, 2000 TABLE OF CONTENTS Topic Page ----- ---- I. Introduction 1 A. Individuals and Entities Covered by the Code 1 B. Fiduciary Duty 1 1. The Funds Come First 1 2. Avoid Taking Advantage 1 3. Comply with the Code 1 C. Application of the Code to Independent Fund Directors 1 II. Personal Securities Transactions 2 A. Preclearance Requirements for Access Persons 2 1. General Requirement 2 2. Trade Authorization Request Forms 2 3. Review of Form 2 4. Length of Trade Authorization Approval 3 5. No Explanation Required for Refusals 3 B. Execution of Personal Securities Transactions 3 C. Prohibited Transactions 3 1. Always Prohibited Securities Transactions 3 a. Inside Information 3 b. Market Manipulation 4 c. Others 4 2. Generally Prohibited Securities Transactions 4 a. Initial Public Offerings (Investment Personnel only) 4 b. One Day Blackout (all Access Persons) 4 c. Seven-Day Blackout (Portfolio Managers only) 4 d. 60-Day Blackout (Investment Personnel only) 4 e. Private Placements (Investment Personnel only) 5 D. Exemptions 5 1. Exemptions from Preclearance and Treatment as a Prohibited Transaction 5 a. Mutual Funds 5 b. No Knowledge 5 c. Legg Mason, Inc. Stock 6 d. Certain Corporate Actions 6 e. Systematic Investment Plans 6 f. Option-Related Activity 6 g. Commodities, Futures, and Options on Futures 6 h. Rights 6 i. Miscellaneous 6 2. Exemption from Treatment as a Prohibited Transaction 7 a. Employer of Access Person Does Not Make Investment Decisions For the Relevant Fund 7 b. De Minimis Transactions 7 i. Equity Securities 7 ii. Fixed Income Securities 7 c. Options on Broad-Based Indices 7 E. Reporting Requirements 8 1. Initial and Periodic Disclosure of Personal Holdings by Access Persons 8 2. Transaction and Periodic Statement Reporting Requirements 8 3. Independent Fund Directors 8 4. Disclaimers 9 5. Availability of Reports 9 III. Fiduciary Duties 9 A. Confidentiality 9 B. Gifts 9 1. Accepting Gifts 9 2. Solicitation of Gifts 10 3. Giving Gifts 10 C. Corporate Opportunities 10 D. Undue Influence 10 E. Service as a Director 10 IV. Compliance with the Code of Ethics 11 A. Code of Ethics Review Committee 11 1. Membership, Voting and Quorum 11 2. Investigating Violations of the Code 11 3. Annual Reports 11 B. Remedies 12 1. Sanctions 12 2. Sole Authority 12 3. Review 12 C. Exceptions to the Code 12 D. Inquiries Regarding the Code 13 V. Definitions 13 "Access Person" 13 "Appropriate Compliance Department" 13 "Batterymarch" 14 "Beneficial Interest" 14 "Brandywine" 14 "Code" 15 "Equivalent Security" 15 "Fund Adviser" 15 "Gray Seifert" 15 "Immediate Family" 15 "Independent Fund Director" 15 "Investment Personnel" and "Investment Person" 15 "Legal and Compliance Department" 15 "Legg Mason Fund" and "Fund" 16 "Lombard Odier" 16 "Portfolio Manager" 16 "Preclearance Officer" 16 "Securities Transaction" 16 "Security" 16 "Western Asset" 16 "Western Asset Limited" 16 VI. Appendices to the Code 16 Appendix 1 - Contact Persons and List of Legg Mason Funds i Appendix 2 - Acknowledgement of Receipt of Code of Ethics and Personal Holdings Report iii Appendix 3 - Trade Authorization Request for Access Persons v Appendix 4 - Certification of Access Person's Designee vi Appendix 5 - Acknowledgement of Receipt of Code of Ethics (Independent Fund Directors) vii Appendix 6 - Form Letter to Broker, Dealer or Bank viii Appendix 7 - Certification of No Beneficial Interest ix I. INTRODUCTION ------------ A. Individuals and Entities Covered by the Code. Unless the use of -------------------------------------------- another Code of Ethics has been approved in writing by the Legal and Compliance Department, all Access Persons/1/ are subject to the provisions of this Code. (See Section I.C. for information regarding the application of the Code to --- Independent Fund Directors). B. Fiduciary Duty. The Code is based on the principle that Access Persons -------------- owe a fiduciary duty to the Legg Mason Funds and must avoid activities, interests and relationships that might interfere with making decisions in the best interests of any of the Funds. As fiduciaries, Access Persons must at all times comply with the following principles: 1. The Funds Come First. Access Persons must scrupulously avoid -------------------- serving their personal interests ahead of the interests of the Legg Mason Funds. An Access Person may not induce or cause a Fund to take action, or not to take action, for the Access Person's personal benefit, rather than for the benefit of the Fund. For example, an Access Person would violate this Code by causing a Fund to purchase a Security the Access Person owned for the purpose of increasing the price of that Security. 2. Avoid Taking Advantage. Access Persons may not use their ---------------------- knowledge of open, executed, or pending portfolio transactions to profit by the market effect of such transactions. Receipt of investment opportunities, perquisites, or gifts from persons seeking business with a Legg Mason Fund or a Fund Adviser could call into question the exercise of an Access Person's independent judgment. 3. Comply With the Code. Doubtful situations should be resolved in -------------------- favor of the Legg Mason Funds. Technical compliance with the Code's procedures will not automatically insulate from scrutiny any Securities Transactions that indicate an abuse of fiduciary duties. C. Application of the Code to Independent Fund Directors. This Code ----------------------------------------------------- applies to Independent Fund Directors and requires Independent Fund Directors to report certain Securities Transactions in which they have a Beneficial Interest to the Legal and Compliance Department in accordance with Section II.E.4. However, provisions of the Code requiring preclearance of trades (Section II.A.), execution of personal trades through Legg Mason (Section II.B.), prohibited transactions (Section II.C.), disclosure of personal holdings, - ---------------- /1/ Capitalized words are defined in Section V (Definitions). 1 transactions and accounts (Sections II.E.1, and 2), receipt of gifts (Section III.B.), and restrictions on serving as a director of a publicly-traded company (Section III.E.) do not apply to Independent Fund Directors. II. PERSONAL SECURITIES TRANSACTIONS -------------------------------- A. Preclearance Requirements for Access Persons. --------------------------------------------- 1. General Requirement. Except for the transactions specified in ------------------- Section II.D.1, any Securities Transaction in which an Access Person has or acquires a Beneficial Interest must be precleared with a Preclearance Officer. 2. Trade Authorization Request Forms. Prior to entering an order --------------------------------- for a Securities Transaction that requires preclearance, the Access Person must complete a Trade Authorization Request form (Appendix 3) and submit the completed form to a Preclearance Officer. The form requires Access Persons to provide certain information and to make certain representations. In the event an Access Person is unable to complete a Trade Authorization Request form, the Access Person may designate another individual to complete the form on his or her behalf. The Access Person's designee should complete the Trade Authorization Request form and the Certification of Access --- Person's Designee (Appendix 4) and submit both forms to a Preclearance Officer. Proposed Securities Transactions of a Preclearance Officer that require preclearance must be submitted to another Preclearance Officer. 3. Review of Form. After receiving a completed Trade Authorization -------------- Request form, a Preclearance Officer will (a) review the information set forth in the form, (b) review information regarding past, pending, and contemplated transactions by any relevant Fund, as necessary, and (c) as soon as reasonably practicable, determine whether to authorize the proposed Securities Transaction. The granting of authorization, and the date and time that authorization was granted, must be reflected on the form. The Preclearance Officer should keep one copy of the completed form for the Appropriate Compliance Department and provide one copy to the Access Person seeking authorization. 2 No order for a securities transaction for which preclearance authorization is required may be placed prior to the receipt of written authorization of the transaction by a preclearance ------- officer. Verbal approvals are not permitted. 4. Length of Trade Authorization Approval. The authorization -------------------------------------- provided by a Preclearance Officer is effective until the earlier of (1) its revocation, (2) the close of business on the trading day after the authorization is granted (for example, if authorization is provided on a Monday, it is effective until the close of business on Tuesday), or (3) the moment the Access Person learns that the information in the Trade Authorization Request form is not accurate. If the order for the Securities Transaction is not placed within that period, a new authorization must be obtained before the Securities Transaction is placed. If the Securities Transaction is placed but has not been executed before the authorization expires (as, for example, in the case of a limit order), no new authorization is necessary unless the person placing the original order for the Securities Transaction amends it in any way, or learns that the information in the Trade Authorization Request form is not accurate. 5. No Explanation Required for Refusals. In some cases, a ------------------------------------ Preclearance Officer may refuse to authorize a Securities Transaction for a reason that is confidential. Preclearance Officers are not required to give an explanation for refusing to authorize any Securities Transaction. B. Execution of Personal Securities Transactions. Unless an exception is --------------------------------------------- provided in writing by the Legal and Compliance Department, all transactions in Securities subject to the preclearance requirements shall be executed through Legg Mason Wood Walker, Incorporated. Notwithstanding the foregoing, transactions in Securities subject to the preclearance requirements effected by employees of Batterymarch, Brandywine, Gray Seifert, Lombard Odier, Western Asset, and Western Asset Limited may be executed through any broker, dealer, bank, or mutual fund so long as the requirements of Section II.E.2. (Transaction Reporting Requirements) are met. C. Prohibited Transactions. ----------------------- 1. Always Prohibited Securities Transactions. The following ----------------------------------------- Securities Transactions are prohibited and will not be authorized under any circumstances: a. Inside Information. Any transaction in a Security by an ------------------ individual who possesses material nonpublic information regarding the Security or the issuer of the Security; 3 b. Market Manipulation. Transactions intended to raise, lower, ------------------- or maintain the price of any Security or to create a false appearance of active trading; c. Others. Any other transaction deemed by the Preclearance ------ Officer to involve a conflict of interest, possible diversions of corporate opportunity, or an appearance of impropriety. 2. Generally Prohibited Securities Transactions. Unless exempted by -------------------------------------------- Section II.D, the following Securities Transactions are prohibited and will not be authorized by a Preclearance Officer absent exceptional circumstances. The prohibitions apply only to the categories of Access Persons specified. a. Initial Public Offerings (Investment Personnel only). Any ----------------------------------------------------- purchase of a Security by Investment Personnel in an initial public offering (other than a new offering of a registered open-end investment company); b. One Day Blackout (all Access Persons). Any purchase or sale ------------------------------------- of a Security by an Access Person on any day during which any Fund has a pending buy or sell order, or has effected a buy or sell transaction, in the same Security (or Equivalent Security); c. Seven-Day Blackout (Portfolio Managers only). Any purchase -------------------------------------------- or sale of a Security by a Portfolio Manager within seven calendar days of a purchase or sale of the same Security (or Equivalent Security) by a Fund managed by that Portfolio Manager. For example, if a Fund trades a Security on day one, day eight is the first day the Portfolio Manager may trade that Security for an account in which he or she has a Beneficial Interest; d. 60-Day Blackout (Investment Personnel only). (1) Purchase -------------------------------------------- of a Security in which an Investment Person thereby acquires a Beneficial Interest within 60 days of a sale of the Security (or an Equivalent Security) in which such Investment Person had a Beneficial Interest, and (2) sale of a Security in which an Investment Person has a Beneficial Interest within 60 days of a purchase of the Security (or an Equivalent Security) in which such Investment Person had a Beneficial Interest, if, in either case, a Fund held the same Security at any time during the 60 days; unless the Investment Person agrees to give up all profits 4 on the transaction to a charitable organization specified in accordance with Section IV.B.I. Of course, Investment Personnel must place the interests of the Funds first; they may not avoid or delay purchasing or selling a security for a Fund in order to profit personally; and e. Private Placements (Investment Personnel only). Acquisition ---------------------------------------------- of a Beneficial Interest in Securities in a private placement by Investment Personnel is strongly discouraged. A Preclearance Officer will give permission only after considering, among other facts, whether the investment opportunity should be reserved for a Fund and whether the opportunity is being offered to the person by virtue of the person's position as an Investment Person. Investment Personnel who have acquired a Beneficial Interest in Securities in a private placement are required to disclose their Beneficial Interest to the Appropriate Compliance Department. If the Investment Person is subsequently involved in a decision to buy or sell a Security (or an Equivalent Security) from the same issuer for a Fund, then the decision to purchase or sell the Security (or an Equivalent Security) must be independently authorized by a Portfolio Manager with no personal interest in the issuer. D. Exemptions. ---------- 1. Exemptions from Preclearance and Treatment as a Prohibited ---------------------------------------------------------- Transaction. The following Securities Transactions are exempt ----------- from the preclearance requirements set forth in Section II.A. and the prohibited transaction restrictions set forth in Section II.C.: a. Mutual Funds. Any purchase or sale of a Security issued by ------------ any registered open-end investment companies (including but not limited to the Legg Mason Funds); b. No Knowledge. Securities Transactions where the Access ------------ Person has no knowledge of the transaction before it is completed (for example, Securities Transactions effected for an Access Person by a trustee of a blind trust, or discretionary trades involving an investment partnership or investment club, in connection with which the Access Person is neither consulted nor advised of the trade before it is executed); 5 c. Legg Mason, Inc. Stock. Any purchase or sale of Legg Mason, ---------------------- Inc. stock. d. Certain Corporate Actions. Any acquisition of Securities ------------------------- through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin- offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of Securities; e. Systematic Investment Plans. Any acquisition of a security --------------------------- pursuant to a systematic investment plan that has previously been approved pursuant to the Code. A systematic investment plan is one pursuant to which a prescribed investment will be made automatically on a regular, predetermined basis without affirmative action by the Access Person. f. Options-Related Activity. Any acquisition or disposition of ------------------------ a security in connection with an option-related Securities Transaction that has been previously approved pursuant to the Code. For example, if an Access Person receives approval to write a covered call, and the call is later exercised, the provisions of Sections II.A. and II.C. are not applicable to the sale of the underlying security. g. Commodities, Futures, and Options on Futures. Any Securities -------------------------------------------- Transaction involving commodities, futures (including currency futures and futures on securities comprising part of a broad-based, publicly traded market based index of stocks) and options on futures. h. Rights. Any acquisition of Securities through the exercise ------ of rights issued by an issuer pro rata to all holders of a --- ---- class of its Securities, to the extent the rights were acquired in the issue; and i. Miscellaneous. Any transaction in the following: ------------- (1) bankers acceptances, (2) bank certificates of deposit, (3) commercial paper, (4) repurchase agreements, (5) Securities that are direct obligations of the U.S. Government, and (6) other Securities as may from time to time be designated in writing by the Code of Ethics Review Committee on the ground that the risk of abuse is minimal or non-existent. 6 2. Exemption from Treatment as a Prohibited Transaction. The ---------------------------------------------------- following Securities Transactions are exempt from the prohibited transaction restrictions that are set forth in Section II.C. They are not exempt from the preclearance requirements set forth in Section II.A: a. Employer of Access Person Does Not Make Investment Decisions ------------------------------------------------------------ For the Relevant Fund. The prohibitions in Sections --------------------- II.C.2.b, c, and d are not applicable to any Securities Transaction effected by an Access Person if the employer of the Access Person is not the Fund Adviser that makes investment decisions for the relevant Fund. For example, an employee of Western Asset may effect a Securities Transaction without regard to transactions that are open, executed, or pending for a Fund managed by Batterymarch so long as the Western Asset employee does not have actual knowledge of any open, executed, or pending transactions for the Fund managed by Batterymarch. A Security Transaction effected by an Access Person who has actual knowledge of an open, executed, or pending portfolio transaction by any Fund is not exempt from the prohibitions of Sections II.C.2.b, c, and d. Employees of more than one Fund Adviser must take into account the transactions of Funds managed by each of their employers. b. De Minimis Transactions. The prohibitions in Section ----------------------- II.C.2.b and c are not applicable to the following transactions: i. Equity Securities. Any equity Security Transaction, or ----------------- series of related transactions, effected over a thirty (30) calendar day period, involving 1000 shares or less in the aggregate if the issuer of the Security is listed on the New York Stock Exchange or has a market capitalization in excess of $1 billion. ii. Fixed-Income Securities. Any fixed income Security ----------------------- Transaction, or series of related transactions, effected over a thirty (30) calendar day period, involving $100,000 principal amount or less in the aggregate. c. Options on Broad-Based Indices. The prohibitions in Section ------------------------------ II.C.2. b, c, and d are not applicable to any Securities Transaction involving options on certain broad-based indices designated by the Legal and Compliance Department. The 7 broad-based indices designated by the Legal and Compliance Department may be changed from time to time and presently consist of the S&P 500, the S&P 100, NASDAQ 100, Nikkei 300, NYSE Composite, and Wilshire Small Cap indices. E. Reporting Requirements ---------------------- 1. Initial and Periodic Disclosure of Personal Holdings by Access -------------------------------------------------------------- Persons. Within ten (10) days of being designated as an Access ------- Person and thereafter on an annual basis (during the month of April), an Access Person (except an Independent Fund Director) must acknowledge receipt and review of the Code and disclose all Securities in which such Access Person has a Beneficial Interest on the Acknowledgement of Receipt of Code of Ethics and Personal Holdings Report (Appendix 2). 2. Transaction and Periodic Statement Reporting Requirements. An --------------------------------------------------------- Access Person (except an Independent Fund Director) must arrange for the Appropriate Compliance Department to receive directly from any broker, dealer, or bank that effects any Securities Transaction in which the Access Person has or acquires a Beneficial Interest, duplicate copies of each confirmation for each such transaction and periodic statements for each account in which such Access Person has a Beneficial Interest. Unless a written exception is granted by a Preclearance Officer, an Access Person must also arrange for the Appropriate Compliance Department to receive directly from any mutual fund that effects any Securities Transaction in which the Access Person has or acquires a Beneficial Interest duplicate copies of periodic statements for each account in which such Access Person has a Beneficial Interest. Attached as Appendix 6 is a form of letter that may be used to request such documents from such entities. If an Access Person opens an account at a broker, dealer, bank, or mutual fund that has not previously been disclosed, the Access Person must immediately notify the Appropriate Compliance Department in writing of the existence of the account and make arrangements to comply with the requirements set forth herein. If an Access Person is not able to arrange for duplicate confirmations and periodic statements to be sent, the Access Person must immediately notify the Appropriate Compliance Department. 3. Independent Fund Directors. Within ten (10) days of being -------------------------- designated 8 an Independent Fund Director and thereafter on an annual basis, an Independent Fund Director must acknowledge receipt and review of the Code of Ethics on the Acknowledgement of Receipt of Code of Ethics (Appendix 5). Each Independent Fund Director must also report to the Appropriate Compliance Department any Securities Transaction in which the Independent Fund Director has or acquires a Beneficial Interest if the Independent Fund Director knew, or in the ordinary course of fulfilling his or her duty as a director of a Fund should have known, that during the 15-day period immediately preceding or after the date of the transaction such Security (or an Equivalent Security) was or would be purchased or sold by the Fund, or such purchase or sale was or would be considered by the Fund. 4. Disclaimers. Any report of a Securities Transaction for the ----------- benefit of a person other than the individual in whose account the transaction is placed may contain a statement that the report should not be construed as an admission by the person making the report that he or she has any direct or indirect beneficial ownership in the Security to which the report relates. 5. Availability of Reports. All information supplied pursuant to ----------------------- this Code may be made available for inspection to the Board of Directors of each Fund Adviser employing the Access Person, the Board of Directors of each Legg Mason Fund, the Chairman of the Board and the Vice Chairman of Legg Mason, Inc., the Code of Ethics Review Committee, the Legal and Compliance Department, Preclearance Officers, the Access Person's department manager (or designee), any party to which any investigation is referred by any of the foregoing, the Securities Exchange Commission, any self-regulatory organization of which Legg Mason Wood Walker, Incorporated is a member, any state securities commission, and any attorney or agent of the foregoing or of the Legg Mason Funds. III. FIDUCIARY DUTIES ---------------- A. Confidentiality. Access Persons are prohibited from revealing --------------- information relating to the investment intentions, activities or portfolios of the Funds, except to persons whose responsibilities require knowledge of the information. B. Gifts. The following provisions on gifts apply to all Investment ----- Personnel. 1. Accepting Gifts. On occasion, because of their position with the --------------- Legg 9 Mason Funds, Investment Personnel may be offered, or may receive without notice, gifts from clients, brokers, vendors, or other persons not affiliated with such entities. Acceptance of extraordinary or extravagant gifts is not permissible. Any such gifts must be declined or returned in order to protect the reputation and integrity of the Legg Mason Funds and the Fund Advisers. Gifts of a nominal value (i.e., gifts whose reasonable ---- value is no more than $100 a year), and customary business meals, entertainment (e.g., sporting events), and promotional items ---- (e.g., pens, mugs, T-shirts) may be accepted. ---- If an Investment Person receives any gift that might be prohibited under this Code, the Investment Person must immediately inform the Appropriate Compliance Department. 2. Solicitation of Gifts. Investment Personnel may not solicit --------------------- gifts or gratuities. 3. Giving Gifts. Investment Personnel may not personally give gifts ------------ with an aggregate value in excess of $100 per year to persons associated with securities or financial organizations, including exchanges, other member organizations, commodity firms, news media, or clients of the firm. C. Corporate Opportunities. Access Persons may not take personal ----------------------- advantage of any opportunity properly belonging to any Fund or Fund Adviser. For example, an Investment Person should not acquire a Beneficial Interest in a Security of limited availability without first offering the opportunity to purchase such Security to the Fund Adviser for the relevant Fund. D. Undue Influence. Access Persons may not cause or attempt to cause any --------------- Fund to purchase, sell or hold any Security in a manner calculated to create any personal benefit to the Access Person. If an Access Person stands to benefit materially from an investment decision for a Fund, and the Access Person is making or participating in the investment decision, then the Access Person must disclose the potential benefit to those persons with authority to make investment decisions for the Fund (or, if the Access Person in question is a person with authority to make investment decisions for the Fund, to the Appropriate Compliance Department). The person to whom the Access Person reports the interest, in consultation with the Appropriate Compliance Department, must determine whether or not the Access Person will be restricted in making or participating in the investment decision. E. Service as a Director. No Investment Person may serve on the board of --------------------- directors of a publicly-held company (other than the Fund Advisers, their affiliates, and the Funds) absent prior written authorization by the Code of Ethics Review Committee. This 10 authorization will rarely, if ever, be granted and, if granted, will normally require that the affected Investment Person be isolated, through a Chinese Wall or other procedures, from those making investment decisions related to the issuer on whose board the Investment Person sits. IV. COMPLIANCE WITH THE CODE OF ETHICS ---------------------------------- A. Code of Ethics Review Committee ------------------------------- 1. Membership, Voting and Quorum. The Code of Ethics Review ----------------------------- Committee is comprised of the individuals identified in Appendix 1. The Committee shall vote by majority vote with two members serving as a quorum. Vacancies may be filled and, in the case of extended absences or periods of unavailability, alternates may be selected, by a majority vote of the remaining members of the Committee; provided, however, that at least one member of the -------- ------- Committee shall also be a member of the Legal and Compliance Department. 2. Investigating Violations of the Code. The Appropriate Compliance ------------------------------------ Department is responsible for investigating any suspected violation of the Code and shall report the results of each investigation to the Code of Ethics Review Committee. The Code of Ethics Review Committee is responsible for reviewing the results of any investigation of any reported or suspected violation of the Code. Any violation of the Code by an Access Person will be reported to the Boards of Directors of the relevant Legg Mason Funds no less frequently than each quarterly meeting. 3. Annual Reports. The Code of Ethics Review Committee will review -------------- the Code at least once a year, in light of legal and business developments and experience in implementing the Code, and will report to the Board of Directors of each Legg Mason Fund: a. Summarizing existing procedures concerning personal investing and any changes in the procedures made during the past year; b. Identifying any violation requiring significant remedial action during the past year; and c. Identifying any recommended changes in existing restrictions or procedures based on its experience under the Code, evolving 11 industry practices, or developments in applicable laws or regulations. B. Remedies -------- 1. Sanctions. If the Code of Ethics Review Committee determines --------- that an Access Person has committed a violation of the Code, the Committee may impose sanctions and take other actions as it deems appropriate, including a letter of caution or warning, suspension of personal trading rights, suspension of employment (with or without compensation), fine, civil referral to the Securities and Exchange Commission, criminal referral, and termination of the employment of the violator for cause. The Code of Ethics Review Committee may also require the Access Person to reverse the transaction in question and forfeit any profit or absorb any loss associated or derived as a result. The amount of profit shall be calculated by the Code of Ethics Review Committee and shall be forwarded to a charitable organization selected by the Code of Ethics Review Committee. No member of the Code of Ethics Review Committee may review his or her own transaction. 2. Sole Authority. The Code of Ethics Review Committee has sole -------------- authority, subject to the review set forth in Section IV.B.3 below, to determine the remedy for any violation of the Code, including appropriate disposition of any monies forfeited pursuant to this provision. Failure to promptly abide by a directive to reverse a trade or forfeit profits may result in the imposition of additional sanctions. 3. Review. Whenever the Code of Ethics Review Committee determines ------ that an Access Person has committed a violation of this Code that merits remedial action, it will report no less frequently than quarterly to the Boards of Directors of the applicable Legg Mason Funds, information relating to the investigation of the violation, including any sanctions imposed. The Boards of Directors of the relevant Legg Mason Funds may modify such sanctions as they deem appropriate. Such Boards shall have access to all information considered by the Code of Ethics Review Committee in relation to the case. The Code of Ethics Review Committee may determine whether or not to delay the imposition of any sanctions pending review by the applicable Board of Directors. C. Exceptions to the Code. Although exceptions to the Code will rarely, ---------------------- if ever, be granted, the Appropriate Compliance Department may grant exceptions to the requirements of the Code on a case by case basis if the Appropriate Compliance Department finds that the proposed conduct involves negligible opportunity for abuse. All such exceptions must be in 12 writing and must be reported as soon as practicable to the Code of Ethics Review Committee and to any relevant Funds' Board of Directors at their next regularly scheduled meeting after the exception is granted. D. Inquiries Regarding the Code. The Appropriate Compliance Department ---------------------------- will answer any questions about this Code or any other compliance-related matters. V. DEFINITIONS ------------ When used in the Code, the following terms have the meanings set forth below: "Access Person" means: ------------- (1) every director or officer of a Legg Mason Fund or a Fund Adviser; (2) every employee of a Fund Adviser (or employee of a company in a control relationship with any of the foregoing), who in connection with his or her regular functions, makes, participates in, or obtains information regarding the purchase or sale of a Security by a Fund; (3) every natural person in a control relationship with a Legg Mason Fund or a Fund Adviser who obtains information concerning recommendations made to a Fund with regard to the purchase or sale of a Security, prior to its dissemination or prior to the execution of all resulting trades; (4) any director, officer or employee of Legg Mason Wood Walker, Incorporated who in the ordinary course of his or her business makes, participates in or obtains information regarding the purchase or sale of Securities for any of the Legg Mason Funds, or whose functions or duties as a part of the ordinary course of his or her business relate to the making of any recommendation to such investment company concerning the purchase or sale of Securities; and (5) such other persons as the Legal and Compliance Department shall designate. Any uncertainty as to whether an individual is an Access Person should be brought to the attention of the Legal and Compliance Department. Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of "Access Person" found in Rule 17j-1(e) (1) promulgated under the Investment Company Act of 1940, as amended. "Appropriate Compliance Department" for an employee means the compliance --------------------------------- department of that employee's immediate employer. For dual employees, the compliance 13 department of one employer will be designated as the Appropriate Compliance Department. "Batterymarch" means Batterymarch Financial Management, Inc. ------------ "Beneficial Interest" means the opportunity, directly or indirectly, ------------------- through any contract, arrangement, understanding, relationship or otherwise, to profit, or share in any profit derived from, a transaction in the subject Securities. An Access Person is deemed to have a Beneficial Interest in the following: (1) any Security owned individually by the Access Person; (2) any Security owned jointly by the Access Person with others (for example, joint accounts, spousal accounts, UTMA accounts, partnerships, trusts and controlling interests in corporations); and (3) any Security in which a member of the Access Person's Immediate Family has a Beneficial Interest if: a. the Security is held in an account over which the Access Person has decision making authority (for example, the Access Person acts as trustee, executor, or guardian); or b. the Security is held in an account for which the Access Person acts as a broker or investment adviser representative. In addition, an Access Person is presumed to have a Beneficial Interest in any Security in which a member of the Access Person's Immediate Family has a Beneficial Interest if the Immediate Family member resides in the same household as the Access Person. This presumption may be rebutted if the Access Person is able to provide the Legal and Compliance Department with satisfactory assurances that the Access Person has no material Beneficial Interest in the Security and exercises no control over investment decisions made regarding the Security. Access Persons may use the form attached as Appendix 7 (Certification of No Beneficial Interest) in connection with such requests. Any uncertainty as to whether an Access Person has a Beneficial Interest in a Security should be brought to the attention of the Legal and Compliance Department. Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of "beneficial owner" found in Rules 16a-1(a) (2) and (5) promulgated under the Securities Exchange Act of 1934, as amended. "Brandywine" means Brandywine Asset Management, Inc. ---------- 14 "Code" means this Code of Ethics, as amended. ---- "Equivalent Security" means any Security issued by the same entity as the ------------------- issuer of a subject Security, including options, rights, stock appreciation rights, warrants, preferred stock, restricted stock, phantom stock, bonds, and other obligations of that company or security otherwise convertible into that security. Options on securities are included even if, technically, they are issued by the Options Clearing Corporation or a similar entity. "Fund Adviser" means any entity that acts as a manager, adviser or sub- ------------ adviser to a Legg Mason Fund, including, but not limited to, Bartlett & Co., Batterymarch Financial Management, Inc., Brandywine Asset Management, Inc., Gray, Seifert & Co., Inc., Legg Mason Capital Management, Inc., Legg Mason Fund Adviser, Inc., LM Institutional Advisors, Inc., LMM LLC, Lombard Odier International Portfolio Management Limited, Western Asset Management Company, and Western Asset Management Company Limited. "Gray Seifert" means Gray, Seifert & Co., Inc. ------------ "Immediate Family" of an Access Person means any of the following persons: ---------------- child grandparent son-in-law stepchild spouse daughter-in-law grandchild sibling brother-in-law parent mother-in-law sister-in-law stepparent father-in-law Immediate Family includes adoptive relationships and other relationships (whether or not recognized by law) that the Legal and Compliance Department determines could lead to the possible conflicts of interest, diversions of corporate opportunity, or appearances of impropriety which this Code is intended to prevent. "Independent Fund Director" means an independent director of a Legg Mason ------------------------- Fund. "Investment Personnel" and "Investment Person" mean each Portfolio Manager -------------------- ----------------- and any Access Person who, in connection with his or her regular functions or duties, provides information and advice to a Portfolio Manager or who helps execute a Portfolio Manager's decisions. "Legal and Compliance Department" means the Legal and Compliance Department ------------------------------- of Legg Mason Wood Walker, Incorporated and the persons designated in Appendix 1, as such Appendix shall be amended from time to time. See also "Appropriate Compliance Department." 15 "Legg Mason Fund" and "Fund" mean an investment company registered under --------------- ---- the Investment Company Act of 1940 (or a portfolio or series thereof, as the case may be) that is sponsored by Legg Mason, including, but not limited to, the funds listed in Appendix 1. "Lombard Odier" means Lombard Odier International Portfolio Management ------------- Limited. "Portfolio Manager" means a person who has or shares principal day-to-day ----------------- responsibility for managing the portfolio of a Fund. "Preclearance Officer" means the person designated as a Preclearance -------------------- Officer in Appendix 1 hereof or such person's designee. "Securities Transaction" means a purchase or sale of Securities in which an ---------------------- Access Person has or acquires a Beneficial Interest. "Security" includes stock, notes, bonds, debentures, and other evidences of -------- indebtedness (including loan participations and assignments), limited partnership interests, investment contracts, and all derivative instruments of the foregoing, such as options and warrants. "Security" does not include futures or options on futures, but the purchase and sale of such instruments are nevertheless subject to the reporting requirements of the Code. "Western Asset" means Western Asset Management Company. ------------- "Western Asset Limited" means Western Asset Management Company Limited. --------------------- VI. APPENDICES TO THE CODE ---------------------- The following appendices are attached to and are a part of the Code: Appendix 1. Contact Persons and List of Legg Mason Funds; -------------------------------------------- Appendix 2. Acknowledgement of Receipt of Code of Ethics and Personal --------------------------------------------------------- Holdings Report; --------------- Appendix 3. Trade Authorization Request for Access Persons; ---------------------------------------------- Appendix 4. Certification of Access Person's Designee; ----------------------------------------- Appendix 5. Acknowledgement of Receipt of Code of Ethics (Independent Fund -------------------------------------------------------------- Directors); ---------- Appendix 6. Form Letter to Broker, Dealer, Bank, or Mutual Fund. --------------------------------------------------- Appendix 7. Certification of No Beneficial Interest. ---------------------------------------- Appendix 1 CONTACT PERSONS AND LIST OF LEGG MASON FUNDS PRECLEARANCE OFFICERS Andrew J. Bowden Neil P. O'Callaghan Suzanne E. Peluso Jennifer W. Murphy (Legg Mason Fund Adviser, Inc.) Philip E. Sachs (Legg Mason Capital Management, Inc.) Ilene S. Harker (Western Asset Management Company) Francis X. Tracy (Batterymarch Financial Management, Inc.) Thomas A. Steele (Bartlett & Co.) Denise Justice (Bartlett & Co.) DESIGNEES OF PRECLEARANCE OFFICER Nancy E. McColgan (Legg Mason Capital Management, Inc.) Nancy Dennin (Legg Mason Fund Adviser, Inc.) Jean C. Collins (Bartlett & Co.) Donna Preishoff (Bartlett & Co.) LEGAL AND COMPLIANCE DEPARTMENT Andrew J. Bowden Neil P. O'Callaghan Frank R. Walker Jr. CODE OF ETHICS REVIEW COMMITTEE Andrew J. Bowden Edward A. Taber, III Neil P. O'Callaghan Philip E. Sachs Jennifer W. Murphy LEGG MASON FUNDS Bartlett Basic Value Fund Bartlett Value International Fund Batterymarch Emerging Markets Portfolio i Batterymarch International Equity Portfolio Batterymarch U.S. MidCapitalization Equity Portfolio Batterymarch U.S. Small Capitalization Equity Portfolio Legg Mason American Leading Companies Trust Legg Mason Balanced Trust Legg Mason Cash Reserve Trust Legg Mason Classic Valuation Fund Legg Mason Emerging Markets Trust Legg Mason Europe Fund Legg Mason Financial Services Fund Legg Mason Focus Trust Legg Mason Global Income Trust Legg Mason High Yield Portfolio Legg Mason International Equity Trust Legg Mason Investment Grade Income Portfolio Legg Mason Market Neutral Trust Legg Mason Maryland Tax-Free Income Trust Legg Mason Opportunity Trust Legg Mason Pennsylvania Tax-Free Income Trust Legg Mason Special Investment Trust, Inc. Legg Mason Tax Exempt Trust, Inc. Legg Mason Tax-Free Intermediate-Term Income Trust Legg Mason Total Return Trust, Inc. Legg Mason U.S. Government Intermediate-Term Portfolio Legg Mason U.S. Government Money Market Portfolio Legg Mason U.S. Small-Cap Value Trust Legg Mason Value Trust, Inc. LM Balanced Institutional Portfolio LM Value Institutional Portfolio LM Special Investment Institutional Portfolio LM Total Return Institutional Portfolio Western Asset Core Portfolio Western Asset Core Plus Portfolio Western Asset Enhanced Equity Portfolio Western Asset Global Strategic Income Portfolio Western Asset Government Money Market Portfolio Western Asset High Yield Portfolio Western Asset Intermediate Portfolio Western Asset Intermediate Plus Portfolio Western Asset Money Market Portfolio Western Asset Non-U.S. Fixed Income Portfolio ii Appendix 2 ACKNOWLEDGEMENT OF RECEIPT OF CODE OF ETHICS AND PERSONAL HOLDINGS REPORT I acknowledge that I have received the Code of Ethics dated April 1, 2000 and represent that: 1. I have read the Code of Ethics and I understand that it applies to me and to all Securities in which I have or acquire any Beneficial Interest. I have read the definition of "Beneficial Interest" and understand that I may be deemed to have a Beneficial Interest in Securities owned by members of my Immediate Family and that Securities Transactions effected by members of my Immediate Family may therefore be subject to this Code. 2. In accordance with Section II.A. of the Code, I will obtain prior written authorization for all Securities Transactions in which I have or acquire a Beneficial Interest, except for transactions exempt from preclearance under Section II.D.1 of the Code. 3. In accordance with Section II.E.2. of the Code of Ethics, I will report all non-exempt Securities Transactions in which I have or acquire a Beneficial Interest. 4. I agree to disgorge and forfeit any profits on prohibited transactions in accordance with the requirements of the Code. 5. I will comply with the Code of Ethics in all other respects. 6. In accordance with Section II.E.1. of the Code, the following is a list of all Securities in which I have a Beneficial Interest: /1/ Provide the information requested below for each account that you maintain with a broker, dealer, bank, or mutual fund. Indicate "None" if appropriate.
NAME OF BROKER, DEALER, BANK, OR MUTUAL FUND ACCOUNT TITLE ACCOUNT NUMBER - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(Attach a separate sheet if necessary) /2/ Attach the most recent account statement for each account identified above that is not maintained at Legg Mason Wood Walker, Incorporated. --- (4/1/00) iii /3/ If you own Beneficial Interests in Securities that are not listed on an --- attached account statement or in an account maintained at Legg Mason Wood Walker, Incorporated, list them below. Include private equity investments. Indicate "None" if appropriate.
NAME OF ACCOUNT ACCOUNT NAME OF SECURITY NUMBER OF BROKER, DEALER, TITLE NUMBER SHARES/PRINCIPAL BANK, OR AMOUNT MUTUAL FUND - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(Attach separate sheet if necessary) 7. (Investment Personnel Only) In accordance with Section III.E. of the Code, the following is a list of publicly-held companies (other than Fund Advisers, their affiliates, and the Funds) on which I serve as a member of the board of directors. Indicate "NA" or "None" if appropriate.
NAME OF COMPANY BOARD MEMBER SINCE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
8. I certify that the information on this form is accurate and complete. - ---------------------------------- Access Person's Name - ---------------------------------- ------------------------------ Access Person's Signature Date (4/1/00) iv Appendix 3 TRADE AUTHORIZATION REQUEST FOR ACCESS PERSONS 1. Name of Access Person: ----------------------------------- 2. Account Title: ----------------------------------- 3. Account Number: ----------------------------------- 4. Name of Security: ----------------------------------- 5. Maximum number of shares or units to be purchased or sold or amount of bond: ----------------------------------- 6. Name and phone number of broker to effect transaction: -----------------------------------
7. Check applicable boxes: Purchase [ ] Sale [ ] Market Order [ ] Limit Order [ ]
9. In connection with the foregoing transaction, I hereby make the following representations and warranties: (a) I do not possess any material nonpublic information regarding the Security or the issuer of the Security. (b) I am not aware that any Legg Mason Fund has an open order to buy or sell the Security or an Equivalent Security. (c) By entering this order, I am not using knowledge of any open, executed, or pending transaction by a Legg Mason Fund to profit by the market effect of such Fund transaction. (d) (Investment Personnel Only). The Security is not being acquired in an initial public offering. (e) (Investment Personnel Only). The Security is not being acquired in a private placement or, if it is, I have reviewed Section II.C.3. of the Code and have attached hereto a written explanation of such transaction. (f) (Investment Personnel Only). If I am purchasing the Security, and if the same or an Equivalent Security has been held within the past 60 days by any Fund managed by my immediate employer, I have not directly or indirectly (through any member of my Immediate Family, any account in which I have a Beneficial Interest or otherwise) sold the Security or an Equivalent Security in the prior 60 days. (g) (Investment Personnel Only). If I am selling the Security, and if the same or an Equivalent Security has been held within the past 60 days by any Fund managed by my immediate employer, I have not directly or indirectly (through any member of my Immediate Family, any account in which I have a Beneficial Interest or otherwise) purchased the Security or an Equivalent Security in the prior 60 days. (h) I believe that the proposed trade fully complies with the requirements of the Code. - ----------------------------------------- ------------------ ---------------- Access Person's Signature Date Time TRADE AUTHORIZATION (to be completed by Preclearance Officer) - ----------------------------------------- ------------------ ---------------- Authorized By Date Time v Appendix 4 CERTIFICATION OF ACCESS PERSON'S DESIGNEE The undersigned hereby certifies that the Access Person named on the attached Trade Authorization Request for Access Persons (a) directly instructed me to complete the attached form on his or her behalf, (b) to the best of my knowledge, was out of the office at the time of such instruction and has not returned, and (c) confirmed to me that the representations and warranties contained in the attached Form are accurate. -------------------------------- Access Person's Designee -------------------------------- Print Name -------------------------------- Date (4/1/00) vi Appendix 5 ACKNOWLEDGEMENT OF RECEIPT OF CODE OF ETHICS (Independent Fund Directors) I acknowledge that I have received the Code of Ethics dated April 1, 2000 and represent that: 1. I have read the Code of Ethics and I understand that it applies to me and to all Securities in which I have or acquire any Beneficial Interest. I have read the definition of "Beneficial Interest" and understand that I may be deemed to have a Beneficial Interest in Securities owned by members of my Immediate Family and that Securities Transactions effected by members of my Immediate Family may therefore be subject to this Code. 2. I will report all Securities Transactions required to be reported under Section II.E.3 of the Code in which I have or acquire a Beneficial Interest. 3. I will comply with applicable provisions of the Code of Ethics in all other respects. ------------------------------------ Director's Signature ------------------------------------ Print Name ------------------------------------ Dated (4/1/00) vii Appendix 6 FORM OF LETTER TO BROKER, DEALER, BANK, OR MUTUAL FUND (Date) (Name and Address) Subject: Account # ----------------------- Dear : ------------------- My employer, , is an investment adviser ----------------------------------- to, or principal underwriter of, an investment company. Pursuant to my employer's Code of Ethics and Rule 17j-1 under the Investment Company Act of 1940, please send duplicate confirmations of individual transactions as well as duplicate periodic statements for the referenced account directly to: (Name and Address of Individual Responsible for Reviewing Periodic Holdings and Transaction Reports) Thank you for your cooperation. If you have any questions, please contact me or (Name of Individual Responsible for Reviewing Periodic Holdings and Transaction Reports) at . ------------------------------- Sincerely, (Name of Access Person) (4/1/00) viii Appendix 7 CERTIFICATION OF NO BENEFICIAL INTEREST I have read the Code of Ethics and I understand that it applies to me and to all Securities in which I have or acquire any Beneficial Interest. I have read the definition of "Beneficial Interest" and understand that I may be deemed to have a Beneficial Interest in Securities owned by members of my Immediate Family and that Securities Transactions effected by members of my Immediate Family may therefore be subject to this Code. The following accounts are maintained by one or more members of my Immediate Family who reside in my household:
Brokerage Firm Relationship of Immediate (Include Legg Mason Account Name Family Member Account Number Accounts) - ------------ ------------------------- -------------- --------------------
I certify that with respect to each of the accounts listed above (initial appropriate boxes): [ ] I do not own individually or jointly with others any of the securities held in the account. [ ] I do not possess or exercise decision making authority over the account. [ ] I do not act as a broker or investment adviser representative for the account. I agree that I will notify the Legal and Compliance Department immediately if any of the information I have provided in this certification becomes inaccurate or incomplete. -------------------------------- Access Person's Designee -------------------------------- Print Name -------------------------------- Date (4/1/00) ix -----END PRIVACY-ENHANCED MESSAGE-----